Thursday, December 31, 2020

Economic Reports: Week Ending Jan 1, 2021


Texas manufacturing eases 

The Texas Manufacturing General Business Activity Index slipped 2.3 points in December to 9.7. It was the second straight decline to a four-month low, as rising COVID cases and waning stimulus impacted the sector. Survey respondents also cited political uncertainty as a concern, both with respect to the incoming Biden Presidency, as well as actions with the current administration. The new COVID relief package, which was signed after the survey window, should placate some of these concerns. Despite the decline in the Business Activity Index, most other indexes posted solid gains in December, indicating that the recovery remains firmly intact. Production and new orders growth accelerated, while capacity utilization increased. Employment and wage growth also picked up from the prior month. All future activity indexes remained positive, but some key indexes, such as future new orders and business activity, declined. Price pressures mounted, as the raw material and finished goods price indexes both rose to two-year highs. Future prices also picked up.

Existing home prices continue to increase 

The S&P CoreLogic Case-Shiller National Home Price Index surged a record 1.7% in October, and posted an 8.4% y/y gain, the most since March 2014. The increase was widespread across the country, with all of the 19 metro areas for which data was available rising from the previous month. Additionally, a majority of metro areas registered faster y/y growth rates than in the month before. But the 10-city and 20-city composite indexes advanced less than the national index, up 7.5% y/y and 7.9% y/y, respectively. This suggests that demand has firmed more in smaller urban, suburban, and rural areas than in major urban areas, confirming a shift in housing demand that has emerged in the aftermath of the COVID lockdowns earlier this year.

Regional manufacturing activity mixed-to-positive 

The ISM Chicago Business Barometer edged up 1.3 points in December to 59.5, above the consensus of 56.0, a sign that factory activity in the region improved modestly. It was led by a notable climb in the employment indicator to a one-year high, although it failed to return to expansion territory. Order backlogs advanced for the second consecutive month, which could lead to more hiring in the near-term. Production ticked up, but new orders growth eased. Inventories rose to a seven-month high. 

All six regional manufacturing indexes we follow were in expansion territory in December, but only half improved from the previous month. Combined with the modest downtick in the Markit flash U.S. Manufacturing PMI, this suggests that the ISM Manufacturing Index will continue to indicate factory activity growth at yearend, although the pace could be slower. 

Pending home sales down modestly 

The pending home sales index fell 2.6% in November, its third consecutive decline, and worse than the consensus for a 0.3% pullback. Activity weakened in all four regions. The NAR attributed the modest slide in contract signing in the past few months mostly to inventory shortages and fast-rising home prices. 

But overall momentum is still strong. Compared to a year ago, pending sales were up 16.4%, and all four regions posted double-digit y/y gains. While mortgage rates could see some modest upward pressure next year, the report noted that housing demand should remain well supported by fiscal stimulus and economic growth. The NAR expects existing home sales to increase roughly 10% in 2021, and new home sales to increase about 20%. 

Advance goods trade deficit widens 

The advance goods trade deficit spiked by $4.4 billion in November to $84.8 billion, a record level. Exports picked up 0.8%, led by food. But imports increased a larger 2.6%, led by consumer goods. On a 12-month total basis, the trade deficit crept up to $883.3 billion, close to a record. The widening suggests that net exports will likely subtract from GDP growth in Q4.

Jobless claims decelerate but remain painfully elevated

Weekly initial jobless claims came in at a level of 787,000 for the week ended December 26, below the Bloomberg consensus estimate of 835,000, and compared to the prior week's upwardly-revised 806,000 level. The four-week moving average rose by 17,750 to 836,750, while continuing claims for the week ended December 19 fell by 103,000 to 5,219,000, south of estimates of 5,370,000. The four-week moving average of continuing claims fell by 77,000 to 5,457,250.

Monday, December 28, 2020

5G Portfolio: A Final Update

My proposed 5G portfolio is up nearly 62 percent since January 2019, not including any dividends paid in the last two years. 

The original portfolio called for an equal weight investment of $75,000 in 15 stocks, recommended as potential winners in the 5G race. 

The portfolio is currently valued at $121,263, and increase of $46,263 or 61.7%. While this may seem like a great investment, investing in QQQ (the NASDAQ index ETF) would have returned about 100% over the last two years. However, you'd have to know that the NASDAQ would be on a tear, especially this year. 

A investment into an equal weight portfolio of the four major indexes (Dow Jones Industrial Average, Russell 2000, NASDAQ and S&P 500) would have resulted in a return of 59%, if dividends are included.  

This was an exercise in a portfolio of telecommunications and technical companies. I will not be following it any further. I would have never -- in reality -- invested in 15 stocks. I'm not interested in managing large portfolios, and neither should the average investor. 

Currently I'm examining more concise portfolios that are easier to manage. My first post on this subject is here.

Sometimes, the simplest solution is the best. 



Thursday, December 24, 2020

Weekly Economic Reports: Week ending Dec. 25, 2020


The economic calendar for Dec. 21, 2020, is void of any major releases but is poised to deliver some key reports later this week that could command attention. We will get the final read (of three) on Q3 GDP, the Conference Board will post its Consumer Confidence report, preliminary November durable goods orders will hit the tape, November personal income and spending data will be released, and the University of Michigan will offer up its revised look at consumer sentiment for this month. Housing data will also continue, with the releases of existing and new home sales for last month, while a timely read on jobless claims for the week ended December 19 will be pulled forward to Wednesday due to the holiday.

CFNAI shows recovery is slowing 

The Chicago Fed National Activity Index (CFNAI) fell 0.74 points in November to 0.27, the smallest positive reading of the past seven months. The three-month average of the CFNAI decreased 0.29 points to 0.56, its lowest level since June. Both the headline index and its trend indicate that the economic recovery has lost momentum in Q4 amid spiking COVID cases and waning fiscal stimulus. 

All four broad categories of indicators declined in November, although three of the four still made positive contributions. The CFNAI Diffusion Index, based on 89 individual indicators, slipped to 0.53 from 0.62. While off its peak in July and August, this index is still at one of its highest readings since December 1999, a sign that the recovery remains broad-based, although the pace has slowed. 

As the rollout of COVID vaccines has begun and Congress has agreed on another fiscal relief bill, the economy should avert another deep contraction similar to the lockdown recession this past spring. Nevertheless, it may be several months before the positive impact from a widespread vaccination is felt. This is a key reason why a weak start to 2021 should be expected, before economic activity ramps up in the second half of the year. 

GDP revised higher

The final look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 33.4%, above forecasts calling for it to remain at the 33.1% posted in the second release. Q2's figure was unadjusted at a 31.4% plunge. Personal consumption was revised to a 41.0% increase for Q3, ahead of expectations to remain at 40.6%. Q2 consumption was unrevised at a 33.2% drop.

On inflation, the GDP Price Index was downwardly revised to a 3.5% rise from the prior 3.6% increase and where it was expected to remain, while the core PCE Index, which excludes food and energy, was also revised slightly lower to a 3.4% advance from the prior 3.5% gain.

Consumer confidence falls

The Conference Board's Consumer Confidence Index (chart) declined more than expected to 88.6 from November's downwardly revised 92.9 level, and versus the Bloomberg consensus estimate calling for an increase to 97.0. The softer-than-expected read came as the Present Situation Index portion of the survey fell noticeably, while the Expectations Index of business conditions for the next six months rose from the prior month's downward revision. On employment, the labor differential—consumers’ appraisal of jobs being "plentiful" minus being "hard to get"—fell into negative territory, posting a reading of -0.2 following the 6.9 level posted in October.

The Reuters/University of Michigan Consumer Sentiment Index slipped 0.7 points from its preliminary December reading to 80.7, below the consensus of 81.0. But it was still 3.8 points higher than in the previous month, with both current conditions and expectations advancing. Sentiment has bounced back from its low in April, but is still more than 20 points below its pre-recession level. On a y/y basis, it is down 18.7%, historically consistent with a bearish outlook for consumer spending and the economy. 

Housing data dips

Existing home sales fell 2.5% month-over-month (m/m) in November to an annual rate of 6.69 million units—the first decline in six months—mostly matching expectations of a decline to 6.70 million units from October's modestly-revised 6.86 million rate. Existing home sales are up 25.8% y/y.

Of the four major regions, the Northeast, Midwest and South each experienced m/m declines, while the West was unchanged from the prior month. All regions saw gains year-over-year (y/y). Sales of single-family homes and purchases of condominiums and co-ops were down m/m, but up y/y. The median existing home price was up 14.6% from a year ago to $310,800, marking the 105th straight month of y/y gains as prices rose in every region. Unsold inventory came in at an all-time low of a 2.3-months pace at the current sales rate, down from 2.57-months in October and the 3.7-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

National Association of Realtors Chief Economist Lawrence Yun said, "Home sales in November took a marginal step back, but sales for all of 2020 are already on pace to surpass last year's levels," adding, "Given the COVID-19 pandemic, it's amazing that the housing sector is outperforming expectations. Circumstances are far from being back to the pre-pandemic normal," he said. "However, the latest stimulus package and with the vaccine distribution underway, and a very strong demand for homeownership still prevalent, robust growth is forthcoming for 2021."

Weekly initial jobless claims lower, but still high

Weekly initial jobless claims (chart) came in at a level of 803,000 for the week ended December 19, below the Bloomberg estimate of 880,000, and compared to the prior week's upwardly revised 892,000 level. The four-week moving average rose by 4,000 to 818,250, while continuing claims for the week ended December 12 fell by 170,000 to 5,337,000, below estimates of 5,560,000. The four-week moving average of continuing claims dropped by 188,000 to 5,538,000.

Mortgage applications rise

The MBA Mortgage Application Index rose by 0.8% last week, following the prior week's 1.1% rise. The increase came as a 3.8% rise in the Refinance Index more than offset 4.6% decrease in the Purchase Index. The average 30-year mortgage rate nudged 1 basis point (bp) higher to 2.86%.

Durable goods orders rise

November preliminary durable goods orders (chart) rose 0.9% month-over-month (m/m), versus estimates of a 0.6% rise and compared to October's upwardly revised 1.8% increase. Ex-transportation, orders increased 0.4% m/m, versus forecasts of a 0.5% gain and compared to October's favorably adjusted 1.9% rise. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were up 0.4%, compared to projections of a 0.6% rise, while the prior month's figure was upwardly revised to a 1.6% increase.

Personal income and spending decline 

Personal income fell 1.1% in November, down in five of the past seven months, and worse than the consensus of -0.3%. Disposable personal income fell 1.2%. Proprietors’ income sank 8.5% amid falling COVID-related payments to farmers and ranchers and a decline in PPP loans to businesses. Net transfer payments from the government fell 5.5%, reflecting the runoff in unemployment benefits and wage assistance programs related to the pandemic. Employee compensation growth moderated to 0.4%. Only rental income and receipts on assets accelerated from the previous month, up 0.5% and 0.6%, respectively. 

The drop in income weighed on personal consumption expenditures (PCE), which fell 0.4%, down for the first time since April, and matching the consensus. Real PCE was also off 0.4%, led by a 1.7% decline in real durable goods spending. The partial lockdowns across the country amid the surge in COVID cases contributed to a 0.2% decline in real services spending, down for the first time since April. The personal saving rate inched down to 12.9% from 13.6%, but it was still near its highest level since 1981. While a higher saving rate could help consumers withstand future crises, it acts as a drag on growth in the near-term. 

On a y/y trend basis, real PCE declined 2.1%. The negative momentum has eased since the spring, as income growth (the primary driver of spending) was boosted by the unprecedented government support. With the pandemic not yet under control and the labor market still struggling, the latest COVID relief bill approved by Congress should support both income and spending, reducing the downside risk to the economy. 

Inflation was nonexistent. Both the PCE Price Index and its core were unchanged from the previous month. On a y/y basis, headline and core PCE prices eased to 1.1% and 1.4%, respectively. With inflation well below 2.0%, the Fed will remain accommodative for the foreseeable future.



Tuesday, December 22, 2020

Comparisons of Different EFT Portfolio Models

One "rule of thumb" for portfolio composition is to have the bond part of your portfolio equal to your age. For example, if you're 70 years old, then 70 percent of your portfolio should be in bonds. I don't follow this "rule." 

First, let's define portfolio for the purpose of this article. It is a collection of stocks, bonds, and other assets with the goal of sustaining a person in retirement. That is the goal of the portfolio: to supplement a retiree's income without running out of money. The amount of the portfolio depends on the needs and goals of the individual. 

There are hundreds of "rules" for portfolios. They can be simple, or complicated. Very popular currently with financial managers is Modern Portfolio Theory, which is based on mean-variance analysis, a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. Wow. What a mouthful. 

Ever since I studied finance in graduate school, which is heavily based on statistical models, I have a problem with the methods for estimating expected rate of returns. Change the model -- or the expectations -- and you'll have different results. Predicting the future is hard, or impossible. If you expect returns of 10 percent next year, you'll definitely make different decisions than if you expected a negative return of 10 percent. 

Stay fully invested. Rebalance your portfolio. Diversify. You can't time the market. These are the mantras of financial "experts," including my own stock broker. (However, there are a few who don't follow these adages: One is Ken Moraif of Retirement Planners of America, and author of Buy, Hold, and Sell.  

While there are certain principles of financial management that have held true for thousands of years, your own portfolio should be based on your own goals and financial plan. Having written goals and a written plan are two of the age-test financial principles. 

Let's get to the point of all this: constructing a portfolio that works. While there a probably a hundred ways to do this, I have selected a few portfolios to test. I think planning your portfolio rather than just investing in things that seem "hot" at the time will bring you better returns, and probably less anxiety. 

I've constructed a couple of test portfolios out of ETFs. What you invest in can be tricky. Just buying an ETF that tracks an index, such as the S&P500 might be one strategy, but different indexes have greatly different returns. Compare these sector areas with the actual returns of the major indexes, year-to-date (2020): S&P500: 14.81%; DJIA: 5.75%; NASDAQ: 42.16%; Russell 2000: 18.07%. 


So attempting to decide what to buy with an uncertain future is -- most of the time -- a guess, at best. So I propose that it's best to diversify, but not overly. For example, if we'd just invested in the DJIA, our return for the last 12 months would have been only 5.75%. But if we'd invested in the NASDAQ, our return would have been more than 42%. But how could we know in December 2019 which was best, or even that the markets would go up over 12 months. You couldn't. While you can chart general trends, and in December 2019, the trend was up, trends reverse themselves, as we saw in March 2020. 

One such remedy would be to invest in all four, in an equal-weighted portfolio. The entry date is Dec. 18, 2019 and current price is the close of Dec. 18, 2020. Total return (including dividends) is 23%. 


So it's not as good as if we'd placed all of our money in the NASDAQ, but how could we know that it would go up 40% while the Dow only went up 8%. There is no way we could have. Of course, you could have tried to re-balance at some point during the year based on performance, but that adds risk to the portfolio. 

Look, a 23% annual return is very good. It beats many mutual funds and ETFs. Many financial advisors would not like the fact there are no bonds in the mix, so let's put together some portfolios with bonds, as we are advised to do. 

This next one was designed to be moderately conservative, with 50% in fixed income. While it only returned 10.15% (including dividends), the best measure of how this portfolio performs is how did it react to the market downturn in March 2020. 

The first chart shows the value of our portfolio as of March 21, 2020. The second, as of Dec. 21, 2020. 

At market bottom: Dec. 18, 2019 - March 20, 2020

Buy and hold: Dec. 18, 2019 - Dec. 21, 2020

Let's see what happens if we use a moving average rule to avoid the market drop of almost 34% on the S&P 500 that begin on Feb. 20 and continued until late March. Our rule will be to sell if the S&P 500 closes 3% or more below its 50-day moving average. Conversely, we'll buy if the SPY is 3% above its 50-day. 

The sell signal came on Feb 25, when the S&P 500 closed at 3128. We would have sold during the day, but we'll use the closing prices. Our overall loss would have been less than 1%. The results below do not include dividends, which probably would have kept us a break-even. We keep our powder dry to fight another day. 

Dec. 18, 2019 - Feb 25, 2020

That day comes on May 18, 2020, when the S&P closes over 2,867. We buy the same portfolio, and the gains to date are shown next. 


May 18, 2020 - Dec. 21, 2020

Buy and hold results in a gain of 10.15%. Buy, hold and sell strategy results in a gain of 17.29%, dividends not included. Another alternative would have been to move everything into the BND EFT, which may have resulted in a few extra dividends for the period. Care must be taken with bonds, because they can have the same downward trend, depending on how interest rates are trending. (Higher interest rates cause lower bond prices.)

Let's do the same with a portfolio that uses 90% of its assets in high-growth ETFs (equity) and the other 10 percent in a high-yield bond ETF. 

First, the buy and hold strategy resulted in nearly 36% gain. Dec 19, 2019 - Dec. 21, 2020.


Selling at the beginning of the 2020 downturn resulted in a 1.63% gain. Dec. 19, 2019 - Feb. 25, 2020.


We buy again on May 18, 2020, as we did in the first example. This resulted in a return of just under 37%.


These charts were done in Excel, using pricing from my broker's web site. You can set these same tests up. Not shown are the columns for dividends, which are added into the gain column, for a total return including dividends. 

Conclusion. If you have the discipline to follow a set rule, such as the 3% 50-day rule, selling and reverting to cash, then buy on a renewed uptrend, creates the largest returns. Longer term outlooks can be created with either the 100-day or 200-day moving averages. However, for the less well disciplined, holding a basket of stocks and bonds long term (5+ years) can provide suitable returns for very little effort. 

Friday, December 18, 2020

Weekly Economic Reports: Week ending Dec. 18, 2020


Oil forecast for 2021

Following OPEC in cutting its forecast for oil demand growth in 2021, the IEA also expects a slower rebound than initially anticipated as the aviation sector takes longer to recover from the pandemic amid border closures and travel restrictions. "It is possible that, after the upcoming holiday season, a third wave of the virus will affect Europe and other parts of the world before vaccines have time to take effect. It will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand." While the "market remains fragile," global consumption is expected to be 96.9M barrels per day next year, about 200K bpd below earlier forecasts. However, the IEA still expects that the crude glut left behind by the pandemic will clear by the end of next year as the global economy recovers and OPEC+ keeps a tight rein on supplies.

A larger-than-expected U.S. inventory draw helped lift oil prices to a nine-month high. West Texas Intermediate futures settled at more than $49 a barrel today for the first time since February.

The crude boost was also helped by the optimism over a stimulus bill, and by a steadily weakening dollar. Commodities priced in the currency—like oil, gold, or lean hogs—are worth more dollars when the value of the dollar declines.


Industrial production still recovering 

Industrial production increased 0.4% in November, double the consensus of 0.2%. It has increased in six of the past seven months, but is still 4.8% below its level in February, and is 5.5% lower than a year ago, underscoring the depth of the recession. 

Manufacturing output, which accounts for about 3/4 of industrial production, rose 0.8% last month, led by a 5.3% jump in vehicle output. Excluding vehicles, manufacturing was up 0.4%, with notable gains in primary metals, computer and electronic products, aerospace and miscellaneous transportation equipment, as well as some nondurables such as food and paper products. Mining output increased 2.3%, while utilities output dropped 4.3%, as warmer-than-normal weather reduced the demand for heating. 

Core industrial production, which excludes vehicles, energy, and high-tech, rose 0.4%, led by business equipment. But similar to overall industrial production, it has yet to regain its pre-recession level and is still down 3.6% from a year ago. 

The capacity utilization rate picked up 0.3 ppt to 73.3%, above the consensus of 73.0%. It has bounced back significantly from the record low in April, as factories reopened, but it remains below its pre-recession level, and is 6.5 ppt below its 1972-2019 average. This suggests there is plenty of production slack in the economy, which tends to put downward pressure on inflation.

Regional manufacturing growth surprisingly decelerates, Fed set to begin final meeting of 2020

The Empire Manufacturing Index, a measure of activity in the New York region, declined to 4.9 in December from 6.3 in November, where the Bloomberg forecast called for it to remain. However, a reading above zero denotes growth. The report marks the sixth-straight month of expansion, as employment growth accelerated solidly but the expansion in new orders slowed slightly.

The Import Price Index (chart) ticked 0.1% higher month-over-month (m/m) for November, versus expectations of a 0.3% gain, and compared to October's unrevised 0.1% dip. Versus last year, prices declined 1.0%, compared to forecasts of a 0.9% decrease and matching October's unadjusted fall.

Also, the Federal Open Market Committee (FOMC) is expected begin its two-day monetary policy meeting today. The FOMC is not expected to make changes to policy, but the markets will likely pay close attention to any guidance on how/if/when it may tweak its asset purchase program amid the threat of near-term disruptions due to rising COVID-19 cases, the recent moves in the Treasury markets, the prospects of an expedited economic recovery as the vaccine gets broadly distributed, and after the European Central Bank boosted its emergency purchase program last week. The FOMC decision will precede monetary policy decisions later in the week from the Bank of England and the Bank of Japan.

Import prices still in deflation territory 

Import prices edged up 0.1% in November, below the consensus of 0.3%. Fuel prices rebounded 4.3%, its first increase in three months, with both natural gas and petroleum contributing to the advance. But nonfuel import prices fell 0.3%, its first decline since April, led by a sharp 2.2% pullback in food prices, the most since June 2018. On a y/y basis, import prices were off 1.0%, and have been in deflation territory almost continuously since late 2018. Despite an uptick from the prior month, fuel prices were still down 24.6% from a year ago, representing the biggest drag on annual import price inflation. But it is worth noting that the deflationary pressures have eased in the past several months, largely due to the weakening U.S. dollar. We maintain a bearish outlook for the U.S. dollar for 2021, which could feed into some import price inflation, as well as a moderate acceleration of CPI inflation to 2.2% next year.

Advance retails sales fall

Advance retail sales (chart) for November fell 1.1% month-over-month (m/m), well below the Bloomberg forecast of a 0.3% decrease and following October's negatively-adjusted 0.1% decline from a previously-reported 0.3% gain. Last month's sales ex-autos dropped 0.9% m/m, compared to expectations of a 0.1% rise and October's figure was downwardly revised to a 0.1% decline from a 0.2% increase. Sales ex-autos and gas were off 0.8% m/m, compared to estimates of a 0.1% increase, and October's reading was adjusted lower to a 0.1% dip from a 0.2% gain. The control group, a figure used to calculate GDP, decreased 0.5% m/m, versus of projections of a 0.2% increase and October's negatively-adjusted 0.1% decline from a 0.1% rise.

Mortgage applications rise

The MBA Mortgage Application Index rose by 1.1% last week, following the prior week's 1.2% drop. The increase came as a 1.4% rise in the Refinance Index was met with a 1.8% gain in the Purchase Index. The average 30-year mortgage rate declined 5 basis points (bps) to 2.85%.

Manufacturing PMI declines

The preliminary Markit U.S. Manufacturing PMI Index for December declined by a smaller amount than expected to 56.5 from November's unrevised 56.7 figure but remaining solidly in expansion territory denoted by a reading above 50. Estimates called for the index to decrease to 55.8. However, the preliminary Markit U.S. Services PMI Index showed output for the key U.S. sector slowed by a larger amount than anticipated, declining to 55.3 from November's 58.4 figure, and compared to forecasts of a decrease to 55.9, but a reading above 50 also denotes expansion.

Home builders sentiment declines

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in December declined more than expected to 86 versus forecasts calling for a decline to 88 from November's record high of 90. A level north of 50 depicts positive conditions. The NAHB said builder confidence fell back from historic levels in December, as housing remains a bright spot for a recovering economy, but adding that the issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs. "As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes," the report noted.

Business inventories rise

Business inventories (chart) rose 0.7% m/m in October, versus forecasts calling for a 0.6% increase, and compared to September's upwardly-revised 0.8% gain.

Fed policy remains basically unchanged

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting today, opting to leave its stance and interest rates unchanged, as was widely anticipated. In its statement, the Committee again said that while the recovery from the disruption of the COVID-19 pandemic is continuing at a moderate pace, "The path of the economy will depend significantly on the course of the virus," adding that, economic activity and employment "have continued to recover but remain well below their levels at the beginning of the year." As well, the FOMC indicated that the ongoing public health crisis "will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term" and that accommodative policy will remain in place until inflation reaches or exceeds its 2% target and the unemployment rate falls to a level deemed sustainable without leading to higher inflation.

One of the more closely watched aspects of the FOMC decision, was the focus on the asset purchase program, of which the FOMC opted to leave the composition unchanged. However, the Federal Reserve did provide updated forward guidance language, saying it will continue its bond buying program at the current rate of $80 billion in Treasuries and $40 billion in mortgage-backed securities per month "until substantial further progress has been made toward the Committee's maximum employment and price stability goals."

In his scheduled press conference following the statement, Chairman Jerome Powell said the Fed is committed to achieving its dual mandate of price stability and full employment, and that it maintains the flexibility to provide further accommodation. Powell also continued to reiterate the need for some sort of fiscal aid, noting that it is up to Congress to act.

Jobless claims continue to accelerate, housing construction activity beats forecasts

Weekly initial jobless claims came in at a level of 885,000 for the week ended December 12, above the Bloomberg estimate of 818,000, and compared to the prior week's upwardly-revised 862,000 level. The four-week moving average rose by 34,250 to 812,500, while continuing claims for the week ended December 5 fell by 273,000 to 5,508,000, above estimates of 5,700,000. The four-week moving average of continuing claims dropped by 215,500 to 5,726,250.

Housing starts for November rose 1.2% month-over-month (m/m) to an annual pace of 1,547,000 units, above forecasts of 1,535,000 units, and compared to October's downwardly-revised pace of 1,528,000 units. Also, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 6.2% m/m at an annual rate of 1,639,000, north of expectations of 1,560,000 units, and compared to the downwardly-revised 1,544,000 unit pace.

The Philly Fed Manufacturing Index fell more than expected but remained in expansion territory (a reading above zero) for December, dropping to 11.1 versus estimates of a decline to 20.0 from November's 26.3 level. Growth in new orders, shipments and employment all decelerated.

The December Kansas City Fed Manufacturing Activity Index unexpectedly moved further into a level depicting expansion (a reading above zero). The index rose to 14 from November's 11 reading, and compared to forecasts calling for a decrease to 9.

U.S. Dollar Index falls below 90

The U.S. Dollar Index (DXY) fell below 90 for first time today since April 2018. Commonly referred to as the "Dixie," it measures the dollar against a basket of other currencies. After spiking during February's and March's market turmoil, the index has declined steadily since as investors moved back into risk assets.

The Dixie's latest leg down came after the Federal Reserve's promise yesterday to keep monetary policy ultra-easy even as the U.S. economy improves. That could mean some greater inflation down the line, decreasing the value of the dollar.

LEI rises at slower pace 

The Conference Board’s Leading Economic Index (LEI) rose 0.6% in November, slightly above the consensus for a 0.5% gain. It was the seventh straight increase, albeit the smallest in the sequence. Seven of the ten components made positive contributions, led by weekly jobless claims and the ISM’s New Orders Index. The economic recovery has slowed amid rising COVID cases and waning fiscal stimulus, with conditions likely worsening in December based on early signs from some high frequency data. 

On a y/y basis, the LEI was down 2.2%, while our Composite Leading Index (which combines the LEI and Co/Lag) was off 2.1%. Both have seen momentum improve significantly since bottoming in April, but the negative readings suggest there’s still more to go until we reach normalcy. 

The Coincident Index (CEI) edged up 0.2%, also its seventh straight, but smallest, gain. The CEI has increased 11% since its April low, but it’s still 4.2% below its pre-COVID level in February. Even so, the continued improvement in the LEI and CEI kept our Economic Timing Model at 24, just one point shy of its pre-COVID level. 

Wednesday, December 16, 2020

Implications for stocks if Democrats win GA runoffs

Investors hear this: If the Senate falls to Democrat control, along with the House and the presidency, we could well see the END OF THE BULL MARKET in stocks and to a lesser extent in bonds. Higher taxes, especially on corporations, are bearish. Ditto for doubling the capital gains rate as Biden proposes.

That’s a bold prediction, I admit. But let’s be clear, this bull market in stocks – which began in March 2009 – is very long in the tooth by historical standards. In fact, it has been the longest and strongest in history. And we all know it will end at some point.

With literally EVERYTHING on the line in these two Georgia Senate races, we are about to see a political spectacle as never before. George Soros and other billionaire Democrat donors are basically writing blank checks to their Senate candidates. I just hope big GOP donors realize what they’re facing and will be ready to pony-up as well.

The bottom line is, Senator Perdue should win his race, thus maintaining Republican control of the Senate by the narrowest margin. Yet while he beat his challenger Ossoff by a decent margin on November 3, it remains to be seen if liberal donors can reverse that outcome on Jan, 5.

Senator Kelly Loeffler, on the other hand, is more questionable. She is trailing her opponent Warnock in some polls, even though he is a very controversial character. You’ll have to look him up to read that he’s a piece of work – but, of course, the media won’t tell you this.

Victor Davis Hanson On GA Runoffs & Fate of Nation 

Since I’ve elected to focus on the importance of the Jan. 5 Senate runoff elections in Georgia, I’ll finish with some excerpts from Victor Davis Hanson’s latest piece on the subject. Regular readers know Hanson is one of my favorite writers. He is a classical historian at the Hoover Institute at Stanford University and the author of several excellent books.

To begin, Hanson agrees with me that the Georgia Senate runoff races will be two of the most important elections in our lifetimes. Perhaps more importantly, he worries that these two elections could be mired in voter fraud and distortions given their potential impact on the future direction of the country.

Hanson points out how rare it is for incumbents to face runoff elections in the first place, and even rarer to have two incumbents facing runoffs in the same state in the same year. Hanson emphasizes early-on in his column that the Democrats have already warned, should they win the Senate, they will change many of the long-standing rules by which we are governed.

Hanson then points out some the many hard-left changes the Democrats have promised to try should they win the Senate and complete control of the government – including:

  • The end of the Senate filibuster after 180 years
  • Eliminate the Electoral College after 233 years
  • Expanding the Supreme Court from 9 to 15 Justices
  • Washington DC and Puerto Rico become US states
  • New restrictions on gun rights and open borders
These are just a few of the changes the Democrats want to make should they gain complete control of all three elected branches of government after the Jan, 5 runoff elections in Georgia. As Senate Minority Leader Chuck Schumer boasted last month: “Now we take Georgia and then we change the world.” They’re deadly serious!

Victor Davis Hanson goes on to make numerous other salient points in his latest column regarding the importance of the Georgia runoff elections on Jan, 5. I highly recommend you read it for yourself HERE.

Monday, December 14, 2020

Energy pulls back from 9-month highs, still bullish

Update for Dec 14: In a typical over-reaction, crude futures wiped out sold early gains on vaccine optimism after OPEC's latest Monthly Oil Market Report cut its forecast for 1Q 2021 demand by 1M bpd. WTI futures fell from a high of $47.37 to $476.25 as of 9:45 am CST. OPEC sees global oil demand at 93.97M bpd in the first three months of next year, down from 94.95M bpd. For all of 2021, OPEC cut its demand 360K bpd. That would be up 6.25M bpd from 2020, or nearly 7%.

Saturday, December 12, 2020

U.S. Housing Outlook Heading Into 2021

From Morningstar Equity Research

Investors had every reason to be hesitant in entering the third quarter of 2020, but economic conditions have proved more favorable than widely expected. In particular, housing markets proved exceptionally robust. Existing-home sales surged toward the end of the summer, giving builders confidence and supporting 11% growth in new-home starts during the third quarter. 

We expect the momentum to continue through the fourth quarter and into 2021, but some dynamics will change. Affluent buyers have driven the surge in housing in 2020. Sales growth in housing categories from $500,000-$1 million-plus accounts for over half of incremental purchase volumes in the third quarter. For most buyers, those prices remain out of reach. 

As more companies have approved indefinite remote-work policies, we suspect wealthier renters could be heading for the suburbs. However, we don't see this as a sustainable source of housing demand in the long run. 

In 2021, our outlook depends on demographic trends. Supply constraints are likely to put a limit on additional growth in new-home starts. Skilled construction labor remains scarce, land availability is constrained, and rising input costs raise the risk of putting home prices out of reach for most buyers. Between these factors limiting the flow of new homes, and extremely low existing-home inventories, the supply side will be the limiting factor. 

We expect 1.345 million new-home starts in 2021. Affluent purchasers will move to the background, while middle-class buyers will move to the fore. Vaccines on the horizon suggest a return to full-time schooling, returning a wider swath of men and women to the workforce. This should bolster the economy overall, especially those who have struggled to make ends meet during 2020. As these folks get back on their feet, we expect a growing appetite for housing.

Friday, December 11, 2020

Weekly Economic Reports: Week ending Dec. 11, 2020

Market close as of 4 pm EST Dec 11



Small business optimism slipped more than expected in November

The National Federation of Independent Business (NFIB) Small Business Optimism Index for November fell to 101.4 from October's 104.0 level, compared to the Bloomberg estimate of a decrease to 102.5. Four of the ten index components improved during the month, while six declined. However, the index remained well above the 47-year historical average reading of 98. The NFIB noted that small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election, which is shaping how they're viewing future business conditions. The report added that the, "Recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses."

Nonfarm productivity revised slightly lower

Final Q3 nonfarm productivity was revised lower to a 4.6% gain on an annualized quarter-over-quarter (q/q) basis, from the preliminary estimate of a 4.9% rise, where it was expected to remain. Q2 productivity was unrevised at a 10.6% increase. Labor productivity, or output per hour, is calculated by dividing real output by hours worked by all persons, including employees, proprietors, and unpaid family workers, and is a major contributor to the economy's long-term health and prosperity. Unit labor costs were adjusted to a 6.6% q/q decline, from the preliminary drop of 8.9%, versus forecasts of an unrevised fall. Unit labor costs were revised higher to an increase of 12.3% in Q2.

Manpower employment outlook up 

The Manpower Employment Outlook Survey for Q1 2021 improved by three points to 17, as hiring intentions continued to recover. The index came within four points of its pre-recession high, which was reached in Q3 2019. All 12 Manpower industry sectors expect payroll gains in early 2021. But the improvement in the overall index was led by durable goods manufacturing, financial activities, and government. The employment outlook was stable to slightly stronger across all four geographic regions.

OECD U.S. CLI shows below-trend growth 

The OECD U.S. Composite Leading Indicator (CLI) increased 0.2 points in November, its seventh consecutive gain, to 98.9, as the economy continued to claw its way back from the recession. But the index has yet to recover to its February level and remains well below 100, reflecting a below-average pace of growth. The latest increase was about even with the gains in the prior two months, but a fraction of the gains in late spring and summer, as the recovery has moderated. Today’s FDA approval of a COVID vaccine should give impetus to the economic recovery in 2021. 

Job openings up, but labor market slack still high 

Job openings rose 2.4% in October to 6.652 million, led by gains in health care and social assistance and state and local government education. But the level is still 360,000 below what it was at the start of the year, as labor demand has yet to fully recover from the pandemic slump. The number of unemployed per job opening edged down to 1.7 from 1.9, which is about double its pre-recession level, indicating a lot of labor market slack. 

Hires slipped 1.3% to 5.812 million, also slightly below their level at the start of this year. Total separations climbed 5.4% to 5.107 million, a six-month high, led by a notable pickup in layoffs. The quit rate was unchanged at 2.2%, but lower than pre-pandemic, implying reduced worker confidence.

Wholesale inventories rise 

Wholesale inventories jumped 1.1% in October, its third consecutive gain, and the most since January 2019. It exceeded the consensus of +0.9%. The increase was led by nondurable goods (mostly farm products and drugs). Wholesale sales rose a larger 1.8%. As a result, the wholesale I/S ratio edged down to 1.31 from 1.32, basically in line with its pre-recession level. 

Mortgage applications still strong 

The MBA Purchase Index fell 5.0% last week, its first decline in four weeks. But the Government Purchase Index picked up 1.9%, up for the fifth consecutive week, highlighting continued strengthening in the demand for FHA and VA backed loans. The Refinance Index increased 1.8%. Broadly speaking, mortgage application volume remains high, supported by near-record low mortgage rates. Both refi and purchasing activities are up from a year ago and headed for a strong finish of 2020.

Jobless claims and consumer price inflation come in higher than expected

Weekly initial jobless claims (chart) came in at a level of 853,000 for the week ended December 5, above the Bloomberg estimate of 725,000, and compared to the prior week's upwardly-revised 716,000 level. The four-week moving average rose by 35,500 to 776,000, while continuing claims for the week ended November 28 increased by 230,000 to 5,757,000, north of estimates of 5,210,000. The four-week moving average of continuing claims declined by 260,250 to 5,935,750.

The Consumer Price Index (CPI) (chart) rose 0.2% month-over-month (m/m) in November, above estimates of a 0.1% gain, and compared to October's unrevised flat reading. The core rate, which strips out food and energy, also increased 0.2% m/m, versus expectations calling for a 0.1% gain and October's unadjusted flat reading. Y/Y, prices were 1.2% higher for the headline rate, north of forecasts projecting a 1.1% increase and matching October's unadjusted rise. The core rate was up 1.6% y/y, above projections of a 1.5% gain and in line with October's unrevised increase.

December consumer sentiment surprisingly jumps, wholesale price inflation subdued

The December preliminary University of Michigan Consumer Sentiment Index (chart) unexpectedly rose to 81.4 versus the Bloomberg expectation of a dip to 76.0 from November's 76.9 reading. The surprising improvement for the index came as both the current conditions and the expectations portions of the index rose. The 1-year inflation forecast declined to 2.3% from November's 2.8% rate, and the 5-10 year inflation forecast remained at November's 2.5% level.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in November ticked 0.1% higher month-over-month (m/m), matching the Bloomberg forecast and below October's unrevised 0.3% increase. The core rate, which excludes food and energy, also gained 0.1% m/m, in line with estimates and October's unadjusted rise. Y/Y, the headline rate was 0.8% higher, compared to projections of a 0.7% gain and the prior month's unadjusted 0.5% increase. The core PPI increased 1.4% y/y last month, below estimates of a 1.5% increase, and compared to October's unrevised 1.1% rise.

Tuesday, December 8, 2020

5G Portfolio Returns 66% in 2 years

Using a basket of stocks that should benefit from the development of 5G wireless networks, I put together a portfolio in January 2019. The original investment was $75,000 and is currently worth $121,204. Adding in dividends of about $3,500, the total value would be nearly $125,000, or a gain of about $50,000, a 66.66% percent return (33.33% annualized). No active management was used, such as re-allocating funds from nonperformers into stronger performing stocks. This portfolio will be deleted while I put together a different one, based on growth ETFs. More on that in a future post.



 

Saturday, December 5, 2020

Weekly Economic Reports: Week ending Dec 4, 2020

Note: Rather than wait until Friday, I'll try to update daily, as new reports and information becomes available. 

Each of the major indices set all-time highs this week, powered higher by growth stocks and value stocks alike. The Nasdaq Composite claimed the winning spot with a 2.1% gain and was followed by the Russell 2000 (+2.0%), S&P 500 (+1.7%), and Dow Jones Industrial Average (+1.0%).

Nine of the 11 S&P 500 sectors contributed to the advance. The energy sector rallied 4.5%, and the information technology sector rose 2.8%. The utilities sector (-2.2%) was the weakest link by a wide margin.


Regional factory activity moderates 

The Chicago Business Barometer fell 2.9 points in November to 58.2, below the consensus of 59.1, indicating some moderation in factory activity growth in the region. New orders and production both grew at slower rates, a sign of softer demand. Inventories eased to a three-month low. Employment remained in contraction territory for the 16th consecutive month. Supplier deliveries slowed significantly. Prices rose at the quickest pace in over two years. 

Similarly, the Texas Manufacturing General Business Activity Index slipped 7.8 points to 12.0 in November, also indicating somewhat slower growth. The six-month outlook for business activity in the region cooled. Respondents shared a similar assessment with respect to their own companies. Production, shipments, and new orders came down. The inventory drawdown intensified and supplier deliveries slowed. But employment and capex picked up, a hopeful sign that the moderation in growth could be only temporary. 

All six regional factory activity indexes we follow remained in expansion territory in November, but all posted lower readings than in the previous month. This suggests a similar directional change for the ISM Manufacturing Index, which will update later this week. 

Pending home sales off slightly 

Pending home sales edged down 1.1% in October, its second straight decline, and contrary to the consensus of a 2.0% gain. Even so, pending sales were still 20.2% higher than a year ago, near its fastest pace since the spring of 2010. All four regions posted double-digit y/y gains. This suggests that existing home sales will remain strong in the near-term. 

Record low mortgage rates and pandemic-driven demand for larger and/or secondary homes have boosted contract signing activity and home sales this year. Combined with scarce inventory, this has led to a significant appreciation in home values. While this creates a positive housing wealth effect for existing home owners, it has begun to chip away at housing affordability, particularly for first-time homebuyers, as noted by the NAR. 

Manufacturing, construction data continues to show solid growth

The November Institute for Supply Management (ISM) Manufacturing Index showed manufacturing slowed slightly but remained comfortably in expansion territory (a reading above 50). The index declined to 57.5 from October's unrevised 59.3 level, and versus the Bloomberg consensus estimate of 58.0. The larger-than-expected deceleration came as new orders and production growth slowed, and employment fell back into contraction territory. Prices remained elevated.

The ISM said, "The manufacturing economy continued its recovery in November. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential." However, the ISM added that panel sentiment is optimistic, improving compared to October.

The final November Markit U.S. Manufacturing PMI Index was unrevised from the preliminary level of 56.7, matching forecasts, and above October's 53.4 level. A reading above 50 denotes expansion. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.

Construction spending rose 1.3% month-over-month (m/m) in October, versus projections of a 0.8% gain, and following September's downwardly-revised 0.5% decrease. Residential spending grew 2.9% m/m but non-residential spending was flat.

ADP's November employment report misses

The ADP Employment Change Report showed private sector payrolls rose by 307,000 jobs in November, below the Bloomberg forecast calling for a 440,000 gain. October's rise of 365,000 jobs was revised to a 404,000 increase. Today's ADP data, which does not include government hiring and firing, comes ahead of Friday's broader November nonfarm payroll report, expected to show headline employment grew by 486,000 jobs and private sector jobs rose by 560,000 (economic calendar). The unemployment rate is forecasted to dip to 6.8% from 6.9% and average hourly earnings are projected to tick 0.1% higher month-over-month (m/m), and be up 4.2% y/y.

MBA Mortgage Application index declines

The MBA Mortgage Application Index declined by 0.6% last week, following the prior week's 3.9% gain. The decrease came as a 4.6% drop in the Refinance Index more than offset a 9.0% jump in the Purchase Index. The average 30-year mortgage rate remained at 2.92%.

Fed Beige Book shows continuing signs of economic recovery

The Fed released its Beige Book report Wednesday afternoon (Dec 2) —an anecdotal look at business activity across all the Fed Districts—a tool used by monetary policymakers in preparation for its next two-day meeting scheduled to conclude on December 16th. The report showed continuing signs of an economic recovery, with economic expansion characterized as modest or moderate, however also noted that several Districts described little or no growth in early November. The release highlighted higher-than-average growth in manufacturing, distribution and logistics, homebuilding, and existing home sales, but also deteriorating loan portfolios for commercial lending in the retail and leisure and hospitality sectors. Finally, the report indicated that most outlooks remain positive, but optimism has waned due to concerns over “the recent pandemic wave, mandated restrictions, and the expiration dates for unemployment benefits and for moratoriums on evictions and foreclosures.”

Jobless claims moderate more than expected

Weekly initial jobless claims came in at a level of 712,000 for the week ended November 28, below the Bloomberg estimate of 775,000 and the prior week's upwardly-revised 787,000 level. The four-week moving average declined by 11,250 to 739,500, while continuing claims for the week ended November 21 fell by 569,000 to 5,520,000, south of estimates of 5,800,000. The four-week moving average of continuing claims dropped by 425,500 to 6,194,250.

November services data continue to show growth

The November Institute for Supply Management (ISM) non-Manufacturing Index showed expansion in the key services sector (a reading above 50) decelerated by a slightly smaller amount than anticipated, declining to 55.9 from October's 56.6 level, and modestly above forecasts of a decrease to 55.8. The index slipped as the new orders and business activity components both declined but remained comfortably above the key 50 level, while employment growth accelerated. The ISM said, "Respondents' comments are mixed about business conditions and the economy. Restaurants continue to struggle with capacity constraints and logistics. Most companies are cautious as they navigate operations amid the pandemic and the aftermath of the U.S. presidential election."

The final Markit U.S. Services PMI Index for November was unexpectedly revised higher to 58.4 from the preliminary estimate of 57.7, and versus forecasts of a modest downward adjustment to 57.5. The index was up from October's 56.9 figure and the 51.6 reading a year ago. A reading above 50 denotes expansion. Markit's release is independent and differs from the ISM report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in size, including small and medium-sized companies.

Energy transition could cost $40 trillion

If the world is to come anywhere close to limiting global warming to 2 degrees Celsius or below, it will need a bare minimum of US $30 trillion to US $40 trillion of investment in energy systems and decarbonization of industries where emissions are notoriously hard to abate such as steel and cement making, according to Wood Mackenzie.

OPEC+ compromises on small production hike of 500K bpd starting January

As of Thursday, crude futures are hovering around the unchanged mark (CL @ $45.74 per barrel) as traders digest OPEC+ members agreeing to small production hikes in the new year. Delegates say they will start to increase output by 500K bpd starting in January and will assess from there. Saudi Arabia had been pushing for a three-month extension of current cuts, but the UAE objected noting that other countries still weren't in compliance with that agreement.

Discord characterized the OPEC+ meeting this week, and concerns grew that the group would fail to agree to postponing the planned production increases. But in the end, instead of allowing cuts to ease by 2 mb/d, the group agreed to monthly incremental production increases of just 0.5 mb/d. They also agreed to meet monthly going forward in early 2021 to assess the health of the market. The deal was not as bullish as market analysts had expected, but neither was it a failure. The reaction in oil prices suggests OPEC+ did enough to maintain market stability. 

Meanwhile, the Baker Hughes North American rig count increased to 425 from 422, reported on Dec. 4, 2020.


Employment growth slows

Nonfarm payrolls increased by just 245,000 in November, well below Wall Street estimates as rising coronavirus cases coincided with a considerable slowdown in hiring.

Economists surveyed by Dow Jones had been looking for 440,000 and the jobless rate to decrease to 6.7% from 6.9% in October.

The unemployment rate met expectations, though it fell along with a drop in the labor force participation rate to 61.5%. A more encompassing measure of joblessness edged lower to 12% while the number of Americans outside the labor force remains just above 100 million.

The November gain represented a pronounced slowdown from the 610,000 positions added in October.

In all, the economy has brought back 12.3 million of the 22 million jobs lost in the first two months of the crisis. There are still 10.7 million Americans considered unemployed, compared with 5.8 million in February.

The total of permanent job losers remained at 3.7 million in November, but is up 2.5 million from February.

Trade balance smaller than expected

The trade balance showed that the October deficit widened by a smaller amount that anticipated, coming in at $63.1 billion, compared to forecasts of $64.8 billion, after September's downwardly-revised deficit of $62.1 billion. Exports rose 2.2% m/m after September's 2.4% gain, and imports increased 2.1% after the prior month's 0.6% rise. A deficit means the U.S. imported $63.1 billion more than it exported. 

The key takeaway from the report is the rise seen in both imports and exports, as that is symptomatic of a pickup in global trade and economic activity.

Factory orders rise

Factory orders rose 1.0% m/m in October, versus estimates of a 0.8% gain, and compared to September's upwardly-revised 1.3% gain. This was the sixth-straight monthly rebound from the historic 13.5% tumble in April which followed the 11.0% fall in March.

Up to the plate: Bad jobs report, inflation and supply chain fears

In an amazing display of deception, Biden declared after the Labor Department had its worst report in decades, “This month’s job numbers sho...