On a stressful day in the stock market, yield spreads are not reflecting much stress. Here is the state of the 10yr-2yr spread at yesterday’s close. It looked constructive as it was gently rising.
But today, as global markets take a good hit (off some hype out of China* no less), the 2’s are not indicating a rush to short-term liquidity instruments. Quite the contrary. While long-term yields are slightly down (30yr) to slightly up (10yr), the 2yr is up significantly more and this is not a risk ‘OFF’ structure.
This in-day stuff is noisy and has nothing to do with greater trends. That’s what we write 30 page weekend reports for; to stay on the correct trends and anticipate those that are coming. But this snapshot is not indicating financial market stress (today at least) that is commensurate with the downside in stock markets.
* And surely, the news about officials allowing shorting of Chinese stocks is not material fundamentally, but is material to knee jerking momos the world over (in the short-term at least).
By Michael Ashton
Summary of My Post-CPI Tweets
Below you can find a recap and extension of my post-CPI tweets. You can follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments.
- Core CPI+0.23% m/m is the story, with y/y upticking to 1.754% (rounded to +1.8%). This was higher than expected, by a smidge.
- Core services +2.4% y/y down from 2.5%. But core goods -0.2%, up from -0.5% last mo and -0.8% two months ago. Despite dollar strength!
- Core ex-housing rose to 0.91% y/y from 0.69% at the end of 2014. Another sign core inflation has bottomed and is heading back to median.
- The m/m rise of 0.20% in core ex-shelter was the highest since Jan 2013.
- Primary rents 3.53% y/y from 3.54%; OER 2.693% from 2.687%. Zzzzz…story today is outside of housing, which is significant.
- Accelerating major groups: Apparel, Transport, Med Care, Recreation (32.1% of index). Decel: Food/Bev, Housing, Educ/Comm, Other (67.9%)
- …but again, in housing the shelter component (32.7% of overall CPI) was unch at ~3% while fuels/utilities plunged to -2.26% from flat.
- [in response to a question “Michael we have been scratching our heads on this one… is it some impact of port strike do you think?”] @econhedge I don’t think so. But core goods was just too low. Our proxy says this is about right.
- @econhedge w/in core goods, Medical commodities went to 4.2% from 3.9%, new cars from 0.1% to 0.3%, and Apparel to -0.5% from -0.8%.
- @econhedge so you can argue Obamacare effect having as much impact as port strike. But it’s one month in any case. Don’t overanalyze.
- Medicinal drugs at 4.46% y/y. In mid-2013 it was flat. That was a big reason core CPI initially diverged from median. Sequester effect.
- @econhedge Drugs 1.70%, med equip/supplies 0.08% (that’s percentage of overall CPI). 8.7% and 0.4% of core goods, respectively.
- Median should be roughly 0.2%. I have it up 0.21% m/m and 2.22% y/y, but I don’t have the right seasonals for the regional OERs.
- Further breakdown of medical care commodities: the biggest piece was prescription drugs, +5.74% y/y vs 5.19%. The other parts were lower.
The main headline of the story is that core inflation rose the most month-over-month since May. After a long string of sub-0.2% prints (that sometimes rounded up), this was a clean print that would annualize to 2.7% or so. And it is no fluke. The rise was broad-based, with 63% of the components at least 2% above deflation (see chart, source Enduring Investments, and keep in mind that anything energy-related is not part of that 63%) and nearly a quarter of the basket above 3%.
This is no real surprise. Median has consistently been well above core CPI, which implied some “tail categories” were dragging down core CPI. These tail categories are still there (see chart, source Enduring Investments), but less than they had been (compare to chart here). Ergo, core is converging upward to median CPI. As predicted.
The next important step in the evolution of inflation will be when median inflation turns decisively higher, which we think will happen soon. But that being said, a few more months of core inflation accelerating on a year/year basis will get the attention of the moderates on the Federal Reserve Board. I don’t think it will matter until the doves also take notice, and this is unlikely to happen when the economy is slowing, as it appears to be doing. I don’t think we will see a Fed hike this year.
By Tom McClellan
US Taxes Returning to Economy-Killing Level
April 17, 2015
The April 15 income tax filing deadline came this week, and so taxes are on the minds of a lot of Americans. As Arthur Laffer noted 3 decades ago, it reaally is possible to set tax rates too high such that it actually hurts the economy. We appear to be in such a condition now.
I wrote about this topic back in January, when lawmakers were contemplating raising the tax on gasoline. But it is worth revisiting as we see total federal receipts creeping up toward 18% of GDP. Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy. And sometimes we can see that effect from a total federal take at less than 18%.
Continue reading US Taxes & Economy…
Given Steve Saville’s all too accurate portrayal of the gold stock sector as one of big thrills and all too bloody spills (Poor Gold Stock Performance…), I thought I’d put up a chart of one of mine that I have held, traded a little, but mostly held.
Klondex is just a little engine that could and has been able to since establishing a bull market for itself in 2013, long before the sector bottomed (assuming it bottomed).
Here’s the weekly showing the beginning of KDX’s bull market (black arrow).
So if your resident gold stock expert does not have the likes of KDX.TO, KGI.TO, LSG and/or other relatively strong out performers on their recommended list, you might wonder why. These have been among the items I perceive as ‘relative quality’ as listed in NFTRH each week. And I am not a gold stock expert… duhhh.
Here’s a hint though… neither are the gold stock experts, most of the time.
By Steve Saville
Poor gold-stock performance is mostly due to poor gold-mining-business performance
If you are speculating in gold-mining stocks it is important to have your eyes wide open and to not be hoodwinked by the pundits who argue that the current low prices for these stocks imply extremely good value. The fact is that at the current gold price not a single senior gold-mining company is under-valued based on traditional valuation standards such as price/earnings and price/free-cash-flow. Also, while some junior gold-mining companies are very under-valued, most are not. In other words, the low price of the average gold-mining stock is not a stock-market anomaly; it’s an accurate reflection of the performance of the underlying business.
The relatively poor operational performance of the gold-mining industry is not something new. It is not something that has just emerged over the past few years or even over the past two decades, meaning that it can’t be explained by, for example, the advent of ETFs (the gold and gold-mining ETFs actually boosted the prices of both gold and the stocks owned by the ETFs during 2004-2011). The cold, hard reality is that with the exception of the banking industry, which usually gets bailed out once per decade at the expense of the rest of the economy, since 1970 the gold-mining industry has wasted capital at a faster pace than any other industry. That’s why the gold-mining-stock/gold-bullion ratio is in a multi-generational decline that shows no sign of reversing.
It’s certainly true that a lot of money can be made via the judicious speculative buying of stocks in the gold-mining sector, because these stocks periodically generate massive gains. It’s just that in real terms (relative to gold) they end up giving back all of these gains and then some.
There is so much data flying around out there. From the Credit data we reviewed yesterday to weakening manufacturing and exports to employment up nicely one month and down big the next, to frisky consumers (the economy’s ‘back end’, putting it nicely) out there confidently living it up.
Big pictures help us let it all simmer and take out the noise. Here is a big picture for you… and it is an unchanged story; America has eaten its financial seed corn (replacing it with the soft meal known as credit) and financial market analysis is now in the hands of data freaks parsing and quantifying every little twitch on short time frames to draw conclusions and extrapolations based on little more than a black hole (that would be debt).
Here is the 10 year yield (blue shaded area) pinned down for decades by our ‘Continuum’ indicator, the monthly EMA 100 along with the 2 year yield (orange).
Continue reading Boom ZERO
As often noted to NFTRH subscribers, I believe now is a good time for swing trading. Not day trading (whipsaw) and not investment (other than maybe a few items I’d consider investment worthy for my own reasons, largely stemming from my originally coming from the productive economy, not the financialized one).
Swing trading is defined here as the act of taking positions on downside buying opportunities and holding through some ups and down and then forcing myself to take profits when they are presented. In 2015, for some reason they have been presented with great regularity. I am not sure why, other than I did improve my own focus as a trader and decided to stop burning so many commissions.
I bought Intel on its big drop and decided to hold into earnings. That’s often a tough call. Today it’s up in AH after meeting expectations.
Then there are the Biotech/Specialty Pharmas. We have been following the index and the sector ETF, advising that until the trend is broken the trend is not broken.
Still, I decided to take profit on this one again after buying the recent plunge.
I decided to continue holding this one despite today’s 10%+. The chart and some light fundamental study (but it’s a spec. Bio!) kept me holding.
Continue reading A Good Run Continues
Well, the knock down in the 30yr-5yr yield spread did not last long. While it has not done anything it didn’t already do before ultimately failing in October and January, it bears watching.
The nominal 10yr is down…
And the nominal 2yr is down by more…
So this spread is rising from yesterday’s close per the following…
This is stuff you won’t find on Bubble Vision or maybe in your CFA’s monthly report. But it is only critical to most markets. The state of nominal yields dropping while curves rise would be a tail wind for gold, and for the stock market? Not so much. Yet neither of these mostly opposed asset classes have reacted yet. That is because… this:
Major trends have not changed yet. Patience my friends.
By Elliott Wave International
[biiwii comment]: 3 posts, all by guests. Some Mondays I am all talked out after an NFTRH report, and just enjoy decompressing. The weather is great, the market has been good thus far in 2015 and well, it’s a day by day thing. As to EWI’s theme here, it makes no difference to me… bubble, no bubble, bubble growing, bubble popping… the theme continues to be trade what you see, not what your ego or hopes and dreams see… and take profits and manage risk along the way. And for crying out loud stop reading people who micro manage gold in a vacuum as if it’s the only market on earth. They call that agenda.
Tech bubble: Different this time?
Editor’s note: This article is from Elliott Wave International’s brand-new investment report, “U.S. Investors Face a Giant, Historic Bubble.” It originally appeared in the April issue of The Elliott Wave Financial Forecast, published March 27, 2015. For a limited-time, EWI has agreed to give our readers exclusive free access to the full report. Please click here to read it now.
In March, we covered the return to a popular fascination with technology.
The striking resemblance to 2000’s technology mania is not going unnoticed. How can it? With the NASDAQ’s much heralded return to 5000 and magazine covers proclaiming “Google Wants You To Live Forever,” concern about an “asset bubble” is being raised. But this is actually another throwback to early March 2000, when the NASDAQ reached its all-time high and the Financial Forecast remarked on a “public ambivalence toward warnings of any kind.”
Continue reading Tech Bubble: Different This Time?