- Late to the Party Again, Apple Gets Added to the Dow –Barry Ritholtz
- An Inflection Point for Bonds? –Dr. Ed
- Stranded in NYC –Jeff Saut
- Why the Prime Labor Force Participation Rate Has Declined –Calculated Risk
Guest Post by Elliott Wave International
Some 30 million people are either out of work or severely underemployed
Editor’s note: You’ll find the text version of the story below the video.
The financial media has recently featured stories with an upbeat outlook for the U.S. economy.
For example: The economy is on track for “the fastest growth in a decade” (Associated Press), and “Experts expect jobs aplenty in ’15” (USA Today).
This upbeat tone is related to December’s U.S. jobless rate of 5.6%, its lowest since June 2008.
This segment is excerpted from this week’s Notes From the Rabbit Hole, NFTRH 329, and was originally titled…
The ISM PMI reports for December and January showed deceleration in line with our view that a persistently strong US dollar would begin to eat away at US manufacturing, exporters and other companies that depend on significant foreign business. But in an age where investors will bid up Twitter* (with its forward P/E of 141 and 30B market cap to 1.2B revenue) by 16% in a day, are we returning to the old days of ‘PE’s don’t matter’ with the hook or tout being ‘it’s all about ad revenue’?
One analyst quoted in the WSJ: “Given FB’s (Facebook) history… we think that investors do not want to miss out on another social stock run”
Is this type of mentality not reminiscent of the late 1990’s? Twitter, like Facebook, is implementing strategies to monetize all those short attention spanned eyeballs, but 30B?
As you will see by the charts in this week’s report, despite elevated general forward valuations (graph below) and ridiculous individual valuations like Twitter and so many other fad stocks, the bull market’s technical situation remains unbroken and generally bullish, although the volatile ‘swing’ market theme remains intact for now.
* Personally, I deleted my Facebook account because after all, who really needs to see yet another picture of someone’s super bowl chili or winter vacation in the tropics? I use Twitter as a button at the websites. Make post, press button… done. Another tweet the world really doesn’t need. But it is a handy little tool.
Back on topic, here is the current forward P/E level of the US stock market (graph source is factset.com, by way of the free ‘Daily Shot’ email service from soberlook.com). They each cover relevant global macro data and are recommended.
P/E is as stretched as it gets for US corporations. But in a world where deflation is the key theme, capital flows have well, flowed into US asset markets. On a risk vs. reward basis, the view continues to be that certain global areas are more favorable than the US for new investment. As an example, we have been noting that Germany, as an exporter operating behind a weak currency and QE-inclined Central Bank, could be a destination for favorable investment vs. the US in 2015. Deutschland factory orders are improving.
Never mind that the US increased employment by 252,000 in December and unemployment sagged to 5.6%. The stock market moves to its own beat and doesn’t care much about the particulars in the ‘Jobs’ report or the media’s interpretations of its details.
The market only cares about how those particulars affect the money creation that has kept it in operation since 2009. Here are two graphs from NFTRH 324…
On the Monetary Base view, Post-QE Base dropped, the S&P 500 popped (Santa seasonals)… then dropped… then the Base popped after the S&P 500 dropped and then the S&P 500 popped, then it dropped (to fill the gaps) and popped again; but today it dropped.
The Fed Funds view (ZIRP is into its 6th year now) simply shows box 1 (black) and box 2 (red). Box 1 wants to see box 2 remain very thin and horizontally rectangular while it continues to grow very tall in a vertically rectangular sort of way.
Economics 101, Wonderland style.
The worry in the ‘Jobs’ details was supposedly in wage stagnation. The mainstream thinking being that wage growth would spur organic economic expansion as all those consumers get out there and gobble up the economy’s products.
But it can be argued (by the second chart above that it is the lack of wage growth that can cause fretting by policy makers and an avoidance of any moves that would threaten box 2. Put another way, if wages start growing and the things that mainstream economists call inflation start to get out of hand the pressure would mount – amidst the strong economic backdrop – to get on that rate hike cycle and not fall behind the curve.
So today’s reaction by the stock market is not unexpected by this individual participant, because I was only looking for a gap-fill bounce with no need to read more into it than that. But the lack of wage growth is not a reason why the stock market should be going down. The jumpiness in yield spreads could be among them, however.
Guest Post by Tom McClellan
November 14, 2014
The data on the U.S. unemployment rate have been getting progressively better over recent months, either because of or in spite of the government’s efforts, depending on one’s viewpoint. And if this week’s chart is to be believed, then the data should continue to get better over the next several months.