Friday, December 8, 2017

Best of All Worlds For Stocks?

Patti Domm of CNBC reports, Strong November jobs report shows solid economy and best of all worlds for stocks:
November's solid jobs gain and modest wage growth shows a strong economy with still low inflation, a perfect recipe for stock market gains.

There were 228,000 jobs added in November, and unemployment remained at a low 4.1 percent rate. Average hourly wage growth at 0.2 percent was a slight disappointment, as economists were hoping to see 0.3 percent, or a 2.7 percent year-over-year rise and a signal that inflation would be picking up.

"This is another addition in the 'Goldilocks' scenario—slightly better jobs, no faster wages, no pressure on inflation. It's not going to change the Fed from increasing rates next week, but there's nothing so dramatic as to accelerate their time table, or at this point ease back," said Ed Keon, managing director and portfolio manager at QMA. "It just shows a robust economy and not one yet that shows inflation pressures."

Stock futures rose after the 8:30 a.m. ET report, and the market opened higher with tech leading the gains. The important monthly jobs report comes after a sloppy period for stocks, but ahead of the time of year when seasonal forces and a "Santa" rally often give the market a boost.

Meanwhile Treasury yields at the short end trended slightly lower, particularly the 2-year note. That area of the yield curve is most affected by Fed rate hikes. The 2-year was at 1.80 percent in morning trading.

Strong areas of hiring included professional and business services, up 44,000; manufacturing, up 31,000; health care, up 30,000, construction up 23,000.

ZipRecruiter's chief economist, Cathy Barrera said manufacturing may be seen as an area that needs help, but it has been doing well.

"Manufacturing is continuing to be called out for a third or fourth month in a row. That usually surprises people. It seems that actually we've seen jobs added there...We've added about 175,000 since last October," she said.

The lack of wage growth may be a concern for economists, but for the markets, it buys more time for a Fed that can slowly increase interest rates.

"We've seen this dance before —strong growth, no inflation. It doesn't change the Fed for December. How much the Fed goes next year is going to be dependent on whether we get inflation pressures picking up," said John Briggs, head of strategy at NatWest Markets. "The fact the economy is doing well and the unemployment rate remains low...means you can keep them on track to gradually raise rates but there is a point where if you do not get inflation pressure, it might give them pause."

The market is now awaiting the Fed's meeting next week, where it is expected to raise interest rates by a quarter point. The Fed also issues its outlook and forecast for interest rates, the last in the Fed headed by Janet Yellen. Fed Governor Jerome Powell takes over as Fed chair in February.

The Fed has forecast three hikes for next year, and it is expected to keep its outlook about the same even though the market has been skeptical it will hike as much as it expects.

"You're starting to enter the transition from Yellen to Powell. I'm not sure this is the time you want to have a huge messaging shift from the Fed," Briggs said.
Jeff Cox of CNBC also reports, November nonfarm payrolls rise 228,000 vs. 200,000 est.:
Economists surveyed by Reuters had expected nonfarm payrolls to grow by 200,000.

A more encompassing measure of joblessness that includes discouraged workers and those holding part-time positions for economic reasons moved up one-tenth of a point to 8 percent. The ranks of those not in the labor force edged higher by 35,000 to 95.4 million.

Closely watched wage data fell short of expectations. Average hourly earnings rose 0.2 percent for the month and 2.5 percent for the year, versus projected increases of 0.3 percent for the month and 2.7 percent for the year.

"The November employment data is largely as expected. For an expansion that began in mid-2009, no negative surprises are welcome," said Mark Hamrick, senior economic analyst at Bankrate.com. "The lingering impacts of recent hurricanes and flooding have reverted back to relative calm in the statistics, meaning that this is a 'cleaner' number."

Federal Reserve policymakers have been concerned over the lack of income growth, though they are still expected to raise the central bank's benchmark interest rate a quarter point next week. The probability dipped a bit after the jobs release but remains above 90 percent, according to the CME FedWatch Tool.

"The jobs number in the report is good news for American workers, but the lack of stronger wage growth is not," said Robert Frick, corporate economist with Navy Federal Credit Union. "Without stronger wage growth, higher inflation remains in doubt, and that takes away one reason for the Fed being more aggressive in hiking rates."

The biggest November job gains came in professional and business services [46,000], manufacturing [31,000] and health care [30,000]. In total, goods-producing occupations rose by 62,000. Construction saw a gain of 24,000, almost all of which were specialty trade contracts, a profession that has added 132,000 jobs over the past year.

Heading into the holiday season, retail jobs also grew by 18,7000.

Markets reacted positively to the news, with major stock indexes opening higher.

Job growth has slowed this year — to 174,000 per month compared with 187,000 a year ago — as the economy edges closer to what officials consider full employment, or the condition where those looking for work have positions. However, Fed officials have been dismayed that the tight labor market has not resulted in significantly higher wages.

"With continued improvement in the labor market, room for continued upward trajectory in 2018 is likely limited because there's not much slack left to hire workers for further growth," said Steve Rick, chief economist at CUNA Mutual Group.

The quality of job creation tilted toward full time, whose ranks grew by 160,000, while part-time positions contracted by 125,000, according to the household survey.
Lucia Mutikani of Reuters also reports, Strong U.S. job growth in November bolster economy's outlook:
U.S. job growth increased at a strong clip in November, painting a portrait of a healthy economy that analysts say does not require the kind of fiscal stimulus that President Donald Trump is proposing, even though wage gains remain moderate.

Nonfarm payrolls rose by 228,000 jobs last month amid broad gains in hiring as the distortions from the recent hurricanes faded, Labor Department data showed on Friday. The government revised data for October to show the economy adding 244,000 jobs instead of the previously reported 261,000 positions.

Employment gains in October were boosted by the return to work of thousands of employees who had been temporarily dislocated by Hurricanes Harvey and Irma. November’s report was the first clean reading since the storms, which also impacted September’s employment data.

Average hourly earnings rose five cents or 0.2 percent in November after dipping 0.1 percent the prior month. That lifted the annual increase in wages to 2.5 percent from 2.3 percent in October. Workers also put in more hours last month.

The unemployment rate was unchanged at a 17-year low of 4.1 percent amid a rise in the labor force. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.

The fairly upbeat report underscored the economy’s strength and could fuel criticism of efforts by Trump and his fellow Republicans in the U.S. Congress to slash the corporate income tax rate to 20 percent from 35 percent.

“The labor market is in great shape. Tax cuts should be used when the economy needs tax cuts and it doesn’t need tax cuts right now,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “When politics and economics are mixed in the stew, the policies that are created often have a very awful smell.”

Republicans argue that the proposed tax cut package will boost the economy and allow companies to hire more workers. But with the labor market near full employment and companies reporting difficulties finding qualified workers, most economists disagree. Job openings are near a record high.

The economy grew at a 3.3 percent annualized rate in the third quarter, the fastest in three years, and appears to have maintained the momentum early on the October-December quarter.

The average workweek rose to 34.5 hours in November, the longest in five months, from 34.4 hours in October. Aggregate weekly hours worked surged 0.5 percent last month after October’s 0.3 percent gain.

“A six-minute increase in the work week does not sound like much, but given the size of the labor market, it turns out to be significant in terms of output,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The dollar was trading higher against a basket of currencies, while prices for U.S. Treasuries fell. Stocks on Wall Street rose.

FULL EMPLOYMENT

While November’s employment report will probably have little impact on expectations the Federal Reserve will raise interest rates at its Dec. 12-13 policy meeting, it could help shape the debate on monetary policy next year.

The U.S. central bank has increased borrowing costs twice this year and has forecast three rate hikes in 2018.

Employment growth has averaged 174,000 jobs per month this year, down from the average monthly gain of 187,000 in 2016. A slowdown in job growth is normal when the labor market nears full employment.

The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

The unemployment rate has declined by seven-tenths of a percentage point this year. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, ticked up to 8.0 percent last month from a near 11-year low of 7.9 percent in October.

Economists believe the shrinking labor market slack will unleash a faster pace of wage growth next year. That, combined with the tax cuts, would help to boost inflation.

“Detractors will argue that wage increases are too slow but we have shown in our research that adjusting for demographic effects, wage gains are where one ought to expect them to be,” said John Ryding, chief economist at RDQ Economics in New York.
"Adjusting for demographic effects, wage gains are where one ought to expect them to be." I love that comment, it's a keeper.

Alright, it's Friday, let me take a step back, analyze this US jobs report and talk markets. First, the US economy is humming along nicely as are plenty of other economies all over the world. That is great news for stocks and other risk assets but it still begs the question, how sustainable is this going forward?

In particular, Zero Hedge notes the following on the November jobs report on where the jobs were:
Assuming that the BLS' estimate of avg hourly warnings growing only 0.2% in November is accurate, it would imply that - as has often been the case - the bulk of job growth in November took place in minimum-paying and other low-wage jobs. However, a breakdown of jobs added by industry shows the contrary to expectations, the bulk of new job creation, and 3 of the 4 top categories, were not in the "low wage" bucket. In fact, as shown below, with the exception of Education and Health jobs which rose by 54K in November, Manufacturing (+31K), Professional and Business Services (+27), and Construction (+24) were the fastest growing occupations in the previous month.


For those wondering, yes waiters and bartenders did hit a new all-time high of 11.783 million in November, an increase of 18.9k for the month.

Now, the folks at Zero Hedge are perennial gold bugs who see inflation conspiracies everywhere, so it doesn't surprise me they think the official numbers are under-reporting real wage inflation.

If you think wage infation is coming back strong next year, now is a great time to load up on SPDR Gold Shares (GLD) and in particular, junior gold miners (GDXJ) which are at critical make-or-break weekly levels:


I'm not in the "inflation is coming" camp so it's hard for me to get excited about gold. I think gold shares will take off after the next crisis, when central banks engage in QE infinity.

Right now, I'm far more worried about deflation headed to the US which won't happen tomorrow, but when it does strike, watch out, it will fundamentally transform markets and the global economy as we know it.

Interestingly, while stocks took off after the employment numbers were released, there was no big selloff in bonds as yields in the long end remain unchanged. US long bond prices (TLT) are still doing well despite all the great economic news:


One has to ask why aren't long bonds selling off strongly, especially if wage inflation is right around the corner?

My answer is that the bond market isn't buying this inflation argument, and neither should you. In fact, even though US inflation expectations edged up again in October to 2.61 percent, touching their highest level in six months, according to a Federal Reserve Bank of New York survey, some are worried about the trend.

Last month, Chicago Federal Reserve Bank President Charles Evans said he is worried about a drop in US inflation expectations and called for the US central bank to respond by flagging the likelihood of higher inflation ahead:
"When I look at the downward drift in multiple expectations measures, I find it tougher to confidently buy into the idea that inflation today is just temporarily low once again," Evans said in remarks prepared for delivery to the UBS European Conference in London.

To prevent low inflation expectations becoming entrenched, he said, "our public commentary needs to acknowledge a much greater chance of inflation running at 2-1/2 percent in the coming years than I believe we have communicated in the past."

Evans, a voter this year on Fed policy, did not say in his prepared remarks whether he would support an interest-rate hike in December, as many of his colleagues have said they would, and as markets overwhelmingly expect.

But his comments suggest he has become increasingly frustrated with falling inflation, despite an economy he said is headed for "continued solid growth" in 2018.

Evans warned Wednesday that unless the Fed addresses falling inflation expectations, "we could be in for the kind of trouble that Bank of Japan has faced for so long."

Inflation by the Fed's preferred measure, core personal consumption expenditures (PCE), was just 1.3 percent in September, even though the unemployment rate, at 4.1 percent, suggests the U.S. economy is at full employment.

Fed Chair Janet Yellen has said she believes that as the labor market tightens, inflation will rise back toward 2 percent. Evans is not so sure.

"With each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory," Evans said. "There is a big strategic risk in failing to get core PCE inflation symmetrically around 2 percent before this economic cycle ends."

Regional Fed presidents like Evans have varying degrees of influence on the direction of Fed policy.

In 2010, Evans tried and failed to win support at the Fed for a new strategy of monetary policy known as price-level targeting that at the time he thought could have lifted troublingly low inflation.

In 2012, though, the Fed included a promise to keep rates near zero until unemployment or inflation reached certain thresholds, an idea Evans had publicly championed for a year before it became policy.
When it comes to inflation, I'm with Charlie Evans and Minneapolis Fed President Neel Kashkari and fear with global inflation in freefall, it's only a matter of time before deflation rears its ugly head on this side of the Atlantic.

The mystery of inflation-deflation has baffled many market analysts but I assure you, there's no big reversal in inflation going on in the US (or elsewhere), and even the recent pickup in inflation expectations is a blip and can be explained by the decline in the US dollar (UUP) over the last year:


Remember, as the greenback sells off relative to the euro and yen, it increases US import prices, temporarily giving a lift to inflation expectations. There is nothing structural going on.

The only structural factor that will boost inflation expectations over the long run is wage inflation, which has been noticably absent despite the US economy being in full employment.

Why is this the case? Well, I think a lot of people are worried about losing their job and maybe, just maybe, the US economy isn't as strong as we think. Forget the baby boomers retiring in droves, there is a lot more Schumpeterian-style "creative destruction" going on than there is job creation.

I listened to Larry Kudlow this morning on CNBC stating that "tax cuts will unleash an investment boom" in the US, but all they will do is exacerbate rising inequality and maybe spur business to invest in more robots, not people.

I want all of you to note once again the seven structural factors that lead me to believe deflation is headed for the US:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Globalization: Capital is free to move around the world in search of better opportunties but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
  7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.
These are the seven structural factors I keep referring to when I warn investors to temper their growth forecasts and prepare for global deflation.

More importantly, when deflation strikes America, it will have devastating effects on risk assets across public and private markets and it will decimate private and public pensions, especially those that are already chronically underfunded.

[Note: Pensions are all about managing assets and liabilities. Deflation strikes both, especially liabilities which will soar to unprecedented levels when the pension storm cometh and rates decline to new secular lows.]

There is a reason why Jack Bogle -- Mr. Index -- is worried about US pensions. He sees the writing on the wall and knows the math simply doesn't add up and "it will end badly".

People confuse the stock market with the economy. Stocks are part of the leading economic indicators but stocks move up and down based upon a lot of factors, including plentiful liquidity.

In a world where bitcoin is going parabolic, Saudi princes are buying paintings for $450 million, and stocks keep soaring to new highs, all it tells me is there is too much money out there chasing risky assets higher and higher.

But as I keep warning you, stocks don't go up forever even if they can go up longer than pessimists and optimists think. There is a lot of money out there fuelling speculative frenzy, and it's coming from central banks, big trading outfits and hedge funds playing the momentum game, hoping to squeeze the very last dollar and get out in time.

The deafening silence of the VIX and bears leads many to erroneously conclude that central banks control these markets and what they say goes. The next generation of "Big Shorts" is anxiously awaiting for something, anything, to blow up (China, Eurozone, etc.) but thus far markets keep soaring higher, steamrolling over them.

Remember what I told you a long time time ago, there are two big risks in these markets right now:
  1. A meltdown unlike anything we've ever seen before, making 2008 look like a walk in the park.
  2. A melt-up unlike anything we've ever seen before, making 1999-2000 look like a walk in the park.
It might shock you to learn that it's the second risk that keeps asset managers awake at night because it forces them to chase risk assets at higher and higher levels knowing that downside risks are multiplying as asset vaues keep hitting record levels.

In other words, if we first get a melt-up before we get the next huge meltdown, it will buy central bankers some time but ultimately, it will ensure a much longer and deeper recession, and likely lead to that prolonged debt deflation scenario I keep warning of.

So maybe it's not as good as it gets for stocks, maybe there is more "juice" left to squeeze shorts and send stocks a lot higher but the bond market isn't buying any of it and neither should you. Trade stocks but be careful, when the music stops, we will experience the worst bear market ever.

Let me end by giving you some quick thoughts on market sectors I track.  As you know, given my fears of deflation, I'm short emerging market stocks (EEM), Chinese shares (FXI), oil (USO), energy (XLE), metals and mining (XME), industrials (XLI) and financials (XLF) and remain long and strong good old boring US bonds (TLT), the ultimate diversifier in these insane markets.

Now, if you look at financials (XLF), you'd think the US economy is just beginning a major expansion but I would use this weekly breakout to take profits:


Energy (XLE) shares have popped recently along with the price of oil but are hovering around the 200-week moving average and unable to make new 52-week highs:


Emerging market stocks (EEM) and Chinese shares (FXI) look like they're rolling over here after a huge run-up:



I definitely would be booking my profits and shorting these sectors going into the new year.

Earlier this week, a lot of fuss over the so-called FANG stocks selling off, but if you look at technology shares (XLK) they have yet to roll over in a meaningful way on the weekly chart:


One area of concern for technology is semiconductor shares (SMH) which look very vulnerable for a reversal here:


As far as biotech, right now I'm more bullish on large biotechs (IBB) than smaller ones (XBI) which ran up lot this year but in general, I still like this sector even if it's extremely volatile:



Lastly, it's Friday, so have fun peeking at stocks making big moves up and down on my watch list (click on images to enlarge):



The stock of the week this week was Sage Therapeutics (SAGE) which exploded up on hopes for breakthrough depression drug:


Once again, hope you enjoyed this week's market comment and please remember to take the time to contribute via Pay Pal on the right-hand side under this image:


I thank all of you who take the time to donate or subscribe to my blog, I truly appreciate it.

Below, Diane Swonk, DS Economics founder & CEO, and David Kelly, JPMorgan Funds chief global strategist, discuss November’s jobs report. Wage growth is disappointing and I fear it will not significantly improve over the next year.

Second, Michael Feroli, JPMorgan chief economist, and Daniel Skelly, Morgan Stanley Wealth Management, discuss the labor market, manufacturing and interest rates in 2018.

Third, days after hitting turbulence, a sustainable comeback for tech stocks could be in the offing, according to Bespoke co-founder Paul Hickey.

Fourth, David Tice, who's known for running the Prudent Bear Fund before selling it to Federated in 2008, predicts stocks could sharply rise again in 2018 before prices plunge and stay low for a long time.

Lastly, CNBC's Meg Tirrell reports on Sage Therapeutics soaring more than 70 percent after a depression drug breakthrough.

Coming from a family with two psychiatirsts, I can assure you there is a desperate need for new treatments for depression, especially hard to treat depression, but temper your enthusiasm because it's still way too early to conclude this new treatment is a "game changer" (there are very few game changers in psychiatry).





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