Wall Street's Best Minds
The Stock Market’s Next Phase
The Wall Street vet argues that the next leg up will be powered by fundamentals, not the Fed.
By Byron Wien
May 27, 2015 5:46 p.m. ET
Since the axiom “Don’t fight the Fed” came into common parlance, we have all been aware that central bank policy is an important component of market performance. Most of us started out as security or business analysts and believed that fundamental factors like the pace of the economy, earnings growth and interest rates were the drivers of equity values. As we became more experienced, we began to understand the influence of psychology, which can be quantified by technical analysis.
Since the end of the bear market and recession of 2008-9, and the fiscal stimulus and monetary easing that followed those tumultuous years, I have begun to appreciate even more the importance of central bank liquidity in determining the direction of equity markets. This is hardly a conceptual revelation, but I thought I would take a look at it quantitatively.
United States equities have tripled since the March 2009 low. The total capitalization of the Standard & Poor’s 500 has increased from about $6 trillion in March 2009 to $19 trillion today. Obviously this is not the total value of the entire U.S. equity market, because it leaves out much of Nasdaq and other peripheral markets, but most of the capitalization of U.S. public companies is captured by this index.
Earnings have clearly driven a good part of that move; they have more than doubled from $417 billion in 2009 to $1.042 trillion in 2014. Since 2008, the Federal Reserve balance sheet has more than quadrupled from $1 trillion in 2008 to $4.5 trillion.
It took the Fed 95 years to build up a balance sheet of $1 trillion and only six years to go from there to the present level. The Federal Reserve was providing this stimulus to improve the growth of the economy, but it is my view that three quarters of the money injected into the system through the purchase of bonds went into financial assets pushing stock prices up and keeping yields low.
If I am right, the Fed contributed almost $3 trillion (some may have gone into bonds) to the $13 trillion rise in the stock market appreciation from the 2009 low to the current level, earnings increases explained $9 trillion (1.5 x $6 trillion) and other factors accounted for $1 trillion. You could argue that the monetary stimulus financed the multiple expansion in this cycle.
In Europe, a similar condition has taken place. The Euro Stoxx index reached its low in the fall of 2014 with a total market capitalization of €8.1 trillion. The current market capitalization is €10.5 trillion, an increase of about 30%. The balance sheet of the European Central Bank in October 2014 was a little over €2 trillion. It is up about 15% from that level today at about €2.344 trillion. An improvement in the outlook for earnings and the European economy helped here as well as in the U.S., but liquidity played an important role in the rise in the market. Like indices for the United States, the Euro Stoxx doesn’t capture the full market value of all European equities.
In Japan, the balance sheet of the Bank of Japan began to increase sharply after reaching about ¥132 trillion at the beginning of 2012. It is now ¥327 trillion, more than doubling the early 2012 level. The market capitalization of the Tokyo Stock Exchange increased from about ¥254 trillion at the beginning of 2012 to ¥587 trillion currently, again more than doubling. Earnings played a role here as well, but the monetary liquidity could explain much of the market appreciation. The concept of the central bank playing a critical role in market performance has been brought home this year with the relatively strong performance of Europe and Japan because of Mario Draghi’s explicit policy of aggressive easing and the accommodative strategy inherent in Abenomics. In contrast, the Federal Reserve is poised to tighten (interpreted as the withdrawal of liquidity) as soon as it becomes comfortable that the economy can handle higher rates. As a result, the U.S. equity market has made little progress this year, while Europe and Japan are up in double digits in local currencies, and Japan is up in double digits in dollars as well.
At this point, the prospects for both revenue and income growth for United States companies are not robust. Optimistic earnings projections for the S&P 500 show only a small improvement for the year, and even that would require a fair amount of financial engineering, including share buybacks, mergers and acquisitions and leverage. The current level of buybacks and mergers and acquisitions is less than 10% off the pre-crisis high, according to Strategas Research. The strong dollar and the decline in oil prices are negatives for near-term earnings improvement. In the face of these factors, it is something of a wonder that the U.S. market has risen at all this year.
One concept that may be helping the market is earnings yield. The 10-year U.S. Treasury is yielding 2.2%. Even if S&P 500 earnings are flat in 2015, the earnings yield (S&P 500 earnings divided by the price of the index) will be 5.5%, a healthy differential that is similar to the earnings yield in March 2009 when the market bottomed and the current upward move began. Earnings are likely to grow over time while the coupon on the 10-year is fixed. Although there is risk that earnings will fall in a recession, there is no recession currently in sight. The attractiveness of a 5%+ earnings yield compared to a 2% Treasury coupon is compelling to some investors.
There are also fundamental factors on the positive side. I have been counting on housing helping the United States economy move toward a 3% growth rate this year. Mortgage applications for purchase, sales of existing homes and the Case-Shiller home price index are all showing a positive trend. New home sales are, however, presently disappointing. Given that I am convinced that the favorable trends will continue, I expect the unfavorable data will reverse and housing starts will consistently exceed one million before too long. The increase in family formations resulting from improved employment in the 25–34 age bracket also gives me encouragement.
There is other good news on the economic front. The Economic Cycle Research Institute’s Leading Index has turned up sharply. This index correctly forecast the slowdowns in the U.S. economy in 2010, 2011 and 2012. After a worrisome decline earlier this year, the index has turned sharply higher, supporting the view that the economy will improve in the remaining quarters. Investors became concerned recently when real Gross Domestic Product (GDP) growth was reported for the first quarter at .2%. Even this weak number may be revised downward because of the recently announced 43% increase in the trade deficit in the first quarter. The quarter was hurt by severe weather across the eastern part of the country, the strong dollar and the West Coast dock strike. First quarters in the U.S. have been significantly soft since 2009, and if the recovery pattern of the last six years follows, it is reasonable to assume real growth will be in the 2.5% to 3% range for 2015.
We are also seeing some signs of improvement in employee compensation. The Employment Cost Index was up 2.5% in the first quarter. This sharp improvement (it was as low as 1.5% in 2014) should help the housing sector. The recent increase in household formations (back to pre-recession levels) should also help housing. In addition, the willingness of corporate managers to borrow money reflects their optimistic outlook. In April, bank borrowing increased 8.3% on a year-over-year basis, matching the peak in 2009. Other indicators support a positive outlook for the economy: rail car loadings improved and consumer spending was up .3% in March.
Despite the positives, there are also some serious negatives, and assessing their significance is important. Productivity declined 1.9% in the first quarter of 2015 after a smaller drop in the fourth quarter of 2014. Because productivity is a key component of profitability, this is a reason for concern.
Part of this may be attributable to slow revenue growth because of weather and other factors, but productivity improvement is essential to growth. Technology has been a major force in increasing productivity, and we may have reached the point where the incremental benefits of using equipment and processes to increase the output per worker may be taking a rest. Given that revenues going forward are likely to increase slowly, this negative trend in productivity must be reversed.
On the jobs front, the April employment report came in slightly below target at 223,000. The previous month was revised downward to 85,000 from an already disappointing 126,000. Average hourly earnings increased 2.2% year-over-year. The unemployment rate dropped to 5.4% and the participation rate increased to 62.8%. The construction sector was strong, reflecting the improved weather, but manufacturing was disappointing, only adding 1,000 jobs. As expected, most of the jobs were created in the service sector, which tends to have a lower rate of compensation.
While I would have preferred to see a stronger report, nothing in the data would indicate that the economy will not show reasonable growth as we move through the year. Looking at the labor report from a broader perspective, however, there is reason for concern. According to David Malpass of Encima Global, the labor force only grew 166,000 in April, 1.1% year-over-year, which was disappointing. The employment to population ratio is 59.3%, which is 3%-4% below the 2000–2010 level and 5% below the level in the 1990s.
What is troubling about this data on the trade balance, productivity and the employment report is that it suggests that there is unlikely to be a major increase in capital spending. According to the Commerce Department, capital investment was down 3.4% in the first quarter. The U.S. industrial stock is 22 years old, an all-time high, but operating rates are below the 80% where companies begin to plan major capital expenditures. Much of the money that has been spent has bought labor-saving equipment that has enabled companies to deliver goods and services with fewer workers.
An important driver of recent capital spending has been energy, and the sharp drop in oil prices over the past year has had a major negative impact. Now that the price of oil has risen from $43 per barrel (West Texas Intermediate) to over $60, energy capital spending should pick up, assuming current prices will hold. The pending nuclear agreement with Iran, while eliminating a major geopolitical risk, does change the supply / demand balance. If this were signed over the next few months and sanctions are lifted, one million barrels of incremental oil could come into the world market and crude prices could decline again. Right now, the negotiations seem to be running into serious difficulty, so I still expect a pick-up in energy capital expenditures as we move through the year.
I am occasionally questioned about the possibility of a bubble forming in the Nasdaq as a result of the strong performance of technology and biotechnology stocks in the current cycle. Investors clearly have not forgotten the excesses of the 1999-2000 period. Looking at the data, however, there seems to be much less froth this time around. For example, the price-earnings ratio (excluding companies with negative earnings) was 49 in 2000; it is 25 now. The dividend was negligible in 2000; it is 1.13% now. The price to sales ratio was 12 in 2000; it is 3.5 now.
The U.S. market has been long overdue for at least a 10% correction. It has been three years since the last one. Sentiment among investors is optimistic or complacent, not a condition conducive to a sustained upward market move. I still maintain a positive outlook for the S&P 500 for 2015, but perhaps we have to endure a little pain first. By the second half of the year, the market mood may be more subdued and the fundamentals of the economy may be better, providing a more favorable environment for stocks to move higher.
I still expect the S&P 500 to rise 10% or more by the end of the year, but it will have to get there on the basis of fundamentals without the help of liquidity provided by the Federal Reserve.
Wien is vice chairman of Blackstone Advisory Partners LP, where he acts as a senior advisor to both Blackstone and its clients in analyzing economic, social and political trends.
Trans-Pacific Trade Pact Highlights the Political Power of the Affluent
MAY 27, 2015
Wednesday, May 27, 2015
Cash is on its Death Bed ...
by Larry Edelson
Into high-end art, rare coins, diamonds and more.
There are numerous reasons why. Chief among them: The big, savvy and smart money knows what's coming. Western socialist governments, on their death beds, are on a witch hunt to find every penny of wealth you have, track it, and tax it.
Some of you may think the rich deserve to be taxed more. Maybe so, maybe not. I'm not going to get into that debate today.
But what I am going to tell you is that if you think it's only the rich under attack, think again.
Washington and Brussels want your money, too. They want to know how you're earning it. Where it's coming from. Where it's going. Every penny of it.
They also want to control it. They want to get you to spend more to boost the economy. Hence, why negative interest rates, a tax on your money, is spreading through Europe.
And perhaps most important of all, why authorities in Europe and the U.S. are moving to abolish cash.
Never mind most of what you already do is electronic. You bank online. You trade online. You conduct business online.
That's not enough for Washington or Brussels. They want all cash gone from the system.
The first such steps have already been taken. The International Monetary Fund (IMF) is now working behind the scenes to make its Special Drawing Rights, or SDRs, the new global reserve currency.
The World Bank is working on its own version.
All over Europe now, cash is under attack. Spain has banned cash transactions over 2,500 euros. Italians have been banned from using cash transactions of more than 1,000 euros, while France is expected to introduce a similar law in September.
France, by the way, is also requiring that all gold in the country and transported through the country must be declared and reported to French customs.
While large cash withdrawals exceeding 10,000 euros per month will also now be monitored and reported.
Throughout Europe now, foreign exchange offices are now required to obtain a copy of someone's ID to exchange more than 1,000 euros.
In the U.K., former Prime Minster Gordon Brown is advocating abolishing all cash and forcing people to use all electronic money via a new nationalized bank.
In effect, Brown wants to usurp the money supply and control it better, he thinks, via a communist-type move to control your savings and spending, allegedly on your behalf.
In Denmark, at least, authorities are being more open about it. They're preparing to introduce a law this fall to make virtually all transactions electronic.
It's not just Europe, though. In many Central and South American countries, finger-printing is required by certain stores and businesses if one pays in cash with US$100 or more. Western Union has certain policies in place that require finger-printing outside the U.S.
Mexico has restrictions on numerous cash transactions.
Here in the U.S., while there are no national cash bans in place, a new trend is indeed emerging.
Louisiana, for instance, recently banned cash transactions for second-hand merchandise — making it tough for flea markets to survive.
In many states, pawn shops are now under very strict scrutiny when it comes to cash transactions, with a good deal of paper work now demanded.
Of course, the propaganda coming out of governments is that cash is how most terrorists and drug dealers work. Outlaw cash, and we put them out of business.
But you and I both know it goes well beyond terrorism and drugs. Just like the NSA spying has.
It's simply another way to spy on you, and to track and tax you — so the government can gain greater control over everything you do.
The problem is that it is going to get worse. Your rights are being trampled on, left and right. The Constitution means nothing these days.
But you have to stop and ask yourself one question: Why do governments want so much power over me these days to control and tax me?
The answer is simple: Western socialist governments are on their death bed, they are fighting for their lives, and if it's a choice between them and you and your rights, they will always choose themselves.
In the end, they will fail. Governments can indeed fool some of the people some of the time, but over time, they can't fool the majority. The people of the world, especially Europe and the U.S., will rise up and throw the bums out ...
In one heck of a giant rebellion and revolution that is coming.
Stay tuned and best wishes, as always ...
Peru: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Peru
|Publication Date:||May 27, 2015|
|Electronic Access:|| Free Full text (PDF file size is 2,463KB). |
Use the free Adobe Acrobat Reader to view this PDF file
|Summary: KEY ISSUES |
Context: Peru remains one of the best performing economies in Latin America, with solid macroeconomic fundamentals, strong policy frameworks, and visible gains in poverty reduction. Like most of the region, Peru faced a challenging external environment in 2014. External shocks were compounded by domestic supply disruptions and a drop in subnational public investment, and growth decelerated sharply. Headline inflation was slightly above the upper band of the central bank’s (BCRP) target range due to supply shocks, but expectations remained well anchored.
The external current account deficit declined slightly despite weaker external conditions. Outlook and risks: Growth is expected to recover in 2015 and over the medium term, contingent on production at new mines approaching capacity, priority infrastructure projects advancing, and shocks to terms of trade fading. However, downside risks dominate. Externally, these include a surge in global financial volatility, further dollar appreciation, or lower commodity prices and external demand.
Domestic downside risks include weaker investment, uncertainties surrounding 2016 Presidential elections, and persistent social conflicts. A faster unwinding of supply shocks or a more complete pass- through of lower food and fuel global prices constitute upside risks. Near-term policy mix: The policy mix is broadly adequate to support the recovery and maintain macroeconomic stability. The immediate priority is expediting the execution of public investment in line with government plans, while avoiding increases in non-priority current spending. Monetary policy should remain responsive to inflation expectations and external developments. Exchange rate flexibility should be the main line of defense against any additional external pressures.
The timely use of macro-prudential tools and ongoing de-dollarization efforts should further solidify financial stability.
Medium-term prospects: With the end of the commodity boom, a push to deepen structural reforms will be necessary to sustain potential growth and diversify the economy. Revenue losses would need to be offset to finance structural reforms, investment, and inclusion along a gradual fiscal consolidation path. Streamlining legal requirements and red tape is rightly a government reform priority and the ambitious education reform and inclusion polices should stay their course within the framework of fiscal discipline. Persevering with labor market reform remains important.
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Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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