Capitalogix

A Jobs Chart That Means Something

The unemployment rate dropped to 7.0% (from 7.3%) while the U.S. economy added 203,000 jobs in November.  In addition, the labor force participation rate rose to 63.0% (from 62.8%).  These numbers were stronger than expected.

Nonetheless, the U.S. labor market remains below its pre-recession employment numbers.

Calculated Risk posts a monthly chart that puts the current jobs recovery into perspective. It is often referred to as the "Scariest Chart Ever".  It shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions.

 

  via CalculatedRisk.

This chart shows the depth of the recent employment recession — worse than any other post-war recession — and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

If things continue as they have been, it appears payrolls will exceed the pre-recession peak in mid-2014.

Currently, there are about 1.3 million fewer payroll jobs than before the recession started; and at the recent pace of job growth it will take about 7 months to reach the previous peak.

Given the circumstances, I think the chart shows we've made good progress.  Talk about Qualitative Easing, coordinated actions by global Central Banks ... or a pretty visible 'unseen hand' all you want ... but the Economy and Market seem to have adapted well to change.

 

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This 'Illusion of Choice' Chart Shows Who's Really In Control

What happens doesn't matter nearly as much as what you what make it mean ... and what  you choose to do.

 

Dallas got about an inch of ice and snow towards the end of last week, and we are still at a virtual stand-still five days later.

 

Growing up in New England, this would have been so minor that people wouldn't have called it a 'storm'.  Because ice is so rare here, and we don’t have sanding, salting, or scraping capabilities (or people skilled enough to be comfortable driving in it) this was a Storm.

As a result, the best plans gave way to the shut-down. 

 

 

Snow isn't 'good' or 'bad' ... and neither was the change of plans.

Perspective.

 

Fund managers recognize the importance of sensibly diversifying risks and opportunities.

Be that as it may, as MotherJones reported in the wake of the financial crisis, the nation's 10 largest financial institutions held 54% of our total financial assets (compare that to the 20% they held in 1990). Meanwhile, the number of banks has dropped from more than 12,500 to about 8,000.

Here is a map, from the Federal Reserve, that shows the consolidation.  Click to see a bigger version.

 

 

The infographic, above, shows how 37 banks have merged to become just four — JPMorgan Chase, Bank of America, Wells Fargo and CitiGroup (in a period of barely two decades). 

Many people are shocked by a chart like this.  It must be 'bad' to have so much controlled by so few, right? 

But it isn't hard to find a version of this story playing-out in other industries:  Print Media,  Music,  Broadcast Channels,  Consumer Products ... this type of consolidation happens for a reason.

A firm that marshals that more resources gains competitive advantage and has more ways to win.

They benefit from economies of scale, transactional leverage, better distribution and partners, and more ways to diversify risks.  In addition, if they work to communicate, collaborate, and coordinate their actions (and data) they can unlock opportunities that others simply don't have (or can't see).

 

Here is a Chart Showing Some of the 'Winners' at that Game.

 

The following chart highlights our "Illusion of Choice".  A surprisingly big portion of what you buy comes from one of these 10 mega-companies (Kraft, Coca-Cola, PepsiCo, Kellog's, Nestlé, Proctor & Gamble, , Mars, Johnson & Johnson, General Mills, and Unilever).

It's amazing to see what these giants own or influence. Click the picture to see a bigger version.

 

via Reddit.

Here is a more specific example.  You probably think you are familiar with Nestlé.  It is famous for chocolate; but did you realize it was $200 billion-corporation ... and the biggest food company in the world?  Nestlé owns nearly 8,000 different brands worldwide, and takes a stake in (or is partnered with) many others. Included in this network is shampoo company L'Oreal, baby food giant Gerber, clothing brand Diesel, and pet food makers Purina and Friskies.

Kind of cool?

 

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The Biggest Winners From The Fed's Decision Not To Taper QE

The Federal Open Market Committee's surprise decision to refrain from announcing a tapering down of its quantitative easing program on September 18 has given a lift to a variety of markets around the world.

The chart below highlights returns across asset classes — both in the year to date and since the September 18 decision.

 

via: Business Insider

The orderly returns by asset class surprised me (Equities, Credit, Debt, FX, then Commodities).  It also surprised me that the biggest winners since the Fed decision were Spanish and Italian equities.

What about you?

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Is the Rally in the S&P500 Bigger Than Usual Historically?

The Stock Market tends to be 'mean reverting' ... meaning when the pendulum swings too far in one direction, it makes sense to expect it to swing back in the other direction.

Recently, the equity market rally has surprised people with its size and duration.  Seemingly everywhere I go, there are traders talking about how they expect a 'Top' but "don't want to fight the Fed."

Yes, price is up and so is the trend ...but how unusual is this year's big move up?

The answer is that it's been 'pretty typical'.

 

 

OK, big one-year returns can be 'normal,' but this has gone on for three years ... how unusual was that move? 

The chart below shows that the returns for the past three years were not unusual, and fits nicely in the fat part of a somewhat normal distribution.

 

 

While it's reasonable to argue that stocks are getting expensive, it may be premature to bet that stocks are doomed to crash.

Observation and cautious action often pay better, over the long-term, than fear or greed.

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The normal (or Gaussian) distribution

Stock Prices Keep Going Up, Even Though Growth Expectations Are Down

Stock prices are going up as earnings growth expectations are going down.  That is often an early indicator of an impending correction.

 

via Busines Insider.

This phenomenon of prices rising faster than earnings is referred to as multiples expansion. In other words, valuations are rising as reflected by an increasing price-earnings ratio. However, price-earnings ratios are drifting farther and farther away from their long-term averages, causing some market watchers to warn that we are in a bubble.

According to FactSet, The forward 12-month P/E ratio for the S&P 500 now stands at 15. This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009).

Given the high values driving the “P” in the P/E ratio, how does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued?

On one hand, the index is now trading above both the 5-year (13) and 10-year (14) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990’s and early 2000’s.

Stock market bears looking for a sell-off are waiting incredulously ; price is the primary indicator (and it is still implying that there are more buyers than sellers).

Dow Jones Industrials Still Trading Above Key Support Levels

This week, the Dow Industrials bounced-off its 200-day moving average and technical traders relaxed a little.

Earlier in the week, a number of U.S. stock indexes briefly slipped below their 50-day averages. Despite the Shut-Down, they have bullishly regained those support lines.

A key example took place in the Dow Industrials. The chart shows the Dow bouncing off initial chart support at its late August intra-day low (14760) and its 200-day average (red line). For technical traders, that is a very important test.

 

 

The sharp rally has kept the Dow above those two important support levels. 

 

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Why the Markets Are Not Showing Much Fear ...

With the government shut down and the debt ceiling looming, one could argue that the U.S. economy may be on the edge of a crisis.

But the stock market is not reflecting this.

 

 

During periods of crisis and high stock market volatility, correlations among stocks increase. In other words, stocks move up and down together.

JP Morgan just published a quarterly market chartbook , which includes a useful chart tracking stock market volatility and correlations among stocks since the Great Depression.

 

Why?  Perhaps Because Markets Tend to Go Up After Government Shutdowns.

We are in the 18th government shutdown in US history. 

 

For some perspective, this chart plots the average S&P 500 performance for the 20 trading days (approximately one calendar month) before and 60 trading days (approximately 3 calendar months) after a government shutdown began.

 

 

 

The chart illustrates a bullish pattern.  While the stock market has tended to struggle prior to and during the initial three days following a government shutdown ... Following this, the stock market has (on average) trended higher over the ensuing three months. 

 

One explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function (coupled with the fact that the shutdown may be short-lived) ultimately encourages a stock market rally as investors worst fears are not realized. 

 

It should be noted that this chart is an 'average performance chart' and that following the last 17 shutdowns, the stock market traded up 60 trading days after a shutdown on 10 out of 17 occasions (i.e. 58.8%) with the average shutdown lasting 6.4 calendar days.

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Here Are Some Links for Your Weekend Reading

Sometimes confusion precedes a breakthrough - other times ...

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Fail Cheaper, Fail Better. (NYTimes Bits)
• Stop Telling Your Employees What to Do. (HBR)
• Carl Sagan on the Meaning of Life. (Brainpickings)
• In Japan, Adult Diapers Are Expected to Outsell Infant Diapers by 2020. (TheGist)
• What English Sounds Like Foreigners. (BusinessInsider)

 

Trading Links:

• 3 Reasons Markets Should Expect A September To Remember. The perfect storm? (The Week)
• Lew Tells Congress Treasury to Hit Debt Limit in Mid-October. (Bloomberg)
• Like Betting On a Horse Race After It's Over. How HFT affects the average investor.  (CNN)
• Attack on Syria Could Start CyberWar. Expanded their hacking attacks expected. (Money)
• Obama's Tightrope Walk. The World both demands that he do something, yet will condemn him for doing it. | (Stratfor)

Big Outflows: Flight to Safety - or Just Temporarily Spooked?

Talk about a flight to safety ...  August saw the biggest cash withdrawal from all U.S. exchange-traded funds in over three years.  Likewise, scared investors triggered the largest outflows from US equity funds in the last five years.  

Think of it as a flight to cash as retail investors dump risk assets.

The question is whether this marks the beginning of a new trend, or just nimble trading in the face of perceived danger?

Joshua Brown, who blogs under the moniker "The Reformed Broker," tries to put things in perspective with this handy guide to market pull-backs. 

 

 

With less than a five percent pull-back, it is a little early to trot out words like "correction."

As to whether we could see a correction (or worse, a bear market or even a crash), the answer is that it is always possible. Nonetheless, most corrections do not become crashes, and over time, every single one of them turned out to have been great buying opportunities.

Apparently not everyone is worried. 

According to Bespoke's Bank and Broker CDS (credit default swap) Index, however, credit traders do not seem too worried.  

The chart below measures default risk for the major financial firms around the world.  Default risk for the financials typically spikes when stocks fall and vice versa.

 

 

 

Throughout 2013, the credit markets have become as comfortable with financial stocks as they've been since before the financial crisis of 2008/09.  During the stock market pullback we saw in June, default risk picked up a bit, but during the most recent pullback, we've seen default risk trade sideways.  Over the last month, the S&P 500 Financial sector is down 4.47%, but Bespoke's CDS Index is actually down 0.45% as well.  So, for whatever the reason, the credit markets don't think there's reason to be concerned just yet.

What about you?

Dow Jones Industrial Average Relative Strength Sinks to Bull Market Lows

When you hear a reference to how the market is doing on the news, it is pretty common for the report to reference the performance of the Dow Jones Industrial Average.  The Dow is a price-weighted measure of 30 U.S. blue-chip companies. It covers all industries with the exception of transportation and utilities. While this index is not as broad a representation of the US economy as the S&P 500, the Dow's performance typically tracks the S&P 500 pretty closely. 

Recently, however, the blue-chip Dow has been a notable laggard compared to the broader S&P 500. 

The chart below shows the relative strength of the DJIA vs. the S&P 500 over the last ten years.  When the line in the chart is rising it indicates the DJIA is outperforming, and when the line is falling the DJIA is lagging.

 

via Bespoke Investment Group.

 

As you can see, in the last several months the DJIA has been underperforming to such a large degree that the relative strength vs. the S&P 500 is at its lowest levels since the depths of the Financial Crisis.

Do you take that as a bullish sign for the broader market, or early indicator that we are in for a lull before the next move up?

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