Are Japanese Stocks Poised for a Change in Trend?

The Japanese stock market has had a good run over the last few months (especially the price weighted Nikkei, which has risen 16% since the June low) and headline indices are close to or have already broken above their May highs on a nominal basis. Our Point & Figure charts show a similar pattern when drawing the nominal price action.

On a relative basis it looks like the MSCI Japan has tentatively broken its downtrend line and hasn't made a new low in over a year. We'd like to see more sideways action as evidence the index has stopped going down (relative to the MSCI World), but breaking the four-year-old down trend line is a good first step.


Absolute in USD:


Relative to MSCI World Index in USD:

Swedish Stocks Weakest in World

Over the last month MSCI Sweden stocks have been in a slump.  There are 32 of them and they are down on average 3.6%, making them the worst performing country in the MSCI World index.



Over the last 50 days, 44% of Swedish stocks were up and 57% were down.  At a net reading of -13%, Sweden has been the worst performer on average.



Sweden has had the fewest days of positive performance over the last 50 days.  For Sweden, only 47% of the last fifty trading days were up, which is the lowest in the world as well.

More Muddle Through Data For The US

Two important indicators for US manufacturing were released this morning and both pointed to a continuation of the "muddle through" pace of growth in the US. Empire Manufacturing index was below expectations at -2.2 (vs expectations of 5.5). The employment component also showed a slowdown in November.

Meanwhile Industrial Production declined by -0.1% month-over-month in October. The headline number wasn't as bad as it looked as it was driven down by utilities output and mining activity. The manufacturing output actually increased by 0.3% month-over-month. However, momentum in production is currently neutral.

Japan Headline GDP Beats Estimates but Details a Bit Murkier

Japan released it's preliminary GDP Q3 GDP estimate last night showing an annualized growth rate of 1.9% vs estimates of 1.6%. However, a little digging into the details reveals that all the strength in the figure was due to public spending and inventory accumulation, contributing a combined 2.6%. One would have to go back to the first quarter of 2010 to find a quarter in which inventories and government spending contributed a combined 2.6% to GDP. Net trade produced a 1.6% drag, but a figure of that magnitude for the trade component is not that unusual. We worry that the boost from the weakened yen is turning out to be less than anticipated, leaving government spending to do the heavy lifting when it comes to growth. But next year government spending will become a net drag on GDP and consumption taxes are going up, leaving the consensus 1.6% estimate for 2014 looking a little rosy to us.

Technology, Health Care and Staples On A Run

In each sector of the MSCI World index we measure the percent of stocks going up, the percent of stocks going down and the net percent of stocks going up (percent up - percent down).

Over the last 20 days, 60% of all information technology companies were up and 40% were down.  So, net +20% of tech stocks were up.  In contrast, only 34% of the utilities were up and 66% were down.  That's almost 2:1 on the downside.



We also measure the percent of days stocks from each sector are up and the percent of days they are down. Over the long-term this mean reverts to 50%, but over the short term stocks can go on "runs". Over the last 20 days, health care, consumer staples and information technology were up 56%, 55% and 54% of the days respectively.  On the other hand, utilities were only up 48% of the days.

Cisco Guides Much Lower, Stock's Outlook Looks Poor

Cisco is down about 12% today after they released earnings results after the market close yesterday. Cisco's Q1 earnings weren't so terrible. The problem was they guided their Q2 earnings and revenues expectations way down.

Technically, the stock was already in a precarious position prior to today's sell off. The stock was holding onto a year and half old up trend line but the overall trend still looked down after failing to break through a down trend resistant line earlier this year. After today's price action, the down trend will be confirmed and support looks a  ways off.

Wal-Mart Slightly Misses, Technicals Indicate Underperformance Will Most Likely Continue

Wal-Mart's 3Q EPS of $1.14 came in just above the street's estimate of $1.13. Same store sales disappointed as they delcined by -0.3% in the quarter versus 0% street expectations. Management set 4Q guidance of $1.60-$1.70 vs expectations of $1.69. Wal-Mart opened lower but has rebounded so far in trading today.

From a technical perspective it looks as if a two-year long up trend has ended. The good news is that Wal-Mart is not a very volatile stock and there seems to be plenty of support relatively nearby.

US Labor Costs Remain Constrained

Productivity and unit labor costs for the US were released today. Unit labor costs fell slightly last quarter on an annualized basis as productivity increased slightly more on an annualized basis in the third quarter compared to the second quarter. Overall, the year-over-year change in unit labor costs remains below the 65-year mean (granted over the past two decades unit labor costs have spent the majority of time below the mean). Unit labor costs are one more data point highlighting a lack of an inflation threat in the United States.

What is the Metal with a PhD in Economics Telling Us?

Copper has rather quietly displayed a good amount of weakness over the last few weeks and is down another 2.2% today. We highlight this because copper, having so many industrial and construction related uses, tends to be a good thermometer by which to measure the temperature of global growth. Admittedly, stocks have been sending a different signal over the last year, but we presume other factors could be at work there.

Growth Defensive Sectors Outperforming With Broad Participation

For the last last month, the MSCI World consumer staples and health care sectors have taken the lead. Of the counter-cyclical sectors, these are the two "growth defensive" sectors while telecom and utilities are more "income defensives".

Performance in these growth defensive sectors has been very broad.  We calculate the percentage of stocks in each sector that are up in price and down in price over various time periods.  In both the consumer staples and health care sectors, over the last month, 72% of the stocks have been up while only 28% were down.

This gives us a net reading of 44% for each sector.  

US Mortgage Apps Fall Again

Mortgage Applications remain weak in the US. The move back up in rates recently would only seem to make this trend continue. US homebuilder stocks look like they will remain under pressure as well.

More Disappointing Japanese Survey Data

Yesterday we cited the weaker Economy Watchers Survey as the latest indicator to suggest printing money on overdrive is no more a panacea than printing money in 4th gear (as we have in the US). Today we got more of the same as consumer confidence shot down to the lowest level of the year on the biggest one month drop since Fukushima. The decline was broad based across components and makes the September number look like noise amid a clearly declining trend since May.

Europe's Youth Unemployment Problem

European leaders met today for the specific purpose of discussing issues of youth unemployment in the region.  And, while rates well over 25% have been seen in troubled peripheral economies since 2009...




It is interesting to note that the proportion of youth unemployment to total unemployment is much higher in some of the Nordic countries (as well as France) than it is in Portugal, Spain, or Greece.  In the extremes, Germany's overall unemployment (5.2%) is not that much lower than joblessness among younger citizens (7.7%).  Meanwhile, Italy's 40.4% youth unemployment rate is about 3x its overall rate of 12.5%.

Asset Back Commercial Paper Continues Falling

The asset backed commercial paper market was one of the signature signs of the shadow banking system leading up to the Great Recession. This market mechanism for creating credit has all but evaporated. From 2004 to 2007, the amount of ABCP outstanding nearly doubled. Since peaking in 2007, the amount outstanding as fallen by nearly 80% and the latest data shows the amount outstanding making new cycle lows.

Small Business Hiring Plans Slowdown

The percentage of small businesses that are planning to increase hiring fell back 4 percentage points to 5% in October. Unfortunately, in this recovery 10% of firms planning on increasing hiring has acted as an upper bound for this series. To put this in perspective, outside of recessions, from 1994-2007, this series was only ever BELOW 10% twice. It would seem that before a more meaningful decline in the unemployment rate can happen, small business will have to start hiring more.

Strange Behavior

The relative performance of stocks vs. bonds historically moves in tandem with the strength of the labor market.  Since the low in March 2009, stocks have outperformed bonds by roughly 100%.  This should be consistent with an employment to population ratio of almost 62%.  It is not.  As of the most recent employment report, the employment to population ratio has fallen to 58.3%, within .1% of its low.  While some of this is government shutdown related, the employment to population ratio is down almost half a percent compared to one year ago. The continued relative outperformance of stocks vs. bonds in this context is somewhat strange behavior.

What Does The Average Stock Look Like?

We find that it is useful at times to step back from individual stock analysis and compare sectors to understand what are the the dynamics going on in the stock market. When we look at sectors, we look at it from an "equal-weighted" basis rather than "market-cap" basis. There are of course pros and cons to both but one particular pro for equal-weighting is it eliminates the distortions that very large market-cap stocks have on aggregate numbers and allows you to understand what are the characteristics of the "average" stock in a sector.

Starting with performance, the average stock in the Consumer Discretionary sector has gained the most over the past year meanwhile the average stock in the Materials sector has gained the least.



The Financial sector has the largest beta of any sector. Not surprisingly, Utilities has the lowest. What may catch most investors off guard, is Health Care has the second lowest beta.



Over the next four years, analysts expect Energy stocks to have the highest sales and earnings growth. The average stock in the Energy sector has actually had the highest growth in sales over the past three years, but is in the middle of the pack when it comes to earnings growth.



Least-squared Growth - 3 Years


Least-squared Growth - 3 Years


Finally, from an intangible-adjusted perspective, Financials are trading at the richest valuations and Telecom at the cheapest.

US Stocks Make New Weekly Highs, but Breadth (Again) Fails to Confirm

Stocks in the US made a new weekly closing high last week, but some breadth measures failed again to confirm the strength. We typically like to see the percent of stocks making new cyclical highs confirm new cyclical highs in headline indices. We also like to see the number of advancing stocks expand along with headline indices. As the below charts demonstrate, we are seeing divergences between our breadth measures and stock index performance of the sort we saw in 2011.

USD the Most Significant Factor Driving Stock Prices Last Week

The USD index, and specifically the Euro portion of it, was the most significant factor in driving world equity prices last week. Interest rates also played a significant role as TIPS yields explained 73% of 1 week price changes.

Japan's Economy Watchers Survey and LEI Are Diverging

QE is rolling on in Japan, but we're starting to see some mixed signals when it comes to the real economy, the latest of which is the divergence between the just released and widely followed Economy Watchers Survey and the Leading Economic Indicator. We are keeping an eye on Abenomics to make sure the strength in some indicators is not a transitory result of the 20% currency devaluation and 2013 fiscal stimulus - both of which if not doubled down upon will fail to be tailwinds next year.