The Yen Carry Trade is Alive and Well Today

The Japanese yen carry trade, in which one barrows low cost yen to speculate in foreign markets with higher interest rates or slower money printers, is performing well today as it goes almost tick for tick with the S&P 500.

The Average Stock Quietly Correcting From Overbought Condition

One way we measure the internal condition of the stock market is to measure the percent of issues that are trading above their own various moving averages. In the below charts we measure the percent of issues trading above their respective 50-day moving averages to get a sense of short to intermediate-term overbought/oversold conditions. What we find is that the average stock has made decent progress in correcting an overbought condition that persisted about a month ago, but is still quite far from being oversold, especially stocks in North America.

Has Christmas Come Early for the Fed?

One day does not make a trend, but we are surprised by the market's reaction to the notably good payroll, personal spending, consumer confidence, and GDP data released recently. Specifically, we have stocks up 1.1%, the dollar unchanged, and bond yields anchored to 2.88 on the ten year treasury. This is the best possible outcome the Fed could have hoped for given that the probability of a December taper has dramatically increased in the last two days. Normally we'd expect taper fears to be met with falling stocks, a rising dollar and rising bond yields. If this type of positive market reaction continues it will indeed be an early Christmas for the Fed.

US Spending Picks Up In November

We highlighted yesterday that spending on services was precariously close to signally a recession in the US (link). The good news is the first data point for the fourth quarter shows spending on services increased by 0.2% month-over-month and is 1.14% higher than it was a year ago. Overall real PCE increased by 0.3% month-over-month.





One potential flag the Fed is sure to be keeping their eye on is the PCE price index. The year-over-year change fell to it's lowest level since 2009 and the core-PCE change fell to it's lowest level in about 2 1/2 years.

To Taper Or Not To Taper? Digging In To Today's Employment Report

Today's employment and personal income and outlays reports may be strong enough for the Fed to begin tapering later this month. November employment came in at 203k jobs and the unemployment report dipped to a 5-year low (7%). The net revisions for September and October were also 8k higher. 

The US has now experienced four months of 200k+ employment growth and our national income proxy remained around 4%. 

The household survey had the biggest one month change since January 2003. This helped drive the unemployment rate to 7% even has the participation rate (encouragingly) gained to 63%.

Finally, the unemployment rate for men aged 20-24 also dropped to five-year low following an almost 2% drop. This group has had by far and away the highest unemployment rates since the 2008 so a decline here is good to see.

US Corporate Profit Margins Increase Again In The 3Q

US corporate profit margins are at their second highest level ever at 10.14%. The highest level was reached in the 4Q11 when profit margins spiked to 10.27%. 4-year annualized growth of profits have slowed from 19.4% to 10.1% in just three quarters. Profit margins at such extreme levels indicate that 4-year annualized profit growth may turn negative in the next 6-8 quarters. Finally, nonfinancial corporate profit margins reached an all-time high in the third quarter.

Service Sector Contributes Practically Nothing To 3Q GDP...Is This A Signal That The US Is Already In A Recession?

The second release for the 3Q GDP was revised up today from 2.8% AR to 3.6% AR. This increase is mainly attributable to further inventory accumulation. Personal consumption expenditures on services only contributed 2 basis points to real GDP. This is the lowest contribution since 2009. And perhaps most concerning, going back to 1948 PCE services have had at least one negative contribution quarter in 9 out of the last 11 recessions. So watching future revisions to this data point will be important.



Also, keep an eye on a component of the PCE services, household consumption expenditures on services. This was just slightly negative at -1 basis point. Going back to 1959, every time this series has had at least one quarter of negative contribution to real GDP the US was in a recession.

Disappointing Retail Sales in Europe

In spite of optimistic forecasts that retail sales in Europe would rise nearly 1% from a year prior, October data released today showed a slight decline for the second month in a row:



While full details are not yet available, the non-food products category posted the largest drop (-0.6%yoy) and all but three countries (Sweden, France, and Finland) in MSCI Europe reported contractions in sales versus October of 2012:



European Consumer Discretionary companies have been the best performers over the last four years, but that momentum is slowing:



Some of the best performing sub-industries and their constituents have begun to struggle over the last month or so:

Lack of Intraday Volatility Consistent with Short to Intermediate Term Market Peak

Over the last few years the range of intraday price swings for the S&P 500 (the intraday high minus the intraday low) has been a good indicator of short to intermediate term peaks and troughs in the market. We read low levels of intraday volatility to be a sign of investor complacency and high levels to be the opposite. We highlight this now because a few days ago the 5-day average intraday range (shown by the red line on the right axis, inverted) hit the lowest level outside of a New Years holiday since April of 2007.



This may all be changing, however, as so far today we have seen a 21 point swing, or 1.2%, in the S&P 500. This would be the biggest intraday move in about three weeks.

5-Year TIPS Implied Breakeven Inflation Diverging Further From S&P 500

It is common for equity prices and inflation expectations to generally move in the same direction. Stock prices are a leading indicator for economic activity. So usually when stock prices are rising, this is an indication of stronger future economic growth which then eventually leads to higher inflation in the economy (and higher expectations of future inflation). This relationship has broken down during 2013. With a little chart magic you can that when these two series "cross" it tends to be at rough inflection points for equities. As usual, only time will tell if past relationships still hold in the future. However, the outlook for US inflation remains muted so a rise in breakeven inflation seems more improbable than a fall in equity prices at the moment.

US Economic Data Round-Up

ADP payroll data surprised to the upside today (215k vs 185k expected). It was the highest reading so far this year. Perhaps most encouragingly the gain was lead by small businesses.



ISM Non-Manufacturing survey came in slightly below expectations (53.9 vs 55.5 expected). This indicates that the non-manufacturing survey is still growing but at a slightly slower rate than it was in the previous month. The approximate GDP-weighted combination of the manufacturing and non-manufacturing surveys implies the US continues on it's "muddle-through" growth trajectory.



Two months of new home sales data was released due to the government shutdown in October. November's new home sales spiked 25% month-over-month to 444k homes. This puts new home sales back at levels seen throughout the first half of the year. This is positive especially in light of another disappointing mortgage application data point.

Fed Says No Reach for Yield, But Fund Flow Data Show Otherwise

We've heard repeatedly from Fed officials that there is no observable reach for yield, but mutual fund flow data paint a different picture. The latest stats (reflecting October data) released by the Investment Company Institute (ICI) show another month in which high yield bond funds (the red line) saw massive inflows and government bond funds (the dark blue line) saw massive outflows. The second chart just shows the three month sum of flows into the various types of bond funds and paints a similar picture. Basically, the individual investor is dumping risk free duration/interest rate risk for credit risk in a most obvious reach for yield.





In other fund flow news, we also note that aggressive growth equity funds saw the largest monthly inflow since January 2011.

Survey Says...Investment Managers Have Never Been More Exposed

Courtesy of our friends at Sentiment Trader, we present the following chart showing the most recent NAAIM (National Association of Active Investment Managers) survey results. And striking those results are, as they show the average active manager to be levered long and very confident about that bet. Charts like this remind us that if this rally continues it will not be because of a current lack of broad participation.

Credit Suisse Downgrades French Equities

In the wake of decent outperformance over the last year, French equities were downgraded today:

Looking more closely, leading sectors were Information Technology, Utilities, Consumer Discretionary, Financials, and Industrials while more defensive sectors like Consumer Staples and Health Care struggled to keep up with the market:

But there is more to the story of MSCI France Information Technology's outperformance-- it is mostly the result of large gains in the stock price of Alcatel Lucent:

Following years of decline and the implementation of a dramatic turnaround plan, the company's stock has surged in the last few months as it seeks to re-join the CAC 40:

Performance of other members of the sector has been mixed as they appear to be encountering areas of resistance or breaking down: