An Historical Perspective On Today's Employment Report

Every month, in the talking contest following the employment report, there is one piece of crucial data that is routinely left of the conversation.  Ironically, we find it to be the most important piece of data. Labor input into the economy has TWO parts: 1) the number of people working and 2) the amount of time each person is working.  Multiplied together these two pieces yield the quantity of aggregate hours worked in the economy.  Aggregate hours worked are the best measurement of labor input into the US economic machine.  

In today's report, we see that aggregate hours worked continued its decline that began with the November report.  Since this trend began in November, it is much harder to blame weather for three sequential downticks.  Aggregate hours peaked in November 2013 at an annualized rate of 3,214,879 and have since fallen to 3,188,708.  This is a 26,171 drop in the annualized aggregate hours worked, or roughly 1%.  During this time the S&P 500 has risen from 1,805 to 1,870, or roughly 4%.

Some historical perspective might be helpful.  Let's go back and look the period of December 2007 to May 2008.  In this five month period aggregate hours worked declined by 25,980, or roughly 1%.  In that five month period the S&P 500 fell from 1,468 on 12/31/07 to 1,400 on 5/30/08, or roughly 5%. 

Aggregate hours worked similarly peaked in October 2000 at 3,115,641 and fell over the subsequent 4 months to 3,091,382, a decline of 24,259 hours, or roughly 1%.  In that phase, the S&P 500 fell from 1,429 to 1,239, for a 13% drop.  By March--one month later--the S&P 500 had fallen another 80 points to 1,160...and kept falling another 17 months into the October 2002 low.

A Tale of Moving Averages

Looking at any and every time dimension, the average constituent of the MSCI Europe is quite a bit extended:







Ignoring the minor dip last year, this index hasn't seen a truly oversold condition for nearly two years.

US Economy "Surprising" To The Downside Over The Last 7 Weeks

While the headline payroll number this morning beat consensus (a funky report overall that was obviously affected by weather), over the past seven weeks the economic reports out of the United States have been underwhelming to say the least judging by the Citi Economic Surprise Index. The Developed Markets index is now solidly negative for the first time since last summer as well. However, on a positive note, the Emerging Market index is near 2-year highs and is "plus" territory once again.

ECB Officials' Inflation Forecasts

The ECB announced that interest rates would be maintained at current levels earlier today, citing staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.0% in 2014, 1.3% in 2015, and 1.5% in 2016.  Though few economists predicted a rate cut, there were rumors that Europe's central bank might discontinue the sterlization of bond purchases under its Securities Markets Program (SMP)-- an action consistent with the adoption of a more accomodative and active policy.  In the end, Draghi defended the ECB's insistence that the euro zone is not experiencing deflation and that no extraordinary measures are called for at this time.
A current chart of harmonized consumer prices in the euro area, with average and standard deviation trendlines for reference:



The € subsequently rallied, reaching its highest level in two years:

Boom-Bust Barometer Hasn't Confirmed S&P500 New Highs

The boom-bust barometer, which compares commodity prices to unemployment claims as gauge for economic activity, has had a strong correlation to the S&P 500 over the past 10 years. However, the boom-bust barometer has not confirmed the new highs made by the equity markets so far this year. The barometer has remained below the high it made in September while the equity market has continued to rally higher. We saw a similar configuration in 2011-2012 but it will be interesting to see if the barometer can break out to new highs once again.

Pharma and Biotech This Year's Big Winners

Year-to-date, the pharmaceutical and biotech industry group is leading all other industry groups in the MSCI World index, up 11.21% on average.



The internal strength has been quite impressive lately, with 82% of the stocks above their 100 day moving average.



22% of the companies in the pharma/biotech industry group are making net new highs, the highest of any industry group.



A net 70% of the companies in the pharma/biotech industry group have recorded positive performance over the last 100 days, again making it the strongest group in the MSCI World index.

S&P 500 and the Yen Still Moving in Lock Step Despite Geopolitical Turmoil

Even amid geopolitical turmoil S&P 500 futures (blue line) and the JPY/USD exchange rate (orange line) are still moving in virtual lock step.



But from a longer term perspective we are starting to see some cracks in the correlation. We will be monitoring closely which series catches up (or down) to the other.

What Is The Australian PMI Telling Us About Chinese Growth?

With the monthly slue of manufacturing PMI data now in we thought it interesting that Australia posted a nice rebound while China showed a further deterioration (Chart 1). Granted, the Australian data series is much more volatile than the Chinese series, but the two indices have been showing a divergence since early 2013. This is odd given the interconnection between Australia's commodity business and China's investment driven growth model. But, when we look at the New Export Orders component of the Australian PMI report and compare it to the headline Chinese PMI series (Chart 2) we notice that these two series recouped their correlation in mid-2013 and have both headed lower recently. That Australian export orders would correlate well with Chinese growth makes sense on the surface. That both series are on the verge of making new lows suggests to us that Chinese growth may disappoint this year.  

Adidas: Tripped Up by Guidance?

While European Retail Sales results pleasantly surprised on the upside today (+1.3%yoy versus expectations for -0.4%yoy)...



Adidas shares fell ~3% on strong volume:



In spite of solid 4Q results, investors seem to have been spooked by less than amazing forward guidance.  In any case, today's decline will likely violate the 45-degree bullish support line that we depend on in our point-and-figure charts:



When a stock begins to underperform (for whatever reason) a benchmark, it is important to take note and consider the potential implications.  In this case, the next level of support is quite a ways away (at row 'e') and would constitute a 25% or so underperformance.

British Pound Finally Overvalued Against The USD

For five years the British Pound was undervalued (and sometimes significantly undervalued) against the US Dollar on a purchasing power parity basis. The pound sterling has finally had a sustained period (over two months) of being slightly overvalued against the Dollar. PPP trends tend to last for quite a while so this may be the start of a multi-year period of relative strength of the pound versus the dollar. 

Slim Pickings for the Tech-Inclined Value Investor-- Especially in Europe

Across all three regions in the MSCI World developed index, Information Technology stands out as the sector with the largest proportion of stocks trading at greater than 25x P/E.

Asia-Pacific:


Europe:


North America:


MSCI Europe, however, sets itself apart in that ALL of it's technology constituents currently trade at greater than 20x P/E.  And that seems almost tame when we consider that other metrics show even more extreme levels of overvaluation: nearly three-quarters of Information Technology stocks in Europe are approaching seven year highs in price to sales:

MSCI Pacific Index Breadth Looking Stronger Than The Rest Of The World

One of the ways we measure breadth is by tracking the one-year cumulative advance/decline ratio. This series keeps a daily running tally of issues that are advancing relative to those that are declining. Since late 2013, we have seen a positive increase in this breadth indicator in the MSCI Pacific Index. This change in direction of breadth is not being confirmed in MSCI North America, MSCI Europe, or MSCI World index which are all showing major breadth deterioration as this rally advances.

Japanese Consumers Are Feeling the Pinch As Real Wages Fall Again

With the yen having undergone its devaluation and import prices having subsequently skyrocketed, the Japanese consumer has been left holding the bag. After taking into account inflation, wages are down by 1.75% YoY (Chart 1) and based on the lagged impacts of the weaker yen they could be headed for a further decline as the year progresses (Chart 2).

European Estimate Revisions and Market Performance

As we have just seen, the main driver behind European equity performance recently is the one-month change in EPS estimates:



And, as we noted last week, those estimates have the worst revisions of any of the three regions:



Will the caution on earnings momentum begin to weigh negatively on the price performance of European stocks or does this market have more room to run?

Last Month's Winners and Losers

In February, Health Care and Utilities led the way higher as the overall index had a very nice monthly gain. Pharma, Biotech and Life Sciences were the top performing industry. Impressively, all 24 industry groups were positive during the month.

By Sector


By Country


By Industry


Best Performing Stocks


Worst Performing Stocks

Underneath The Surface Of January Personal Consumption

Nominal personal consumption expenditures in the rose .4% month over month in January, beating expectations for a .2% increase.  The increase in services drove the increase, while month over month comparisons show a drop in spending on goods--both durable and non-durable.



The overall monthly increase in nominal personal consumption amounted to roughly $48 billion, on a base of $11.7 trillion.  The monthly increase in services spending was almost $73 billion, accounting for over 100% of the total increase in spending.  In particular, household spending on utilities increased by $35 billion and spending on healthcare increased $30 billion.  So, non-discretionary spending accounted for more than the entire increment to spending in January.