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By HaleStewart September 13, 2015 11:29 am
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US Equity and Economic Review For Sept. 7-11

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

     The US economy remains insulated from the recent international turmoil.  The latest Beige Book described growth as moderate while last Friday’s employment report showed a .2% drop in the unemployment rate. This week’s news continued in the positive vein.

     The primary data point was the JOLTs survey, which measures job openings, hires and separations.  From the BLS:

The number of job openings again rose to a series high of 5.8 million on the last business day of July, the U.S. Bureau of Labor Statistics reported today. The number of hires and separations edged down to 5.0 million and 4.7 million, respectively. Within separations, the quits rate was 1.9 percent for the fourth month in a row, and the layoffs and discharges rate declined to 1.1 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

The following graph illustrates the data:

The BLS began releasing this data in the early 2000s, so the historical record is short.  But for the first time there are more job openings than hires.  The openings increase signals high business confidence.  The fact hires is below this number indicates employers may be having a difficult time finding employees. 

     The report also provides information on various types of separations, such as lay-offs and quits.  The latter is a good proxy for the population’s perception of the job market: people are more prone to quit a job if they believe their next job will be easy to find.  From the release:

There were 2.7 million quits in July, little changed from June. Although the number of quits has been increasing overall since the end of the recession, the number has held between 2.7 million and 2.8 million for the past 11 months. The quits rate was unchanged in July, measuring 1.9 percent for the fourth month in a row.

This data shows a less bullish labor force; if employees were growing more confident in the job market, the quit rate would increase rather than level off.  Instead, it appears some trepidation regarding the macro environment still exists.

     The BLS also released import and producer price numbers.  Currently these data are minimally important.  Thanks to the huge drop in commodity prices and the strong dollar, the threat of inflation is non-existent.  In fact, deflation remains one of the biggest threat to the economy. 

     Conclusion: Last week’s data points were minimally important.  We’ve known for some time that price pressures are minimal.  While the JOLTs survey did show a healing labor market, minimal wage growth is still the primary problem facing consumers. 

     The Markets

     The markets are expensive as the following table from the WSJ’s website shows:

The most encouraging data point is the 16.42 forward PE on the S&P 500.  But that’s hardly a bargain, especially when the average’s long-term median PE is 14.6.

     Technically, the averages continue to consolidate.  The 30 minute SPY chart best illustrates this development:

At the end of August, prices broke support at the 204-206 level, eventually falling a little over 13%.  They rebounded abd established a new resistance level at 199-200.  Lows are rising, creating a rising wedge pattern.

     Other averages indicate the most likely next moves are either lower or continued consolidation.   Let’s start with the IWMs:

Prices broke the 119-121 level and fell below the 200 day EMA.  Shorter EMAs fell through the 200 day EMA.  Currently, prices are in a rising channel, but with declining volume and weak technicals. 

     Mid-caps (the IJHs) have a similar chart pattern:

     And with the exception of a brief move in early August, the transports have declined for 5 ½ months:

        Markets Conclusion: the trading environment is difficult.  The markets are expensive, top line revenue growth is weak and the international economic environment is challenging.  Moreover, the strong dollar makes it difficult for companies with a large international presence (a list that comprises more S&P 500 companies) to translate that revenue into earnings.  Finally, oils’ weakness continues to hurt the entire energy complex.  Conversely, the US’ macro environment is positive.  None of the long-leading indicators indicate an imminent recession: money supply is strong, building permits are rising, and corporate profits after tax (for the entire economy, not just the S&P 500) are up.  Corporate yields have risen a bit, but not fatally.  Although the LEIs decreased slightly in their latest reading, this was due to an anomaly in building permits.  Although the US economy continues growing slower than we’d like, it is still growing.      

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