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   Brian Wesbury
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  Yes, Stocks are Volatile
Posted Under: Bullish • Markets • Video • Stocks • Wesbury 101
Posted on Wednesday, October 01, 2014 @ 4:01 PM • Post Link Share: 
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  The ISM Manufacturing Index Declined to 56.6 in September
Posted Under: Data Watch • ISM

Implications: The ISM index says the manufacturing sector was still growing at a robust rate in September, just not quite as fast as in August. The index, which measures factory sentiment around the U.S., came off its highest reading in three years to a still healthy 56.6 in September. Zigs and zags are to be expected and no one should see the report as a sign of economic weakness. Both the three and six month averages for the index are the highest in more than three years. According to the Institute for Supply Management, an overall index level of 56.6 is consistent with real GDP growth of 4.4% annually. While last week’s GDP report came in at a strong 4.6% for Q2, the ISM report has tended to over-estimate real GDP growth in the past several years and we're projecting growth of around 3% for the rest of the year. On the inflation front, the prices paid index rose to 59.5 in September from 58.0 in August, a sign of overly loose monetary policy. In other news this morning, the ADP index, which measures private-sector payrolls, increased 213,000 in September. Plugging this into our models suggests an increase of 225,000 in both nonfarm and private payrolls in September, although this forecast may change slightly when we get jobless claims data tomorrow morning. In still other news, construction declined 0.8% in August and dropped 2.1% including downward revisions for prior months. The decline in August was led by power plants, home improvements (although new home construction was up), shopping centers, and classrooms at public colleges. On the housing front, the national Case-Shiller index, which measures home prices, increased 0.2% in July and is up 5.6% from a year ago. In the past year, price gains have been led by Las Vegas, Miami, and San Francisco. Prices should continue to rise in the year ahead, but not as fast as in the past two years. In other housing news earlier this week, pending home sales, which are contracts on existing homes, declined 1% in August after a 3.2% gain in July. Our model suggests existing home sales, which are counted at closing, should be up 2% in September to 5.15 million, which would be the fastest pace in a year. Overall, recent data show neither an economic boom or an impending recession, just more Plow Horse.

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Posted on Wednesday, October 01, 2014 @ 11:13 AM • Post Link Share: 
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  History Says: August Payrolls Will Be Revised, Up
Posted Under: Employment

The August Employment Report disappointed many who live number by number. The consensus was expecting 230,000 jobs which would have been the 7th straight month of job gains over 200,000. Instead what came in was a much slower 142,000 gain.

But the dour reactions were unnecessary. Not only are payroll numbers volatile, but August is usually the month with the largest upward revisions. Remember that August initially came in at “zero” new jobs, but was revised up to over 100,000 a few months later. Since 2009, the initial August nonfarm payrolls number has been revised up by an average of 64,000. If you look at the chart above you can see that most upward revisions happen late in the year, but that August is by far the biggest month for upward rejiggering. If the average holds true for this year, August payrolls will be revised to over 200,000. While forecasting is a humbling business, we do expect upward revisions to last month’s data when the September payroll report comes out this Friday.
Posted on Wednesday, October 01, 2014 @ 7:51 AM • Post Link Share: 
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  Is Housing Healthier Than It Appears? Are Mortgage Lenders Loosening Up?
Posted Under: Home Sales • Housing

Clearly, tight credit has held back housing in recent years. Both markets, and regulators, bounce from one extreme to another – from too loose to too tight over the course of economic cycles. These days, if you do not have a credit score north of 720 and are able to put down 20% it remains tough to get a mortgage.

The market responded and all-cash buyers skyrocketed to about 30% of all existing homes sold over the past few years, up from just about 10% of the total sales before the bust.

But in August 2014, all-cash transactions suddenly fell to 23%, the lowest share of sales since December 2009, while non-cash (or, financed transactions) surged to 77% of the total. We wonder if this is a sign that lending standards may be easing? We think it might.

As the chart above shows, overall existing home sales (blue line) have bounced off the recession low, but have clearly remained subdued. Existing home sales are down 5.3% from a year ago and are down 6.1% from the peak in July last year.

But, let’s break it down. Cash sales peaked in September 2013. But financed sales (sales that used a loan) have risen for six consecutive months, are up 7.3% from a year ago, and are at the highest level since November 2009, back when sales were artificially inflated by the $8,000 homebuyer tax credit.

So, as cash sales flattened, and then fell, financed sales have picked up the pace. We would argue that this “core” housing market shows new signs of life in 2014. In other words, the housing market is getting healthier and if lenders are indeed finally easing mortgage credit, we believe home sales could show some acceleration over the next year.
Posted on Tuesday, September 30, 2014 @ 2:37 PM • Post Link Share: 
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  A Slight GOP Edge in the Mid-Terms
Posted Under: Monday Morning Outlook
There are only 36 days until the mid-term elections.

The only thing we know for sure is that the Republicans will keep the House.  They already have a majority and the president’s party almost always loses seats in mid-terms. Our best guess is that GOP ends up with an enlarged majority.

The Senate, however, is completely up for grabs.  More Democrats have to defend seats this year.  President Obama’s low popularity, a Plow Horse recovery, scandals, and continued problems in the Middle East, had set up 2014 to be an anti-incumbent election.  It could have been a huge Republican wave.  Instead, the GOP has put its collective head in the sand, avoiding any real controversy, passing bills just to get things out of the way.  This is a “pro-incumbent strategy,” managed by risk-avoiding GOP members already in power.  As a result, the GOP Senate seat in conservative Kansas is up for grabs.

Despite this, the cards are stacked so high against the Democrats that the GOP will probably pick up enough seats to take the Senate.  According to polls, they’re running ahead in eight states now controlled by Democrats, although some of the leads are narrow, like in Colorado and Iowa.

The most likely result is that the GOP will end up with between 51 and 53 Senate seats, even though the GOP hasn’t put forward a broad positive policy agenda, and even though the GOP is behind in the money game.  A “do nothing” strategy has left their base uninspired.

This outcome of a slight GOP majority in the Senate won’t be able to overturn any vetoes, which means any hardball politics that attempts to use the budget process to extract major policy concessions from the President is unlikely.

We expect two more years of gridlock, with the possible exceptions of more oil exports and approval of the Keystone pipeline.  The White House would go along with these moves because the changes would help spur economic growth, some of it in the heavily-unionized commercial construction business, which would help Democrats keep the White House in 2016.

President Obama will never face another election and doesn’t need youthful environmentalists anymore.  Meanwhile, any Democrat presidential candidate wouldn’t be responsible for the policy changes.  Cynical?  Yes, but this is politics.

It’s the next presidential election that has the ability to fundamentally change the policy course.  And mounting debt will force our next president, from either party, to be more pro-growth.  We will expound on this at a later date, but we expect policy to be supportive of equities in the years ahead.

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Posted on Monday, September 29, 2014 @ 10:19 AM • Post Link Share: 
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  Personal income increased 0.3% in August
Posted Under: Data Watch • PIC

Implications:  A solid report on consumer spending and income today.  Consumption rose 0.5% in August and was revised up for prior months.  This shouldn’t be a surprise; payrolls are up about 2.5 million in the past year.  Don’t let anyone tell you this is all unsustainable.  Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.3% in August, was revised up for prior months, and is up 4.3% from a year ago.  This is slightly faster than the 4.1% increase in consumer spending in the past year.  In other words, incomes lead spending and the US is not experiencing a credit-created increase in consumption.  One overlooked part of this economic report is the massive growth in government redistribution.  Medicaid, for example, is up 12.5% versus a year ago, largely due to Obamacare.  Overall government transfer payments – like Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment compensation – are a very large share of income.  Before the Panic of 2008, these transfers were roughly 14% of income.  In early 2010, they peaked at 18%.  Now they are 17%.  Redistribution hurts growth because it reallocates scarce resources away from productive ventures.  Keynesians try to say government spending is necessary to boost the economy in a recession, but this is certainly not the case anymore.  Private sector jobs have expanded for 54 consecutive months and private-sector wages & salaries are up 5.8% from a year ago, which is faster than the 5.3% gain in government transfers.  We expect both income and spending to accelerate in the year ahead as jobs and wages continue to grow.  In addition, consumers’ financial obligations are hovering at the smallest share of income since the early 1980s. (Financial obligations are money used to pay mortgages, rent, car loans/leases, as well as debt service on credit cards and other loans.)  On the inflation front, the Federal Reserve’s favorite measure, the personal consumption price index, was unchanged in August and is up only 1.5% from a year ago.  Given loose monetary policy, by the middle of next year, the Fed is going to struggle to keep inflation down at 2%. That’s part of the reason we expect short-term rates to move up in the first half of 2015.    

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Posted on Monday, September 29, 2014 @ 9:10 AM • Post Link Share: 
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  Real GDP Growth in Q2 was Revised to a 4.6% Annual Rate
Posted Under: Data Watch • GDP

Implications: Forget about GDP for a moment. The most important news this morning was that economy-wide corporate profits were revised up for the second quarter, rebounding 8.4%. In particular, profits in the domestic non-financial sector rose 11.9% to a new record high. All of these profit numbers are calculated by government statisticians and include “capital consumption and inventory valuation adjustments.” (Sorry for the jargon, but that’s what they call it.) These adjustments don’t affect cash flow. However, combined with the weather in Q1, they have made the profits data extremely volatile. Excluding the adjustments, overall corporate cash flow is at a record high and the highest share of GDP since the early 1950s. These figures support the case for optimism for equities in general as well as business investment. In terms of real GDP, the consensus got it exactly right, with an upward revision to a 4.6% annual growth rate in Q2. The upward revision from the prior estimate of 4.2% was unusually broad, with every major category of real GDP revised slightly higher. As a result, after declining in Q1, nominal GDP (real growth plus inflation) snapped back at a 6.8% rate in Q2, the fastest pace for any quarter since 2006. Nominal GDP is now up 4.3% from a year ago and up at a 3.8% annual rate in the past two years. These figures continue to signal that a federal funds rate of essentially zero makes monetary policy too loose. Regardless, the Federal Reserve won’t start raising rates until next year. Plugging today’s data into our models suggests real GDP is growing at about a 3% annual rate in Q3, still in the Plow Horse range.

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Posted on Friday, September 26, 2014 @ 10:36 AM • Post Link Share: 
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  New Orders for Durable Goods Fell 18.2% in August
Posted Under: Data Watch • Durable Goods

Implications: What goes up must come down,…at least when it’s orders for durable goods. Orders for durables skyrocketed in July, both literally and figuratively, with a massive increase in Boeing plane orders that generated the largest gain on record for durables going back to 1958. A spike in Boeing orders is obviously not going to happen every month and so a return to a normal level of plane orders in August meant overall durable orders had to fall back to earth as well. This kind of monthly volatility is why it’s important to look at the trend, which is clearly upward. Orders for durables are up 8.9% from a year ago and up 7.3% excluding the transportation sector, a new record high for non-transportation. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – rose 0.1% in August and were upwardly revised in July. These "core" shipments are up 6.6% versus a year ago, up an annualized 10.3% in the past six months and 12.7% rate in the past three months - a clear sign of acceleration. As a result, it now looks like business investment in equipment is growing at about a 14% annual rate in Q3 and real GDP grew at roughly a 3% rate. The Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, increased to 14 in September from 12 in August, which backs up the national data. In other news this morning, new claims for unemployment insurance increased 12,000 last week to a still low 293,000. Continuing claims rose 7,000 to 2.44 million. Plugging these figures into our payroll models suggests a gain of about 220,000 in September, both nonfarm and private. This is better than the consensus forecast, which, spooked by last month’s tepid report, is around 200,000.

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Posted on Thursday, September 25, 2014 @ 1:30 PM • Post Link Share: 
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  New Single-Family Home Sales Boomed 18.0% in August
Posted Under: Data Watch • Home Sales • Housing

Implications: Looks like we may be seeing a thaw in mortgage lending. New single-family home sales surged 18% in August, coming in 33% higher than a year ago and at the highest level in more than six years. This comes on the heels of Monday's report, which showed a big gain in existing home sales that included financing (as opposed to all-cash deals). Nonetheless, new home sales still remain at depressed levels relative to where they should be by now in the recovery and we believe there are a few key reasons for this. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. Second, buyers have shifted slightly from single-family homes, which are counted in the new home sales data, to multi-family homes (think condos in cities), which are not counted in the report. Third, although we may be seeing a thaw, financing is still more difficult than it has been in the past. The inventory of new homes rose 2,000 in August, but still remains very low as the chart to the right shows, and most of the inventory gains are for homes not started, instead of homes completed. As a result, homebuilders still have plenty of room to increase both construction and inventories. On the pricing front, the median sales price for a new home is up 8% versus a year ago. In other recent news on home prices, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.1% in July, and is up 4.4% from a year ago. We expect price gains to continue in the year ahead, but at a slower pace than the past year.

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Posted on Wednesday, September 24, 2014 @ 11:58 AM • Post Link Share: 
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  Existing Home Sales Declined 1.8% in August
Posted Under: Data Watch • Home Starts • Housing

Implications: After increasing four consecutive months, existing home sales declined 1.8% in August, falling to a 5.05 million annual rate. Home sales have been a microcosm of the Plow Horse economy. They have not boomed by any measure, but have certainly bounced off the bottom. Why haven’t we seen more robust improvement? One big reason is tight credit. Despite being loaded with excess reserves from the Federal Reserve, banks are still reluctant to lend to home buyers. This is in direct contrast to the auto market, where non-bank lenders have loosened standards substantially since 2008-09 and auto sales have fully recovered. Another reason for the tepid recovery in existing home sales is a lack of inventory. After rising for seven consecutive months, inventories declined 1.7% in August. Still, inventories are 4.5% higher today than they were a year ago and more inventory should eventually help spur sales as buyers have more choices. The median price of an existing home sold is up 4.8% from a year ago and inventories are up 4.5%. In other words, recovering prices are getting more potential sellers into the market, which should lead to higher sales. An encouraging sign of continued healing in the housing market is that distressed homes (foreclosures and short sales) accounted for only 8% of August sales, down from 12% a year ago, and the lowest level since NAR started tracking distressed sales in October 2008. All-cash buyers, which averaged about 10% of total sales before the housing bust and around 30% of sales over the past few years, fell to 23% in August, the lowest level since December 2009. This means non-cash sales rose in August and may be an early sign that lenders are finally easing mortgage credit. If so, home sales could accelerate over the next year. Either way, whether existing home sales are up or down, these data should not change anyone’s impression about the overall economy. Remember, existing home sales contribute almost zero to GDP. Look for better sales in the months ahead. But, unless lenders dramatically loosen standards, the increases in sales will remain tame by historical standards.

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Posted on Monday, September 22, 2014 @ 12:30 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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