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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  Brian Wesbury discusses why he thinks the market is undervalued
Posted Under: Bullish • Markets • Video • Stocks • TV • Fox Business
Posted on Thursday, August 27, 2015 @ 2:45 PM • Post Link Share: 
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  Real GDP was Revised to a 3.7% Annual Growth Rate in Q2
Posted Under: Data Watch • GDP • Government • Fed Reserve

 
Implications: If the Fed thinks the recent stock market correction makes the case for a September rate hike "less compelling", then today's GDP report should make it more compelling again. Real GDP is at an all-time record high. It already was before today's upward revision, but it's at a new high now after being revised to a 3.7% annualized growth rate in Q2 from an original estimate of 2.3%. Growth in Q2 beat even the highest estimate of all 79 economists who were surveyed. Nominal GDP (real growth plus inflation) snapped back at a 5.9% rate in Q2, is up 3.7% from a year ago and up at a 4.1% 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. We think the Fed should raise rates in September and still believe the Fed may pull the trigger on rate hikes as long as the stock market shows signs of recovery from the recent correction. All major categories for GDP were revised higher, with business investment leading the way. Business investment was originally reported down at a 0.6% annual rate but was revised to a growth rate of 3.2%. Also in today's GDP report was our first glimpse at economy-wide corporate profits, which rose 2.4% in Q2 after falling 5.8% in Q1. These profits numbers are calculated by government statisticians and include "capital consumption and inventory valuation adjustments," neither of which affect cash flow. In the past two quarters, the BEA capital consumption adjustment, which converts depreciation from historical cost to replacement cost, has subtracted massively from profits. Excluding these adjustments, corporate profits are at a record high, both on a pre-tax basis and after-tax. That's the fuel which is going to keep the Plow Horse economy moving along despite the growth in the size of government. In other news this morning, new claims for jobless benefits declined 6,000 last week to 271,000. Continuing claims rose 13,000 to 2.27 million. Plugging these figures into our models suggests August payrolls are up about 195,000. The last piece of news reported this morning was a 0.5% gain in pending homes sales in July after a 1.7% decline in June. Pending home sales are contracts on existing homes and these figures suggest existing home sales, which are counted at closing may slip a little in August after surging almost 10% in the prior three months.

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Posted on Thursday, August 27, 2015 @ 10:53 AM • Post Link Share: 
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  New Orders for Durable Goods Rose 2.0% in July
Posted Under: Data Watch • Durable Goods

 
Implications: A surprisingly strong report on new orders of durable goods shows the economy continues to plow on with no signs of weakening. Orders for durable goods rose 2% in July, exceeding even the highest estimate of all 76 economists who were surveyed, and were revised higher for previous months. A big chunk of the gain in July came from the very volatile transportation sector, specifically a 4% increase in autos, which brought the overall transportation sector up 4.7% for the month. The good news was that orders excluding transportation still rose 0.6%. Some pessimists may point out that orders are down 19.6% from a year ago, but this is due to a statistical anomaly. In July of last year, transportation orders soared as Boeing took in a massive order for 324 new planes. Excluding the volatile transportation sector, orders are still down 2.5% from a year ago. But this too doesn't tell the whole story, as the decline is due almost entirely to the precipitous drop in energy prices since mid-2014. We believe these factors are temporary, and in the last three months orders excluding transportation are up at a 5% annual rate. The best news in the report was that "core" shipments, which exclude defense and aircraft, increased 0.6% in July and were up 1.3% including revisions to prior months. Plugging these and other recent data into our models, we are forecasting real GDP grew at a 3.3% annual rate in Q2 and will be up at a 2.0% annual rate in Q3. Expect stronger gains in orders for durables in the year ahead. Consumer purchasing power is growing with more jobs and higher incomes, while debt ratios remain very low, leaving room for an upswing in big-ticket spending. Meanwhile, profit margins are high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment.

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Posted on Wednesday, August 26, 2015 @ 10:32 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 5.4% in July
Posted Under: Data Watch • Home Sales • Housing

 
Implications: After taking a breather in June, new residential home sales returned to a healthy plow horse upward trend in July. Sales increased 5.4% from June and are now up 25.8% in the past year, signaling that the housing market continues its recovery. It's important to remember that monthly data is volatile, and what really matters is the trend. New home sales over the past year have averaged the fastest pace going back to 2008. Housing starts, which are a good predictor of future home sales, have followed this trend as well. In fact, new home sales have been running slightly above the levels that would be expected with the pace of housing starts. The underlying details of the report also showed strength. The months' supply of homes for sale fell to 5.2 months in July from 5.3 in June, with the decline entirely due to the faster sales pace, as inventories rose by 4,000 units. Note, however, that the increase in inventories was not due to finished homes, but homes under construction. With the increased pace of sales, builders still have plenty of room to increase both construction and inventories. Having made these points, don't forget that new home sales are still depressed relative to history. We think there are a few reasons for this. First, a larger share of the population is renting. 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 this report. Third, although we may be starting to see a thaw, financing is still more difficult than it has been in the past. The trend is what matters, though, and the trend in sales continues higher. In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, rose 0.2% in June and is up 5.6% from a year ago. The national Case-Shiller index, another measure of home prices, increased 1.0% in June and is up 4.5% from a year ago. In the past year, price gains have been led by Denver, San Francisco, and Dallas, although prices are up in all 20 major metro areas around the country. On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, came in at 0, well below the consensus expected 10. Look for the national ISM manufacturing index to be little changed in August, suggesting continued moderate growth in the factory sector.

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Posted on Tuesday, August 25, 2015 @ 11:18 AM • Post Link Share: 
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  This Correction is Technical, Not Fundamental
Posted Under: Bullish • Employment • Housing • Markets • Stocks
Well...what's up? The Chicago Cubbies, that's what. They've won 19 out of their last 23 games and have the fourth best record in Major League Baseball. Maybe hell really is about to freeze over. Cub's fans have been waiting for a very long time.

The only people more giddy with anticipation are the stock market pundits looking for The Big Short – II. It's an eagerly anticipated sequel of the Panic of 2008. The S&P 500 is tumbling again today, more than 10% below the peak in May.

The Pouting Pundits of Pessimism have been waiting for a long time for this. They haven't waited as patiently as Cubs fans, but they've waited. In the past six and one-half years, every time the market has gone down sharply for a day or two, or a piece of economic data turned negative, the decibels have risen. Technical moves in stocks, or seasonal patterns in data, are turned into a fundamental reason to run for the hills with weapons and gold.

These fear-mongers are traders, not investors. Macro-short-sellers face impossible odds because markets go up over time. To make money shorting, you have to know when to sell and when to cover. No one we know can do this successfully over time. Investing involves long-term thinking about fundamental factors, like profitability, new technology or serious policy changes. Trading is short-term, involving technical factors and emotion.

Shorts get power from fear and confusion, and nothing creates fear like the belief that market declines are being caused by some fundamental problem.

We don't see any serious fundamental problems.

1 – Private sector jobs have increased for 65 consecutive months. There is unambiguous improvement in housing and construction taking place. Auto sales are near record highs, and rising. Yes, it's Plow Horse growth, but profits, outside of energy, continue to grow. Using total profits, or forward-PE ratios, which include the drop in energy profits paints a distorted picture.

2 – Since the crisis of 2008, pundits have convinced themselves that the bull market in stocks is because the Fed, and Quantitative Easing, have created a "sugar high." By definition, taking away the sugar is painful. But, there is no "proof" that QE is responsible for record high corporate profits. M2 (the money supply Milton Friedman told us to watch) has continued to grow at about a moderate 6% per year.

3 – Even though tapering didn't end the world, now they say rate hikes will. But, seriously, is there anyone out there who thinks a 0.375% federal funds rate will stop the iPhone7 from being introduced? There are still massive amounts of excess reserves in the system, and paying banks even 1% for those reserves (instead of 0.25%) is not going to cause the money supply to shrink.

4 – Yes, China is slowing. So what? Exports to China make up 0.7% of US GDP.

5 – The very same people who three months ago were saying the Chinese yuan would be the new reserve currency, now say Chinese devaluation is calamity. Which should we fear, a rising or falling yuan? Answer, neither.

6 – Corrections are about moving capital from weak hands to strong hands and are always scary, especially when the pundits argue loudly that the correction is due to fundamental factors.

But, this correction is not due to fundamental factors. It's technical. We can't prove it to you, but that's what corrections are all about – opportunity for those who can see through the fog. Die-hard shorts are just like Cubs fans – this is the year, until we have to wait for the next one.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist


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Posted on Monday, August 24, 2015 @ 11:00 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 
Source: St. Louis Federal Reserve FRED Database
Posted on Monday, August 24, 2015 @ 7:54 AM • Post Link Share: 
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  Existing Home Sales Increased 2.0% in July
Posted Under: Data Watch • Home Sales • Housing

 
Implications: Despite tight inventories and rising prices, sales of existing homes surprised to the upside in July. Sales of previously owned homes increased to a 5.59 million annual rate in July, rising for a 3rd consecutive month (and up in five of the last six) and marking the fastest pace of sales since 2007. Sales have now increased year over year for 10 consecutive months and we expect the trend to continue. All-cash buyers accounted for 23% of sales in July, down from 29% a year ago. As a result, while total sales are up a healthy 10.3% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 19.6%. So when all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. The gain in mortgage-financed sales suggests a long-overdue thaw in lending. What's interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. In fact, the looming rate hike appears to be increasing the pace of sales, as buyers look to lock in terms before borrowing costs move higher. However, tight supply and high prices continue to generate headwinds. We believe this will be remedied as more inventory comes to market in the year ahead through "on-the-fence" sellers moving to take advantage of higher prices. In other news this morning, new claims for jobless benefits rose 4,000 last week to 277,000. Continuing claims fell 16,000 to 2.25 million. Initial claims have now been below 300,000 for 24 straight weeks. Plugging these figures into our models suggest the first report on nonfarm payrolls for August will show a gain of 195,000 with healthy upward revisions in the months to follow. This positive sentiment was echoed by the Philadelphia Fed index, a measure of strength in East Coast manufacturing, which increased to 8.3 in August from 5.7 in July. All signs point to continued Plow Horse growth.

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Posted on Thursday, August 20, 2015 @ 12:24 PM • Post Link Share: 
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  Q2 Slowdown in Median Home Size?
Posted Under: Housing

 
A recent story on the housing market by Kris Hudson in The Wall Street Journal (link) started by proclaiming that "The median size of U.S. homes built in the second quarter declined from the record set in the previous quarter, suggesting builders are starting to shift toward producing more entry-level homes."

It's hard to prove this isn't true, but the data the reporter used to support the idea don't support that case. The median square footage for single-family homes that were started in the second quarter was slightly lower than in the first quarter, Hudson noted. But these figures, which come from the Census Bureau, are not seasonally adjusted and normally decline in the second quarter of each year.

In fact, since the second quarter of 1999, median square footage has increased 22%. But, in the second quarter of each year, it's declined twelve times and only expanded four times. As the chart above shows, the real story is how much square footage has rebounded since the recession.

Median square footage is still higher than a year ago, the four-quarter moving average is at a record high, and we expect continued gains in the year ahead, particularly given the drop in heating costs due to the drop in energy prices.

This kind of reporting is becoming more commonplace as people become enamored with the idea that short-term moves are indicative of long-term trends.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist
Posted on Thursday, August 20, 2015 @ 12:07 PM • Post Link Share: 
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  The Consumer Price Index Increased 0.1% in July
Posted Under: CPI • Data Watch • Inflation

 
Implications: In the continued wake of collapsing oil prices, the consumer price index increased for a sixth consecutive month in July, and showed the fastest three-month pace of inflation since 2012. At 3.6%, the three-month annualized rate of overall inflation is well above the Federal Reserve's 2% long-term target. Core prices, which remove the volatile food and energy components, continue to hover around 2% inflation from a year ago. Either way, the recent pace of inflation has been running above the Fed's target and should eventually put pressure on the Fed to raise rates faster than the market expects. Overall consumer prices rose 0.1% in July and showed slightly positive year-over-year growth. The lack of headline inflation in the past year is due to energy prices, which rose 0.1% in July (and are up 27% at an annual rate in the past three months) but remain down 15% from a year ago. Core prices increased 0.1% in July, are up 1.8% in the past twelve months, and have risen at a 2.2% annualized rate since the start of the year. In other words, core prices are continuing to gradually accelerate. With core prices so close to the Fed's two percent inflation target, policymakers should remain concerned about future increases in inflation, even with overall inflation near zero in the past twelve months. Core consumer prices in June were led higher by housing. Owners' equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in July, is up 3.0% in the past year, up at a 3.7% annual rate in the past three months, and will be a key source of higher inflation in the year ahead. While some scaremongers warn about deflation, others stoke fears of hyperinflation. But the truth is that neither is a threat at present. What we have is low inflation that is likely to gradually work its way upward over the next few years. On the earnings front, "real" (inflation-adjusted) average hourly earnings rose 0.1% in July, and are up a modest 1.9% in the past year. Taken as a whole, recent trends in both consumer and producer prices suggest the Fed has solid grounding to start raising rates in September.

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Posted on Wednesday, August 19, 2015 @ 9:52 AM • Post Link Share: 
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  Housing Starts Increased 0.2% in July
Posted Under: Data Watch • Home Starts • Housing

 
Implications: Another strong report on the home building sector. After booming in June, housing starts rose another 0.2% in July to a 1.206 million annual rate, the highest level since 2007. More importantly, the increase in July was all due to a 12.8% gain in single-family starts, which are much less volatile from month to month, add more (per unit) to GDP than multi-family units, and are up 19.0% from a year ago. The underlying trend for overall starts has been up since 2011 and we expect that trend to continue. Although permits for future building fell 16.3% in July, a huge drop, this comes on the back of the largest three-month gain since 1982. Some of that gain can be attributed to tax incentives for builders in New York that expired on June 15th. Builders tried to squeeze in as many permits as they could before the expiration. So it makes sense that permits declined by 60% in the Northeast in July. The decline in overall permits, as the chart to the right shows, just brings us more in line with underlying trend, which continues to move higher. The total number of homes under construction (started but not yet finished) increased 2.0% in July and is up 14.9% versus a year ago. Based on population growth and "scrappage," overall housing starts should rise to about 1.5 million units per year over the next year or so, which means a large part of the recovery in home building is still ahead of us. In other recent housing news, the NAHB index, which measures confidence among home builders, increased to 61 in August, the highest reading since November 2005. Readings greater than 50 mean more respondents report good market conditions. Just one year ago, the overall index was at 55. Also yesterday, the Empire State index, a measure of manufacturing sentiment in New York, came in at -14.9 in August, the lowest since April 2009, versus 3.9 in July. However, we think this is an outlier and not the start of some new negative trend. The same survey showed that New York manufacturers were the most optimistic about the future than at any time in the past four months, a sign the slowdown seen in August is likely to be short lived.

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Posted on Tuesday, August 18, 2015 @ 10:09 AM • 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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