GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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TICKET TO RIDE: US CORPORATE PROFITS AND S+P 500 TRENDS (c) Leo Haviland, May 17, 2017

In “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.

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CONCLUSION AND OVERVIEW

In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.

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After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.

Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.

What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.

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However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.

In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.

Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.

Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.

Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.

A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.

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So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.

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In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.

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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)

TICKING CLOCKS: US FINANCIAL MARKETPLACES (c) Leo Haviland August 8, 2016

“Isn’t it a pity…the wrong people always have money.” From “The Big Clock”, a 1948 American film noir (John Farrow, director)

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CONCLUSION AND OVERVIEW

Ongoing yield repression by the Federal Reserve Bank, the European Central Bank, and their allies plays a crucial role in keeping the US Treasury 10 year note well beneath 6/11/15’s 2.50 percent interim yield top, as well as later and lower heights of 2.38pc (11/9/15) and 2.00pc (3/16/16). For the next few months, running up at least through America’s 2016 election period, it will be difficult for the UST 10 year to break above the resistance range of 2.00/2.50pc or much under its 7/6/16 low at 1.32pc.

The Fed leadership promotes caution regarding Fed Funds rate boosts. The NY Fed President recently argued “at the moment, for caution in raising U.S. short-term interest rates” (“The U.S. Economic Outlook and the Implications for Monetary Policy”; 7/31/16). A Fed Governor is “not in a hurry to lift rates”; he argues “for a ‘very gradual’ path for any rises” (Interview with Financial Times, 8/8/16, p2).

Economic growth in America, Europe, and Japan generally remains subdued. China, though it retains a comparatively strong real GDP rate, has slowed down. Despite massive money printing (quantitative easing) by assorted leading central banks at various times over the past seven to eight years, inflation yardsticks generally remain beneath the two percent target beloved by the Fed and its loyal allies. Ongoing government deficit spending, though less than during the global economic disaster era and the following few years, in recent times likewise has not sparked sustained substantial growth or sufficient inflation.

The broad real trade-weighted US dollar (“TWD”, monthly average; Fed H.10 statistics), though still lofty relative to its July 2011 major bottom around 80.5, remains beneath first quarter 2016’s 101.2 pinnacle. Central banks and finance ministers have been determined to keep the TWD beneath (or at least not much over) its January 2016 summit. For the next few months, they probably will continue to succeed in accomplishing this goal. The TWD also for the near term probably will not plummet more than 10 percent from its first quarter 2016 pinnacle.

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Establishment icons such as the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan probably will retain their highly accommodative policies for the next several months (at least). They will persist in their path not merely because of failure to achieve inflation goals, relatively sluggish growth, fears about global economic troubles (such as the United Kingdom’s Brexit Leave vote fallout) or worries about assorted “headwinds”/”volatility”. So why else?

The economic and political “establishment” (elites) in America and overseas fervently battles to subdue both left-wing and right-wing “populist” advances. See “‘Populism’ and Central Banks” (7/12/16). These guiding lights do not want populist leaders, whether America’s Donald Trump or European (or other) left or right wing firebrands, to achieve power.

The S+P 500 and other global stock marketplace benchmarks have rallied sharply from their 1Q16 depths. The S+P 500 has edged above its 5/20/15 peak at 2135. But a sharp downturn in worldwide equities probably would help populist advocates of “Change” to claim that “the establishment” had inadequate or failing economic (and political and social) policies. So the US establishment and its overseas comrades do not want the S+P 500 and related equity marketplaces to collapse, especially during the countdown up to US Election Day (11/8/16). Keeping US government (and other) yields low and avoiding big moves in the US dollar intertwine with central bank (and other establishment) stock marketplace support and anti-populist strategies.

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Ticking Clocks- US Financial Marketplaces (8-8-16)

THE METALS MARKETPLACE GAME: TOUCHING BASE (c) Leo Haviland March 16, 2015

Base metals such as aluminum, copper, lead, nickel, and tin capture far fewer headlines than the alluring stars of the petroleum complex. Nevertheless, base metals play an important position in the global economic game. Base metals are very significant not only to the economies of emerging/developing countries (think of China), but also to numerous so-called advanced nations. Despite assorted twists and turns, base metals “in general” (use the London Metal Exchange’s base metal index, “LMEX”, as a benchmark) have been in a bear path since early 2011. The renewed price meltdown in base metals over the past several months underscores recent and probable future slowdowns in real GDP growth rates in developing nations such as China. However, as emerging and developed nations closely interconnect in today’s international economy, base metal weakness probably also points to reductions in future output rates for advanced nations.

In the 2007-09 global economic crisis era and its aftermath up to the present, many significant trend changes in base metals, gold, the broad Goldman Sachs Commodity Index (and the petroleum complex), and the emerging marketplace stocks arena “in general” have occurred around roughly the same time.

The broad real trade-weighted United States dollar’s trend does not lock base metals prices, or those of any other playground, into a particular pattern. Nevertheless, the gradual strengthening of the dollar since mid-2011 roughly intertwines with the large bear move in base metals, gold’s bloody stumble since its September 2011 peak, and monumental declines in the broad GSCI (and the petroleum complex).

Emerging marketplace stocks in general, like benchmarks for base metals and commodities in general, have slumped in recent months. Further declines in the LMEX and the broad GSCI, especially when accompanied by US dollar rallies, will be a bearish warning sign (confirmation) for emerging marketplace stocks. Further noteworthy erosion in emerging marketplace stock prices likewise will be ominous for stock marketplaces of advanced nations.

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The Metals Marketplace Game-Touching Base (March 16, 2015)

WALKING THE WALK: US STOCKS AND THE DOLLAR © Leo Haviland October 5, 2014

The recent advance in America’s broad real trade-weighted dollar index has attacked June 2012’s 86.3 high (Federal Reserve Board, H.10; March 1973=100, monthly average). That key top rests near August 2008’s 86.7, a level from which the dollar rallied sharply during the worldwide economic disaster that emerged in mid-2007 and accelerated during 2008. The broad real trade-weighted dollar (“TWD”) probably will climb higher (even if only modestly) over the next several months given the current trends in the US Treasury 10 year note, emerging stock marketplaces, and commodities in general. For these present-day marketplaces and their interrelations, keep in mind their 2007-2009 history. Moreover, the current level and probable near term climb in the TWD, when viewed in conjunction with trends in the UST 10 year and emerging stocks and commodities, indicate that a significant plateau in the S+P 500 is or soon will be in place. A walk in the TWD toward or above September 2008’s 88.8 (and especially) October 2008’s 93.9 increases the likelihood of a noteworthy S+P 500 peak.

After the Fed ceased its prior rounds of money printing, the 10 year UST note yield and the S+P 500 tumbled. Although that benevolent central bank embarked on a slow tapering process in mid-December 2013, America’s 10 year government note yields have meandered downhill from 1/2/04’s 3.05 percent top. Shouldn’t US longer term government interest rates tend to rise if significant real GDP growth or widespread hopes for it exist? In an interdependent international economy, the ongoing sideways to down trend in emerging marketplace stocks in general warns of slowing growth in advanced as well as developing nations. The retreat in the overall commodities complex roughly resembles that of emerging marketplace equities.

Are owners of US stocks complacent? Not only do many players in stocks and elsewhere have faith in the Fed. Over the past year and a half, the S+P 500’s percentage declines have been even smaller and of increasingly short duration. This probably has mitigated marketplace fears of a large stock retreat.

Measurement moves hint that the S+P 500 probably does not have much more room to travel upward for the near term relative to 9/19/14’s recent high at 2019. The 3/6/09 major low around 667*3 equals about 2000. The 7/1/10 low at 1011 times two is 2022. The key take-off point of 1343 on 11/16/12 (various renewed easing by the ECB, Fed, and Bank of Japan within several months before or after that date) times 1.5 is 2015. All these levels are around the recent high. Also, within the context of the current long run bull move in the S+P 500, October is an important anniversary month. Recall 10/11/07’s major peak 1576 and the significant 10/4/11 bottom at 1075.

Charts--S+P-500-and-emerging-stock-marketplace-index-(10-5-14,-for-essay-Walking-the-Walk--US-Stocks-and-the-Dollar)-2

Charts--S+P-500-and-emerging-stock-marketplace-index-(10-5-14,-for-essay-Walking-the-Walk--US-Stocks-and-the-Dollar)-1

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Walking the Walk- US Stocks and the Dollar (10-5-14)
Charts- S+P 500 and emerging stock marketplace index (10-5-14, for essay Walking the Walk- US Stocks and the Dollar)