Monthly Archives: August 2013

The Impact Of Rising Interest Rates

With the recent increase in interest rates, perhaps the paramount question is what impact a rising interest rate environment will have on the economy.

First, for reference, here is a long-term chart of interest rates from 1962, as seen in Doug Short’s post of August 17 titled “Treasury Yields In Perspective” :

(click on chart to enlarge image)

Dshort 8-17-13 - treasuries-FFR-since-1962

As one can see, the overall trend in interest rates has been declining, dating back to the peak seen in the early-80s.

The impacts that these falling interest rates have had is extensive, and many of the impacts lack (full) recognition.  As I have previously commented, most recently in my February 6, 2013 post, “Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.”

While the list of ways in which lower interest rates have acted as a benevolent factor to the economy is exceedingly lengthy, one such notable area is the impact lower interest rates have had on corporate earnings.  I highlighted two estimates concerning the positive impact of declining interest rates on corporate profitability in my July 29 ProfitabilityIssues.com post titled “Impact Of Low Interest Rates On Corporate Profitability.”

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy.  While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

The impact of the recent rising interest rate environment is particularly noteworthy, not only because of the historically-rapid speed of its ascent, but also because, as I have commented before, my analyses indicate that interest rates can rise to levels much higher than generally expected.  I have written extensively about my belief that there is an exceedingly large bond bubble; if one believes that such is the case, the implications concerning the level of future interest rates is disconcerting.  A “deflating” or “bursting” of such a large bubble will have widespread negative impacts on the economy and markets.

For reference, below is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 8-21-13 interest rates

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1642.80 as this post is written

Trends Of S&P500 Earnings Forecasts

S&P500 earnings trends and estimates are a notably important topic, for a variety of reasons, at this point in time.

FactSet publishes a report titled “Earnings Insight” that contains a variety of information including the trends and expectations of S&P500 earnings.

For reference purposes, here are two charts as seen in the “Earnings Insight” (pdf) report of August 16, 2013:

from page 11:

(click on charts to enlarge images)

CY Bottom-Up EPS vs. Top-Down Mean EPS (Trailing 26-Weeks) 

FactSet Earnings Insight 8-16-13 CY2013 and CY2014

from page 12:

Calendar Year Bottom-Up EPS Actuals & Estimates

FactSet Earnings Insight 8-16-13 CY2000-CY2014

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1647.62 as this post is written

S&P500 Earnings Estimates For Years 2013, 2014, And 2015

As many are aware, Thomson Reuters publishes earnings estimates for the S&P500.  (My other posts concerning S&P earnings estimates can be found under the S&P500 Earnings tag)

The following estimates are from Exhibit 12 of “The Director’s Report” of August 20, 2013, and represent an aggregation of individual S&P500 component “bottom up” analyst forecasts:

Year 2013 estimate:

$110.70/share

Year 2014 estimate:

$123.01/share

Year 2015 estimate:

$135.62/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1648.08 as this post is written

Standard & Poor’s S&P500 Earnings Estimates For 2013 & 2014 – As Of August 15, 2013

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings tag)

For reference purposes, the most current estimates are reflected below, and are as of August 15, 2013:

Year 2013 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $108.41/share

-From a “top down” perspective, operating earnings of N/A

-From a “top down” perspective, “as reported” earnings of $100.91/share

Year 2014 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $122.28/share

-From a “top down” perspective, operating earnings of $114.53/share

-From a “top down” perspective, “as reported” earnings of $111.53/share

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1656.87 as this post is written

Updates Of Economic Indicators August 2013

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The August 2013 Chicago Fed National Activity Index (CFNAI)(pdf) updated as of August 20, 2013:

cfnai_monthly_MA3 8-20-13

The ECRI WLI (Weekly Leading Index):

As of 8/16/13 (incorporating data through 8/9/13) the WLI was at 131.2 and the WLI, Gr. was at 4.7%.

A chart of the WLI, Gr. since 2000, from Doug Short’s blog of August 16 titled “ECRI Recession Watch:  Weekly Update” :

Dshort 8-16-12 ECRI-WLI-growth-since-2000 4.7

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, depicting 12-31-07 through 8-10-13:

ads_12-31-07 through 8-10-13

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the July 18 press release, the LEI was at 95.3 and the CEI was at 105.9 in June.

An excerpt from the July 18 release:

Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI was flat in June. Declines in building permits, new orders and stock prices were offset by gains in consumer expectations, initial claims for unemployment insurance, and other financial indicators. However, the LEI’s six-month growth rate remains positive, suggesting the economy will continue expanding through the end of the year.”

Here is a chart of the LEI from Doug Short’s blog post of July 18 titled “Conference Board Leading Economic Index:  Unchanged In June” :

Dshort 7-18-13 CB-LEI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1658.25 as this post is written

Philadelphia Fed – 3rd Quarter 2013 Survey Of Professional Forecasters

The Philadelphia Fed Third Quarter 2013 Survey of Professional Forecasters was released on August 16.  This survey is somewhat unique in various regards, such as it incorporates a longer time frame for various measures.

The survey shows, among many measures, the following expectations:

Real GDP: (annual average level)

full-year 2013 : 1.5%

full-year 2014 : 2.6%

full-year 2015:  2.9%

full-year 2016:  2.5%

Unemployment Rate: (annual average level)

for 2013: 7.5%

for 2014: 7.1%

for 2015: 6.6%

for 2015: 6.1%

As for “the chance of a contraction in real GDP” in any of the next few quarters, estimates are 10.5%, 11.2%, 11.7%, 11.5%, and 11.8% for each of the quarters from Q3 2013 through Q3 2014, respectively.

As well, there are also a variety of time frames shown (present quarter through the year 2022) with the expected inflation of each.  Inflation is measured in Headline and Core CPI and Headline and Core PCE.  Over all time frames expectations are shown to be in the 1.3%-2.3% range.

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1655.83 as this post is written

Markets During Periods Of Federal Reserve Intervention – August 16, 2013 Update

In the August 9, 2011 post (“QE3 – Various Thoughts“) I posted a chart that depicted the movements of the S&P500, 10-Year Treasury Yield and the Fed Funds rate spanning the periods of various Federal Reserve interventions since 2007.

For reference purposes, here is an updated chart from Doug Short’s blog post of August 17 (“Treasury Yields In Perspective“) :

(click on chart to enlarge image)

Dshort 8-17-13 SPX-10-yr-yield-and-fed-intervention

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1655.83 as this post is written

Long-Term Charts Of The ECRI WLI & ECRI WLI, Gr. – August 16, 2013 Update

As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

The movement of the ECRI WLI and WLI, Gr. is particularly notable at this time, as ECRI publicly announced on September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reiterated the view that the U.S. economy is currently in a recession, seen most recently in these seven sources :

Other past notable 2012 reaffirmations of the September 30, 2011 recession call by ECRI were seen (in chronological order)  on March 15 (“Why Our Recession Call Stands”) as well as various interviews and statements the week of May 6, including:

Also, subsequent to May 2012:

Below are three long-term charts, from Doug Short’s blog post of August 16 titled “ECRI Recession Watch:  Weekly Update”  These charts are on a weekly basis through the August 16 release, indicating data through August 9, 2013.

Here is the ECRI WLI (defined at ECRI’s glossary):

(click on charts to enlarge images)

Dshort 8-16-13 ECRI-WLI 131.2

This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

Dshort 8-16-13 ECRI-WLI-YoY 7.0 percent

This last chart depicts, on a long-term basis, the WLI, Gr.:

Dshort 8-16-13 ECRI-WLI-growth-since-1965 4.7

 

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1655.28 as this post is written

St. Louis Financial Stress Index – August 15, 2013 Update

On March 28, 2011 I wrote a post (“The STLFSI“) about the  St. Louis Fed’s Financial Stress Index (STLFSI) which is supposed to measure stress in the financial system.  For reference purposes, the most recent chart is seen below.  This chart was last updated on August 15, incorporating data from December 31,1993 to August 9, 2013, on a weekly basis.  The August 9, 2013 value is -.619:

(click on chart to enlarge image)

STLFSI_8-15-13 -.619

Here is the STLFSI chart from a 1-year perspective:

STLFSI_8-15-13 -.619 1-year

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed August 16, 2013:

http://research.stlouisfed.org/fred2/series/STLFSI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1661.32 as this post is written

Walmart’s Q2 2014 Results – Comments

I found various notable items in Walmart’s Q2 2014 earnings call transcript (pdf) dated August 15, 2013.  I view Walmart’s results and comments as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented on their quarterly conference call comments; these previous posts are found under the “paycheck to paycheck” tag.

Here are various excerpts that I find most notable:

comments from Mike Duke, president and CEO of Wal-Mart Stores, Inc, page 3:

Walmart U.S. comp sales declined 0.3 percent in the 13-week period ended July 26. Traffic improved from the first quarter, and we gained market share in key categories. We continue to invest in price and we are focused on delivering positive comps during the next two quarters.

comments from Bill Simon, president and CEO of Walmart U.S., page 9:

Net sales grew 2.1 percent to $68.7 billion, with about $1.4 billion added in sales year over year. For the quarter, we delivered a negative 0.3 percent sales comp. Traffic decreased 0.5 percent and ticket increased 0.2 percent. The lack of meaningful inflation and the 2 percent increase in payroll taxes impacted our results; however our performance reflects more than a 100 basis point improvement over Q1.

comments from Bill Simon, president and CEO of Walmart U.S., page 10:

Now, let’s cover additional financial details. During the quarter, we continued working with our suppliers to drive cost of goods savings. These initiatives, along with more favorable merchandise mix and logistics productivity, benefited gross profit rate. Overall, our gross profit rate was up 23 basis points, leading to an increase of 2.9 percent in gross profit dollars. We continue to monitor the pricing environment in each market to ensure price leadership, which is the cornerstone of our business strategy.

comments from Bill Simon, president and CEO of Walmart U.S., page 12:

For the quarter, grocery sales, which includes food and consumables, grew by nearly $1 billion. We delivered delivered a slightly negative comp for the retail period. Our results were influenced by lower than anticipated inflation, even deflation in some areas, including dry grocery, frozen and snacks and beverages. Softer performance among these larger categories impacted our overall comp by more than 50 basis points. Adult beverages continued a solid trend of results, delivering a high single-digit comp.

comments from Bill Simon, president and CEO of Walmart U.S., page 15:

I’m particularly pleased with the performance of Neighborhood Markets. We continue to roll out this format aggressively throughout the country, opening more sites in the second quarter than in any other quarter in our history. In fact, we opened 12 stores in just one day this quarter.

comments from Bill Simon, president and CEO of Walmart U.S., page 16:

Given the current economic environment, we expect our comps to be relatively flat in the coming quarter. We remain confident about the back half of the year, as we continue to execute on initiatives to drive our business, and in particular, our top line. The customer remains challenged, but I’m confident in our position and in the ability of our teams to execute. Our strategy is sound, our pricing position is solid and our ability to leverage is strong, all of which bodes well as our comps continue to improve.

comments from Charles Holley, CFO, page 36:

Economic conditions in many of our markets around the world remain difficult. The U.S. retail environment remains challenging, with virtually no inflation in food and the higher payroll tax instituted earlier in the year. High fuel prices can impact spending as well. Our expectations for the back half of the year are through a lens of cautious consumer spending.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1661.64 as this post is written