Jobless Claims

Last week’s initial jobless claims were the lowest in 42 years as shown in blue in the chart below.  The reading garnered headlines on its own, but if you think about the fact that the population has grown a lot since then and look at this based on population (the white dotted line), it is clearly the lowest ever (or at least since they started calculating it in 1967).  For those of you who look very closely at these charts, you will notice the population adjusted series doesn’t make it all the way to the right side of the chart…this is because the census data only goes to the end of 2014.  On a related note, last night on Facebook I saw two different people who had posted something saying their companies needed workers.  Could we be approaching a labor shortage and wage inflation?

Texas Tea

As you may have noticed, energy stocks and particularly MLPs have moved sharply higher since the new quarter started last week.  Whether this is a “dead cat bounce” remains to be seen.  Consensus thought has been that even though rig counts are down, efficiency gains have meant that production itself has not dropped.  With that in mind, I thought the chart below might be interesting.  It shows a dramatic reduction in U.S. rig count, which I showed in a recent blog, along with U.S. crude oil production.  As you can see, production has begun to tick down.  Will it end up being just a tick, or are we on the verge of a measurable drop in production? 

Correction or Bear Market?

One of the biggest questions facing stock market investors going forward is whether the recent weakness is a healthy correction like 2011, or the beginning of a bear market, like 2001 or 2008.  Obviously no one knows the answer to this, but below are a couple of charts that look back at data during previous recessions and bear markets.  In the first chart (below) provided by Strategas, the blue line shows wage rate growth over time.  As you can see, wage inflation of 4+% preceded every recession since 1980.  Currently, wage inflation is a mere 1.9%.

The chart below shows the S&P 500 in white and Consumer Confidence in green.  As you can see, these two series are usually highly correlated, with consumer confidence dropping before a recession and in unison or before the stock market.  In today’s case, while we have experienced a fairly sharp stock market decline, consumer confidence has remained strong and even increased in the face of market weakness.

Recent Market Action

It is widely said that the market hates uncertainty.  This time is no different.  Last week’s Fed decision (or lack thereof) has added additional uncertainty to the market.  While it may seem that keeping rates the same would be better for equities, it may be that raising rates on Thursday would have been good for the stock market because then at least market participants know what they are dealing with.  The chart below shows that the S&P 500 is down 4.3% from its peak on Thursday, which was the day of the Fed release:

Rig Count

I have shown oil price charts a number of times in previous blogs, but I have not highlighted rig counts for a while.  In the chart below, the white line is oil prices and the yellow line is the number of active oil and gas rigs operating worldwide.  Historically, and not surprisingly, major declines in oil prices have been followed by major declines in rig counts.  This time is no exception.  The current rig count decline has been as big and as steep as any decline since the 1980s.  

Insider Buying in Energy

We all know that oil prices and the corresponding energy stocks have declined dramatically in the past year.  The recent drop in oil prices has been similar in magnitude to the other major drops of the last 32 years, which is as far back for which I can easily retrieve the data.  It is never a good idea to try to pick bottoms or “catch falling knives” as they say, but one might argue that the decline in oil prices is at least in the “seventh inning” from a magnitude standpoint.  See below:

You will undoubtedly hear on the news and read about how the Dow was down over 1,000 points at one point today, so I will not regurgitate that information.  What you might not read is that today was reminiscent of the 2011 “Flash Crash” for many stocks.  On the open, a number of well-known stocks dropped twenty percent or more.  Stocks like GE, Colgate-Palmolive, Boeing and Starbucks all experienced major, albeit brief, collapses.  Below is a one-year chart on Colgate-Palmolive.  Note today’s movement on the far right of the chart.  This stock went from mid-sixties to $50 and back to mid-sixties all by 9:36 am.  Now that this is the second “flash crash”, it appears to be a flaw in the market which has likely been exacerbated by automated and ETF trading.  It is hard to argue that the market is efficient and orderly when huge, usually non-volatile stocks can move up and down twenty percent in a five minute period.  Some illiquid ETFs were down as much as 40% this morning.  My guess is that like last time, many of these trades will be reversed by regulators. 

Recent Market Action

The stock market weakness I have highlighted in previous blogs continues.  Today, stocks were down fairly strongly.  Fears have shifted from Greece to concerns about global and emerging market economic weakness.  Last week’s currency adjustments in China attracted a lot of attention, not only as a sign of slowing growth in China, but because it raised concerns regarding a currency war.  Of course, all of this feeds into expectations of when the Fed will raise interest rates. Not surprisingly, as the chart below highlights, the odds of a September rate hike have lessened: 

Today’s big market news was that China decided to abruptly devalue their currency with the biggest move in over twenty years.  In recent years, China has been trying to move toward a model of growth via consumption and away from a reliance on external investment.  Part of this has been the move toward a more free-market currency policy.  Moving toward this new economy takes a long time, and given recent economic weakness in China, they decided to take a step back and devalue their currency to help strengthen their economy.  This decision rippled through the financial markets, contributing to a one percent loss in the U.S. stock market.  Many well-known stocks with Chinese or commodity exposure were down significantly more than the overall market.  On paper, this currency move should be good for safe-haven and defensive assets, and bad for commodity prices and stocks with Chinese exposure.   At the simplest level, it makes goods and services originating in China cheaper and makes things made elsewhere more expensive for people in China. 

The market was abuzz today about the “death of the bundle” as media stocks dropped on weak cable subscriber data.  We all know people who have dumped cable in favor of streaming services and I have observed that my 14-year old kids watch most of their television via streaming services.   Since 2010, 13- to 24-year olds have cut their traditional television viewership by 32 percent, while 25- to 34-year olds are watching 23 percent less traditional television.  Meanwhile, high-flying stock Netflix stock (below) has moved up almost 20x since 2012 and has been hitting new all-time highs on a daily basis.  The question is whether the market is getting ahead of itself or are we are truly seeing a rapid and permanent change in the cable industry?