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Crafty_Dog
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« Reply #1250 on: August 08, 2017, 11:41:03 AM »

In the words of Scott Grannis, upon my forwarding that to him:

"Yes. And it’s shocking: in 10 years credit card debt outstanding has managed to increase by a whopping $1 billion! In inflation adjusted terms it has fallen by 10%. Relative to nominal GDP it has fallen by almost 25%. The sky is falling!"
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Crafty_Dog
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« Reply #1251 on: August 11, 2017, 02:57:36 AM »

Are Stock Prices Dangerously High? It Depends How You Look at It
These three P/E measurements are alarming. So why hasn’t it mattered?
Each of the major P/E measures is currently higher than its long-term average. Still, the market hit its latest high on Friday.
Each of the major P/E measures is currently higher than its long-term average. Still, the market hit its latest high on Friday. Illustration: Davide Bonazzi for The Wall Street Journal
By Jeff Brown
Aug. 6, 2017 10:13 p.m. ET
47 COMMENTS

U.S. stocks have set record after record this year, pleasing investors who might have expected a postelection slump. But have prices soared to levels that are too risky?

Just as a 50-degree day is cool in August and warm in January, share prices can look high or low depending on the frame of reference. Still, by almost any standard, share prices are indeed high today—sobering for anyone with a serious stake in the market. Consider the three most popular measures: trailing price-to-earnings ratio, forward P/E ratio and cyclically adjusted P/E ratio.
 

“Each of the measures is currently higher than its long-term average, prompting many market analysts to predict an impending market decline,” says Brandon Thomas, co-founder and chief investment officer at Envestnet , ENV -3.70% a Chicago-based research and advice provider for financial advisers.

Yet some experts make a case that stocks are not overpriced by important measures and will continue to rise. What’s an investor to do?

Here’s a look at what the top barometers are showing—and why stocks continue to defy them—along with the pros’ arguments about what comes next.

• Trailing P/E Ratio: The classic price-to-earnings ratio, or P/E, looks at the current price divided by the company’s total earnings for the past 12 months.

Today, the P/E for the stocks in the S&P 500 index is about 24, meaning investors pay $24 for every $1 in corporate earnings. That’s quite high compared with the historical average of about 15 or 16, but not so high compared with some periods of crisis in the past—more than 40 around the dot-com bubble and above 100 after the financial crisis broke. To return to average, prices would have to tumble or earnings skyrocket.

Some experts note, however, that it isn’t unusual, or particularly risky, for the P/E to be somewhat higher than average when interest rates and inflation are unusually low. If you’ll earn only a tad over 2% on a 10-year Treasury note, paying $50 for every $1 in interest income, why not pay 24 times earnings on a stock? That would be a 4% earnings yield (earnings divided by price). Also, a low earnings yield is easier to stomach if little will be lost to inflation.

Andrew Kleis, co-founder of Insight Wealth Group, a wealth-management firm in West Des Moines, Iowa, says that “in times of incredibly low interest rates, like today and the last several years, investors put their money into the equities markets because they believe that is their best opportunity for risk-adjusted returns. That drives up P/E ratios. It’s happened before, and it’s happening again.”

This view assumes investors own stocks to share in current or future earnings, even though not all earnings are paid out as dividends. Undistributed earnings used for plant expansion, research and development or stock buybacks should boost the share price.

• Forward P/E: For another look, many experts use a P/E based on projected or forecast earnings, usually from company estimates and a consensus among analysts. Because many analysts are predicting earnings will grow in the near and medium term, this view produces a P/E a little less frightening—currently about 19 for the S&P 500, close to its long-term average.

Jim Tierney, chief investment officer for concentrated U.S. growth equities at AllianceBernstein asset management in New York, says “forward earnings are what we care about the most,” and notes that Wall Street analysts expect healthy earnings gains, producing a forward P/E just shy of 19 this year and close to 17 in 2018. “A bit elevated, but not excessive in a world where the 10-year Treasury as at 2.37%,” Mr. Tierney says.

Of course, a forward-looking P/E can be off if earnings later come in higher or lower than expected. Earnings estimates sometimes have a bit of wishful thinking, and experts say many analysts currently assume earnings will be boosted by a big Republican corporate-tax cut.

Craig Birk, executive vice president of portfolio management at Personal Capital, an investment-management firm in San Carlos, Calif., says he prefers trailing P/E because it relies on established facts. “Forward-looking P/E is also useful, but it must be taken in the context that earnings projections tend to change meaningfully,” Mr. Birk says.

• CAPE: Robert Shiller, the Yale economist known for his book “Irrational Exuberance,” which warned of price bubbles in stocks and housing, devised a different approach to reduce distortions from short-term factors. His “cyclically adjusted price-to-earnings ratio,” or CAPE, divides the S&P 500’s current level by the average of 10 years of earnings adjusted for inflation.

That produces a frightening figure—a P/E today around 30, matching the level on Black Tuesday in 1929, and nearly double the long-term average of about 17 (but still below the peak of nearly 45 in 2000).

While CAPE is less volatile than the other two P/E gauges, some experts caution that it can be misleading at times. Right now, the 10-year earnings average is dragged down by the poor results during the financial crisis, pushing the CAPE ratio up.

Steve Violin, senior vice president and portfolio manager, F.L. Putnam Investment Management in Wellesley, Mass., prefers a CAPE using a five-year earnings average instead of 10, feeling it captures the current business climate and avoids distortions from events too far back to matter.

“A five-year CAPE ratio tends to be reasonably stable by avoiding estimates and smoothing out annual fluctuation,” he says. It’s currently at 23.6, compared with about 18 over the long term.
How long will this last?

A look at the S&P’s components shows that P/Es vary, with some stocks riskier than others—and demonstrates that no gauge can provide a simple view by itself of what’s going on.

Mr. Kleis notes, for example, that the average price of the S&P 500 is driven up by the 100 largest stocks in the index, with the remaining 400 trading closer to their historical P/E levels. “We know that investors have invested [their money] largely in the big, popular names they know and love,” he says. Because the index is based on market weight (stock price times number of shares), the top 100 make up 65% of the index’s value and have a disproportionate effect, he says.

Debating what various gauges really mean at any given moment is an endless process that always has some experts screaming that the sky is about to fall and others saying, “What, me worry?”

The important point today is that all the most popular barometers say share prices are high.
   
Mr. Violin notes, though, that valuation measures like P/E ratios are only part of the picture and need to be seen alongside measures of profit growth and financial strength. For that, he recommends zeroing in on individual companies. “It’s hard to use valuation ratios as a timing mechanism on their own,” he says. “Elevated stock-market valuations can persist for extended periods as they are sometimes justified.”

P/E ratios have been above average for years, and investors who dumped stocks as soon as they started to look high would have missed huge gains. “Stock valuations are elevated in aggregate, but economic and profit growth has justified these valuations so far,” Mr. Violin says. “This trend looks like it could persist, especially if interest rates remain low.”

Mr. Thomas says that despite high P/Es, the market is currently a “Goldilocks environment”—just right—due to low inflation and forecasts for higher corporate earnings. Though rising interest rates are traditionally damaging to stocks, Mr. Thomas believes rates are going up slowly enough for the markets to digest without much harm.

“Stock prices are at record highs for a reason,” he says, “and that is an expectation of improving earnings growth going forward. Many analysts are forecasting an acceleration in earnings growth as a result of an expected tax cut.”

Of course, things can go wrong. With the turmoil in Washington, for example, tax cuts are far from guaranteed.

Mr. Brown is a writer in Livingston, Mont. He can be reached at reports@wsj.com.
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Crafty_Dog
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« Reply #1252 on: September 14, 2017, 11:54:41 AM »

The Consumer Price Index Rose 0.4% in August To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/14/2017

The Consumer Price Index (CPI) rose 0.4% in August, coming in above the consensus expected increase of 0.3%. The CPI is up 1.9% from a year ago.

"Cash" inflation (which excludes the government's estimate of what homeowners would charge themselves for rent) rose 0.4% in August and is up 1.5% in the past year.

Energy prices rose 2.8% in August, while food prices rose 0.1%. The "core" CPI, which excludes food and energy, increased 0.2% in August, matching consensus expectations. Core prices are up 1.7% versus a year ago.

Real average hourly earnings – the cash earnings of all workers, adjusted for inflation – declined 0.3% in August but are up 0.6% in the past year. Real average weekly earnings are up 0.9% in the past year.

Implications: Consumer price inflation in August was the hottest for any month since January, with prices rising 0.4%. But, between Hurricanes Harvey and Irma, we're going to have to wait a couple of months to figure out whether there has been a shift in the underlying trend. The increase in prices in August was led by gasoline and housing costs. We're certain to see more upward pressure from gas prices in September as Harvey hit late in August, and so only affected prices for a small part of the month. In the past year, consumer prices are up 1.9%. This is below the Federal Reserve's 2% target, and so some are saying the Fed should hold off on raising rates in December. But consumer prices were up only 0.2% in the year ending in August 2015 and up 1.1% in the year ending August 2016, so seeing through temporary fluctuations, we think inflation has remained in a rising trend. "Core" consumer prices, which exclude food and energy, rose 0.2% in August and are up 1.7% from a year ago. A closer look at core prices shows a handful of goods that are keeping that measure below the 2% inflation target. Cellphone service prices have declined an unusually large 13.2% in the past year, while major household appliances are down 3.9% and vehicle costs are falling. For the consumer, these falling prices - which are the result of technological improvements and competition – plus rising wages mean increased spending power on all other goods. We still expect inflation to trend towards 2%+ in the medium term, and don't think the gains to consumers from falling prices in select areas are reason for concern or a justification for the Fed to hold off on a steady path of rising rates. A week ago, the futures market put the odds of a December rate hike at only 22%; now those odds are up to 47%. We think they should be more like 65%. The most disappointing news in today's report is that real average hourly earnings declined 0.3% in August. However, these earnings are up 0.6% over the past year. On the jobs front, initial claims for unemployment benefits declined 14,000 last week to 284,000. The recovery from Harvey should keep exerting downward pressure on claims over the next couple of weeks. Unfortunately, Irma will likely exert even more powerful upward pressure in the near term, so next week's report in claims should rise to about 300,000. After that, claims should drop over the following few weeks back to about 240,000, where it was before the hurricanes. In the meantime, continuing claims for unemployment benefits fell 7,000 to 1.94 million. Plugging all this data into our models suggests payroll gains will be muted for September, but then bounce back in the fourth quarter of the year.
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Crafty_Dog
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« Reply #1253 on: October 16, 2017, 02:52:23 PM »

GDP Growth Looking Good To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/16/2017

Next week, government statisticians will release the first estimate for third quarter real GDP growth. In spite of hurricanes, and continued negativity by conventional wisdom, we expect 2.8% growth.

If we're right about the third quarter, real GDP will be up 2.2% from a year ago, which is exactly equal to the growth rate since the beginning of this recovery back in 2009. Looking at these four-quarter or eight-year growth rates, many people argue that the economy is still stuck in the mud.

But, we think looking in the rear view mirror misses positive developments. The economy hasn't turned into a thoroughbred, but the plowing is easier. Regulations are being reduced, federal employment growth has slowed (even declined) and monetary policy remains extremely loose with some evidence that a more friendly business environment is lifting monetary velocity.

Early signs suggest solid near 3% growth in the fourth quarter as well. Put it all together and we may be seeing an acceleration toward the 2.5 – 3.0% range for underlying trend economic growth. Less government interference frees up entrepreneurship and productivity growth powered by new technology. Yes, the Fed is starting to normalize policy and, yes, Congress can't seem to legislate itself out of a paper bag, but fiscal and monetary policy together are still pointing toward a good environment for growth.

Here's how we get to 2.8% for Q3.

Consumption: Automakers reported car and light truck sales rose at a 7.6% annual rate in Q3. "Real" (inflation-adjusted) retail sales outside the auto sector grew at a 2% rate, and growth in services was moderate. Our models suggest real personal consumption of goods and services, combined, grew at a 2.3% annual rate in Q3, contributing 1.6 points to the real GDP growth rate (2.3 times the consumption share of GDP, which is 69%, equals 1.6).

Business Investment: Looks like another quarter of growth in overall business investment in Q3, with investment in equipment growing at about a 9% annual rate, investment in intellectual property growing at a trend rate of 5%, but with commercial constriction declining for the first time this year. Combined, it looks like they grew at a 4.9% rate, which should add 0.6 points to the real GDP growth. (4.9 times the 13% business investment share of GDP equals 0.6).

Home Building: Home building was likely hurt by the major storms in Q3 and should bounce back in the fourth quarter and remain on an upward trend for at least the next couple of years. In the meantime, we anticipate a drop at a 2.6% annual rate in Q3, which would subtract from the real GDP growth rate. (-2.6 times the home building share of GDP, which is 4%, equals -0.1).

Government: Military spending was up in Q3 but public construction projects were soft for the quarter. On net, we're estimating that real government purchases were down at a 1.2% annual rate in Q3, which would subtract 0.2 points from the real GDP growth rate. (1.2 times the government purchase share of GDP, which is 17%, equals -0.2).

Trade: At this point, we only have trade data through August. Based on what we've seen so far, it looks like net exports should subtract 0.2 points from the real GDP growth rate in Q3.

Inventories: We have even less information on inventories than we do on trade, but what we have so far suggests companies are stocking shelves and showrooms at a much faster pace in Q3 than they were in Q2, which should add 1.1 points to the real GDP growth rate.

More data this week – on industrial production, durable goods, trade deficits, and inventories – could change our forecast. But, for now, we get an estimate of 2.8%. Not bad at all.
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Crafty_Dog
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« Reply #1254 on: November 15, 2017, 11:25:23 AM »

Retail Sales Increased 0.2% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/15/2017

Retail sales increased 0.2% in October (+0.5% including revisions to prior months). The consensus expected no change. Retail sales are up 4.6% versus a year ago.

Sales excluding autos rose 0.1% in October (+0.2% including revisions to prior months). The consensus expected a 0.2% gain. These sales are up 4.3% in the past year. Excluding gas, sales were up 0.4% in October and are up 4.3% from a year ago.

The rise in sales in October was led by autos, restaurants & bars and food & beverage stores.

Sales excluding autos, building materials, and gas rose 0.4% in October. If unchanged in November/December, these sales will be up at a 2.8% annual rate in Q4 versus the Q3 average.

Implications: Retail sales beat expectations for October and were revised up for prior months, a sign that - if you cut through the volatility due to the hurricanes - the economy is picking up. Retail sales rose 0.2% in October, after being held down by Harvey in August and then surging in September as consumers recovered following the storms. The growth in October was led by autos, which should remain unusually strong through year end as people replace vehicles destroyed in the hurricanes. But sales were also strong at restaurants & bars as well as food and beverage stores. The weakest categories in October were building materials, which should rebound in future months as Texas and Florida rebuild, and gas station sales, due to gas prices falling after the surge in September. Total retail sales are now up 4.6% in the past year. The best news today was the considerable strength for "core" sales, which excludes autos, building materials, and gas. Core sales grew 0.4% in October, and are up 3.4% from a year ago. Although some retail outlets are getting beat up by on-line retailing, the sector looks good from the consumer's point of view. Jobs and wages are moving up, consumers' financial obligations are an unusually small part of their incomes, and serious (90+ day) debt delinquencies are down substantially from post-recession highs. In other news this morning, business inventories were unchanged in September but revised up for earlier in the third quarter. As a result of these figures and the retail revisions, we now expect the government's estimate of Q3 real GDP growth to be revised up to a 3.3% annual rate from an originally reported 3.0%. Meanwhile, early tracking for Q4 real GDP growth in the 3.5 – 4.0% range. If we're right about Q4, this would be the first time we've had three straight quarters above 3% since before the financial crisis. In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, fell to 19.4 in November from 30.2 in October, suggesting continued strength in the factory sector.
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Crafty_Dog
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« Reply #1255 on: November 16, 2017, 02:05:32 PM »


________________________________________
Industrial Production Increased 0.9% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/16/2017

Industrial production increased 0.9% in October (1.4% including revisions to prior months), easily beating the consensus expected 0.5%. Utility output rose 2.0%, while mining fell 1.3%.

Manufacturing, which excludes mining/utilities, increased 1.3% in October (1.7% including revisions to prior months). Auto production rose 1% while non-auto manufacturing rose 1.3%. Auto production is down 1.6% versus a year ago while non-auto manufacturing is up 2.9%.

The production of high-tech equipment rose 1.2% in October and is up 4.2% versus a year ago.

Overall capacity utilization increased to 77.0% in October from 76.4% in September. Manufacturing capacity utilization rose to 76.4% in October from 75.5% in September.

Implications: Industrial production continued its post-hurricane rally in October, easily beating consensus expectations as the manufacturing sector led the way. But even without the storms, production would have been a solid 0.3%, according to the Federal Reserve. Industrial production rose 0.9% in October and is now up 2.8% versus a year ago. The biggest positive contribution to today's headline number came from manufacturing which rose 1.3%, matching the largest monthly gain since 2010. Auto manufacturing rose 1% in October and is now up at a 27.5% annual rate in the past three months, getting back to pre-hurricane levels of output. Meanwhile, non-auto manufacturing posted its largest monthly gain since 2006, rising 1.3%. This strength was also reflected in manufacturing capacity utilization, which rose to its highest level since 2008. Looking forward, expect further gains in overall production as the economy recovers from the effects of the two hurricanes. The one disappointment in today's report came from mining which fell 1.3%, primarily due to both oil and gas well drilling and extraction. Oil and gas-well drilling has struggled since the storms, but its monthly declines have begun to level off and it is still up a massive 61% from a year ago. Look for a surge in drilling activity in the months ahead once the effects of the storms pass. In other news this morning, the Philly Fed Index, a measure of sentiment among East Coast manufacturers, fell to a still high 22.7 in November from 27.9 in October. On the employment front, new claims for jobless benefits rose 10,000 last week to 249,000. Meanwhile, continuing claims fell 44,000 to 1.86 million. Look for another solid month of job growth in November. Finally, on inflation, import prices rose 0.2% in October while export prices remained unchanged. In the past year however, import prices are up 2.5% while export prices are up 2.7%, both in stark contrast to the price declines in the twelve months ending in October 2016. Yet another reason why the Federal Reserve should and will raise rates in December.
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Crafty_Dog
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« Reply #1256 on: November 20, 2017, 11:27:22 AM »

The Economy is Accelerating To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/20/2017

We've called it a "Plow Horse" economy, which was our metaphor invented to counter forecasters who said slow growth meant a recession was on its way. A Plow Horse is always slow, but that slowness hides underlying strength – it was never going to slip and fall. Now, the economy is accelerating.

Halfway through the fourth quarter, monthly data releases show real GDP growing at a 3%+ annual rate. If that holds, it would make for three consecutive quarters of growth at 3% or higher. Believe it or not, the last time that happened was 2004.

Last week saw retail sales, industrial production, and housing starts all come in better than expected for October, the latter two substantially better.

And while retail sales grew "just" 0.2% in October, that came on the back of a 1.9% surge in September. Overall sales, and those excluding volatile components like autos, gas and building materials, all signal a robust consumer.

Meanwhile factory output surged 1.3% in October, tying the second highest monthly gain since 2010. Production at factories is now up 2.5% from a year ago, and accelerating. By contrast, factory production was down 0.1% in the year ending October 2016 and unchanged in the year ending October 2015. The current revival is not due to the volatile auto sector, where output of motor vehicles is down 5.9% from a year ago while the production of auto parts is down 0.3%.

The last piece of last week's good economic news was on home building: housing starts surged after a storm-related lull in September. Single-family starts, which are more stable than multi-family starts - and add more per unit to GDP - tied the highest level since 2007. Housing completions hit the highest level since 2008.

As a result of all this data, the Atlanta Fed's "GDP Now" model says real GDP is growing at a 3.4% annual rate in Q4. The New York Fed's "Nowcast" says 3.8%.

Of course, if we get anything close to those numbers, some analysts will claim the fourth quarter is just a hurricane-related rebound. But the conventional wisdom has been way too bearish for years, and Q3 is likely to be revised up to a 3.4% growth rate from the original estimate of 3.0%. Put it all together, and things are looking up. It's no longer a Plow Horse economy. In fact, after years of smothering the growth potential of amazing new technologies, the government is finally getting out of the way.

The Obama and Bush regulatory State is being dismantled piece by piece, and spending growth has slowed relative to GDP. Tax cuts are moving through Congress. These positive developments have monetary velocity – the speed at which money moves through the economy – picking up. "Animal spirits" are stirring. We don't have a cute name for it, but growth is accelerating.

This reduction in the burden of government would be easier, and much more focused on growth, if Republicans had fixed the budget scorekeeping process when they first had the chance back in 2015, or even in the mid-1990s, after having gained control of both the House and Senate.

Instead, they took a cowardly pass. As a result, when assessing the "cost" of tax cuts, Congress still ignores the positive economic effects of tax cuts on growth. Oddly, while refusing to "score" better GDP growth, we understand the budget scorekeepers assume tax cuts lead to higher interest rates, which add to the cost of the tax cuts. In effect, the scorekeepers will use dynamic models to count the negative effects of tax cuts on the overall economy, but not the positive ones!

This kind of rigged scoring system is why the current tax proposals don't cut tax rates on dividends or capital gains, and why some of the tax cuts are temporary. It's also why the top tax rate on regular income for the highest earners is likely to end up near the current tax rate of 39.6%.

We were never satisfied with Plow Horse growth, but we always thought it showed the power of innovation. The power of new technology caused the economy to grow since 2009, despite the burden of big government.

Now with better policies, growth is on the rise. We haven't fixed enough problems to get 3% real growth in every quarter, and maybe not even as the average growth rate over time. That would probably take some major changes to entitlement spending programs. But the recent improvement is hard to miss and signals that entrepreneurship is alive and well in the United States.
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DougMacG
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« Reply #1257 on: November 20, 2017, 12:08:27 PM »

"the Atlanta Fed's "GDP Now" model says real GDP is growing at a 3.4% annual rate in Q4. The New York Fed's "Nowcast" says 3.8%."

Yet we cannot pass meaningful tax reform because budget rules require a 2.6% projection AFTER the incentives to hire, build, expand are restored.  Stuck on stupid.
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