September 1, 2015 Patrick Oliver-Kelley

US Zone

The economy grew at an anemic 1.5 percent annual rate in the first half of 2015, a half a percentage point weaker than the average of the past three years. Roughly 8.3 million Americans are still looking for jobs. An additional 14.4 million people have left the job market — either abandoning their job search or choosing to retire — since the recession officially began in late 2007. The result is that the share of adults working has fallen to 59 percent from nearly 63 percent eight years ago. July employment report showed an economy that was not quite as buoyant as market expected. But it was probably not bad enough to make the Red postpone the rate hike. Alternative measures of economic output, GDP, grew much slower- 0.6% last quarter. By that gauge, growth barely moved ahead in the first half of the year. Housing date is pretty good. And employers added a solid 215,000 jobs in July

Global-sensitive stocks are in well-established downtrends. More recently, bull market darlings such as media (Disney) and tech hardware (Apple) have broken down.

There has been a sharp decline in equal-weighted indexes, such as Value Line, versus market cap-weighted measures like the S&P500.

High-flying, high-growth-potential, high-multiple sectors are losing momentum. Social media stocks have gone nowhere for two years, yet they still trade at double-digit multiples of sales. The NASDAQ biotech index has been stronger than social media, but the pace of the uptrend is looking tired and the index sells at 10 X sales.
The backdrop is a new high in NYSE margin debt relative to GDP. It might take higher borrowing rates for the margin buildup to sustainably reverse. Still, the high level of debt increases the vulnerability to a round of margin calls if equity prices continue falling.

Oil Prices

Let’s take the unassailable good news first: The price of benchmark West Texas Intermediate crude oil recently dipped below $39 a barrel, which is down from $140 in 2008. That’s an incredible 72% drop. And, yes, lower oil prices have pushed down gas prices, and it could continue to fall. Some analysts are looking for prices to drop below $2, maybe even down toward $1.60 a gallon, the low during the Great Recession in early 2009. Lower gas prices help poor people in particular; And of course businesses make out as well. Automakers sell more cars and especially higher-margin trucks when gas is cheap.

And yet there is a downside. First thing to consider is U.S. employment in the oil and gas business. It appears that some 500,000 Americans work in the oil and gas business in the U.S. and has been dropping, especially hurting the big five oil producing states: Texas, North Dakota, California, Alaska and Oklahoma. Bottom line: While these states in particular will suffer some from declining employment in this industry, Fortress America can absorb the hit, and furthermore, lower energy prices will more than make up for it.

Euro Zone

Inflation stays nearly unchanged at + 0.2% in August. Germany is a bright-ish spot with factory orders increasing 2% in July while, annually orders are up 7.2%. Record low unemployment is rewarding. Some manufacturer, though benefiting from cheap oil, low interest rates and a sluggish recovery euro area, have face a drag recently because of Greece’s crisis and the Chinese slowdown. The Bundesbank continues to predict a quite robust economic growth.
Some manufacturers, although benefiting from cheap oil, low interest rates and a recovering euro area, have faced a drag in recent months as a result of Greece’s crisis and a slowdown in China. Even so, the Bundesbank predicts “quite robust” economic growth for this year as record employment fuels consumption. Output, adjusted for seasonal swings and inflation, fell 1.4 percent after rising a revised 0.2 percent in May, data from the Economy Ministry in Berlin showed on Friday. The typically volatile number compares with a median estimate of a 0.3 percent gain in a Bloomberg survey. Exports fell 1 percent while imports dropped 0.5 percent. Spain had a great 4.5% increase in industrial production, beating France’s meager rise.

UK’s economy is doing very well thank you very much, though unemployment is massive. GDP rose 0.7% versus previous quarter making if 10 consecutive quarters of positive growth.

Asia Zone

Japan’s economy was flat for the last few months and consumer prices were steady adding further pressure on the BOJ to achieve its target of 2.% inflation. Producer prices fell by 3%, its biggest fall since 2009. Lower esport demand from China means few expect a turnaround soon.

China’s recent devaluation of the RMB reflects the slowdown in Chinese growth and policymaker efforts to support the economy. RMB should weaken further creating headwinds for commodity producers. This will bring added upward lift on the dollar.

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