Succinct Summation of Week’s Events
Positives:
1) The SNB cries mercy and comes to terms with the fact that it can’t win a currency battle with the ECB. The Swiss people have just dramatically improved the purchasing power of their savings. Also, while highly disruptive to economies and markets in the short term, maybe the cult of central banking is seeing its end of days which would ultimately be a huge positive for free markets and price discovery.
2) The UoM consumer confidence index for January jumped to 98.2 from 93.6, well above expectations of 94.1 and the best read since January 2004. Both the current conditions and expectations components were higher m/o/m. One year inflation expectations fell to 2.4% from 2.8%, the lowest since September 2010 and likely driven by lower gas prices.
3) Manufacturing IP rose .3%, one tenth more than expected but was led by mining and an increase in oil and gas extraction which will soon be negatively impacted by a reduction in drilling. A drop in utility output was a drag on the topline and the reduction in capacity utilization to back below 80%.
4) The NY manufacturing index was +10 vs -1.2 in December. That was above the estimate of 5.0 and it gets back to the level of 10.3 seen in November. The 6 month outlook was a bright spot as it rose to 48.4 from 39.3 and that’s the best read since January ’12.
5) With the big caveat that the MBA data around the holidays is extremely noisy, applications to refinance a mortgage exploded higher by 66.4% and purchases spiked by 23.6%. The average 30 yr mortgage rate fell 12 bps to 3.89%, the lowest since May ’13.
6) The level of job openings in November made a new recovery high at 4.97mm, the most since January 2001 and up by 142k m/o/m. The hiring did fall one tenth to 3.4% but the separation rate was down by two tenths. The quit rate was unchanged at 1.9%.
7) The NFIB small business optimism index rose to 100.4 from 98.1 and that is the best since October ’06. There was a 4 pt gain in Plans To Hire to the highest level since August ’07. Encouragingly too, capital spending plans increased to the best level since December ’07. Also, the NFIB said “labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations.”
8) Headline CPI fell .4% m/o/m as expected while the core rate was flat vs the estimate of up .1%. The y/o/y gains for both are .8% and 1.6% respectively. The y/o/y core rate is the slowest since February but since August 2012, core CPI has been between 1.6-2%. The drop in energy prices of course drove the headline but food prices were higher and services inflation due to rent remains sticky at 2.4% y/o/y. Let’s separate the current commodity deflation from services inflation in the overall discussion over prices.
9) Believing in the virtues of positive real interest rates, the Reserve Bank of India has given itself flexibility to respond to changes in inflation and growth and they lowered interest rates by 25 bps and won’t be pushing on a string.
10) Australia, beset by falling oil and iron ore prices, reported a much better than expected job gain in December.
11) China reported a better than expected export figure for December of up 9.7% vs the estimate of 6%. Imports fell less than expected as likely the lower price of oil and iron ore helped.
12) Putting aside my opinion of ECB QE (negative as it’s the wrong medicine), as expected, the European Court of Justice’s interim ruling (final one doesn’t come for another 4-6 months) stayed away from interfering with the ECB’s OMT program which directly eases the pressure on the ECB in conducting sovereign bond buying.
13) Industrial production for the EU in November rose .2% m/o/m, two tenths more than expected and the prior month was revised up. It was still down .4% y/o/y.
14) UK CPI in December rose just .5% y/o/y, the lowest since May ’00 and below the estimate of up .7%, thus helping REAL wage gains. Core inflation however (also takes out alcohol and tobacco) was steady at 1.3% vs 1.2% last month and in line with the estimate. With respect to asset price inflation in the UK, home prices in November rose 10% y/o/y, still robust but the slowest rate of growth since April. London home prices slowed to a still vibrant 15% increase y/o/y vs 17.2% in the month prior.
Negatives:
1) The SNB created an earthquake for its exporters (contribute about half of GDP) and tourism industry who were planning on a 1.20 peg to the euro and now have to scramble. Over time, they should adjust both from a cost structure perspective and an FX hedging one. Until then, a sharp economic slowdown is likely. Negative bond yields in Switzerland now go out 10 years as the SNB makes it poison (and hugely expensive) to hold Swiss francs. I refer to this now as impounding instead of compounding ones capital.
2) US December retail sales were much weaker than expected across the board. Headline sales fell by .9% vs an expected drop of just .1%. Sales ex volatile autos and gasoline fell by .3% vs the expected gain of .5% and the ‘control group’ which also takes out building materials saw sales fall by .4%, well below expectations of up .4%. What was saved at the gas station was apparently not spent elsewhere.
3) After a print of 40.2 in November and 24.3 in December, the January Philly manufacturing survey moderated further to 6.3, the lowest since February when it touched -2.0 in the dead of that miserable winter. The six month outlook held steady at 50.9 vs 50.4 but that was the lowest since May.
4) US Initial jobless claims jumped to 316k vs 297k last week and that was 26k more than expected. The w/o/w rise brings the 4 week average to 298k from 291k. After rising by 123k last week, continuing claims fell by 51k. For the first time since oil prices collapsed, Texas showed up as one of the states that saw the largest increase in claims for the week ended December 27th where 5,422 people filed.
5) For purposes of calculating GDP, business inventories rose .2%, one tenth less than expected and the I/S ratio held at the highest level since October ’09 as sales fell.
6) Japanese machinery orders in November were up 1.3% m/o/m but that was well below expectations of up 4.4%. The y/o/y drop was 14.6%.
7) Aggregate loan growth in China totaled 1.69T yuan in December, well above expectations of 1.2T and it’s the largest monthly gain since March. I put this in the negative camp because credit growth remains excessive and the GDP created per each yuan of debt continues to shrink.

BONUS ONE:
“I come not to praise forecasters but to bury them.” | The Big Picture

 BONUS TWO:
What’s So Bad About Cheap Oil? - NYTimes.com



It’s time for market forecasters to admit the errors of their ways
By Barry Ritholtz January 16 
I come not to praise forecasters but to bury them.
After lo these many years of listening to their nonsense, it is time for the investing community — and indeed, the seers themselves — to admit the error of their ways. Most forecasters are barely cognizant of what happened in the past. And based on what they say and write, it is apparent (at least to this informed observer) that they often do not understand what is occurring here and now.
So there’s no reason to imagine that they have the slightest clue about the future.
Economists, market strategists and analysts alike suffer from an affinity for making big, frequently bold — and most often, wrong — pronouncements about what is to come. This has a pernicious impact on investors who allow this guesswork to infiltrate their thinking, never for the better.
I have been beating this drum for more than a decade. What say we finally put a fork in Prediction, Inc.?
There is a forecasting-industrial complex, and it is a blight on all that is good and true. The symbiotic relationship between the media and Wall Street drives a relentless parade of money-losing tomfoolery: Television and radio have 24 hours a day they must fill, and they do so mostly with empty-headed nonsense. Print has column inches to put out. Online media may be the worst of all, with an infinite maw that needs to be constantly filled with new and often meaningless content.
Just because the beast must be fed does not mean you must be dragon fodder. (More on this later.)
The other partner in this mutually beneficial dance is the financial industry. Forecasting is simply part of its marketing strategy. There are two principle approaches to meeting the media’s endless demand for unfounded guesses about the future. Let’s call them a) Mainstream and b) Outlier.
The Mainstream strategy is simple: Take the average annual change in whatever the subject at hand is and extrapolate forward a year. Voila! You have a mainstream forecast. If you are talking about equities, predict an 8 to 10 percent gain in the Standard & Poor’s 500-stock index. For economic data, project out the past 12 months forward. You can do the same for gross domestic product, unemployment, commodity prices, bonds, inflation, just about anything with a regularly changing data series. If you are feeling puckish, you can shade the numbers slightly up or down to separate your prediction ever so slightly from the rest of the pack — just to keep it interesting. As Lord Keynes once said, better to fail conventionally than succeed unconventionally.
A perfect example is the recent collapse in oil prices. Having completely missed the 50 percent drop that occurred over 2014, analysts are now tripping all over themselves to forecast $40, $30, $20 per barrel in 2015. Since their prior guesswork completely missed the biggest energy story in decades, why should any of us care about their current guesswork?
Then there is the Outlier approach, where a wildly un­or­tho­dox forecast is made. The prognosticator predicts the Dow Jones industrial average at 5,000 when it’s three times that, or hyper-inflation, or $10,000 gold, or a 1 percent yield on the 30-year treasury bond, or a collapse in the Federal Reserve’s balance sheet.
If it comes to pass, the forecaster is feted as a rock star. If not, most people forget. (Although some of us actually track these outlier forecasts). Those in the prediction industry are pernicious survivors. They understand how to play on the human psyche to great advantage. Like the cockroach, they adapt well to conditions of chaos or uncertainty.
There is a flaw in the human wetware that leads to a demand for even more (bad) predictions. The evolutionary propensity that humans suffer from is the desire for specific predictions from self-confident leaders.
This is demonstrated in a wealth of academic data about forecasting track records. Research has shown there is a high correlation between a forecaster’s appearance of self-confidence and believability. Unfortunately, there is an inverse correlation with accuracy, for reasons revealed by the Dunning and Kruger studies on metacognition and self-evaluation. Same with specificity: Studies show that the more precise a prediction, the more likely it will be believed, and the less likely it is to be right. These (and other) factors set up viewers to have the most faith in the people who are least likely to be right.
Perhaps the biggest issue of all is the most obvious: Human beings, in general, stink at predicting the future. All of you. History shows us that people are terrible about guessing what is going to happen — next week, next month, and especially next year.
Why is that? In my last column, I noted that people are error machines, a mess of biases and emotions. They seek out, read and remember only that which agrees with their thinking.
The experts are no better than the public at large. Consider the comprehensive examination of expert forecasting performed by Philip Tetlock, professor of psychology and management at the University of Pennsylvania. “Expert Political Judgment” is the book that came out of a study of 28,000 forecasts made by hundreds of experts in a variety of different fields. His findings?
“Surveying these scores across regions, time periods, and outcome variables, we find support for one of the strongest debunking predictions: it is impossible to find any domain in which humans clearly outperformed crude extrapolation algorithms, less still sophisticated statistical ones.”
In other words, expert forecasts are statistically indistinguishable from random guesses.
What should investors do instead of paying attention to these unsupported, mostly wrong, exercises in futility called forecasting? I suggest three simple things:
1) Have a well-thought financial plan that is not dependant upon correctly guessing what will happen in the future.
2) Have a broad asset allocation model that is mostly passive indexes. Rebalance once a year.
3) Reduce the useless, distracting noise in your media diet.
It is important for investors to understand what they do and don’t know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependant on accurately forecasting where markets will be next year is doomed to failure.
Never forget this simple truism: Forecasting is marketing, plain and simple.

What’s So Bad About Cheap Oil?


The sharp drop in oil prices will benefit American consumers, many of the nation’s businesses and the economy as a whole. So why are stock market investors behaving as though oil under $50 a barrel and gasoline prices hovering around $2 a gallon are bad news?
The overall market’s recent decline reflects more than just the free fall in oil prices. Overseas economies are struggling; last week, the World Bank cut its forecast for global growth to 3 percent from 3.4 percent.
But fears about losses emanating from a devastated oil patch have weighed heavily on broad stock indexes, investment strategists say. This response appears to be a case of investors seizing on the industry’s highly visible losers while ignoring the far larger number of winners.
“The stock market has reacted negatively, and some of that comes down to the fact that you can see what the impact is on large energy firms,” said Paul Ashworth, chief North American economist at Capital Economics in Toronto. “It’s harder initially to see the positive impact that spreads around the rest of the economy. The big benefit to consumers is not as noticeable.”
Since the beginning of 2015, the broad market averages have lost roughly 2 percent of their value. The collapse in oil company shares, of course, has been far greater.
The Standard & Poor’s index of 80 oil and gas exploration companies is down 11.14 percent in 2015 and 35.4 percent over the last 52 weeks. The S.&P. index of six large oil services companies has fallen 5.2 percent so far this year, and 12.4 percent over the last year.
Both indexes reflect the undeniable pain that oil and gas producers, their investors, suppliers, service providers, workers and lenders are going to feel.
Layoff announcements, disclosures of capital spending cuts and falling rig counts are all highly visible to investors. So are anecdotal tales of woe from former boomtowns in North Dakota.
Less conspicuous, however, are the winners in a world of cheaper oil, economists say. The good news is, they far outnumber the losers.
David R. Kotok, chief investment officer at Cumberland Advisors in Sarasota, Fla., estimates that the economic output among oil companies and related businesses could decline by as much as $150 billion this year because of the oil price collapse. But an increase of about $400 billion is expected in other areas of the economy, he said. The net effect is double the annual value of the 2 percent payroll tax cut in 2011 and 2012, which provided a big increase to consumer spending.
“The market’s first reaction to almost any shock is not to like it because it raises the uncertainty premium,” Mr. Kotok said. “Meanwhile, the beneficial effects happen over a longer period, when the change is perceived and anticipated to become more permanent. The difference between temporary and permanent may explain the behavior of the markets here.”
To some degree, investors are operating in an information vacuum: They don’t yet have clarity on the full effects of under-$50 oil.
News items about companies mothballing projects that are no longer economically viable have been common: Last week, for example, Royal Dutch Shell canceled a $6.5 billion petrochemical plant deal it struck with Qatar Petroleum in 2011.
Still, few of the major oil companies — which must plan over a long time horizon, building in expectations that prices will eventually rebound — have disclosed their spending plans for 2015.
One that has, ConocoPhillips, says it plans to invest $13.5 billion, a 20 percent drop from 2014. Much of that decline resulted from lower expenditures on unconventional energy projects, the company said.
Another wild card in assessing the impact of the oil decline is the shale oil industry. Because the economics of horizontal drilling and hydraulic fracturing are not the same as those of traditional wells, it is unclear how investment and production in this industry will be affected by the price decline.
Andrew Hunter at Capital Economics in London noted in an analysis last week that many shale projects had short-term variable operating costs as low as $20 a barrel. Production in such projects won’t necessarily be stopped just because oil prices have fallen to $45 a barrel, he concluded.
Of course, a sizable reduction in the industry’s capital spending and the number of workers it employs is certainly coming. Total employment in the oil industry — including oil and gas extraction and support services — averaged 528,000 in 2014, according to Rigzone, an industry data provider.
“My guess is that in 2014, energy companies spent over $200 billion, mostly on structures but also on equipment,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He now expects that figure to fall by half or more.
That’s not pocket change, but capital spending cuts will be small when set against the overall $17 trillion size of our economy. And even if the industry lost half its jobs — which it won’t — that would be equivalent to less than a single month’s gain for the overall economy, which added about 275,000 jobs a month last year.
“That completely dwarfs any hits in the oil business, capital spending and oil services business,” Mr. Shepherdson said.
Investors also seem to be ignoring the benefits of lower-cost oil to small businesses. In December, as the oil price was dropping, the National Federation of Independent Business’s optimism index returned to its prerecession average and rose to the highest point since October 2006.
Owners of these businesses say they are increasing their capital expenditures this year. The N.F.I.B.’s most recent quarterly survey showed capital spending among these businesses rising to a seven-year high. This, too, will help offset the drop in oil and gas expenditures.
The overall economic benefits of the collapse in oil prices are significant, Mr. Shepherdson said. He predicted that it could add almost one percentage point to real gross domestic product growth in the United States this year. In an economy trending at 2.25 percent annual growth, that’s a sizable gain.
“The oil business and everything to do with it is a very small share of the economy,” Mr. Shepherdson said. “Could it possibly be more than 5 percent of G.D.P? No, and the other 95 percent of the economy is saying, ‘Thank you very much.’ ”