The Laird Report - January 11 2014

....The Laird Economics Report

Jan 11, 2014

Where we are now . . . . . . . . . . . . . . . . . . . . . . . . 1

Indicators for US Economy . . . . . . . . . . . . . . . . . . . 3

Global Financial Markets . . . . . . . . . . . . . . . . . . . . 5

US Interest & Inflation Rates . . . . . . . . . . . . . . . . . 10

QE Taper Tracker . . . . . . . . . . . . . . . . . . . . . . . . . 12

Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 13

US Banking Indicators . . . . . . . . . . . . . . . . . . . . . . 14

US Employment Indicators . . . . . . . . . . . . . . . . . . . 15

US Business Activity Indicators . . . . . . . . . . . . . . . . 16

US Consumption Indicators . . . . . . . . . . . . . . . . . . 17

US Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Global Business Indicators . . . . . . . . . . . . . . . . . . . 19

Canadian Indicators . . . . . . . . . . . . . . . . . . . . . . . 21

European Indicators . . . . . . . . . . . . . . . . . . . . . . . 22

Chinese Indicators . . . . . . . . . . . . . . . . . . . . . . . . 24

Global Climate Change . . . . . . . . . . . . . . . . . . . . . 25

Where we are now

Welcome to The Laird Economics Report. This report looks atwhere we are today based on a presentation of economic indicatorswith some historical context.

Happy New Year! Just in time for the end of the year, the dreaded“Taper” has begun - the beginning of the end of the latest round ofQuantitative Easing in the U.S. This was started because with all thebudget cuts, shutdowns and sequesters, the Fed felt that fiscal help forthe economy (i.e. increased spending) was not going to happen, so itneeded some monetary help until “things got better”.

The U.S. economy over the past year has been slowly improving infits and starts. In fact, the Fed had originally hinted in summer 2013that it might start the taper soon - which made sense given evidence ofimprovement. However, the stock market had an immediate negativereaction - this is surprising, as you might expect that news of growingeconomic strength would be welcomed by the market.

There are two explanations I can think of for this reaction: (1) theFed relishes its role in “taking away the punch bowl at the party too

soon” - but in this case, the economy was believed to be so weak in itsrecovery that the Fed was acting too soon; and/or (2) taking up longterm rates will bring up borrowing costs for corporations and reducediscount rates that determine long term prices under net present valuemodels - the impacts of which are more than the purported improve-ments in earnings increases in a stronger economy.

It’s hard to say which of these is true (and there’s probably otherreasons I haven’t thought of) because the market freak-out resulted inthe Fed walking back those comments pretty quickly - this is unsurpris-ing as the Fed’s philosophy is to try and give clear guidance of what itis going to do - surprises are a bad thing in their minds.

So, with additional strengthening, the long awaited taper was an-nounced in December - and it is truly baby steps. QE isn’t going toend, as much as peter out - see the Taper Tracker at the back of thereport for some historical context. I’ll run the tracker for the next littlewhile to show where we are in the taper.

One thing worth pointing out is that all of this hinges on the

strength of the economy. The Fed has described two key indicatorsthat they would consider in assessing that health (though in practice,they look at everything): inflation at the 2% target rate and unemploy-ment at the 6.5% target rate.

Inflation is important to consider because while the monetary fightsof the past have been about taming inflation, the current concerns arethat inflation is too low. Part of the point of QE was to reduce longterm rates and to increase liquidity in the economy - inflation beingrelated to these two points.

The bigger issue is unemployment. We have been charting the pathof U.S. unemployment regularly in this report and it would seem thatthey are hitting their 6.5% target (most recently at 6.7% in December).However, unemployment only counts people who are actively lookingfor work, but who cannot find it.

A different approach is to look at employment participation - the

ratio of employed people versus the population as a whole. There was ahuge drop in the recession and there’s been very little recovery - thesepeople without jobs are not showing up in the improving unemploy-ment numbers. I think that this is partially the reason why the taper,now that it has come, has been so delicate: things look better thanthey are. Corporate earnings are up, but people aren’t that happy. Seealso the various consumer confidence indicies.

Formatting Notes The grey bars on the various charts are OECDrecession indicators for the respective countries. In many cases, the lastavailable value is listed, along with the median value (measured fromas much of the data series as is available).

Subscription Info For a FREE subscription to this monthly re-port, please email us at [email protected]

The Laird Report, Jan 11, 2014

US Employment Ratio and Unemployment Rate

Em

ploy

men

t Pop

ulat

ion

Rat

io

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

5658

6062

64

1210

86

4

Une

mpl

oym

ent R

ate

(rev

erse

d)

Employment RatioUnemployment Rate

Divergence between rates

The Laird Report Jan 11, 2014 Page 2

mailto:[email protected]

Indicators for US Economy

Leading indicators are indicators that usually change before theeconomy as a whole changes. They are useful as short-term predictorsof the economy. Our leading indicators include the Leading Index whichsummarizes multiple indicators; initial jobless claims and hours worked(both decrease quickly when demand for employee services drops and

vice versa); purchasing manager indicies; new order and housing per-mit indicies; delivery timings (longer timings imply more demand inthe system) and consumer sentiment (how consumers are feeling abouttheir own financial situation and the economy in general).

Leading Index for the US

Inde

x: E

st. 6

mon

th g

row

th

−3

−1

12

3

median: 1.41Nov 2013: 1.52

Growth

Contraction

Initial Unemployment Claims

1000

's o

f Cla

ims

per

Wee

k

200

400

600

median: 354.00Jan 2014: 349.00

Manufacturing Ave. Weekly Hours Worked

Hou

rs

39.0

40.0

41.0

42.0

median: 40.60Dec 2013: 42.10

ISM Manufacturing: PMI Composite Index

Inde

x: S

tead

y S

tate

= 5

0

3040

5060

70 median: 53.25Dec 2013: 57.00

expanding economy

contracting economy

Manufacturers' New Orders: Durable GoodsB

illio

ns o

f Dol

lars

120

160

200

240

median: 181.16Nov 2013: 241.62

ISM Manufacturing: Supplier Deliveries

Inde

x

4050

6070

median: 51.50Dec 2013: 54.70Slower Deliveries

Faster Deliveries

Capex (ex. Defense & Planes)

Per

cent

cha

nge

(3 m

onth

s)

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−10

−5

05

median: 0.92Nov 2013: 0.64

Chicago Fed National Activity Index

Inde

x V

alue

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−4

−2

02

median: 0.07Nov 2013: 0.60

U. Michigan: Consumer Sentiment

Inde

x 19

66 Q

1 =

100

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

5070

9011

0

median: 88.45Dec 2013: 82.50


Leading Indicators vs. Real GDP Growth

We can model the various leading indicators versus changes in realGDP as a way of inidicating their relationship. The plots below showthe correlations between the indicators and, using a simple linear model,the corresponding real GDP change in the next quarter consistant withthat level. The red dot shows the current predicted value. The red bar

at the bottom shows the 25%-75% confidence intervals for real GDPchange. The green lines show the regression line along with confidenceintervals. Given these are simple univariate models, these plots arebest used to estimate growth/no-growth scenarios, rather than partic-ular growth levels.

−2 −1 0 1 2 3 4

Leading Index vs Real GDP

% QoQ Change in GDP (+1Q)

Est

imat

ed G

DP

% G

row

th

−3

−2

−1

0

1

2

3 r2 : 0.56

−2 −1 0 1 2 3 4

Initial UI Claims vs Real GDP

% QoQ Change in GDP (+1Q)%

Cha

nge

in C

laim

s

−20

−10

0

10

20

30

40 r2 : 0.35

−2 −1 0 1 2 3 4

% Change in Hours Worked vs Real GDP


% C

hang

e in

Hou

rs

−1.0

−0.5

0.0

0.5

1.0 r2 : 0.31

−2 −1 0 1 2 3 4

PMI vs Real GDP


PM

I Ind

ex V

alue

30

40

50

60

70r2 : 0.26

−2 −1 0 1 2 3 4

Durable Goods Orders vs Real GDP


% C

hang

e in

Goo

ds O

rder

ed

−15

−10

−5

0

5r2 : 0.24

−2 −1 0 1 2 3 4

Suppliers Index vs Real GDP


Sup

plie

rs In

dex

−0.2

−0.1

0.0

0.1

0.2

0.3 r2 : 0.058

−2 −1 0 1 2 3 4

Capex vs Real GDP


% C

hang

e in

New

Ord

ers

−8

−6

−4

−2

0

2r2 : 0.19

−2 −1 0 1 2 3 4

National Activity Index vs Real GDP


Inde

x V

alue

−4

−3

−2

−1

0

1

2 r2 : 0.50

−2 −1 0 1 2 3 4

Consumer Sentiment vs Real GDP


Sen

timen

t60

70

80

90

100

110 r2 : 0.17


Global Financial Markets

Global Stock Market Returns

Country Index Name Close Date CurrentValue

WeeklyChange

MonthlyChange

3 monthChange

YearlyChange

Corr toS&P500

Corr toTSX

North AmericaUSA S&P 500 Jan 10 1842.4 0.6% s 2.2% s 8.9% s 25.2% s 1.00 0.73USA NASDAQ Composite Jan 10 4174.7 1.0% s 2.8% s 11.0% s 33.7% s 0.91 0.67USA Wilshire 5000 Total Market Jan 10 19674.0 0.7% s 2.8% s 9.0% s 26.8% s 0.99 0.73Canada S&P TSX Jan 10 13747.5 1.5% s 3.2% s 6.6% s 9.1% s 0.73 1.00Europe and RussiaFrance CAC 40 Jan 10 4250.6 0.1% s 3.9% s 0.8% s 14.8% s 0.52 0.53Germany DAX Jan 10 9473.2 0.4% s 3.9% s 9.1% s 22.9% s 0.54 0.49United Kingdom FTSE Jan 10 6739.9 0.1% s 3.3% s 4.8% s 10.5% s 0.49 0.54Russia Market Vectors Russia ETF Jan 10 27.5 -0.9% t -0.3% t -4.6% t -6.0% t 0.69 0.57All Europe Euro Stoxx 50 Jan 09 3090.3 0.5% s 3.4% s 6.4% s 14.2% s 0.55 0.50AsiaTaiwan TSEC weighted index Jan 10 8529.4 -0.2% t 1.0% s 2.2% s 9.2% s -0.07 0.08China Shanghai Composite Index Jan 10 2013.3 -3.4% t -10.0% t -8.1% t -11.8% t -0.13 -0.09Japan NIKKEI 225 Jan 10 15912.1 0.0% s 1.9% s 12.1% s 49.4% s 0.29 0.20Hong Kong Hang Seng Jan 10 22846.2 0.1% s -3.8% t -0.5% t -2.2% t 0.04 0.14Korea Kospi Jan 10 1938.5 -0.4% t -2.8% t -3.1% t -3.4% t 0.14 0.19South Asia and AustrailiaIndia Bombay Stock Exchange Jan 10 20758.5 -0.4% t -2.3% t 2.4% s 5.6% s 0.27 0.24India S&P CNX NIFTY Jan 10 6171.4 -0.6% t -2.5% t 2.5% s 3.4% s 0.26 0.23Indonesia Jakarta Jan 10 4255.0 -0.1% t -0.5% t -5.2% t -1.4% t 0.10 0.23Malaysia FTSE Bursa Malaysia KLCI Jan 10 1826.6 -0.4% t -0.9% t 2.9% s 8.4% s 0.07 0.04Australia All Ordinaries Jan 10 5316.3 -0.7% t 3.3% s 3.3% s 12.0% s 0.06 0.11New Zealand NZX 50 Index Gross Jan 10 4864.4 2.0% s 3.4% s 3.1% s 17.7% s 0.00 0.08South AmericaBrasil IBOVESPA Jan 10 49696.0 -2.5% t -2.5% t -6.2% t -19.4% t 0.39 0.35Argentina MERVAL Buenos Aires Jan 10 5490.9 2.0% s 5.1% s 6.3% s 76.3% s 0.31 0.33Mexico Bolsa index Jan 10 1842.4 0.6% s 2.2% s 8.9% s 25.2% s 1.00 0.73MENA and AfricaEgypt Market Vectors Egypt ETF Jan 10 56.2 4.1% s 6.6% s 10.7% s 9.1% s 0.25 0.34

Market Vectors Gulf States ETF Jan 10 28.0 1.9% s 7.0% s 11.6% s 33.5% s 0.36 0.23South Africa iShares MSCI South Africa Index Jan 10 62.2 0.5% s 0.0% s -3.1% t -8.7% t 0.67 0.57

Market Vectors Africa ETF Jan 10 30.5 1.1% s 1.2% s 2.8% s -0.3% t 0.60 0.65CommoditiesUSD Spot Oil West Texas Int. Jan 06 $93.1 -5.8% t -4.5% t -9.7% t -0.1% t 0.16 0.09USD Gold LME Spot Jan 10 $1232.2 0.0% u -1.1% t -5.1% t -25.9% t -0.11 -0.12

Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.


S&P 500 Composite Index

The S&P 500 Composite Index is widely regarded as the best singlegauge of the large cap U.S. equities market. A key figure is the valua-tion level of the S&P500 as measured by the Price/Earnings ratio. Wepresent two versions: (1) a 12-month trailing earnings version which

reflects current earnings but is skewed by short term variances and (2)a cyclically adjusted version which looks at the inflation adjusted earn-ings over a 10 year period (i.e. at least one business cycle). Forecastedearnings numbers are estimates provided by S&P.

S&P 500 Stock Price Index (USD$ Inflation Adjusted to current prices − Log Scale)

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

100

200350500750

100013001750

100

200350500750100013001750

S&P Quarterly Earnings (USD$ Inflation Adjusted to current prices)

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

−5.00 0.00 5.0010.0015.0020.0025.0030.0035.00

−5.00 0.00 5.0010.0015.0020.0025.0030.0035.00

Tech Bubble

Japanese Asset Bubble

House BubbleAsian Financial Crisis

US Financial Crisis

Eurozone crisis

Oil Crisis I Oil Crisis II

Gulf War

Savings and Loans Crisis

High Inflation Period

Afganistan/Iraq WarVietnam War

Reported EarningsOperating Earnings

Trailing P/E Ratios for S&P500

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

010

2030

4050

010

2030

4050

12−month P/E ( median = 17.3, Jan = 18.2)10−year CAPE ( median = 19.4, Jan = 24.1)


S&P 500 Composite Distributions

This is a view of the price performance of the S&P 500 index com-panies. The area of each box is proportional to the company’s marketcap, while the colour is determined by the percentage change in price

over the past month. In addition, companies are sorted according totheir industry group.

AAPL−3.3%

GOOG7.2%

MSFT−6.3%

IBM5.5%

ORCL9%

FB23%

V7.8%

INTC7.7%

QCOM CSCO

MA11%

EBAY

ACN HPQ

EMC

ADP

CRM

MU

FIS

CA

BRK−AWFC4%

JPM3.3%

BAC6.7%

C4%

AXP

GS AIG

USB MS

MET

BLK

SPG

COF

PRU

PNC

BK

BEN

ACE

STT

AMT

TRV

AFL

MMC CME

AON

ALL

L

WY

BXP

RF

XL

AMZN

DIS

HD

MCD

FOXA

NKE

F

TWX

PCLN

SBUX

GM

LOW

TJX

TGT

VIAB

DTV

CBS

TWC

JCI

YUM

CCL

M

DG

LB

RL

JNJ0.49%

PFE−3.6%

MRK

GILD BMY

ABBV UNH BIIB

ABT

MDT

LLY

BAX

ACT

COV

WLP AET

CI

CAH

A

GE1.9%

BA

UTX3.2%

UPS

MMM UNP

HON

CAT

LMT

PCP

ITW

ETN

DE

GD

WM PH

IR

WMT−3.2%

PG−3.6%

KO0.12%

PM

PEP

CVS4.3%

MO

MDLZ

CL

KMB

KRFT

GIS ELK

HSY

KR

LO

XOM7.5%

CVX−1.1%

SLB0.65%

COP

OXY

PSX

HAL

APC

KMI

APA

VLO

HES

SE PXD

NE

MON

DD

DOW

LYB

PX

PPG

APDIP

CF

AA

DUK D

SO

EXC PPL

ED

NI

T−2.1%

VZ−2%

CCI

Information Technology

Financials

Consumer Discretionary

Health Care

Industrials Consumer Staples

EnergyMaterials Utilities

TelecommunicationsServices

<−25.0% −20.0% −15.0% −10.0% −5.0% 0.0% 5.0% 10.0% 15.0% 20.0% >25.0%

% Change in Price from Dec 01, 2013 to Jan 10, 2014

Average Median Median MedianSector Change P/Sales P/Book P/EInformation Technology 4.5% s 3.1 3.9 25.2Industrials 4.1% s 1.7 3.3 21.7Materials 3.9% s 1.3 3.3 23.1Health Care 3.3% s 3.2 3.7 24.2Financials 3.3% s 2.9 1.5 18.6

Average Median Median MedianSector Change P/Sales P/Book P/EConsumer Discretionary 2.6% s 1.6 4.1 19.7Utilities 2.0% s 1.3 1.4 18.2Energy 1.8% s 1.8 1.7 18.0Consumer Staples -0.2% t 1.8 4.9 20.5Telecommunications Services -1.8% t 1.1 3.0 61.9


US Equity Valuations

A key valuation metric is Tobin’s q: the ratio between the marketvalue of the entire US stock market versus US net assets at replacementcost (ie. what you pay versus what you get). Warren Buffet famouslyfollows stock market value as a percentage of GNP, which is highly(93%) correlated to Tobin’s q.

We can also take the reverse approach: assume the market hasvaluations correct, we can determine the required returns of future es-

timated earnings. These are quoted for both debt (using BAA ratedsecurities as a proxy) and equity premiums above the risk free rate (10year US Treasuries). These figures are alternate approaches to under-standing the current market sentiment - higher premiums indicate ademand for greater returns for the same price and show the level ofrisk-aversion in the market.

Tobin's q (Market Equity / Market Net Worth) and S&P500 Price/Sales

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0.25

0.50

0.75

1.00

1.25

1.50

0.25

0.50

0.75

1.00

1.25

1.50

Buying assets at a discount

Paying up for growth

Tobin Q (median = 0.75, Sep = 0.98)S&P 500 Price/Sales (median = 1.40, Sep = 1.51)

Equity and Debt Risk Premiums: Spread vs. Risk Free Rate (10−year US Treasury)

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%Implied Equity Premium (median = 4.2%, Dec = 4.7%)Debt (BAA) Premium (median = 2.0%, Dec = 2.3%)


US Mutual Fund Flows

Fund flows describe the net investments in equity and bond mutualfunds in the US market, as described in ICI’s “Trends in Mutual FundInvesting” report. Note however that this is only part of the story as

it does not include ETF fund flows - part of the changes are investorsentering or leaving the market, and part is investors shifting to ETF’sfrom mutual funds.

US Net New Investment Cash Flow to Mutual Funds

US

$ bi

llion

s (m

onth

ly)

2007 2008 2009 2010 2011 2012 2013

−40

−20

020

40

Domestic EquityWorld EquityTaxable BondsMunicipal Bonds

US Net New Investment Cash Flow to Mutual Funds

US

$ bi

llion

s (M

onth

ly)

2007 2008 2009 2010 2011 2012 2013

−60

−40

−20

020

4060

Flows to EquityFlows to BondsNet Market Flows


US Interest & Inflation Rates

Yield Curve - US Treasuries

US Treasury Yield Curves

For

war

d O

vern

ight

Rat

es (

%)

13 14 15 16 17 18 19 20 21 22 23

0.0

0.5

1.0

1.5

2.0

2.5

3.0

09 Jan 14 ( Today )09 Dec 13 ( 1 mo ago )09 Oct 13 ( 3 mo ago )09 Jan 13 ( 1 yr ago )

3 Month & 10 Yr Treasury Yields

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0%

1%

2%

3%

4%

5%

6%

7% 10 Yr Treasury3 Mo TreasurySpread

US Inflation measures

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−1%

0%

1%

2%

3%

4%

5%

6%

−1%

0%

1%

2%

3%

4%

5%

6%

US Inflation Rate YoY% (Nov = 1.2%)US Inflation ex Food & Energy YoY% (Nov = 1.6%)Delta of Treasury vs. TIPS (Jan = 2.3%)


AAA vs. BAA Corporate Bond Spreads

4%

5%

6%

7%

8%

9%

4%

5%

6%

7%

8%

9%

Per

cent

AAA BAA

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

median: 91.00Jan 2014: 80.00

0

100

200

300

0

100

200

300

Spr

ead

(bps

)

TED Spread (LIBOR vs. Fedfunds Rate)

0%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

Per

cent

3 mos t−bill LIBOR

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

median: 37.50Jan 2014: 19.98

0

100

200

300

0

100

200

300

Spr

ead

(bps

)


QE Taper Tracker

The US has been using the program of Quantitative Easing to pro-vide monetary stimulous to its economy. The Fed has engaged in aseries of programs (QE1, QE2 & QE3) designed to drive down longterm rates and improve liquidity though purchases of treasuries, mor-gage backed securites and other debt from banks.

The higher demand for long maturity securities would drive up theirprice, but as these securities have a fixed coupon, their yield would bedecreased (yield ≈ coupon / price) thus driving down long term rates.

In 2011-2012, “Operation Twist” attempted to reduce rates without

increasing liquidity. They went back to QE in 2013.The Fed chairman suggested in June 2013 the economy was recover-

ing enough that they could start slowing down purchases (“tapering”).The Fed backed off after a brief market panic. The Fed announced inDec 2013 that it was starting the taper, a decision partly driven byseeing key targets of inflation around 2% and unemployment being lessthan 6.5%. These charts track that progress. Note - in the US Bankingcharts, repos have spiked recently - not sure what that means.

QE Asset Purchases to Date (Treasury & Mortgage Backed Securities)

Trill

ions

0.0

1.0

2.0

0.0

1.0

2.0QE1 QE2 Operation Twist QE3Treasuries

Mortgage Backed Securities

Total Monthly Asset Purchases (Treasury + Mortgage Backed Securities)

Bill

ions

−10

00

100

−10

00

100

Month to date Jan 08: $−2.7

Inflation and Unemployment − Relative to Targets

Per

cent

02

46

8

02

46

8

Target Unemployment 6.5%Target Inflation 2%

U.S. 10 Year and 3 Month Treasury Constant Maturity Yields

Per

cent

02

4

02

4

2008 2009 2010 2011 2012 2013

Short Term Rates:Once at zero, Fed moved to QE

Long Term Rates:Moving up in anticipation of Taper?


Exchange Rates

10 Week Moving Average CAD Exchange Rates

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0.62

0.71

0.81

0.90

1.00

1.09

US

A /

CA

D

0.55

0.61

0.66

0.72

0.77

0.82

Eur

o / C

AD

59.

16 7

4.71

90.

2610

5.81

121.

3613

6.91

Japa

n / C

AD

0.38

0.44

0.49

0.55

0.61

0.67

U.K

. / C

AD

0.59

0.98

1.36

1.74

2.12

2.51

Bra

zil /

CA

D

CAD Appreciating

CAD Depreciating

1 Month Change in Rates versus Average

−3.0%

−1.5%

1.5%

3.0%

Euro−0.2%

UK−0.5%

Japan 1.7%

South Korea−0.5%

China−0.9%

India−0.6%

Brazil 1.8%

Mexico−0.3%

Canada−0.1%

USA 0.2%

% Change over 3 months vs. Canada

<−10.0% −8.0% −6.0% −4.0% −2.0% 0.0% 2.0% 4.0% 6.0% 8.0% >10.0%

CAD depreciatingCAD appreciating

ARG−8.3%

AUS−1.2%

BRA−3.6%

CHN 5.2%

IND 4.1%

MEX 5.1%

RUS 1.8%

USA 4.5%

ZAF−3.3%

EUR5.4%


US Banking Indicators

The banking and finance industry is a key indicator of the healthof the US economy. It provides crucial liquidity to the economy in theform of credit, and the breakdown of that system is one of the exac-erbating factors of the 2008 recession. Key figures to track are the

Net Interest Margins which determine profitability (ie. the differencebetween what a bank pays to depositors versus what the bank is paidby creditors), along with levels of non-performing loans (i.e. loan lossreserves and actual deliquency rates).

US Banks Net Interest Margin

Per

cent

3.5

4.0

4.5

median: 3.952013 Q3: 3.20

Repos Outstanding with Fed. Reserve

Bill

ions

of D

olla

rs

5015

025

0

median: 42.08Jan 2014: 150.73

Bank ROE − Assets between $300M−$1B

Per

cent

05

1015

median: 12.892013 Q3: 9.06

Consumer Credit Outstanding

% Y

early

Cha

nge

−5

05

1015

20

median: 7.10Nov 2013: 5.57

Total Business Loans%

Yea

rly C

hang

e

−20

010

20median: 7.81Dec 2013: 6.56

US Nonperforming Loans

Per

cent

12

34

5

median: 2.312013 Q3: 2.89

St. Louis Fed Financial Stress Index

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

02

46 median: −0.19

Jan 2014: −0.90

Commercial Paper Outstanding

Trill

ions

of D

olla

rs

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1.0

1.4

1.8

2.2

median: 1.36Jan 2014: 1.06

Residential Morgage Delinquency Rate

Per

cent

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

24

68

10

median: 2.302013 Q3: 8.59


US Employment Indicators

Unemployment Rate

Per

cent

45

67

89

10 median: 5.70Dec 2013: 6.70

Ave. Duration of Unemployment

Wee

ks

1520

2530

3540 median: 17.35

Dec 2013: 37.10

Index: Employment, Hours

Inde

x

−1.

5−

0.5

0.5

1.5

median: 0.00Nov 2013: 0.28above ave growth

below ave growth

Total Nonfarm Hires

Rat

e

3.0

3.5

4.0

median: 3.60Oct 2013: 3.30

Services: Temp Help

Tho

usan

ds o

f Per

sons

1500

2000

2500

median: 2219.50Dec 2013: 2816.60

Employment Ratio

Per

cent

6065

7075

8085

All civilianBachelor Degree 25+Aged 25−54Some college 25+

(U6) Unemployed + PT + Marginally Attached

Per

cent

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

810

1214

16

median: 9.60Dec 2013: 13.10

4−week moving average of Initial Claims

Jan

1995

= 1

00

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

5010

015

020

0

median: 108.84Jan 2014: 107.30

Small, Med, Lrg Nonfarm Emp (ADP)

Jan

2005

= 1

00

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

8090

100

110

Firm Size

1−4950−499500+


US Business Activity Indicators

Business activity is split between manufacturing activity and non-manufacturing activity. We are focusing on forward looking business

indicators like new order and inventory levels to give a sense of thecurrent business environment.

Manufacturing Sector: Real Output

YoY

Per

cent

Cha

nge

−15

−5

515

median: 6.612013 Q3: 8.54

ISM Manufacturing: PMI Composite Index

Inde

x

3040

5060

70

Dec 2013: 57.00

manufac. expanding

manufac. contracting

ISM Manufacturing: New Orders Index

Inde

x

3040

5060

7080 Dec 2013: 64.20

Increase in new orders

Decrease in new orders

Non−Manufac. New Orders: Capital Goods

Bill

ions

of D

olla

rs

3545

5565

median: 56.86Nov 2013: 69.53

Average Weekly Hours: Manufacturing

Hou

rs

3940

4142

43

median: 41.10Dec 2013: 42.10

Industrial Production: Manufacturing

YoY

Per

cent

Cha

nge

−15

−5

05

10

median: 3.28Nov 2013: 3.05

Total Business: Inventories to Sales Ratio

Rat

io

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1.1

1.2

1.3

1.4

1.5

1.6

median: 1.38Oct 2013: 1.29

Chicago Fed: Sales, Orders & Inventory

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−0.

50.

00.

5 Nov 2013: 0.06Above ave growth

Below ave growth

ISM Non−Manufacturing Bus. Activity Index

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

3545

5565

Dec 2013: 55.20

Growth

Contraction


US Consumption Indicators

Variations in consumer activity are a leading indicator of thestrength of the economy. We track consumer sentiment (their expec-

tations about the future), consumer loan activity (indicator of newpurchase activity), and new orders and sales of consumer goods.

U. Michigan: Consumer Sentiment

Inde

x 19

66 Q

1 =

100

5060

7080

9011

0

median: 88.45Dec 2013: 82.50

Consumer Loans (All banks)

YoY

% C

hang

e

010

2030

median: 7.16Dec 2013: 2.36

AccountingChange

Deliquency Rate on Consumer Loans

Per

cent

2.5

3.0

3.5

4.0

4.5 median: 3.49

2013 Q3: 2.40

New Orders: Durable Consumer Goods

YoY

% C

hang

e

−30

−10

1030

median: 3.83Nov 2013: 16.53

New Orders: Non−durable Consumer Goods

YoY

% C

hang

e

−20

010

20

median: 3.97Nov 2013: 0.16

Personal Consumption & Housing Index

Inde

x

−0.

40.

00.

2

median: 0.02Nov 2013: −0.12above ave growth

below ave growth

Light Cars and Trucks Sales

Mill

ions

of U

nits

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1012

1416

1820

22

median: 14.71Dec 2013: 15.30

Personal Saving Rate

Per

cent

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

24

68

10

median: 5.50Nov 2013: 4.20

Real Retail and Food Services Sales

YoY

% C

hang

e

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−10

−5

05

median: 2.50Nov 2013: 3.03


US Housing

Housing construction is only about 5-8% of the US economy, how-ever a house is typically the largest asset owned by a household. Sincepersonal consumption is about 70% of the US economy and house val-ues directly impact household wealth, housing is an important indicatorin the health of the overall economy. In particular, housing investment

was an important driver of the economy getting out of the last fewrecessions (though not this one so far). Here we track housing pricesand especially indicators which show the current state of the housingmarket.

20 City Housing Prices: 1991 − present

Atlanta

Boston

Charlotte

Chicago Cleveland

Dallas

Denver

Detroit

Las Vegas

Los Angeles

Miami

Minneapolis

New York

Phoenix

Portland

San Diego

San Francisco

Seattle

Tampa

WASHINGTON

Lowest value (1991−)

Highest value (1991−)

Current Value (Oct 2013)

Bubble Peak (Jan 2007)

New Housing Units Permits Authorized

Mill

ions

of U

nits

0.5

1.0

1.5

2.0

2.5

median: 1.36Nov 2013: 1.02

New Home Median Sale Price

Sal

e P

rice

$000

's

100

150

200

250

Nov 2013: 270.90

15 20 25 30 35

150

200

250

300

Disposable Income Per Capita (000's)

New

Hom

e P

rice

(000

's)

(Real) Personal Income vs. Housing Prices

Nov 2013

r2 : 88.8%Range: Jan 1963 − Nov 2013

New Homes: Median Months on the Market

Mon

ths

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

46

810

1214 median: 5.00

Nov 2013: 3.10

US Monthly Supply of Homes

Mon

ths

Sup

ply

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

46

810

12 median: 6.00Nov 2013: 4.30


Global Business Indicators

Global PMI Reports

The Purchasing Managers’ Index (PMI) is an indicator reflectingpurchasing managers’ acquisition of goods and services. An index read-ing of 50.0 means that business conditions are unchanged, a numberover 50.0 indicates an improvement while anything below 50.0 suggests

a decline. The further away from 50.0 the index is, the stronger thechange over the month. The chart at the bottom shows a moving av-erage of a number of PMI’s, along with standard deviation bands toshow a global average.

Global PMI − December 2013

<40.0 42.0 44.0 46.0 48.0 50.0 52.0 54.0 56.0 58.0 >60.0

Steady ExpandingContracting

Eurozone52.7

Global PMI53.3

TWN55.2MEX

52.6

KOR50.8

JPN55.2

VNM51.8

IDN50.9

ZAF50.5

AUS47.6

BRA50.5

CAN53.5

CHN50.5

IND50.7

RUS48.8

SAU58.7

USA55.0

Global PMI Monthly Change

<−5.0 −4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 4.0 >5.0

PMI Change ImprovingDeteriorating

Eurozone1.1

Global PMI0.2

TWN1.8MEX

0.7

KOR0.4

JPN0.1

VNM1.5

IDN0.6

ZAF−1.1

AUS−0.1

BRA 0.8

CAN−1.8

CHN−0.3

IND−0.6

RUS−0.6

SAU 1.6

USA 0.3

Purchase Managers Index (Manufacturing) − China, Japan, USA, Canada, France, Germany, Italy, UK, Australia

04 05 06 07 08 09 10 11 12 13

3040

5060

70

3040

5060

70

Business Conditions Contracting

Business Conditions Expanding


Global Trade Indicators

The BDI is often described as a leading indicator of economic ac-tivity; it’s offered as evidence that global manufacturers are re-stockingon material inventories. However, the BDI is highly volatile, and de-pendent on the available shipping capacity as well as demand. If thereare 50 ships and only enough bulk cargoes to fill 49 of them, shippingrates can fall by 20%. If 51 cargoes are competing for the same ships,rates can rise 20%. So a 4% change in demand can cause a 40% change

in shipping costs.While the BDI measures bulk cargo transport - ore, crude oil, coal,

grain, etc. HARPEX measures container transport - electronics fromTaiwan, toys from China, textiles from Italy, etc. The HARPEX is agood indicator of global consumer activity and in a high value-addedconversion economy like the US, it is a critical indicator.

Global Shipping Indices

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

2000

6000

1000

0

Bal

tic S

hipp

ing

Inde

x

400

600

800

HA

RP

EX

Inde

x

Shipping Demand Exceeds SupplyShipping Supply Exceeds Demand

Germany − Exports

YoY

% C

hang

e

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−40

−20

020

40

median: 7.492013 Q3: −1.10

South Korea − Exports

YoY

% C

hang

e

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−40

−20

020

40

median: 16.772013 Q3: −0.34

Japan − Exports

YoY

% C

hang

e

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−40

−20

020

40

median: 5.962013 Q3: 14.54


Canadian Indicators

Unemployment rate

Per

cent

67

89

1011 median: 7.40

Dec 2013: 7.20

Permits issued for Dwelling

YoY

Per

cent

Cha

nge

−50

050

100

Dec 2013: NA

Retail Sales

YoY

Per

cent

Cha

nge

−5

05

10

median: 4.29Oct 2013: 2.39

Inflation rate

YoY

Per

cent

Cha

nge

in C

PI

−1

01

23

45

median: 1.68Nov 2013: 1.49

Consumer Confidence

6070

8090

100

median: 95.00Nov 2013: 87.10

Housing Prices

YoY

Per

cent

Cha

nge

−5

05

1015 median: 1.87

Nov 2013: 1.19

Money Supply (M2)

YoY

Per

cent

Cha

nge

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

05

1015 median: 5.88

Nov 2013: 6.67

PMI: Manufacturing

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

4050

6070

median: 56.80Dec 2013: 53.50

Retail Sales Performance

YoY

Per

cent

Cha

nge

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−5

05

10

median: 4.29Oct 2013: 2.39


European Indicators

Unemployment Rates

Per

cent

age

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

05

1015

20

Business Employment Expectations

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−40

−20

010

Volume of Retail Sales (ex−cars)

Inde

x (J

an 2

010

= 1

00)

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

6070

8090

110

130

Manufacturing Turnover

Inde

x (J

an 2

010

= 1

00)

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

6070

8090

110

130

Building Permits

Inde

x (J

an 2

010

= 1

00)

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

010

020

030

040

050

0

Industrial Orderbook Levels

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−60

−40

−20

020

Country EmploymentExpecta-

tions

Unempl.(%)

Bond Yields(%)

RetailTurnover

ManufacturingTurnover

BuildingPermits

IndustryOrderbook

PMI

Series Dates Nov 2013 Nov 2013 Oct 2013 Oct 2013 Oct 2013 Oct 2013 Nov 2013 Dec 2013� France -15.2 10.9 2.39 105.4 109.2 80.25 -23.2 47� Germany -1.3 5.2 1.76 100.6 110.4 143.63 -9 54.3� United Kingdom 8 7.4 2.26 101.27 104.67 NA 10.4 57.3� Italy -7.9 12.5 4.25 95.6 98.38 NA -24.8 53.3� Greece -12.3 27.4 8.74 72.63 103.48 17.32 -30.7 49.6� Spain -6.3 26.7 4.22 81.11 98.81 40.18 -27.3 50.8� Eurozone -4.3 10.9 3.03 98.37 108.2 76.29 -15.3 52.7


Government Bond YieldsLo

ng T

erm

Yie

lds

%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

02

46

810

Economic Sentiment

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

6070

8090

110

130

Consumer Confidence

Inde

x

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−10

0−

60−

200

20Production of Total Industry: Sep 2013

<−10.0%−7.5%−5.0%−2.5% 0.0% 2.5% 5.0% 7.5%>10.0%

YoY % Difference increasingdecreasing

AUT 0.10%

DEU 1.41%

ESP 0.52%

FIN−3.81%

FRA−0.91%

GBR 3.19%

GRC−2.79%

HUN 2.94%

IRL−7.54%

ITA−1.08%

NOR 0.36%

POL 3.76%

RUS−0.09%

SWE−1.98%

Inflation: Nov 2013

AUT 1.4%

DEU 1.3%

ESP 0.2%

FIN 1.4%

FRA 0.7%

GBR 2.1%

GRC−2.9%

HUN 1.0%

IRL 0.3%

ITA 0.7%

NOR 2.5%

POL 0.7%

SWE 0.1%

<−1.0%0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% >7.0%

YoY % Change in Prices

PMI: December 2013

<40.042.0 44.0 46.0 48.0 50.0 52.0 54.0 56.0 58.0>60.0

Steady ExpandingContracting

BRA50.5

CAN53.5

DEU54.3

ESP50.8

FRA47.0

GBR57.3

GRC49.6

IRL53.5

ITA53.3

MEX52.6

POL53.2

SAU58.7

TUR53.5

USA55.0

PMI Change: Nov − Dec

<−5.0−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 4.0 >5.0

PMI Change ImprovingDeteriorating

CAN−1.8

DEU 1.6

ESP 2.2

FRA−1.4

GBR−1.1

GRC 0.4

IRL 1.1

ITA 1.9

POL−1.2

TUR−1.5

USA 0.3


Chinese Indicators

Tracking the Chinese economy is a tricky. As reported in the Finan-cial Times, Premier Li Keqiang, confided to US officials in 2007 thatgross domestic product was “man made” and “for reference only”. In-stead, he suggested that it was much more useful to focus on three alter-native indicators: electricity consumption, rail cargo volumes and bank

lending (still tracking down that last one). We also include the PMI- which is an official version put out by the Chinese government anddiffers slightly from an HSBC version. Finally we include the ShanghaiComposite Index as a measure of stock performance.

Manufacturing PMI

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

4045

5055

60

Dec 2013: 50.50

Shanghai Composite Index

Inde

x V

alue

(M

onth

ly H

igh/

Low

)

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1000

2000

3000

4000

5000

6000

Jan 2014: 2013.30

Electricity Usage

100

Mill

ion

KW

H (

log

scal

e)

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1000

2000

3000

5000

Nov 2013: 4392.00

Consumer Confidence Index

Inde

x

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

9810

010

210

410

610

8

median: 102.90Nov 2013: 98.90

Exports

YoY

Per

cent

Cha

nge

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

−20

020

4060

80

median: 20.30Dec 2013: 4.30

Retail Sales Change

YoY

Per

cent

Cha

nge

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

1015

20

median: 13.20Nov 2013: 13.70


Global Climate Change

Temperature and precipitation data are taken from the US NationalClimatic Data Center and presented as the average monthly anomalyfor the previous 6 months from November 2013. Anomalies are defined

as the difference from the average value over the period from 1961-1990for precipitation and 1971-2000 for temperature.

Trailing 6 month Temperature Anomalies from November 2013

<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0

Anomalies in Celcius WarmerCooler Anomalies in Celcius

−4 −2 0 2 4

Trailing 6 month Precipitation Anomalies from November 2013

<−40.0 −30.0 −20.0 −10.0 0.0 10.0 20.0 30.0 >40.0

Anomalies in millimeters WetterDrier Anomalies in millimeters

−40 −20 0 20 40


Economy & Finance

The Laird Report - January 11 2014