Month: July 2021

U.S. Housing Starts Strengthen in June

Housing starts increased 6.3% (29.1% y/y) during June to 1.643 million (SAAR from 1.546 million in May, revised from 1.572 million units. The Action Economics Forecast Survey expected June starts of 1.586.

Starts of single-family homes rose 6.3% (28.5% y/y) in June to 1.160 million units from 1.091 million in May, revised from 1.098 million. Starts of multi-family units improved 6.2% (30.5% y/y) to 483,000 from 455,000 units, revised from 474,000.

Building permits declined 5.1% (+23.3% y/y) last month to 1.598 million from 1.683 million in May, revised from 1.681 million. Permits to build single-family homes declined 6.3% (+25.1% y/y) to 1.063 million, down for the third straight month. Permits to build multi-family homes weakened 2.6% (+20.0% y/y) to 535,000, remaining the lowest level since December.

By region, housing starts in the Northeast fell 9.0% (+5.2% y/y) to 122,000, the third straight monthly decline. In the Midwest, starts declined 7.5% (+1.0% y/y) to 210,000 after rising 26.1% in May. Housing starts in the South improved 9.7% (35.1% y/y) to 882,000 following a 2.8% rise in May. In the West, starts rose 12.6% (44.9% y/y) to 429,000, the highest level in four months.

  

INFLATION!?

Base and transitory effects

Axios’ note after NFLX reported sounds like the Fed after the last CPI release: the widely expected base effect proved much worst than forecast but is still hoped to be only transitory.

Netflix added the fewest new subscribers in years last quarter, the company said today.

• Blame that pandemic boost. Growth was bound to slow after Netflix added an unprecedented number of new streamers when the world locked down.
• It lost subscribers in the U.S. and Canada for only the second time since it starting reporting these figures, per Marketwatch.

After a big subscriber miss last quarter, Netflix said that it hoped momentum will pick back up in the second half of the year. Its new guidance suggests that a bounce-back may not be as big as initially expected — or at least not in the third quarter.

Data: FactSet, company filings; Chart: Sara Wise/Axios

But NFLX also predicted it would add 3.5m subs in Q3, substantially below analysts’ forecast of +5.9m.

Back to the real world:

Chip Shortage Reaches Smartphone Makers Shipments are slowing and prices are rising as companies hunt for parts; supply-chain wait times enter the danger zone

Shipments are slowing and customers are seeing their first significant price increases in years. Some companies have had to scale back production and delay new releases. (…) Phone manufacturers purchase key parts roughly a half a year in advance, but now those stockpiles have shrunk. (…)

The chip supply struggles aren’t distributed evenly across the smartphone industry. Apple Inc., which accounts for about a sixth of the 1.3 billion smartphones sold annually, has stayed out of trouble given its supply-chain clout, according to industry analysts, as have most of Samsung’s premium devices. But that still leaves more than 80% of the smartphone industry reeling for parts. (…)

Industrywide shipments are expected to drop by 10% in the second quarter from the first, Counterpoint estimates.

Meanwhile, smartphone unit sales for the rest of the year also look relatively flat compared with 2019 and 2020. Counterpoint Research projects global smartphone shipments in the second half of this year will total about 771 million units, up 1.3% from the 761 million units shipped a year earlier. The parts shortages held back what could have been bigger gains in the second half, said Tarun Pathak, a research director at Counterpoint. (…)

The average wholesale price for phones world-wide went up 5% in the April-to-June quarter, according to market researcher Strategy Analytics. That is a break from recent years when prices didn’t increase by more than 2%. (…)

Those delays, combined with the chip shortage, have affected the total number of new phone releases: About 310 phones were launched in the first half of 2021, an 18% drop from 370 devices a year earlier, according to Counterpoint Research. (…)

• Daimler sees chip shortage dragging on into 2022 The company said it expected full-year car sales to be in line with 2020 levels, after previously forecasting car unit sales this year would be significantly above last year’s. (…) The premium carmaker, which also faces the challenge of high prices for steel, copper and aluminium in the second half of 2021, said its visibility into how chip supply would develop was currently low.

• Commodity Traders Harvest Billions While Prices Rise for Everyone Else From oil to steel, raw material prices are surging. As the world economy recovers, how much further does the boom have to run?

(…) For consumers, however, the commodity boom means rekindling memories of high inflation. For now, companies are mainly absorbing the brunt of the impact, pushing factory inflation in some countries, including China, to their highest in more than a decade. But sooner or later, consumers will pay the price, too. (…)

The speed and breadth of the rally, affecting dozens of raw materials from vegetable oil to coal, have prompted many to talk about a new commodities supercycle, similar to the one that started nearly two decades ago as China’s rapid industrialization changed the structure of the global economy.

Economists typically define a supercycle as a period of abnormally strong demand that oil companies, miners and farmers struggle to match, sparking a rally that outlasts a normal business cycle. (…)

With many families under lockdown, spending shifted from services into goods everywhere, even in the richest nations like the U.S. In many ways, American and European consumers behaved for a few months like their counterparts in emerging countries, spending on everything from new bicycles to television screens. (…)

“Ultra-accommodative monetary policy, unprecedented fiscal stimulus, pent-up demand, strong household balance sheets, and record savings all combine to paint a picture of a resilient and strong growth trajectory,” said Saad Rahim, chief economist at Trafigura. The fiscal stimulus has other parallels with emerging markets as Western governments are targeting infrastructure spending, promising to rehabilitate their highways, railways and bridges.

Governments are also keen to build a greener future, spending on electrification to move away from fossil fuels. While that’s bad news for coal and oil, it means more demand for raw materials like copper, aluminum and battery metals like cobalt and lithium that are key for the energy transition. (…)

Supply is struggling to catch up. Some of the bottlenecks are due to deliberate moves by producing countries, like the OPEC+ alliance, which slashed oil production last year. And others are due to the difficulty of running mines, smelters, slaughters houses and farms in the middle of the pandemic. (…)

Crucially for the longevity of the rally, there’s a structural supply constraint that means high prices may not work as a signal to increase production and eventually bring the market back into balance.

The forces slowing the supply response are twofold. First, companies are under pressure from shareholders and courts to join the fight against climate change, reducing their production of fossil fuels like coal, oil and gas. Second, the same shareholders are demanding that chief executives reward them with higher dividends, in turn leaving less money to expand mines or drill new wells.

The impact of those forces are evident already in some corners of the commodity market, where companies stopped investing in new supply several years ago. Take thermal coal, for example. Mining companies have been cutting spending since at least 2015. As demand has picked up, coal prices have jumped to levels unseen in 10 years. The same has happened in iron ore, where prices shot up to all-time high earlier this year. Next is likely to be oil, where companies are cutting spending significantly.

(…) “This is the beginning of a proper boom cycle — this isn’t a transitory spike,” he said.

• From yesterday’s Almost Daily Grant’s:

This morning, BHP Group announced that it will hold production steady over the next year, projecting between 278 and 288 million tons of iron ore output.  That compares to the 284 million tons of production over the 12 months through June 30 and is slightly below the company’s long-term target of 290 million tons per annum.

A sparse longer-term pipeline further colors that decision, as The Wall Street Journal notes that the company has just two major projects in development and is a minority partner to BP in one of those.  During the commodity price boom of a decade ago, BHP had 18 such ventures in the hopper.

“Chasing production does not really make sense,” CEO Mike Henry told analysts in March. “The industry has a great track record of being quite pro-cyclical and that has ended in tears all too often.”  (…)

A similar dynamic is underway among stateside energy majors. In April, Exxon reiterated full-year capex guidance at $16 billion to $19 billion for 2021, down from $21.4 billion last year and some $31 billion in 2019. The oil giant expects that figure to remain at between $20 billion and $25 billion from 2022 to 2025, down from a pre-virus projection of $30 billion to $35 billion in annual capital spending over that period.  Rival Chevron now targets $14 billion to $16 billion in capex through 2025, which is less than half of its spending levels in 2014 when WTI crude hovered near $100 a barrel. (…)

• Inflation Percolates Globally: Is It Really Transient?

By ROBERT BRUSCA:

(…) OPEC-plus has already cut a deal to try to support higher oil prices. While supply chain issues may be temporary there are also many global supply chain changes that are being made to reduce dependence on China (for example). In the U.S. with a new party in control, fiscal policy and the whole of the national wage structure is being pressured by new goals moving to a concept of fairness instead of one based on competitiveness and market pricing. How this purely domestic notion of fairness, as distinct form ability, will fit in with the notion of free trade and how U.S. workers will compete with lower paid workers overseas we have yet to discover…

Everywhere globally fiscal policy has been more expansive and debt levels are higher. Meanwhile, unemployment is still elevated since many firms have gone out of business. The lessons of the pandemic are affecting economic behavior in ways that it is difficult to predict and that may or may not have lasting impacts on the price level and economic performance.

In short, there is little reason to think that anyone or any central bank really knows what is in store for the future. The ECB has recently changed its policy focus to target an undefined average inflation rate of 2%. The Federal Reserve in the U.S. made that shift a year ago. These shifts give policy more flexibility, more discretion and probably allow for less oversight. In the case of the ECB, it is an actual easing of policy since inflation can be higher under the new policy than what would have been allowable before.

Currently central bankers are ignoring the flaring of inflation even though it is by far the worst in a decade and a period of historic inflation proportions as it stands. That could change. But with so many loose ends, is it a good time to assume that this inflation flare will go away? The chart shows that inflation is cyclical and that after flaring prices generally settle down but to what level or pace? That is the question. And this timeline is short. We have had other periods in which inflation settled into a steady but too-high of a pace. The final question is whether inflation of this magnitude will shift expectations. So far, it seems to be doing just that, but central banks are not attuned to this shift because they are still focused on nursing economic recovery ahead and in getting the unemployment rates back down to their pre-Covid levels. While that may be an aspirational, we have no idea if it is in fact a reasonable goal for the period immediately ahead.

SENTIMENT WATCH

Bubbles, bubbles everywhere: Jeremy Grantham on the bust ahead

(…) Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier. You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month. The scale of these things is so much bigger than in 1929 or in 2000.

Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it.

My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.

Markets peak when you are as happy as you can get, and a near-perfect economy is extrapolated into the indefinite future. But around the corner are lurking serious issues like interest rates, inflation, labor and commodity prices. All of those are beginning to look less optimistic than they did just a week or two ago.

(…) The probabilities are that this will go into the fall: The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a few months longer than I would have initially guessed.

What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven’t even thought of will come out of the woodwork, and you had no idea it was even there.

There will be an enormous negative wealth effect, broader than it has ever been, compared to any other previous bubble breaking. It’s the first time we have bubbled in so many different areas – interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all a positive wealth effect, and on the way down it will retract, painfully. (…)

Q: It is difficult to be bearish right now?

A: Not for me, because I don’t have career risk anymore. But every big company has lots of risk: They facilitate a bubble until it bursts, and then they change their tune as fast as they can, and make money on the downside.

But this bubble is the real thing, and everyone can see it. It’s as obvious as the nose on your face.

John Authers today surfs on the P/S ratio to suggest, like many have for many years, that “The U.S. is usually more expensive than the rest of the world. But on this basis, it is more expensive than ever before (including 2000) and the valuation gap compared with the rest of the world is wider than it’s ever been”:

With all due respect to Mr. Grantham, his favorite metric is useless if not measured against how much money each dollar of sales earns. High price-to-sales ratios are bad only if not accompanied with high profit margins. This Morningstar/CPMS chart plots S&P 500 P/S against a proxy for trailing net profit margins (black). The fact is that corporate America’s margins have increased spectacularly over the years, owing to efficient cost management, the growing importance of highly profitable technology companies in both our daily lives and in equity indices and, more recently, to lower tax rates. Mr. Grantham has long been predicting that margins would mean revert, which they cyclically do, but within a sharply rising secular trend.

A better metric, in my view, is Price to Book Value measured against the rate of return on book value (ROE). It supports the bubble reading at its current 4.8x BV when ROE is near its previous cyclical peak levels.

ROEs are more dependable mean reverters because there is a natural economic/financial limit to returns large corporations can achieve on shareholders equity as “excessive” returns attract competing capital and/or political/social backlash.

If we can’t reasonably expect ROEs to rise much above current levels given prospective higher tax rates, it should be difficult for investors to pay more for peaking book values. That said, the lower for longer Fed policy surely makes owning equity more attractive than debt capital…

But as this next chart shows, S&P 500 companies continue to earn returns on their reinvested capital within the 8-13% range of the past 28 years. With current low interest rates, it is difficult to see this getting much out of this long-term range.

One way to boost ROE is thus to shrink the denominator, i.e. boost the debt/equity ratio (red line). Some companies are doing just that, even borrowing to buyback their equities. But borrowing low to buyback high has its drawbacks.

Biden nominates Google critic to lead DoJ antitrust division Lawyer Jonathan Kanter had been championed by progressives urging tougher competition enforcement

Novartis aims to beat rivals to novel $10bn cancer treatment market Trial results for new targeted therapy ‘pretty remarkable’, says CEO