COMMERCIAL REAL EST

Saudi, Russia, Qatar, Venezuela Agree to Freeze Oil Output Saudi Arabia, Russia, Qatar and Venezuela said they wouldn’t increase crude-oil output above January’s levels but the agreement came with a significant caveat: Iran and Iraq must also halt production increases.

(…) “Freezing now at the January level is adequate for the market,” Saudi oil minister Ali al-Naimi said. “We don’t want significant gyrations in prices, we want to meet demand. We want a stable oil price.”

Mr. Naimi said the move was “simply the beginning of a process to assess in the next few months and decide whether we need other steps to stabilize and improve the market.” He said rising demand would eventually catch up to oil supplies. (…)

Venezuelan officials have assured the Saudis that Iran and Iraq can be convinced to go along with the plan, an OPEC official said. Venezuela’s oil minister, Eulogio del Pinoplans to meet Iraqi and Iranian oil officials on Wednesday in Tehran.

“We will start intensive communication almost straightaway with other major producers, OPEC and non-OPEC, including Iran and Iraq,” said Mohammed al-Sada, Qatar’s minister of energy and industry. (…)

Halting production increases won’t likely help reduce the world’s oversupply of oil. Qatar and Venezuela were already producing at or near capacity, Russia’s production is expected to be flat or decline this year, and Saudi Arabia’s output wasn’t expected to increase significantly.

Where’s Waldo? Still out shopping!

While official stats have been spreading doubts on consumer spending during the important final months of 2015, real world info such as corporate results and guidance from retailers and credit card companies remained generally positive. Friday’s retail sales report should help relieve recession fears in the U.S.

• Strong U.S. consumer spending counters recession fears U.S. consumer spending regained momentum in January as households ramped up purchases of a variety of goods, in a hopeful sign that economic growth was picking up after slowing to a crawl at the end of 2015.

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services increased 0.6 percent last month after an unrevised 0.3 percent decline in December. (…)

In the wake of the retail sales report, forecasting firm Macroeconomic Advisers raised its first-quarter GDP growth estimate by one-tenth of a percentage point to a 2 percent annual rate, and economists at Morgan Stanley lifted their forecast to a rate of 1.5 percent from 1.2 percent. (…)

• Consumers Power Past Headwinds U.S. consumers showed signs of strength in January, taking advantage of low oil prices to increase their spending and offering a welcome counterpoint to the gloom that has gripped investors and roiled markets since the start of the year.

Sales at retail stores and restaurants rose 0.2% in January from the prior month, the Commerce Department said Friday. And December’s retail sales were revised to a 0.2% gain instead of a drop, showing a better end to the year than initially estimated. (…)

Consumers continued to spend less at gas stations thanks to lower fuel prices. But a core measure of retail sales excluding autos and gasoline posted a 0.4% increase. Americans stepped up spending across several major categories, including vehicles, groceries and building materials. Compared with a year earlier, sales grew 3.4%. (…)

Core sales are up at a 3.2% annualized rate in the last 3 months, most likely in the 4-5% range in real terms when considering deflation across the retail trade. ISI estimates that retail prices declined 0.7% in December and January combined, meaning that real core retail sales jumped 1% during these 2 months (+6.2% a.r.), following November’s 0.5% nominal gain. Car sales have also remained healthy as Haver Analytics illustrates:

These volume gains ending the retail year in January are important as they likely helped clear a good part of excess inventories, paving the way for better orders and production rates in coming months (chart from Markit).

I generally give little weight to consumer confidence data which is coincident at best. Still, Bloomberg’s latest U.S. consumer comfort index and the U. of Michigan surveys point to a generally upbeat consumer amid the current turmoil in financial markets. Given the early Easter this year, the consumer could well provide the hoped for boost to the economy during Q1.

From the Atlanta Fed:

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 2.7 percent on February 12, up from 2.5 percent on February 9. After this morning’s retail sales report from the U.S. Census Bureau, the forecast for first-quarter real consumption growth increased from 3.0 percent to 3.2 percent.

In less than 2 weeks, the Atlanta Fed GDPNow Q1 GDP forecast has gone from 1.2%to 2.7%!

Expect the Citigroup’s ESI to turn up pretty soon…

(Ed Yardeni)

…which should have an impact on investors sentiment…

(Ed Yardeni)

…and on valuations (see Upgrading Equities to 3 Stars)

U.S. Import Prices Fell 1.1% in January

Import prices fell 1.1% in January from December, matching the prior month’s decline, the Labor Department said Friday. Prices have fallen for seven consecutive months and were down 6.2% in January from a year earlier. (…)

The price of imported petroleum fell 13.4% from December, the biggest drop since August, and 35.3% from a year earlier.

Outside of petroleum, prices for all other imports fell 0.2% over the month and 3.1% over the year. (…)

Export prices fell 0.8% in January after dropping 1.1% in December. They’re down 5.7% over the past year.

Non-oil import prices have declined at a 3.3% annualized rate in the last 3 months (-3.1% YoY). Consider this when analysing nominal retail sales (chart from Haver Analytics)

Warning Light Flashes for the Commercial Property Boom

The financial engine of the market for office buildings, hotels and malls is showing signs of strain, raising questions about the resilience of the commercial real-estate boom.

Bonds backed by commercial real-estate loans have weakened significantly since the start of the year amid concerns of an economic slowdown. Risk premiums on some slices of commercial-mortgage-backed securities have jumped 2.75 percentage points since Jan. 1, a move that translates into a roughly 18% drop in prices for Triple-B-rated bonds, according to data from Deutsche Bank.

The sharp move could make it harder for buyers to keep paying ever-higher prices in a market regulators already caution could be overheating. It’s also causing a lot of head scratching on Wall Street. Real-estate prices are at or near record highs in many parts of the country, and loan delinquency rates are low. The sector doesn’t have much exposure to oil and energy companies, the focus of a lot of the recent market distress.

Yet investors in some cases are demanding to be paid as much to take on CMBS risk as they are to take on corporate junk bonds. Property owners and developers are now facing the prospect of higher rates on loans, tougher refinancings and diminished property values as debt issuance slows and financing becomes more expensive.

Close to $200 billion in real-estate loans that have been bundled into securities are scheduled to mature this year and next, and most need to be refinanced, according to Trepp LLC, a real-estate data service. (…)

The $600 billion CMBS market accounts for around a quarter of all U.S. commercial real-estate loans. (…)

The concern now is that weakness in the financing market could start to hurt property values—which the Federal Reserve has already warned were getting frothy. (…)

A national commercial property price index from Moody’s Investors Service and RCA rose 12.7% in 2015 to an all-time high and is now 17.3% above its precrisis peak. Price gains slowed in the second half of last year, however. (…)

People Over 50 Carrying More Debt Than in the Past Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining debt than previous generations

(…) The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, after adjusting for inflation, according to data from the Federal Reserve Bank of New York released Friday.

Just over a decade ago, student debt was unheard-of among 65-year-olds. Today it is a growing debt category, though it remains smaller for them than autos, credit cards and mortgages. On top of that, there are far more people in this age group than a decade ago. (…)

Most of the households with debt also have higher credit scores and more assets than in the past. (…)

Still, the trend could become more worrisome in the future as an increasing number of people will be retiring without pension plans and with limited assets in their 401(k)s, said Alicia Munnell, the director of the Center for Retirement Research at Boston College. (…)

By contrast, the overall debt balances of most young borrowers haven’t grown or have declined. The average 30-year-old borrower has nearly three times as much student debt as in 2003. But these borrowers have so much less home, credit card and auto debt that their overall debt balances are lower. (…)

An important barometer of household financial health is the percentage of this debt that is in some stage of delinquency, and that percentage has been steadily dropping. Only 2.2% of mortgage debt was in delinquency, the lowest since early 2007. Credit-card delinquencies also declined, while auto-loan and student-loan delinquencies were unchanged. (…)

Low Inflation, Which Complicates Fed Plans, Cheers Consumers

The University of Michigan consumer sentiment survey out Friday showed Americans expect inflation to register 2.4% over the next five years, the lowest long-term rate since the institution first started asking the question in the late 1970s. (…)

China Exports, Imports Fall More Than Expected

Exports fell 11.2% year-over-year in January, following a drop of 1.4% in December, the General Administration of Customs reported Monday. The January decline was larger than the median 2.4% forecast from 13 economists surveyed by The Wall Street Journal. Imports last month declined 18.8%, far exceeding December’s 7.6% decline and more than four times the forecast 4.6% decrease. (…)

The import drop came despite a sharp jump in imports from Hong Kong that some economists suggest is largely due to companies manipulating invoices to avoid China’s restrictions on capital leaving the country.

Economists warn that January and February data must be viewed with caution as the Lunar New Year holiday, the dates of which shift from year to year, tends to greatly disrupt consumption and production patterns around China. (…)

South Korea, which serves many of the same U.S. and European markets as China, saw an 18.5% year-over-year decline in its January exports, its biggest monthly drop in several years. And a subindex of China’s official purchasing managers index that tracks new export orders has been in contraction for 16 consecutive months. (…)

In an interview with Caixin Media Co. reported over the weekend, People’s Bank of China Gov. Zhou Xiaochuan said that Beijing has no intention of engineering a large depreciation of the yuan to boost exports. While some exporters were using trade flows to move capital offshore, this would be transitory as companies will eventually repatriate the proceeds to pay wages and meet other obligations back in China, Mr. Zhou was quoted as saying. (…)

Chinese factories often stockpile goods in January to meet orders after they return to work, but this year they purchased less—one reason imports fell sharply and a sign of further trade weakness ahead, economists said.

January imports were also weighed down by falling commodity prices, especially oil—which tend to make trade flows look smaller when measured in dollar terms, even when volumes remain relatively constant—and by weak demand. (…)

China Turns on Taps and Loosens Screws in Bid to Support Growth

The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China’s cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending.

Officials are upping their rhetoric too. Premier Li Keqiang said policy makers “still have a lot of tools in the box” to combat the slowdown in the world’s No. 2 economy, days after People’s Bank of China Governor Zhou Xiaochuan broke a long silence to talk upconfidence in the nation’s currency, the yuan.

And to ram the message home, the biggest economic planning agencies on Tuesdaypromised to reduce financing costs as they rein in overcapacity. Throw in a record surgein lending in January and a picture emerges of an administration determined to put a floor under growth. (…)

Signs are now emerging that six interest-rate cuts by the People’s Bank of China since November 2014, along with other measures to boost lending, are starting to flow through. PBOC data released Tuesday showed that aggregate financing surged to 3.42 trillion yuan ($525 billion) in January, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey. (…)

In a more positive sign, companies are paying down their foreign debt. Over the past six months, corporates have shaved their dollar borrowings to $820 billion from $940 billion in July. Cutting back on U.S. dollar exposure brings down borrowing costs for companies in the real estate, energy and banking sectors especially, and removes risks should the yuan continue to weaken.

Instead, corporate borrowers have been turning to the domestic bond market for financing. The nation’s firms sold 454.7 billion yuan of notes in January, 2.5 times the amount sold in the same month last year, as the yield on top-rated 10-year corporate notes dropped to a decade low. By contrast, they issued $6.8 billion of dollar-denominated bonds so far this year, a decline of 42.9 percent from the same period last year, according to Bloomberg-compiled data. (…)

China’s Central Bank Says No Basis for Continued Yuan Decline

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine.

Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability. (…)

The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.” (…)

China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s gross domestic product and its exchange rate, Zhou said. Capital outflows need not be capital flight and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, he added.

The country will not peg the yuan to a basket of currencies but rather seek to rely more on a basket for reference and try to manage daily volatility versus the dollar, Zhou said. The bank will also use a wider range of macro-economic data to determine the exchange rate, he said.

China Loses Control of the Economic Story Line The gloom around the Chinese economy is different this time. With reforms to cure economic ills stalled, Beijing has ceded the narrative to the speculators.

(…) The U.S.-China Business Council, an industry lobbying group, issues a regular scorecard on the progress of Mr. Xi’s ambitious reforms that testifies to dismay among its members. Even though Beijing frequently boasts about its success in cutting red tape and streamlining a notoriously complicated licensing regime, a council survey showed 77% of companies see no progress at all in those areas.

Without a convincing narrative to offer hope of improvement, investors are drawing an increasingly bleak conclusion: On reform, Mr. Xi’s administration is losing control of the plot.

Japan’s Economy Contracts Again

(…) Gross domestic product contracted an annualized 1.4% in the fourth quarter, according to data released Monday by the Cabinet Office, as consumer spending and exports declined. That was worse than a 1.2% contraction forecast by economists surveyed by The Wall Street Journal.

For the full calendar year 2015, Japan’s economy expanded 0.4%, as a 2.7% increase in exports helped offset a 1.2% drop in private consumption. (…)

The main cause of the slowdown in the fourth quarter was a decline in consumer spending, according to the government. Private consumption fell 3.8% on an annualized basis. Unseasonably warm weather likely caused people to buy less winter clothing, while sluggish wage growth also kept pocketbooks closed.

Japan’s consumers have been tight fisted since a sales-tax increase in April 2014. Paychecks failed to keep pace. Including the effects of inflation, wages fell 0.9% last year.

Exports unexpectedly fell during the latest quarter, by an annualized pace of 3.4%. Slower sales of smartphones in China sapped demand for equipment in Taiwan and South Korea. Shipments of mining equipment to the U.S. also slumped as companies shelved shale-gas projects because of depressed oil prices. (…)

European Car Sales Rise in January

New car sales in the European Union rose more than 6% in January, but Volkswagen, the bloc’s biggest manufacturer by sales, failed to keep pace with the industry and lost market share to its rivals as it continues to grapple with its emissions investigation.

New EU car registrations, a mirror of sales, rose to 1.06 million vehicles in January from 999,195 vehicles a year ago. The data show a marked slowdown from the previous two months but were “encouraging for the near future, as the upward market trend remains stable,” the European Automobile Manufacturers’ Association, or ACEA, said Tuesday. (…)

The January sales data also revealed a geographic shift in the European market. Italy, which suffered for years under the weight of the euro crisis, surged past France in January to become the EU’s third-largest auto market by sales after Germany and the United Kingdom. New car sales in Italy rose 17.4% in January, outpacing all of the top five European car markets.

Bank Credit Risk Crimps U.S. Stocks

… The S&P 500’s end-of-week rally marked the fifth Friday in a row that the S&P 500 moved 1.8 percent or more. Such a stretch of volatility on the last day of the week hadn’t occurred since the Great Depression.

Declines in banks set the tone in the market’s latest rout. A gauge of financial shares in the S&P 500 has slumped more than 14 percent this year, ending Thursday at its lowest level since 2013. The group surged 4 percent on Friday, the most in almost five years, as JPMorgan Chase & Co.’s Jamie Dimon repurchased stock and a major German lender’s profit topped estimates.

The earnings beat from Commerzbank AG provided a respite from a reporting season full of disappointment from financial firms, after Prudential Financial Inc. and American International Group Inc. both fell short of analyst estimates this week. Other industries in the S&P 500 have shown similar futility in boosting the benchmark index, even though more than three-quarters of companies that have reported so far have beaten profit forecasts. (…)

Yellen’s comments reflected a concern that has hung over equity markets all year: whether the evaporation of wealth in share prices could bleed into the economy, sour consumer confidence and restrain spending. Almost $3 trillion of equity value has been erased as declines in the S&P 500 swelled to as much as 11 percent this year.

With stock prices plummeting amid stagnating profit growth, the S&P 500’s forward 12-month price-to-earnings ratio has decreased 11 percent since the start of the year, falling from 17.4 times to 15.5, data compiled by Bloomberg show. The measure is now below its historical average of 16.6 times. Still, the gauge remains more expensive than developed markets in Europe, where the Stoxx Europe 600 Index trades at 13.9 times estimated earnings.

A measure of investor anxiety reflects recent declines in U.S. stocks. The Chicago Board Options Exchange Volatility Index climbed 8.6 percent for the five days, bringing its two-week increase to 26 percent. The so-called fear gauge surged 11 percent on Monday, its biggest single-day gain in more than two weeks. (…)

Bank of America Cuts S&P 500 Estimate by 9% After 6-Week Slide

(…) The bank now expects the Standard & Poor’s 500 Index to end the year at 2,000. (…) While the bank’s new target implies a 7.7 percent advance from the current level, it’s 9 percent lower than the prior target of 2,200. It also implies that the gauge will fall for two consecutive years for the first time since the dot-com era.

“Unless we see signs of a growth recovery, there may be significant near-term downside to current levels,” the group, led by Savita Subramanian, wrote in a note to clients Friday. “The S&P 500’s move this year has been extreme, worsened by the dearth of liquidity in financial markets amid the tightest regulatory backdrop of our careers. This lack of liquidity could exacerbate downside risk potential.” 

Wall Street strategists are losing their resolve to project big gains in the stock market as everything from China to oil and interest rates roil markets. The handful of cuts has reduced the average annual estimate, the first time that’s happened this early in a year since the Iraq war in 2003.

Subramanian is now the eighth strategist of 21 followed by Bloomberg to reduce a forecast this year. The new level leaves her as the least-bullish in the survey along with JPMorgan Chase & Co.’s Dubravko Lakos-Bujas. The 2,000 target is 8 percent below the median of 2,175.

Goldman Says Worst of Credit-Market Selloff May Be Over

Nothing to Fear but Fear Itself, Says Goldman Sachs

In a note out late Monday in Europe, titled “Nothing to fear but fear itself” Goldman Sachs GS +3.72%’s Jeffrey Currie says that global financial markets may be dominated by fear for now, but that these concerns “ignore the facts that systemic risks from oil, China and negative rates are very unlikely.”

He says that banks have ample liquidity to maintain funding against higher capitalization, and that the negative macro impacts from low oil prices have likely already played out and are not systemic. The spillover from the Chinese economy slowing down is limited, Mr. Currie says, and the U.S. economy is far from a recession. (…)

Tepper Buys Pipeline Operators as Appaloosa Stock Bets Rise

Stock picker David Tepper increased his firm’s U.S. equity holdings by 56 percent last quarter, led by a jump in his Alphabet Inc. position and new stakes in pipeline companies.

The billionaire founder of $18 billion Appaloosa Management bought 5.1 million shares of Energy Transfer Partners worth $173.5 million as of Dec. 31, and 9.4 million shares of Kinder Morgan Inc. with a market value of $140.9 million, according to a regulatory filing Friday. (…)

Tepper, whose firm has about 12 percent of its U.S. public equities in energy, joins value investor Seth Klarman in betting the stocks will rebound with the price of oil. (…)

With the energy sector now considered “so toxic to investors that almost no one wants to get involved,” prices may be approaching a bottom, Klarman wrote in the letter. (…)