LEADING ECON. INDIC. - Edge and Odds

Conference Board Leading Economic Index Increased in September

Here is an overview from the LEI technical press release:

The Conference Board LEI for the U.S. increased in September, after declining in August. Large positive contributions from building permits, the yield spread and average initial claims for unemployment insurance (inverted) fueled September’s gain. In the six-month period ending September 2016, the leading economic index increased 1.1 percent (about a 2.3 percent annual rate), much faster than its growth of 0.3 percent (about a 0.7 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators remain slightly more widespread than the weaknesses. [Full notes in PDF]

HOUSING

U.S. Existing Home Sales Rebound

Sales of existing homes increased 3.2% (0.6% y/y) in September to 5.470 million units (AR) following a 1.5% decline to 5.300 million in August, revised from 5.330 million. Expectations had been for 5.32 million sales in the Action Economics Forecast Survey. Sales of existing single-family homes improved 4.1% last month (0.6% y/y) to 4.860 million following two months of decline. Sales of condos & co-ops declined 3.2% (0.0% y/y) to 610,000 after a 10.5% increase. (…)

Sales rose 5.7% (0.0% y/y) in the Northeast to 740,000. In the West, sales increased 5.0% (1.6% y/y) to 1.250 million. Sales gained 3.9% in the Midwest (2.3% y/y) to 1.320 million, and sales in the South improved 0.9% (-0.9% y/y) to 2.260 million.

The total inventory of homes on the market declined 6.8% y/y to 2.040 million. The months’ sales supply of homes ticked lower to 4.5, down from 4.8 months during all of last year and 5.2 months in 2014.

Look at this CalculatedRisk chart on which I highlight the 2004-07 aberration and you could think we are really not far from the “normal” cyclical high.

Same with inventory which swelled after prices exploded and with the ensuing crisis. Where many economists and realtors see weakness, I tend to see a return to normalcy, the “old normal” if you will.

U.S. Housing Starts Decline, but Building Permits Rise

Housing starts fell 9.0% during September (-11.9% y/y) to 1.047 million units (AR) following a 5.6% August decline to 1.150 million, revised from 1.142 million. It was the lowest level of starts since March of last year. Expectations were for 1.18 million starts in the Action Economics Forecast Survey.

Last month’s drop reflected a 38.0% plummet (-40.8% y/y) in starts of multi-family homes, which include apartments & condominiums, to 264,000, the lowest level since June 2013. Starts of single-family homes increased 8.1% (5.4% y/y) to 783,000, the highest level since February. (…)

Building permits increased 6.3% (8.5% y/y) to 1.225 million, the highest level since November. Permits to build single-family homes improved 0.4% (4.4% y/y) to 739,000, while permits to build multi-family homes increased 16.8% (15.4% y/y) to 486,000.

Housing starts are a different story, however: “One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers.” (David Rosenberg)

The underperformance of US homebuilders’ shares has worsened. (The Daily Shot)

Apartment Markets Retreat in the October NMHC Quarterly Survey

Apartment markets softened across all four indexes in the October 2016 National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. The Market Tightness (28), Sales Volume (42), Equity Financing (33) and Debt Financing (38) Indexes all landed below the breakeven level of 50 – showing weaker conditions from the previous quarter.

“The growing supply of new apartments, primarily in the Class A space, appears to have finally reached a level to slow the historically high rent growth. Additionally, debt and equity markets are more discerning in terms of what deals they are ready to take on, including the continued slowing of available construction loans,” said Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist. “Despite the softening due to the new development focus on Class A apartments, the overall fundamentals for apartments remain stable, indicated by the strong demand for Class B and C properties.” (…)

The survey also asked about rent growth among different class buildings. Excluding the ten percent that marked “don’t know/ not applicable”, nearly nine of ten (84 percent) respondents reported rent growth for Class B and C apartments as much stronger (33 percent) or somewhat stronger (51 percent) rent growth compared to Class A units. Just five percent reported somewhat weaker rent growth among Class B and C apartments compared to Class A, and two percent thought that B and C apartments exhibited much weaker rent growth. The remaining nine percent reported that rent growth levels were about the same throughout all classes of apartments.

Bill McBride from CalculatedRisk:

As I’ve mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010. This is the fourth consecutive quarterly survey indicating looser conditions – it appears supply has caught up with demand – and I expect rent growth to slow (the vacancy rate is generally creeping up too).

Now in Chicago too, the Condo Market Cracks

Looking for housing inventory? (via The Daily Shot)

Philadelphia Fed Factory Business Outlook Survey Indicates Growth

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index remained positive in October. At 9.7, it was third consecutive positive reading, and followed an unrevised 12.8 in September. (…)

The ISM-Adjusted General Business Conditions Index, constructed by Haver Analytics increased to 49.8 this month, the highest level since March. The ISM-Adjusted headline index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each). This figure is comparable to the ISM Composite Index. During the last ten years, there has been a 71% correlation between the adjusted Philadelphia Fed Index and real GDP growth.

The new orders component jumped to its highest level since March, while shipments turned positive. Unfilled orders, delivery times and inventories improved as well.

The employment component increased to the highest level since May. During the last ten years, there has been an 81% correlation between the jobs index and the m/m change in manufacturing sector payrolls.

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Restaurant CEOs Blame Presidential Election for Hurting Sales

(…) “Overall, retail trends and the results of other businesses dependent on consumer discretionary spending confirm that during the quarter, many preferred to stay home versus going out.” (…)

U.S. WAGES EXPLODING?

The Atlanta Fed wage tracker jumped to +4.2% last month!

U.S. mall investors set to lose billions as retail gloom deepens

Daimler Sees Growth Stalling on North America Truck Market Woes

(…) Daimler, also the world’s largest maker of heavy-duty vehicles, is battling with declining demand in key truck markets. The company said pricing competition was on the rise in Europe and predicted that the market in North America would fall 15 percent this year. It said there is no turnaround in sight for Brazil’s commercial-vehicle sector. (…)

Earnings at Daimler’s truck division, which cut its profit forecast in May because of lower demand in the U.S. and the Middle East, tumbled 37 percent to 510 million euros. That pushed the adjusted return on sales to 6.5 percent, below its 8 percent target. Truck deliveries dropped 24 percent to 97,100 vehicles in the quarter, prompting Daimler to reduce output in markets like Brazil. (…)

Peers are also suffering. Volvo AB, the world’s second-largest truckmaker, reported a 4.7 percent drop in third-quarter earnings burdened by the downturn in the U.S., where Volvo owns the Mack brand, a rival to Daimler’s Freightliner. Volvo said it would make further adjustments to production in North America as inventories remain too high. (…)

Euro hits 7-month low against the dollar Stocks mixed after European Central Bank keeps quiet on quantitative easing outlook

From The Daily Shot:

The currency bloc’s equity markets did well as a result of the weaker euro. The chart below compares the Dax Index with the S&P 500 over the past three months.

GE Cuts Outlook as Sluggish Economy Crimps Industrial Demand

David Rosenberg Calls For A Multi-Trillion, “Helicopter Money” Stimulus Package

(…) One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers. Employment growth for the 65s and over is 7%, meanwhile, as the aging boomers have to work longer because they didn’t save enough for retirement.

“Helicopter money is QE plus where, say, the treasury issues a perpetual– call it, like, a century bond, a $2 trillion bond on the Fed’s balance sheet. And so when that bond matures, it’s, like, we’re all dead in the long run at that point. And then the Treasury can use that money to stimulate growth. ”

The beauty of this idea, according to Rosenberg is that you don’t have to go through Congress, with such difficulty in achieving corporate or personal tax reform. “It would lead to a permanent increase in the monetary base. Inflation expectations would go up, which means that real interest rates would go negative. And the theory is that that would provide a bigger thrust towards getting what we all want, which is sustainable and accelerating nominal income growth.“ (…)

“The problem is that when you have the economy running on average 1% growth, or 1% plus, which is not a big cushion. And so, you know, it’s a complicated question to try and handicap a recession on us right now. There’s a lot of people out there that are convinced that a recession is coming.”

To watch the full interview with David Rosenberg, visit Real Vision TV. You can access this and many more interviews with a free trial.

EARNINGS WATCH

107 companies (27.1% of the S&P 500’s market cap) have reported. Earnings are beating by 7.0% while revenues are surprising by 0.9%.
Expectations are for revenue, earnings, and EPS of 2.4%, -0.7%, and 1.3%, respectively.
EPS is on pace for +6.4%, assuming the current beat rate for the remainder of the season. This would be +10.1% excluding Energy.

Who Is Buying? Another $5 Billion Pulled From US Equity Funds, Outflows In 6 Of Past 7 Weeks

It may come as a surprise to some that as the S&P500 has remained in a tight trading range over the past month, investors continued to withdraw substantial amounts of cash. According to the latest EPFR weekly data, global equities saw another $3.9bn outflows (comprised of $6.2bn in mutual fund outflows vs $2.3bn ETF inflows), which brings the number of weekly outflows to 5 in the past 6 weeks. Of note here is that while Europe has now suffered a record record 37 straight weeks of outflows, the US has been comparably pressured, with outflows in 6 of the past 7 weeks.

On a global basis, a whoppping $146 billion has now been pulled across equity funds, with $79 billion in ETF inflows offsetting $225 billion in mutual fund outflows.

As money was leaving equities it entered bonds, which saw not only $2.7bn inflows in the latest week, but inflows in 15 of past 16 weeks. Precious metals, the “forgotten category” benefited from $0.5bn in inflows in the last week, making that 4 straight weeks of money being allocated to PMs. (…)

So we go back to our favorite question: with everyone pulling their cash, who is buying? Traditionally the normative answer would be buybacks, however we mostly entered buyback week two weeks ago, so the question certainly remains unanswered.

M&A PEAKS JUST BEFORE EQUITIES

M&A Is In Very Late Cycle Mode

Deutsche Bank Shares Back to Level Before DOJ $14 Billion Demand

Bloomberg’s Editorial Board: Trump Threatens Law, Order, Democracy

U.S. Leading Economic Indicators Decline

The Conference Board’s Composite Index of Leading Economic Indicators fell 0.2% during August (+1.1% y/y) following a 0.5% July gain, revised from 0.4%. It was the first decline in three months. Expectations had been for no change in the Action Economics Forecast Survey. The three-month change in the index held steady at 2.3% (AR), but was below its peak growth of 7.1% roughly one year ago.

Contributing negatively to the index last month were a shorter factory sector workweek, more initial claims for jobless insurance, a lower ISM new orders index, fewer nondefense capital goods orders and fewer building permits. These declines were offset by positive readings from a gain in stock prices, a steeper interest rate yield curve and the leading credit index.

Doug Short has the best charts on this:

(…) the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.

Smoothed LEI

Here is a twelve month smoothed out version, which further eliminates the whipsaws:

Chicago Fed National Activity Index Deteriorates

The National Activity Index from the Federal Reserve Bank of Chicago declined to -0.55 during August from 0.24 in July, revised from 0.27. It was the weakest reading in three months. The three-month moving average was little changed at -0.07. During the last ten years, there has been a 75% correlation between the Chicago Fed Index and the q/q change in real GDP.

Weaker readings in the component series were widespread. The Production & Income reading fell sharply to -0.33, its lowest level since March. The Employment, Unemployment & Hours figure declined to -0.09, the weakest level in three months. The Sales, Orders & Inventories figure eased to -0.05, in negative territory where it’s been for most of the past year. The Personal Consumption & Housing reading fell to -0.08, also the weakest figure in three months. The Fed reported that 19 of the component series made positive contributions to the total while 66 made negative contributions. (Chart from Haver Analytics)

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Existing-Home Sales Fall for Second Straight Month Americans reduced home buying for the second straight month in August, suggesting the housing market might be stumbling due to a run-up in prices, an inventory shortage and persistent doubts about the economy’s strength.

Sales of previously owned homes fell 0.9% from a month earlier to an annual rate of 5.33 million, the National Association of Realtors said Thursday. (…)

The median price of an existing home—the point at which half of all homes were priced above and half priced below—stood at $240,200 in August, up 5.1% from a year earlier.

Higher prices have been driven in part by dwindling inventory. The number of homes on the market has declined 10.1% over the past year. Regionally, sales rose in only the Northeast last month from July, while declining in the South, West and Midwest.

Curiously, even though real estate is more local than national, the YoY trend is similar across the country as this Haver Analytics table shows:

Many economists, including the NAR’s Lawrence Yun, say that the lack of available inventory is the main cause and that higher housing starts would help, housing starts data don’t go along that thesis. In effect, starts are up 24.8% YoY in the Northeast, 17.1% in the Midwest and 15.7% in the West. Only the South has seen a drop in starts this year.

Looking at longer term charts, I tend to think that the housing market is simply near its “normal” cyclical peak, considering that the 2003-07 peak was a bubble aberration.

And as much as realtors complain about the lack of inventory (same as listings for them), the reality is that we are simply back to normality after the “good old bubble days”. (Charts from CalculatedRisk)

What is below normal is housing starts which continue to suffer from demographics and financial considerations:

SENTIMENT WATCH

US stock funds suffer biggest redemptions since Brexit vote

Bespoke Investment shows that the bears are back:

aaii-bearish-sentiment092216