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LEADING ECON. INDIC.

NEW$ & VIEW$ (18 MARCH 2016)

Philly Fed Surges

Following on a string of recent stronger than expected data in the manufacturing sector, today’s release of the Philadelphia Fed Manufacturing survey showed a surge for March.  While economists were forecasting the headline index to come in at a level of -1.5, the actual reading came in at +12.4.  That was the first positive reading since August, the highest reading since last February, the largest monthly increase since November 2014, and the strongest report relative to expectations since November 2014.  Concerns about weakness in the manufacturing sector that were so persistent in the beginning of the year are becoming more and more scarce by the day.

Philly Fed Chart 031716

Philly Fed Table 031716While the surge in the headline reading for the Philly Fed report was impressive, the internals were even more so.  The table to the right lists the m/m change for each category.  You may recall that last month, every component of the report besides the top line headline reading declined.  This month, nearly the opposite happened.  As shown in the table, every component increased this month, and some by a lot.  New Orders, for example, surged 21 points which is the largest monthly increase since October 2005!  Shipments haven’t seen such a large monthly increase since March 2014, and the last time every component of the Philly Fed report increased on a month to month basis was back in August 2009. (Bespoke Investment)

Haver Analytics relates the various Fed district surveys to the ISM:

The ISM-adjusted General Business Conditions Index constructed by Haver Analytics increased to 51.7 from 44.7. It also was the highest level since April and 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.

Doug Short averages out the last 3 months:

Meanwhile, the LEI has been flat for nearly a year…

Conference Board Leading Economic Index: Slight Increase in February

The Conference Board LEI for the U.S. edged up in February, driven mostly by large positive contributions from initial claims for unemployment insurance (inverted) and the yield spread. In the six-month period ending February 2016, the leading economic index increased by just 0.3 percent (about a 0.7 percent annual rate), much slower than the growth of 2.0 percent (about a 4.0 percent annual rate) during the previous six months. Despite a more modest pace of growth, the strengths among the leading indicators have remained slightly more widespread than the weaknesses. [Full notes in PDF]

Conference Board's LEI
Smoothed LEI

Hmmm…

Global Currencies Soar, Defying Central Bankers Efforts by many of the world’s central banks to weaken their currencies are failing, raising concerns about whether policy makers are losing the ability to wield control over financial markets.

Despite the Bank of Japan’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies. (…)

Even some central banks with less actively traded currencies are having a hard time guiding markets. Norway’s central bank on Thursday cut its main interest rate to a record low of 0.5%, and a bank governor said he wouldn’t rule out negative rates, in which central banks charge big lenders to hold deposits. The Norwegian krone gained more than 1% against the dollar and was up against the euro. (…)

“Central banks are experimenting in real time,” he said. “There is no lab for them to practice in.” Hot smile

Fewer Americans Got Hired or Quit Their Jobs in January The number of people hired into a new job or quitting an old job both declined in January, a sign that despite the overall 4.9% unemployment rate, the labor market has yet to regain its full vitality.

Five million people were hired in January, down from 5.4 million in December. The number of people quitting declined to 2.8 million from 3.1 million. The number laid off was little changed at 1.6 million. (…)

The decline in quitting in January represents a shift toward a less healthy mix of job separations. Among those who left a job in January, a smaller share did so voluntarily. (…)

And in a development that’s perplexed observers of the labor market, the number of job openings available at the end of the month continued to climb. Job openings are near their all-time peak, but for whatever reason, the pace of hiring is not following suit. Large numbers of jobs sit unfilled.

Auto U.S. Subprime Auto ABS Delinquencies Hit Highest Level Since 1996 Delinquencies on U.S. subprime auto ABS have eclipsed 2009 recessionary levels and are now at a level not seen in nearly two decades.

Subprime delinquencies of 60 days or more hit 5.16% for February reporting, marking the highest level observed since October 1996 (5.96%). During the most recent recession, delinquencies peaked at 5.04% in January 2009. February’s delinquencies are increased 11.63% year-over-year (YoY) and 3.63% month-over-month (MoM).

Subprime annualized net losses (ANL) have followed the rise in delinquencies, reaching 9.74% as of February, an increase of 34.10% YoY and 11.59% MoM from January reporting. Despite the increase, ANL remains below the recessionary peak of 13.14% experienced in February of 2009.

Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year. Subprime ABS issuance averaged just over $20 billion in 2013 and 2014 before ballooning to over $25 billion in 2015, the highest level since 2005-2006. The number of lenders issuing ABS also increased to 19 in 2015 compared to the previous high of 14 in 2005 and 2006. Increased competition has led to increases in loan-to-value (LTV) ratios and extended term lending. Additionally, lenders have marginally weakened credit standards, with particular increases in originations to borrowers with no FICO scores. (…)

In contrast, performance within the prime sector remains stable, albeit slightly weaker. 60+ day delinquencies stood at 0.46% for February reporting, up 9.27% MoM but flat compared to the same period a year earlier. Prime ANL has increased slightly in 2016, reaching 0.69% for February, increased 32.17% YoY. While representing the highest level since February 2011 (0.90%), losses are still well below the historical average of 0.92% and the recessionary peak of 2.23% in January 2009. (…)

Fitch expects both prime and subprime auto loan ABS asset performance to improve over the spring months with the onset of tax refunds. That said, typical seasonal benefits are likely to be more muted this year versus recent years given rising pressures on the aforementioned asset performance as well as anticipated weakness in the wholesale market. Both the prime and subprime sectors have been buoyed by strong used vehicle values over the past five years, contributing to lower loss severity on defaults. However, with new vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates weakness in the wholesale market, as reflected by the Manheim Used Vehicle Value Index (Manheim), which recently dipped 1.4% in February. Any future declines in the Manheim, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher.

Despite further weakness anticipated, Fitch continues to have a stable outlook for prime and subprime auto ABS asset and ratings performance in 2016. ANL is expected to rise at or near the 1% and 10% area for prime and subprime, respectively, both well within peak recessionary levels.

Fitch’s indices track the performance of $99.5 billion of outstanding auto loan ABS transactions, of which 61.68% is prime and the remaining 38.32% is subprime ABS as of February 2016 reporting.

February 2016 Was Warmest Month Ever Measured Globally

Property prices soar in top China cities Price increases in top cities expand, smaller cities bottom out

(…) Prices of new residential buildings in Shenzhen rose 57 per cent from a year earlier, up from January’s increase of 52 per cent, data from the National Bureau of Statistics showed on Friday. Meanwhile, the northern city of Dandong in rust-belt Liaoning province saw prices drop 3.9 per cent.

Nationally, prices rose at an average annual 2.8 per cent, the biggest one-month rise since June 2014, according to FT calculations based on government data. There are signs that price gains are also feeding through to increased construction activity. Growth in property investment accelerated in the first two months of 2016, breaking a two-year run of slowing growth.

Governments in Beijing and Shanghai are now concerned about housing-market overheating and undersupply, while other cities still face an overhang of unsold houses built in expectations of gravity-defying property inflation. (…)

Overall, 32 of 70 cities in the government’s official price survey posted annual price gains in February, up from 25 cities in January. Analysts expect local governments in major cities to adopt measures to tamp demand, while a slow-motion recovery in smaller cities will continue. (…)

Highlighting the contrasting fortunes of China’s two-tier property market, the central bank last month cut the minimum downpayment requirement on mortgages outside of top cities from 25 to 20 per cent, in a bid to boost demand. (…)

Strategists Now See Virtually No Europe Stock Gains in 2016

Hit by one of the weakest earnings seasons in at least nine years, combined with waning faith in central banks, the Euro Stoxx 50 Index is expected to advance 1 percent for all of 2016. Only a few months ago, those same strategists were calling a 12 percent rally. The most dramatic about-face: Societe Generale SA, which cut its estimate from a 22 percent surge to a 0.5 percent decline. (…)

Two-thirds of the Euro Stoxx 50 members are still trading below their Dec. 31 level. (…)

At least 10 of 12 strategists surveyed by Bloomberg have lowered their 2016 forecast since December, cutting the average year-end projection for the Euro Stoxx 50 to 3,301 from 3,646. Back then, the most pessimistic call, that of Bankhaus Lampe KG, forecast a 6.2 percent gain. (…)

Analysts expect profits for Euro Stoxx 50 members to grow by only 1.5 percent this year, down from 5.1 percent in December. (…)

Money Hedge fund closures back to crisis highs Clients became risk averse in 2015 as big names suffered losses

(…) Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter. (…)

The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. (…)

So far, this year does not appear to be any kinder for the industry.

Between market losses and redemptions, assets in hedge funds fell by $64.7bn in January, bringing total money in the industry below $3tn for the first time since crossing that threshold in May 2014, according to data provider eVestment. Redemptions in January were the worst since January 2009.

In February — normally a big month for inflows — about $3bn of new money trickled in, compared with $18.6bn last year, eVestment data show. Investment losses dragged down total assets by almost another $20bn to $2.95tn. (…)

Herd mentality hurts hedge funds Markets are being whipsawed by the Fed, but it’s not working out for most hedgies

(…) Avoiding the crowd is difficult: iconoclasts miss the momentum on the way up and look bad by comparison, or they get caught in a short squeeze. But even those who play it safe may find the snapback painful when the mood turns. Last year, according to Novus research, returns dropped for hedge funds in “crowded” trades. That may be because the number of hedge funds hit a record last year — there are too many funds chasing too few ideas. Adding to the crowd are retail investment products, such as AlphaClone and Guru, that scrape hedge fund filings, mimic their investments, and now share their losses.

Trading in widely-held or widely-shorted names such as Facebook, Apple, and Netflix is already at the mercy of the view of hundreds of hedgies. Breaking away from them may lead to greener pastures.

NEW$ & VIEW$ (9 MARCH 2016): The Big Margin Squeeze Here?

SMALL BUSINESS “OPTIMISM” CHARTED

These are the big job creators and they are not in good shape nor in good mood.

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Surprised smile THE BIG SQUEEZE!

This is the biggest margin squeeze in 30 years:image

Something’s got to happen soon: either prices go up or employment comes down.

Deflation Is Coming To The Auto Industry As Used Car Prices Drop, Off-Lease Deluge Looms

Last week, we learned that vehicle leasing as a percentage of monthly light-vehicle sales hit a record in February at 32.3%.

In other words, a third of the over 1 million cars and light trucks “sold” during the month were leases, according to J.D. Power. (…)

Of course the thing about leased vehicles is that they come back, and as WSJ wrote last week, “about 3.1 million vehicles will return to dealer lots off leases this year, up 20% from 2015 [and] the number will climb to 3.6 million in 2017 and 4 million in 2018.”

So what does that mean for dealers? Deflation. 

And what does that mean for the automakers? Hefty losses.

Nothing about this is hard to understand. You get a supply glut causing pricing assumptions for your existing inventory to prove wildly optimistic and you end up with giant writedowns.

This has happened before. “The auto industry expanded the use of leasing in the mid-1990s, helping to fuel retail sales of new vehicles,” WSJ recounts. “Eventually, a glut of off-lease cars sent resale values down and auto lenders who had bet residuals would remain high ended up racking up billions of dollars in losses, having to sell the cars for much less than they anticipated.” (…)

The Manheim Used Vehicle Value Index posted its largest Y/Y decline in over two years last month, falling -1.4% and -1.5% M/M. We’re now 3.5% below the peak. (…)

And of course falling used car prices means pressure on new car prices as well, which would be a shock to America’s booming auto market. (…)

Bonus chart: largest used car price decline for any February since 2008

 

Foreign Buyers Are Pulling Back, Realtors Say Demand from foreign buyers is weakening, the National Association of Realtors said Monday, undermined by a strong U.S. dollar and rising home prices.

(…) In fact, there is growing evidence that many foreign buyers have been pulling back, in part because prices in many of the cities they favor, such as New York and San Francisco, have risen sharply. The affordability of those properties is weakened further by a stronger U.S. dollar.

In January, the median price of existing U.S. homes had increased 67% for a buyer from Brazil, factoring in the exchange rate, compared with a year earlier, according to NAR. For a buyer from Canada, it increased 27% and for a Chinese buyer, 14%. (…)

Foreign buyers remain a small sliver of the U.S. housing market. But any pullback could have a disproportionate effect on demand for high-end condos in places like Miami and Manhattan and luxury homes in Southern California. (…)

Fed Likely to Stand Pat on Rates, Keep Options Open for April or June Amid uncertainties about inflation and global growth, Federal Reserve officials are likely to hold short-term interest rates steady at their policy meeting next week but keep open options to move in April or June.
The IMF Is Sounding the Alarm. Is Anyone Listening? Few major economies seem to be hearing the International Monetary Fund urging action.

“The IMF’s latest reading of the global economy shows once again a weakening baseline,” the fund’s No. 2 official, David Lipton, warned Tuesday in a speech to the National Association for Business Economics.

While the world economy is still expanding, he said, “we are clearly at a delicate juncture, where risk of economic derailment has grown.” (…)

IMF Managing Director Christine Lagarde said a coordinated effort was needed, urging governments with room in their budgets to ramp up spending and all countries to accelerate delivery of long-promised economic overhauls.

Unlike the G-20’s massive joint-stimulus effort in 2009 to combat the financial meltdown wreaking havoc across the globe, IMF members are at odds about the severity of the problem and how to fix it.

“We are strictly against announcing publicly that the G-20 is preparing a stimulus program,” German officials privately told other countries as the group drafted its joint communiqué.

The IMF fears such an attitude risks jeopardizing the global economic expansion. (…)

RECESSION WATCH

The outlook points to easing growth in the United Kingdom, the United States, Canada and Japan. Similar signs are also emerging in Germany. Stable growth momentum is anticipated in Italy and in the Euro area as a whole. In France, and India, CLIs point to stabilising growth momentum. The outlook for China remains unchanged from last month’s assessment, pointing to tentative signs of stabilisation, while in Russia and Brazil the CLIs point to a loss in growth momentum.

imageimage

Forward-looking indicators for the global economy fell sharply for the month of February. The JPMorgan Global Manufacturing PMI (in blue) is now resting at 50, which is the key threshold separating expansion from contraction. At the end of last year, the services measure (in red), which increasingly comprises a larger share of global GDP, was sitting comfortably above contractionary territory near 53 and was as high as 55 toward the first half of last year. It has now fallen steeply to 50.7 and shows the global economy is on a much weaker footing compared to last year (all charts below courtesy of Bloomberg).

jp morgan manufacturing services pmi

In the next chart we take a look at the recent bounce in commodities and oil. As you can see, it’s all about the dollar. Here we’ve plotted the trade-weighted broad dollar index (inverted, in green) next to oil (in black) and commodities (in red). The correlation between the three is quite striking. If you are betting on oil and commodities to move higher, then you are betting on the dollar to weaken from here.

dollar commodities oil

Do credit card delinquency rates help predict the onset of recession? See for yourself. Here are three measures we are watching that have a fairly high correlation over time, which also help to signal economic downturns. Credit card delinquency rates appear to be forming a bottom similar to 2005-2006, but the most troubling are delinquency rates on commercial and industrial loans (in blue), which are now clearly trending higher. In terms of the last economic cycle, this appears more similar to where we were in 2007.

delinquency rates

Financial conditions in the US turned decidedly positive in the third quarter of 2012 and remained so until turning decidedly negative in the third quarter of 2015. The recent market rally off the February lows was unable to lift financial conditions back into favorable territory.

us financial conditions

An area that strategists are closely watching for signs of improving or worsening financial conditions is the high yield market. High yield corporate bonds for each of the 10 major sectors have traded flat to negative since last year, with energy seeing the greatest damage. All 10 sectors of the high yield market are now rallying from their lows. Can this be sustained? Time will tell.

high yield

Here’s another look at corporate spreads, both high yield and investment grade, compared to the S&P 500. Credit spreads were narrowing from 2012 until around 2014-2015 when they started to widen and signal greater pressure on the market. Echoing the chart above, they’ve since backed off their highs though it’s unclear whether this is a change in trend or simply a pause before heading higher.

high yield investment grade

On a more positive note, initial jobless claims are not yet raising a recessionary red flag for the US. This agrees with the overall message coming from broad US leading economic indicators like the Conference Board’s LEI (see here). We continue to watch the LEIs closely for signs of further deterioration or, conversely, a turnaround, however unlikely that may seem.

initial jobless claims

Citigroup warns of fall in revenues Forecast sets scene for lacklustre results in banking sector

John Gerspach, chief financial officer, forecast that revenues at Citi’s investment banking operation would drop about a quarter in the first three months of the year compared with 2015.

Fixed income and equities trading revenues would be down about 15 per cent, he added.

His forecasts come a month before bank results season gets under way. Shares in Citi, the fourth-largest US bank by assets, fell 3.7 per cent to $41.04 on Tuesday. Losses for the year so far stand at 21 per cent. (…)

Seasonal factors — investors tend to place more orders in January as they set their annual investment strategies — traditionally makes the first quarter a strong period for securities businesses. (…)

Investment banking — which includes debt and equity underwriting — had a “tough first quarter”, the Citi finance chief said. Mergers and acquisitions had a “tough comparison” with the same period a year ago.

“There’s probably some hope that we would recapture some of that in the last three quarters,” he said. “But it’s been a tough first quarter.”

Last month Edward Pick, Morgan Stanley’s head of trading, said the year “started out OK” but “it’s been a lot choppier since then”.

Daniel Pinto, head of JPMorgan’s corporate and investment bank, forecast first-quarter investment banking revenues would be down by about 25 per cent from last year. Trading would be down about a fifth, he said.

The latest downbeat forecast will raise concerns about further job cuts and pay levels at investment banks. (…)

What Doesn’t Kill Bull Market in S&P 500 May Make It Stronger

“How low can stocks go,” the Wall Street Journal wondered on March 9, 2009, as the financial crisis was wiping away trillions of dollars from American equities, the deepest rout since the Great Depression.

That day, of course, marked the bottom. The bull market that celebrates its seventh anniversary today has restored $14 trillion to stock values, pushing up the Standard & Poor’s 500 Index by almost 200 percent. (…)

Now, investors are awash in angst, showing little faith the run can continue. They worry about contracting corporate earnings, slowing Chinese growth and uncertainty over interest rates. And they’re walking the talk by pulling cash from stocks at almost the fastest rate on record. (…)

Investors took out almost $140 billion from equity mutual and exchange-traded funds in the last 12 months, more than double the peak outflows experienced over any comparable periods during the global financial crisis. 

Yet when people withdraw money, stocks inversely tend to rise later, according to data since 1984. In the 12 instances when funds experienced monthly outflows that were at least 2 standard deviations from the historic mean, the S&P 500 rose an average 7.1 percent six months later, compared with a normal return of 3.9 percent, data compiled by Bloomberg and Investment Company Institute show. (…)

What happens next? Wall Street strategists see the bull market lasting at least through December, with the S&P 500 rising to 2,158, or an 9 percent increase from yesterday’s close, according to the average of 21 estimates compiled by Bloomberg. If the run lasts until the end of April, this bull will become the second oldest on record. Coincidentally or not, the last two ended near the eighth year of an election cycle. (…)

Nerd smile May I humbly submit this post I wrote on March 2, 2009, S&P 500 Valuation Analysis: Near Bottom to be followed on March 3, 2009 with S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years, precisely to answer that question: “How low can stocks go”. To conclude that

  • Trough valuation analysis shows trough S&P 500 Index levels at 720 using 2009 estimates, with a low probability downside risk to between 516 and 602.
  • Valuation using the Rule of 20 method gives “trough” valuation of 791-923 for the S&P Index using current trailing earnings.
  • Using 2009 operating earnings estimates, “trough” valuation would be 720-840.
  • The worst case scenario, using the $43 estimate would bring trough valuation of 516-602.

The actual low was 666 on March 6, 2009.

(Note on the links: these posts under the old New$-to-Use site are more difficult to access and most if not all the charts have vanished into the blosgosphere Crying face.)

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