U.S. Jobless Claims Fall To Lowest Level Since 1973 The number of U.S. workers filing applications for jobless benefits last week fell to the lowest level in four decades, another sign of a strengthening labor market.
Initial jobless claims, an indication of layoffs, decreased by 26,000 to a seasonally adjusted 255,000 in the week ended July 18, the Labor Department said Thursday.
While claims figures have been trending down for most of the year, the latest drop likely reflects some seasonal volatility. Two weeks earlier claims touched their highest level since April. Data can be particularly bumpy in July, when automakers shut down factories temporarily for retooling.
Mommy, is this a cyclical bottom?
Not convinced that there is a labor shortage? (Charts from Doug Short)
Chicago Fed: Economic Growth Picked Up Slightly in June
Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) moved up to +0.08 in June from –0.08 in May. Three of the four broad categories of indicators that make up the index increased from May, and two of the four categories made positive contributions to the index in June.
The index’s three-month moving average, CFNAI-MA3, edged up to –0.01 in June from –0.07 in May. June’s CFNAI-MA3 suggests that growth in national economic activity was very close to its historical trend. The economic growth reflected in this level of the CFNAI-MA3 sug- gests limited inflationary pressure from economic activity over the coming year.
The CFNAI Diffusion Index, which is also a three-month moving average, moved up to +0.07 in June from –0.01 in May. Forty-eight of the 85 individual indicators made positive contributions to the CFNAI in June, while 37 made negative contributions. Forty-four indicators improved from May to June, while 40 indicators deteriorated and one was unchanged. Of the indica- tors that improved, 13 made negative contributions.
When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.
Conference Board Leading Economic Index Increased Again in June
The Conference Board LEI for the U.S. increased again in June, with the yield spread and building permits continuing to make large positive contributions to the index. In the six-month period ending June 2015, the leading economic index increased 2.1 percent (about a 4.3 percent annual rate), slower than its growth of 3.2 percent (about a 6.6 percent annual rate) over the previous six months. However, the strengths among the leading indicators remain more widespread than the weaknesses. [Full notes in PDF]
Existing-Home Prices Hit Record: $236,400
Prices of existing homes sold in the U.S. vaulted to a record high in June, topping the mark set in 2006, as sales increased at their strongest pace in more than eight years.
The median sale price for a previously owned home jumped 6.5% in June from the same month a year earlier to $236,400, the National Association of Realtors said Wednesday. That eclipsed the previous high of $230,400 recorded in July 2006.
The pace of existing-home sales, meanwhile, increased 3.2% last month from May to a seasonally adjusted rate of 5.49 million, the strongest since February 2007. (…)
Total housing inventory at the end of June increased 0.9% to 2.3 million existing homes available for sale. (…)
The June bounce came after a strong spring season. Sales were up sharply in May, driven in part by a return of first-time home buyers, which increased to 32% of all buyers from 27% the same period last year. In June first-time home buyers declined to 30% of overall buyers.
FYI: Hamptons Home Prices Fall as More Sellers List Properties
South Korea growth falls to 2-year low
The Bank of Korea said on Thursday that gross domestic product grew 2.2 per cent from a year before — the lowest figure since the first quarter of 2013.
The economy was disrupted during the period by sudden fears over Middle East Respiratory Syndrome (Mers), which has claimed 36 lives since the first case in South Korea was reported in May.
The disease’s spread through the nation’s hospitals appears to have been halted — no new cases have been reported for 13 days. But public alarm at the outbreak helped pull down private consumption by 0.3 per cent from the previous quarter, while tourist numbers last month fell 41 per cent year on year. (…)
Government data for the year to June 20 showed declining exports to key markets including Europe, Southeast Asia and Japan. Exports to China — by far South Korea’s biggest foreign market — fell 2.5 per cent.
Automotive exporters have been among the worst hit, while steel exporters have been hurt by weak demand from China. Low oil prices have pulled down the value of petrochemical exports, further weakening the export figure.
Indonesia boosts import taxes
Indonesia has boosted import duties on a range of consumer goods, in an effort to support local industry as economic growth slows in Southeast Asia’s largest economy.
The levy on imported meat was on Thursday raised from 5 to 30 per cent, the duty on coffee rose 5 to 20 per cent, while the tax on imported alcohol — including whisky and vodka — goes from a flat Rp125,000 ($9.32) per litre to 150 per cent.
The rule changes come amid a backdrop of slowing growth and spiralling inflation in Indonesia, which has weighed heavily on private consumption and dented the bottom lines of local businesses.
“This is naked protectionism,” said Gareth Leather, an economist at Capital Economics. “They want to try to help domestic producers . . . but it goes against everything you see in textbooks about opening up the economy to competition so domestic producers thrive.” (…)
The Indonesian economy grew less than 5 per cent year on year in the first quarter — the slowest pace since 2009 — while annual inflation has ticked up to more than 7 per cent. (…)
Eurozone borrowing rises to record level
(…) Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU’s statistical agency.
Greece remains the EU’s most indebted nation, with debt equal to 169 per cent of annual GDP, but Italy, Belgium, Cyprus and Portugal also carry government debt that exceeds 100 per cent of economic output. (…)
Sovereign debt has risen across the rich world since the financial crisis and there are few signs of decline, even as recovery picks up. The British economy grew 3 per cent last year but government debt as a proportion of GDP continued to climb, from 87.3 per cent to 89.4 per cent, because of a high budget deficit, which stood at 5.7 per cent.
China Wind Chills U.S. Earnings China’s slowdown is showing up in U.S. companies’ earnings, and the worst may be yet to come.
For the many companies that have built out their Chinese operations over the past several years, things are tough enough already. On Wednesday, Whirlpool reported that demand in the country was down 3%, while Illinois Tool Works said revenue fell by 2%.
On Tuesday, United Technologies said that orders for its Otis elevators were down 10% in China from a year earlier, and saw a sharp drop in heating, ventilation and air conditioning orders, too. And on Monday, International Business Machines reported that revenue in China was down by 25%.
Trade activity underscores the depth of the slowdown. According to the Commerce Department, the value of U.S. exports to China was 6.1% lower this year through May than the first five months of last year. That weakness appears to have extended into June, with the ports of Long Beach and Los Angeles reporting a 9.7% drop in loaded outgoing containers versus a year earlier.
Microsoft on Tuesday said that macroeconomic conditions in China were challenging, while software maker VMware said that for the first time it had seen a significant slowdown in its China business. (…)
A weaker Chinese economy is helping depress prices for commodities like crude oil and copper, hurting producers. A step up the supply chain, many companies are dealing with a glut of China-made goods that China can no longer absorb.
Discussing steel and specialty-metal maker Allegheny Technologies’ second-quarter loss Tuesday, Chief Executive Rich Harshman said that a “surge of low-price imports of standard stainless products from China created significant pressure on base selling prices.”
Such pressure looks to be extending to many other industries. Last week, the Labor Department reported that the overall price of imports to the U.S. from China was down 1.2% from a year earlier.
I have been writing about the impact that the strong dollar and weak foreign prices are having on U.S. inflation on core goods, down 0.4% YoY in June. This helps explain the low sales growth rates at many U.S. retailers. When inflation on your sales is slower than inflation on your costs (e.g. wages), margins get squeezed unless management can grow volume and/or rapidly cut SG&A.
A panel formed at New York Governor Andrew Cuomo’s behest recommended that the minimum wage for fast-food workers be raised to $15 an hour by 2018 in New York City and three years later in the rest of the state. (…)
Cities including Seattle, San Francisco and Los Angeles have raised their minimum wages recently as part of a nationwide movement that’s responding to a call from President Barack Obama to take local action amid gridlock in Washington. On Tuesday, the Los Angeles County Board of Supervisors voted to raise the minimum to $15 an hour by 2020.
World: Trade data not encouraging
The world economy just had its worst two-quarter sequence since the global financial crisis. That’s according to latest CPB data which not only showed a significant drop in trade volumes in May, but also a sharp downward revision to the prior month. It will now take a miraculous recovery in June, highly unlikely in our view, to prevent the first back-to-back quarterly contraction of trade volumes since 2009 (Chart, left).
Industrial output was soft again in the second quarter, but wasn’t as bad as trade. So much so that the ratio of output to trade, a proxy for global inventories, surged to a five-year high, not an encouraging development for growth in the second half of 2015 (Chart, right). All told, while a rebound in growth is expected after a tepid first half, we’re not expecting a stellar H2. World GDP growth should be no better than 3.3% this year, the worst performance since 2009. Commodity woes are far from over.
From the Cat’s mouth:
(…) second quarter sales dropped by, drumroll, 14% – the worst tumble in two years, driven almost entirely (but nott exclusively) by China and Latin America. Although every other part of the world was pretty bad too.
But as always the best insight comes from CAT’s commentary of what is going on around the globe. Some excerpts from what is essentially a China bash fest:
- The economic and industry conditions that were expected at the beginning of the year are occurring. World economic growth is about as the company expected: severe weakness in mining continues, construction-related sales in China and Brazil are lower and new orders for oil-related applications declined.
- “While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant. Many of the key industries we serve remain weak, and we haven’t seen sustained signs of improvement. Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven’t helped confidence.
- Prices for commodities like coal, iron ore and oil are not signaling an improvement in the short term.
But it wasn’t just China and Latin America – Europe and the US were crushed too. In fact, here is CAT explaining why it is nothing short of a global recession:
- In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan. In China, the lower sales resulted primarily from continued weak residential construction activity. In Japan, the weaker yen contributed to the decline as sales in yen translated into fewer U.S. dollars.
- Decreases in Latin America were primarily due to continued weak construction activity and the absence of a large government order in Brazil that occurred during the second quarter of 2014.
- Sales declined in EAME primarily due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars. In addition, the impact of changes in dealer inventories was unfavorable as dealers increased inventories more significantly in second quarter of 2014 than in the second quarter of 2015.
- Sales declined slightly in North America as weakness in oil and gas-related construction was largely offset by stronger activity in residential and nonresidential building construction.
Or as we showed yesterday:
In short: at least when it comes to heave industrial equipment, and a need for mines and/or construction, the world is now in an all out recession if not depression. As expected, CAT’s Outlook confirms it:
- Overall, our view of world economic growth in 2015 is about the same as we expected in the outlook provided with our 2014 year-end financial release in January of 2015. We now expect world GDP growth in 2015 of about 2.5 percent, about the same as 2014. We expect growth in developed countries to improve slightly and economies in developing countries to grow at a rate moderately below their growth rate in 2014.
- There are still significant risks and uncertainties that could temper growth. Political conflicts and social unrest continue to disrupt economic activity in several regions; in particular, the Commonwealth of Independent States, Africa and the Middle East. The unresolved economic uncertainty in Greece is also a cause for concern. The Chinese government’s push for structural reforms is slowing growth, and the ongoing uncertainty around the direction and timing of U.S. fiscal and monetary policy actions may temper business confidence.
- The outlook for sales and revenues has been lowered from about $50 billion to about $49 billion for 2015, down from $55.2 billion in 2014. The primary reason for the decrease from our initial outlook provided in January is due to the currency translation impact of a stronger U.S. dollar on our sales outside the United States.
- While the outlook for sales and revenues is down slightly, our expectation for profit has not changed. We continue to expect that 2015 profit per share will be $4.70, or $5.00 per share excluding restructuring costs. The expectation for 2015 restructuring costs remains at about $250 million. Profit per share in 2014 was $5.88, or $6.38 excluding restructuring costs. (…)
EARNINGS WATCH
- 118 companies (38.2% of the S&P 500’s market cap) have reported. Earnings are beating by 5.3% while revenues have positively surprised by 0.5%.
- The beat rate is 74% (69% last Tuesday) (77% ex-Financials (72%))
- Expectations are for a decline in revenue, earnings, and EPS of -3.7%, -2.1% (-2.3%) , and -0.6% (-0.9%). EPS growth is on pace for 2.7%, assuming the current 5.3% beat rate for the remainder of the season. This would be 7.4% (7,3%) on a trend basis (ex-Energy and the big-5 banks).
Oil Warning: The Crash Could Be Worst in More Than 45 Years
(…) Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.
1. Demand will rise: Check
In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.
In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.
2. Spending on new oil will fall: Check
In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.
In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.
3. Stock prices remain low: Check
In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.
In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.
4. Oil supply will drop: Uh-oh
In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.
In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.
OPEC Production Surges in 2015
Source: Morgan Stanley Research, Bloomberg
For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.
But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”
“In that case,” they wrote, “there would be little in analysable history that could be a guide” for what’s to come.
Briefly stated, they don’t know.
Record Period of Indecisiveness
Individual investors are not alone on the fence. Evercore ISI hedge fund survey remains below the MIDDLE of its historical range. Investors have pulled $77B out of equity funds YtD and put $74B into bond funds.
SENTIMENT WATCH
Giant Fund Flips View on China: Steer Clear The world’s biggest hedge fund has turned on the world’s fastest-growing economy. Bridgewater Associates says China’s recent stock-market rout will likely have broad, far-reaching repercussions.
(…) “Our views about China have changed,” Bridgewater’s billionaire founder, Raymond Dalio, wrote with colleagues in a note sent to clients earlier this week. “There are now no safe places to invest.”
Bridgewater, which has $169 billion under management, is renowned for its ability to navigate global economic trends—including the profit it turned in 2008, when most of its peers lost big. (…)
The change by Bridgewater is a particularly sharp reversal. Mr. Dalio has gone out of his way in the past to praise Chinese President Xi Jinping and has compared the country’s economic environment to a patient undergoing a heart transplant by a skilled surgeon.
In a note to clients in June, Mr. Dalio said China’s problems “represent opportunities” because they give policy makers a chance to make positive reforms. As recently as earlier this month, Mr. Dalio wrote that the stock-market move was “not significantly reflective of, or influential on, the Chinese economy, Chinese investors, or foreign investors,” with the market still largely driven by a small pool of speculative investors in China.
But this week, Mr. Dalio said he was particularly alarmed about the psychological damage of the stock-market decline. While prices remain above their levels from two years ago, many ordinary investors are sitting on losses because they piled in more recently, he said.
“Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity,” Mr. Dalio wrote.
Kingdon Capital Management LLC, a nearly $3 billion New York hedge-fund firm, told clients this week it had sold all its shares in Chinese companies listed on the Hong Kong exchange. It said it was spooked by the fallout from a surge in China in the use of borrowed money to purchase stocks, particularly after authorities cracked down on the practice, helping drag down Kingdon’s investments.
The firm said it would wait until the level of such borrowing in the market drops further before going in anew. (…)
“It looks worse to me than 2007 in the United States,” Mr. Ackman said during an investment conference in New York, pointing to the unreliability of the government’s economic statistics. “Much worse.” (…)
Overseas investors have pulled cash out of Chinese stocks via a trading link between Hong Kong and Shanghai for 12 of the past 13 trading days, according to Hong Kong stock-exchange data. (…)
Eashwar Krishnan, who runs the $3 billion Hong Kong-based Tybourne Capital Management (HK) Ltd., said in a note to investors earlier this month that he has been heartened by regulators’ efforts to clean up the market
Just a reminder from Bernstein for the diamonds seeker within you:
However, exclude financials and the Shanghai Composite is trading at 26x forward earnings. Because of the over-representation of low growth and low ROIC sectors within the Shanghai Composite (banking, industrials), it arguably should trade at a significant discount to other global indices. The “growth” parts of the Shanghai Composite are still trading at much higher multiples. If the Shanghai Composite industry weightings were identical to those of the S&P 500, Shanghai would be trading at 27x, even today. In addition, foreign investors are going to take their time in re-engaging given the volatility of the market and the unpredictability of the regulator. We would avoid the Shanghai market for now.
And regarding China’s economic growth:
(…) we got a 7 per cent print for Q2 GDP growth in China last week. Here’s the breakdown from CreditSights — do note the weakness generally vs the contribution from the financial sector. As CreditSights say “The finance sector’s contribution grew by over 20% in 1H15 this is no thanks to the banks and more likely due to profit growth at securities firms and possibly asset management companies. In contrast, the industrial sector, which contributes over a third to GDP, is growing at under 2% YoY.”
Of course, it’s real (ish) activity but it most probably isn’t going to be repeated at that level and without it GDP would have been down closer to 6 per cent, according to UBS.
