Improvement in the labor market may have picked up steam this month. Initial unemployment insurance claims fell unexpectedly to 284,000 during the week ended July 19 from a revised 303,000 in the prior week, earlier reported as 302,000. The four-week moving average of initial claims fell to 302,000, the lowest level since May 2007. During the last ten years there has been a 76% correlation between the level of claims and the m/m change in payroll employment.
Demand for durable goods—products like airplanes, cars, heavy machinery and appliances that are designed to last at least three years—rose a seasonally adjusted 0.7% from May, the Commerce Department said Friday. Orders have increased in four of the past five months; they fell 1% in May.
Excluding transportation, an often volatile category influenced by orders of civilian aircraft, durable-goods orders rose 0.8% in June. Excluding defense, orders increased 0.7%.
A closely watched measure of business investment—orders for nondefense capital goods, excluding aircraft—rose 1.4% in June after a 1.2% decline in May that was previously reported as a 0.7% gain. Shipments of those goods fell 1% in June following declines in May and April. (…)
In all, Non-def cap.goods ex-aircraft are down 0.9% in the last 3 months but up 3.8% in the last 4 given March’s +4.7% print. Capex remains erratic, at best. If only Congress could grow up and make taxation clearer for businesses… (Chart below from Haver Analyics)
Some Home Builders Say First-Time Buyers Returning, Others Not Sure The anticipated return of first-time buyers to the housing market remains, like many economic indicators, prone to fits and starts. This week, two more leading home builders differed on whether first-timers are on their way back.
(…) “To be clear, the entry level does appear to be improving in other markets as well,” Pulte Chairman and Chief Executive Richard Dugas Jr. said on the Thursday call.
Meanwhile, rival builder D.R. Horton, the largest U.S. builder by closings, provided mixed signals on first-time buyers. On one hand, the percentage of the mortgages originated by D.R. Horton going to first-timers remains low. In the quarter ended June 30, it was 41%, according to data the builder released Friday. That’s down from 42% in the year’s first quarter and down from 54% two years earlier.
Yet, on the other hand, that ratio is likely to take a sharp turn upward in the coming months. D.R. Horton is putting substantial muscle behind the rollout of its entry-level Express brand, which started late last year. Express homes are priced at an average of $156,000. During the builder’s earnings call on Thursday, executives noted that Express already accounts for 7% of D.R. Horton’s sales contracts.
The slightly conflicting signals are reminiscent of the last week of June, when builder KB Home said it had seen signs of a nascent revival among first-time buyers, but Lennar Corp. said it hadn’t yet. (…)
In yet another contradictory figure, Commerce Department data released Thursday show entry-level segments of the new-home market accounting for an increasingly smaller portion of overall sales. For example, new homes priced at $150,000 to $200,000 accounted for 17% of new-home sales in the U.S. in June, down from 20% a year earlier and 22% two years earlier.
Many first-time and entry-level buyers have been sidelined for the past two years for a variety of reasons, including stringent mortgage-qualification standards, mounting student debt and tepid wage growth. The National Association of Home Builders estimates that first-timers will account for 16% of new-home sales this year, down from a range of 25% to 28% between 2001 and 2007.
Well, at least some builders are seeing light at the end of the tunnel. This is new.
New-Home Slowdown Pressures Recovery Demand for new homes slowed sharply during the first half, a development that threatens to reverberate beyond the housing market and throughout the broader economy.
Sales of new single-family homes fell 4.9% through the first six months of the year compared with the same period of 2013, according to Commerce Department data released Thursday. June sales fell 8.1% from the prior month, and the May number was revised down from the best figure in six years to not even the best figure in six months. (…)
Home construction was a major employment and growth engine before the recession—historically accounting for 5% of the U.S. economy, according to the National Association of Home Builders. That figure has fallen to about 3% in recent years. (…)
The National Association of Home Builders calculates that, for every single family home constructed, three full-time jobs are created for a year. Half of those jobs are in construction and the other half in related industries such as manufacturing of construction goods.
Jobs in residential building have increased 2.6% so far this year, outpacing a 1% gain in overall employment. But with signs that building is slowing, the pace of hiring could be difficult to maintain. (…)
The automakers will report July vehicle sales next Friday, August 1st. Sales in June were at 16.92 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in July will be above 16 million SAAR again. The analyst consensus is for July sales of 16.8 million SAAR.
Note: There were 26 selling days in July this year compared to 25 last year.
From HotelNewsNow.com: STR: US hotel results for week ending 19 July
In year-over-year measurements, the industry’s occupancy rate rose 2.9 percent to 77.1 percent. Average daily rate increased 4.1 percent to finish the week at US$117.57. Revenue per available room for the week was up 7.1 percent to finish at US$90.68.
(…) While Fed policy makers are unanimous on the bond-buying program, they are increasingly divided on when they expect to start raising short-term interest rates from near zero, where they have been since late 2008. (…)
A communication issue also looms in the months ahead. The Fed’s guidance about interest rates has been linked to the path of the bond program. The Fed has said since March it will keep rates near zero for a “considerable time” after the bond program ends. With the program likely to end in October, the guidance therefore will need to be somehow revised later this year to frame how much longer rates will stay near zero.
MEANWHILE, IN EUROPE
Weighing on the Eurozone is that bank loans continue to fall in the region. They declined by €243 billion at an annual rate over the three-month period through June. While the ECB has been providing easy monetary policy, bank regulators (including the ones at the ECB) continue to subject the banks to stress tests that discourage risky lending.
Even Germany, the Eurozone’s strongest economy, is showing the negative effects of tough lending standards, particularly on its large trading partners in the region. The strong euro is another headwind. The uncertainty caused by the Ukrainian crisis, with the potential for shortages and higher prices of natural gas this coming winter, is also weighing on the Eurozone. No wonder that Germany’s Ifo business confidence index fell from a recent peak of 111.3 during February to 108.0 in July. Both its present and expectations components fell sharply this month. (Ed Yardeni)
BREAKS FOR THE 99%:
Corn Advances in Chicago on Outlook for Increased Demand Corn and soybeans rose in Chicago as investors weighed the outlook for bumper crops in the U.S., the top producer, against signs that demand may increase after prices fell to the lowest levels since 2010.
Cotton Price Unravels as Supplies Rise Cotton prices have retreated to the lowest level in nearly five years as investors worry that global production could overwhelm demand for the fiber.
Nearly at half time, Factset writes:
With 46% of the companies in the S&P 500 reporting actual results for Q2 to date, the percentages of companies reporting EPS and sales above estimates are well above recent historical averages.
Overall, 230 companies have reported earnings to date for the second quarter. Of these 230 companies, 76% have reported actual EPS above the mean EPS estimate and 24% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is
well above both the 1-year (72%) average and the 4-year (72%) average.
In aggregate, companies are reporting earnings that are 4.2% above expectations. This surprise percentage is above the 1-year (+3.2%) average, but below the 4-year (+5.1%) average.
In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is well above both the 1-year (55%) average and the 4-year average (57%).
The blended earnings growth rate for the second quarter is 6.7% this week, above the growth rate of 5.4% last week. During the past week, upside earnings surprises reported by companies in multiple sectors were significant contributors to the increase in the growth rate for the index. Overall, six of the ten sectors witnessed an increase in earnings growth during the week, led by the Health Care, Information Technology, Industrials, and Materials sectors.
However, one sector is still reporting a slight year-over-year decline in earnings growth for the second quarter: Financials (-0.4%). If the sector does report a decline, it will mark the second consecutive quarter that the sector has reported a year-over-year drop in earnings. Much of the weakness is coming from the Banks industry (-9%), as Bank of America, Citigroup, and JPMorgan Chase all reported year-over- year declines in EPS for the quarter.
If the Financials sector is excluded, the blended earnings growth for the remaining nine sectors would be 8.5%. If the final percentage for the quarter is 8.5%, it would be the highest earnings growth rate for the S&P 500 excluding the Financials sector since Q3 2011 (17.4%).
At this point in time, 47 companies in the index have issued EPS guidance for the third quarter. Of these 47 companies, 32 have issued negative EPS guidance and 15 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the third quarter is 68% (32 out of 47). This percentage is slightly higher than the 5-year average of 64%.
But negative guidance is much lower than what we have seen since 2013.
S&P data, up-to-date to July 24th, puts Q2 EPS at $29.47, down $0.17 from the previous week. Q3 estimates have also been shaved $0.15 to $30.56.
Trailing 12-month EPS should reach $111.96 after Q2. With inflation at 2%, the Rule of 20 says fair P/E is 18x = 2015 on the S&P 500 Index.
This 1980 level is proving resilient, as is the Rule of 20 fair P/E level which remains a strong barrier, unlike during most other bull markets when investors merrily traversed the Rule of 20 “20” level to, and often, through the 22 level.
Largely upbeat corporate earnings secured the spotlight at the start of a quiet trading session in Europe Monday, supporting equity indexes across the region. (…) Spain’s Bankia S.A.BKIA.MC +1.38% reported a similarly upbeat set of second-quarter figures. The country’s largest nationalized bank—commonly considered a barometer of the nation’s nascent economic recovery—said net profit in the period nearly doubled compared with a year earlier as loan losses fell, sending shares up 2.3%. (…)
(…) At the start of the year, the average forecast among 18 strategists tracked by Birinyi Associates Inc. called for the S&P 500 to rise 5.3% for all of 2014. Instead, stocks have made a slow, steady push higher that has the S&P 500 already up 7% in 2014. (…)
A handful of strategists have raised their targets, but they are largely remaining cautious. As a group, the strategists tracked by Birinyi now expect a 7.4% yearly rise in the S&P 500 to 1986, from 1848.36 at the end of 2013. With the index closing Friday at 1978.34, that would mean most of the rally has already taken place. (…)
On Friday, earnings reports from two other companies proved disappointing. While Visa outpaced investor expectations for earnings, the company cut its revenue guidance as the strong U.S. dollar has hurt cross-border transactions. Amazon’s loss was larger than the Street expected, and the Internet goliath projected more losses ahead.
Earnings results have mostly beaten expectations. With nearly half of the S&P 500 having reported, companies have eclipsed earnings expectations 76% of the time and exceeded sales expectations 67% of the time, according to FactSet. Companies are on track to grow earnings by about 6.7%, which would exceed expectations for 4.9% growth as of June 30.
And note that Visa said that domestic credit payment volume improved in the most recent quarter and has accelerated further through July 21.
CONFUSING (CONFUSED?) BROKER TALK
They are now going out of their ways to tell you in as many words as possible what they think you should be doing but that, in reality, they have no clues about what is really going on (via FT Alphaville):
First, Goldman Sachs:
We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then. At the same time, on our forecasts the acceleration of economic growth is now largely behind us, with any further expansion being very small compared to what we have seen. We see an environment where growth is sustained around current levels as being positive for equities over the longer term, but would expect the pace of returns to slow down relative to the strong performance we have seen over the last couple of years. This suggests that the forgone return by lowering the equity exposure temporarily if equities continue their grind higher is likely to be lower than it has been. This is particularly true in the US where earnings and valuations are at high levels, and where data surprises are already very positive. Our MAP index of data surprises here is close to its highest levels over the last couple of years. Over the longer term we still see equities as the best positioned asset class, and remain overweight over 12 months. We would see any sell-off over the next few months as an opportunity to increase exposure again also on a short-term basis.
Now you may have a better idea of what short and long term mean.
The Goldman report comes after similar thoughts from BoAML’s chief investment strategist Michael Hartnett, who said he remains bullish in temperament but cautious in near-term outlook.
High cash levels say the summer “melt-up” is not over yet. But with both institutional and private client (Chart 1) allocations to stocks at multi-year highs, we think an autumn correction is increasingly likely. Our derivative strategists say TWSE puts are the best hedge for an autumn risk correction.
Meanwhile BCA Research have been more explicit about the nagging feeling, after they were asked by a client “how do you know that you’re not coming up with analysis to justify what’s already occurred?”. The strategists stick with stocks and credit versus cash and short term Treasuries as they expect positive real returns over the next year…
Still, for a team of researchers that strives to be aware of cognitive biases so as to reduce its susceptibility to them, the question hit home. It stayed on our mind the whole week and inspired no small amount of soul-searching about our equity view. In the end, we reiterate our overweight, persuaded by the consistency and the power of the fed funds rate cycle’s impact on stocks; the lack of a catalyst for the Fed to speed up its normalisation of the fed funds rate; encouraging signs of growth, highlighted by the red-hot start to earnings season; and the dearth of other opportunities in an extended ZIRP environment.
The leap is always hard when the going is good. Just one more year…
JP Morgan, on the other hand, will have none of it and offer a counterpoint on fallacy of composition lines.
We stay long and bullish equities as we have for over five years on low macro risk, no return on cash, and now also improving earnings growth. Active positions are likely quite long and this could bring a correction, but there is also likely a lot of money waiting to buy on such a correction. The main macro threats to equities are lower growth or volatility caused by Fed tightening. We downplay the first and find the second too far.
If everyone is waiting on a correction it ain’t going to last long.
From the last clearly bear around:
Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000. The median price/revenue ratio of S&P 500 components is already far above the 2000 level, and the average across S&P 500 components is nearly the same as in 2000. The extent of this bubble is also partially obscured by record high profit margins that make P/E ratios on single-year measures seem less extreme (though the forward operating P/E of the S&P 500 is already beyond its 2007 peak even without accounting for margins).
California Marinas Docked by Drought California’s relentless drought is beginning to dry up revenue in its popular lake and river tourism industry.
Casualties abound from a three-year dry spell that also has wreaked havoc on California agriculture and prompted mandatory statewide restrictions on urban watering effective Aug. 1.
Hedge Funds Bet Big on ‘Inversion’ Deals The funds are wagering billions of dollars on companies they believe will benefit from a wave of takeover deals designed to lower taxes for U.S. acquirers.
(…) Shares of the 23 Irish- and U.K.-domiciled health-care companies with market values of more than $500 million have risen 82% over the past 12 months, according to S&P Capital IQ, compared with a 17% rise in the S&P 500. Four of those companies have received takeover bids, and three—Shire, Covidien and Mallinckrodt MNK -2.86% PLC—have struck deals.
Yet as more investors have caught on to the trend, share prices are rising so much that the ability to make a handsome gain is diminishing. (…)