U.S. Auto-Sales Pace Accelerates Auto makers overcame a holiday shift to post a strong, 17.8 million annualized pace in August, underscoring the continuing strength of the U.S. new car market.
The seasonally adjusted annual rate of sales for light vehicles rose to 17.8 million compared with 17.3 million a year earlier and was the highest since July 2005, according to researcher Autodata Corp. August was the fourth consecutive month that adjusted sales remained above the 17 million mark.
Still, total light vehicle sales fell slightly last month to 1.57 million from 1.58 million a year earlier, Autodata said, largely on a quirk of the calendar. August volumes were dented by one less selling day than the same period in 2014 and by the absence of Labor Day weekend sales, which this year is deeper into the month. That, and weakness in sedan sales, led five of the top 10 sellers in the U.S. to report declines compared with the same month a year earlier. (…)
Last Friday’s report on consumer spending showed that overall consumer spending was up 3.2% from a year earlier in the three months that ended in July, adjusting for inflation. But sales of major household appliances were up 7.4%, and sales of sports and recreational vehicles, such as motorcycles, boats and campers, were up 7.4%. (Table from Haver Analytics)
Total construction spending climbed 0.7% from the prior month to a seasonally adjusted annual rate of $1.083 trillion, the Commerce Department said Tuesday, the highest level since May 2008.
Private building led the way, with both residential and nonresidential construction hitting new postrecession highs. State and local government spending dropped in July, but only after posting solid gains during the previous four months. (Table from Haver Analytics)
Fed official flags concern over US growth Eric Rosengren makes case for modest path of policy tightening
Eric Rosengren, president of the Boston Fed, suggested that the slowdown overseas may prompt a reduction in his growth outlook in the central bank’s next forecasting round and dent his confidence that inflation will accelerate.
“These developments might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labour markets is likely,” Mr Rosengren said in a speech in New York.
“Without an expectation of growth above potential and further tightening of labour markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 per cent target within a reasonable timeframe.” (…)
The Fed has set itself two tests for lifting rates. One sets the need for “some further improvement” in the labour market — and Mr Rosengren said this one had largely been met. The second requires policymakers to be “reasonably confident” that core inflation measured by the personal consumption expenditures index will move back to 2 per cent in the medium term.
Here Mr Rosengren argued that recent data “have yet to indicate that this second condition will be met in the coming months”. As such, policymakers would need to rely on forecasts of higher inflation — something Mr Fischer did in his speech over the weekend. Unfortunately, forecasters have in recent years inaccurately predicted that inflation will return to 2 per cent, Mr Rosengren observed.
Being confident on inflation depends on being sure that the economy will continue to grow above its potential rate, and that labour market slack will carry on shrinking. This is where recent global developments are important, because they could trigger a sufficiently large setback in the outlook to raise questions about whether the US labour market will carry on tightening.
“Indications of a much weaker global economy would at least increase the uncertainty surrounding policymakers’ economic growth and inflation forecasts,” Mr Rosengren added.
Obviously, Fed people are just as confused as everybody is…
Canada’s Commodity Perils Canada’s woes are a harbinger of what could come for a small clutch of advanced economies that rely heavily on commodity exports, and demand from China, for their economic growth.
The energy- and mineral-rich country’s economy contracted for a second consecutive quarter between April and June, as low prices for base metals and crude oil erode business investment and exports. Gross domestic product fell 0.5% on an annualized basis in the second quarter, Statistics Canada said Tuesday, and the first-quarter decline in GDP was revised to a 0.8% drop from an earlier estimate of a 0.6% contraction.
Output expanded in June, making the quarterly decline less sharp than many economists forecast, and the Bank of Canada has said it expects statistics to improve during the second half of 2015. But it has already lowered its growth forecast for the year to 1.1%, down from a previous forecast of 1.9%.
In Australia, a 40% drop in iron-ore prices over the past year has dragged down quarter-on-quarter growth in the gross domestic product, hitting 0.9% in the first quarter of 2015. Norway’s oil-dependent economy grew just 0.2% in the second quarter from the first as oil investment dropped, and lower prices for dairy, New Zealand’s top export, have contributed to reduced expectations for the country’s growth this year. Canada is heavily dependent on energy and mining, with crude oil ranking as its top export and commodities in total making up about 17% of its economy, according to the country’s central bank. (…)
While Australia hasn’t had a recession in 24 years the International Monetary Fund cautioned in June that the country faces sharply slower economic growth and falling living standards. On Wednesday, Australia posted second-quarter growth of 0.2%, compared with a 0.9% rise in the previous three months.
Mining alone accounts for nearly 10% of the country’s A$1.5 trillion ($1.07 trillion) economy, but its influence ripples out to a range of services companies from builders to accountants. Eight of the country’s top 10 exports are commodities. As mining surged, other sectors felt the impact of a rising currency: Australia’s century-old automotive industry, for example, will soon stop producing cars domestically. (…)
Canada: This doesn’t look like a recession
The simple rule of thumb that a recession is defined as consecutive quarterly declines in GDP may be too simplistic, even more so in this particularly instance. Though real GDP was down 0.5% annualized in Q2, the non-energy sector (90% of the economy) actually expanded 0.6% on the back of a June rebound which saw no less than 17 of 20 industries reporting higher output.
In the U.S., a recession according to the NBER is defined as “a significant decline in activity spread across the economy, lasting more than a few months, and visible in industrial production, employment, real income and wholesale-retail trade”. So far, industrial production is the only sector that has seen a significant decline in activity in Canada. We need to see economic weakness spread to the service sector to confirm the end of the economic expansion. As today’s Hot Chart shows,
we were clearly not there in Q2 with service-producing industries showing a 2.3% increase in output. At this juncture, the scope and amplitude of the drop in economic activity so far in 2015 looks more like stagnation than recession, unless of course you work in the energy industry.
Goldman Sachs and Citigroup agree that the near-parabolic trajectory of crude prices has been driven by a shift in sentiment, rather than a significant change in the fundamentals of the oversupplied global oil market. But while the former believes that energy stocks have more room to run, the latter says the shaky foundation of the rally should prompt investors to head to the sidelines.
The notable increase in energy options prices amid the severe equity selloff last week “demonstrates a capitulation in sentiment and positioning that we have been waiting for for the past two months,” according to Goldman Sachs.
Spikes in implied volatility, which can be derived from options prices and the put-call skew—or the extent to which investors will pay more to protect from downside than to realize potential upside—have been “excellent quantitative indicators for shifts in energy investor positioning over the past 15 months,” asserted Managing Director John Marshall and Vice President of Equity Derivatives Katherine Fogertey of Goldman.
The recent surge in the implied volatility and the put-skew rank for West Texas Intermediate, the Energy Select Sector SPDR ETF, and the United States Oil ETF marked a key turn in investor sentiment that will serve as a tailwind for energy stocks for weeks, said Goldman:
“Spikes suggest a ‘hedge at any price’ sentiment often associated with a capitulation in investor conviction,” the pair wrote. “Whether it is driven by long investors hedging or short investors buying puts to express a view that the sell-off is likely to accelerate, buying options at peak prices suggest investors are so fearful of a further down move that they are not price sensitive.”
By contrast, Citi’s team, led by Edward Morse, took a decidedly bearish view on the underlying commodity.
“Citi foresees that WTI and Brent prices should post another fresh leg lower—perhaps making new 2015 lows—before year-end,” Morse wrote. “Sharp gains over the past three trading sessions were driven by a combination of short covering and chart-readers again looking to call a bottom falsely.”
According to Morse, investors should take the revised Energy Information Agency data showing that U.S. shale production has been lower than previously thought, rumors of slowing production from Saudi Arabia, and reports that OPEC is willing to work with other producers to manage supply not with a grain, but a heap of salt.
“2015 is not like 1998 when both Mexican and Russian production were surging and when both countries participated in a supply cut,” said Morse. “Russian production is growing this year because of a significantly weaker ruble cost of oil while Mexico is trying to push through energy reform.”
A big debate is whether U.S. shale production is declining. Monday, the DOE released monthly figures for crude oil supply and disposition for the month of June. Total U.S. crude oil production declined by 104,000 bpd from May to June and prior months (Jan-May) production figures were revised by ~40,000-130,000 bpd lower. Here’s Raymond James’ summary:
Monthly crude oil production averaged 9.296 MMbpd in June, down 104,000 bpd from the newly-revised April figure of 9.400 MMbpd (which in turn was revised lower
by 111,000 bpd). The largest component of the sequential decline was lower-48 onshore production falling by 95,000 bpd (offshore PADD 3 & 5 and Alaska were down a combined 9,000 bpd) on top of a revised 74,000 bpd decline in May. On a state-by-state basis, Texas showed the largest sequential decline, with production falling by 66,000 bpd in June.
With this month’s introduction of the new data set, production data for the months of January to May have been revised – all of them lower, by between 40,000 bpd and 130,000 bpd.
Regular Bearnobull readers will recall that timely and never revised data from the Association of American Railroads have been showing declining rail shipments of petroleum products since April (see the OIL segment in my Aug. 10 New$ & View$)
U.S. Class I railroads originated 111,068 carloads of crude oil in the second quarter of 2015, down 2,021 carloads (1.8%) from the first quarter of 2015 and down 21,189 carloads (16.0%) from the third quarter of 2014, which is the peak quarter for rail crude oil originations.
I added simple math:
YoY, the drop in Q2 crude oil traffic was 18.4%, confirming that U.S. shale oil production entered a downtrend during Q2 which seemed to intensify in July given that carloads of crude oil and other petroleum products sank 13.6% YoY after -7.3% in June, +0.5% in May and -1.1% in April. Weekly average carloads in July 2015 were 13,582, the lowest since October 2013.
Official monthly DOE data are for June. The AAR will provide us with its August tally this Friday afternoon.
BTW, Raymond James adds this:
Total product demand was estimated at ~19.6 MMbpd for June, up from ~19.1 MMbpd in May but down from the implied weekly demand figures. Importantly, gasoline demand increased by ~1.5% sequentially to just under 9.4 MMbpd (up 4.0% y/y), implying impressive growth for the biggest driver of total U.S. demand. Additionally, continued strength in the weekly figures implies that our forecast from January for 3% demand growth for gasoline in 2015 may well prove conservative.
To understand, go back to the vehicle sales data at the top of this post and check the light truck sales trends.
Meanwhile, some producers seem tired of the current low prices. I bet even the Saudis are surprised how low oil is selling at these days:
Russia is ready to continue consultations with OPEC on oil price stabilization issues, deputy Prime Minister Arkady Dvorkovich said Monday, commenting on a recent call by the group for cooperation between oil-producing nations to counteract the recent plunge in prices to multi-year lows.
“Russia’s energy minister Alexander Novak [earlier] held consultations and took part in OPEC oil ministers’ meetings. (…)
In its latest bulletin published Monday, OPEC said cooperation between oil-producing countries “is and will always remain the key to oil’s future and that is why dialog among the main stakeholders is so important going forward.”
“There is no quick fix, but if there is a willingness to face the oil industry’s challenges together, then the prospects for the future have to be a lot better than what everyone involved in the industry has been experiencing over the past nine months or so,” it added. (…)
Russia’s crude production rose 1.4% year on year to 10.692 million b/d in the first seven months of the year. (…)
Latest GDP data from IBGE showed that the Brazilian economy registered its worst quarterly performance since 2009 in quarter two, broadly in line with the Markit-compiled PMI data. Worryingly, the PMI suggests that this downturn extended into the third quarter. Output continues to contract across the manufacturing and service sectors, with the country’s economic malaise compounded by high interest rates, stubborn inflation and rising unemployment.
Data released on August 28th by the IBGE highlighted a 1.9% quarterly decline in GDP, following a revised 0.7% drop in Q1. The official data follow signs sent by the PMI, which has pointed to contraction in each month since March.
Brazil GDP and the PMI
Moreover, the outlook for the country’s economy in Q3 looks bleak, with the Manufacturing PMIsignalling continued downturn in August. IBGE reported that the economic retreat reflected declines across the three main sectors; farming (-2.7%), industrial (-4.3%) and services (-0.7%).
The deteriorating economic scenario has also been evident in the labour market. In July, the IBGE reported 1.8 million of unemployed among the main metropolitan areas, an increase of 56.0% compared against July 2014. This is the sharpest rise since data were first collected in 2002. Although workforce numbers were broadly unchanged since May (22.8 million), a 0.9% annual drop was signalled.
Employment in the industrial sector (PIMES), measured by the IBGE, fell 1% in June from May and dropped 6.4% on an annual basis (sharpest decline since July 2009). Similarly, the manufacturing Employment Index was at a 70-month low of 46.9 in May, before plummeting to a new low of 46.6 in August and indicating that the end of the downturn is not yet in sight.
The season is essentially over but analysts are busy updating their estimates which continue to edge downward. Since July 31, Q3’15 estimates have declined 1.5% and Q4’15 estimates 1.2%. Trailing EPS, per S&P are now $108.33 and are expected to decline to $107.57 after Q3 before, potentially, bouncing back to $111.62 after Q4 if the 15% jump in Q4 EPS materializes.
At 1920, the S&P 500 Index sells at 17.7x trailing EPS which only looks good if you compare it with data since 1993 (18.5x average) which, as we all know, but which many forget to mention, include two bubble periods. Longer term, the average and median P/E is 13.7x.
The Rule of 20 P/E is now 19.5, back slightly into undervalued territory as the Rule of 20 fair value is 1972. Going back to the August low of 1824 would take the Rule of 20 P/E to 18.6x (16.8 P/E). Time to re-enter?
Not for me just yet. Too much volatility. Too much uncertainty, confusion. And earnings are weakish (downward sloping Rule of 20 Fait Index Value, in yellow):.
And the 200-day moving average has turned down!
And, for what it’s worth, the new trend line support is much lower:
And September is not the most investor-friendly month. As David Rosenberg observes, September more often than not, following August corrections, does not post a rebound.