Month: October 2016

Growth Rebounds to 2.9% After a Weak First Half U.S. economic growth accelerated at a 2.9% rate in the third quarter, the fastest recorded in two years, giving voters their last comprehensive look at the economy’s health before the election.

That was stronger growth than the second quarter’s pace of 1.4%. Economists surveyed by The Wall Street Journal expected growth at a 2.5% pace for the July-to-September period. (…)

The third-quarter acceleration largely reflected increased exports and a buildup of inventories, while consumer spending increased at a slower rate. (…)

The third-quarter GDP report showed consumer-spending gains slowed after a strong advance this spring. Personal-consumption expenditures rose at a 2.1% pace in the third quarter compared with a 4.3% gain during the prior period. Spending on long-lasting durable goods such as cars and appliances rose grew at better than 9% in the past two quarters. (…)

Exports, which add to GDP, increased at a 10% rate in the third quarter, the best gain in nearly three years. Export gains had slumped over the prior year and half, in part because a stronger dollar made U.S. good more expensive overseas. But separate data suggested that shipments of agricultural products, especially soybeans, supported the latest gain. (…)

Imports, which subtract from domestic output, increased at a 2.3% rate. In total, trade contributed 0.83 percentage point to overall growth.

The change in private inventories, a drag on output the five previous quarters, contributed 0.61 percentage point to the overall growth rate in the third quarter. An increase in stockpiles could indicate businesses are more confident in future demand.

A measure of economic growth that excludes inventory effects, real final sales of domestic product, rose at a 2.3% pace in the third quarter, a slight slowdown compared with a 2.6% increase in the second quarter.

A measure of business spending, nonresidential fixed investment, rose at a 1.2% rate versus the prior quarter’s 1% advance. (…)

The price index for personal-consumption expenditures rose at a 1.4% seasonally adjusted annual rate in the third quarter from the second. Consumer prices rose at a 2% rate during the second quarter. When excluding volatile food and energy costs, the price index increased at a 1.7% rate in the third quarter.

Also in the WSJ feeling it must also act as a spirit booster:

• Rebound in GDP Signals Improved Growth Next Year Corporate, government and consumer spending are likely to pick up

(…) More important than that headline figure were the details of the report that suggest the economy may be achieving better balance. (…)

With household finances in good shape and the unemployment rate at 5%, consumer spending will likely pick back up a bit. Still, with much of the post-recession pent-up demand for big-ticket items like cars now likely exhausted, it isn’t about to start running hot.

But at the corporate level, spending is showing some signs of life. Spending on nonresidential structures—office buildings, warehouses, oil wells and the like—grew at a 5.4% rate in the third quarter after falling 2.1% in the second. That suggests that the energy sector’s drag on business spending is starting to ease. Spending on equipment fell at a 2.7% rate, but this was actually the smallest drop of the year. It may be that with the removal of election uncertainty next month, companies will step up their spending on equipment in order to boost productivity and allay rising labor costs. (…)

In what most investors see as the likely scenario—a victory for Mrs. Clinton with Republicans hanging onto the House—some sort of modest budget package next year might be the best bet. That would nudge GDP upwards.

None of this argues the economy is about to surge. More things would have to come together, including a more substantial pickup in the housing market and a renewed focus on growth from U.S. companies, for that to happen. But the third quarter does signal a strong chance of better growth next year.

Objectively:

• The bean counters were particularly busy during Q3 as poor soybean harvests in South America opened the door for a large, one-off, surge in U.S. soybean exports, likely to reverse in Q4, which added a significant 0.9% to Q3 GDP growth.
• The inventory build contributed +0.6%. Whether this reflects increased business confidence in future demand is highly debatable, especially in light of the slow 2.1% growth in personal spending, not a confidence booster by any means.
• Real final sales grew 2.3% but a very slow 1.4% ex-soybeans, slower than the +1.9% average of the first half.
• Domestic final sales rose 1.4%, down from +2.4% in Q2 and the +1.8% first half average.
• Car sales are not really trending up lately and lending standards are tightening. Inventories seem on the high side and some manufacturers have announced downtime recently.

David Rosenberg:

In fact, looking at the various high-frequency data reports of late, such as industrial production, core capex shipments and real retail sales, it is going to be a real challenge to get to 2% growth this coming quarter. (…) The U.S. may still be the “best house in a bad neighborhood”, but in straight-up absolute terms, the economy remains stuck in the mud.

Real Disposable Income Slides For 2nd Straight Month

(…) Personal Income rose less than expected in September (+0.3% vs +0.4% exp MoM) and thanks to a downward revision in August, Spending rose more than expected (+0.5% vs +0.4% MoM). Both income (+3.2%) and spending (+3.7%) growth rose in September on a year-over-year basis with service sector wages rising dramatically relative to goods-producing. Thanks to the historical revisions, personal savings dipped a little from 5.8% to 5.7% as real disposable income fell for the 2nd straight month. (…)

U.S. Employment Cost Index Increases at Steady Rate

The employment cost index for civilian workers increased 0.6% (2.2% y/y) during Q3’16 for the third straight quarter. Wages and salaries increased 0.5% (2.4% y/y) after a 0.6% rise, and benefits rose 0.7% (2.3% y/y) following a 0.5% gain.

The employment cost index for private industry workers increased 0.5% in (2.2% y/y) following a 0.6% gain. (…) Wages and salaries in private industry rose 0.5% (2.4% y/y), the weakest rise since Q2’15. (…)

Benefits for private industry workers grew 0.5% (1.8% y/y), following a 0.4% increase. (…)

Steady and ok as the slowdown in benefits offsets the acceleration in wages.

   

Trucking Firms Pare Down Their Fleets Big trucking companies have spent the second half of the year shrinking their fleets in hopes of changing an imbalance between the supply of rigs on the road and tepid shipping demand.

(…) In quarterly earnings reports this month, Swift Transportation Co., Werner Enterprises Inc. and Covenant Transportation Group Inc., said they have pulled a combined hundreds of trucks from service since the second quarter. (…)

Swift, the largest truckload carrier in the U.S., counted 581 fewer trucks in the third quarter than it did this time last year, and plans to cut another 200 trucks in the fourth quarter. The company’s fleet tops 19,000 big rigs.

Werner, the country’s fifth-largest truckload carrier, according to SJ Consulting Group, said it trimmed its fleet by 240 trucks in the quarter ending Sept. 30 from a year ago. The company reported a 41% drop in net profit, to $18.9 million in the third quarter, and said in its earnings statement that it will not add trucks “until we see meaningful improvement in the freight and rate markets.”

Phoenix-based Knight Transportation Inc., which saw its net profit fall 22.9% year-over-year in the third quarter to $23.4 million, says the average age of its trucks has grown as the carrier delayed buying new equipment and focused instead on getting more use out of the trucks already in its fleet.

(…) U.S. domestic truck and rail shipments declined in September for the 19th straight month, according to research firm Cass Information Systems Inc.

Still, several companies said they see signs that the downturn in freight demand may have bottomed out. Covenant and Heartland Express Inc. reported declines in net profit in the third quarter that were smaller the second-quarter declines. Swift’s net profit improved 4.7% year-over-year in the third quarter, largely because of what the company said were cost cuts and improved efficiency.

Private-Jet Forecast Cut by 600 Planes as Slow Growth Zaps Sales

(…) The number of used jets for sale that are less than five years old has increased and prices continue to drop, which drags on demand for new aircraft, Park said. The introduction of new models from manufacturers such as Gulfstream and Bombardier Inc. in 2018 should stimulate sales, he said. (…)

China as Factory to World Mulls the Unthinkable: Price Hikes

(…) That push to recover lost margins — even as demand remains muted — was shared by exporters of everything from clocks to hot tubs interviewed in Guangzhou last week at the Canton Fair, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.

For the world economy, decisions from companies like Jiangmen Tissue to stop cutting prices — and even raise them where demand allows — removes a source of disinflationary pressure. To be decided is whether China, the factory to the world, swings from becoming a drag on consumer prices to a source of pressure nudging them higher. (…)

In the meantime, a depreciating currency is offering a buffer, helping exporters preserve some margin in local-currency terms even if they keep prices for their goods unchanged in dollars. That may slow any transmission to export prices — historically closely linked. (…)

The weaker yuan is also one of the driving forces behind the PPI turnaround as it pushes up input prices of the raw materials China’s factories need. (…)

OPEC Splits Prevent Deal With Other Producers to Curb Supply

(…) More than 18 hours of talks over two days in Vienna yielded little more than a promise that the world’s largest oil producers would keep on talking. Discussions will continue in late November, just days before the Organization of Petroleum Exporting Countries is supposed to finalize the accord that lifted oil prices to one-year highs. (…)

In Shift, Exxon Signals Energy Reserves at Risk Exxon Mobil said it may be forced to recognize that billions of barrels of its oil reserves are no longer profitable to produce, as it posted a 38% earnings drop.

Exxon Mobil Corp. warned that it may be forced to eliminate almost 20% of its future oil and gas prospects, yielding to the sharp decline in global energy prices.

Under investigation by the U.S. Securities and Exchange Commission and New York state over its accounting practices—and the impact of future climate change regulations on its business—Exxon on Friday disclosed that some 4.6 billion barrels of oil in its reserves, primarily in Canada, may be too expensive to tap. (…)

Nine of the world’s top oil companies, including Exxon, Chevron and Royal Dutch Shell PLC, have been counting on wringing more Canadian crude from the ground in the coming decades. Combined, Canadian crude accounts for 23% of the firms’ proven reserves, according to data from investment bank Peters & Co.—up from only 5% in 2006. (…)

The Liberal government’s proposal to charge a price for carbon emissions compounds the headwinds energy companies already face if they want to mine Canada’s oil sands for decades to come. (…)

Advanced shale drilling techniques have unleashed a new wave of American oil into world markets. Those drilling and fracking techniques have made smaller American companies the industry’s new “swing producers,” or those most able to ramp up output quickly.

Exxon’s Mr. Tillerson acknowledged that prospect in a recent speech at a conference in London where other energy executives were forecasting a sharp supply shortfall in coming years.

“I don’t necessarily agree with the premise,” he said.

VW’s electric car switch ‘to cost 10,000 jobs’

Volkswagen plans to cut more than 10,000 jobs in coming years as the German auto giant switches its focus to making electric cars in the wake of the “dieselgate” scandal, a top executive has said.

(…) electric cars require fewer components than combustion-engine vehicles, meaning fewer employees are needed in the long term, Blessing was quoted as saying. (…)

VW has said it plans to develop and manufacture more than 30 new electric vehicles by 2025.

The group employs over 620,000 people worldwide, including 280,000 in Germany.

One of my friends said that the Tesla is but a giant ipad on wheels.

EARNINGS WATCH

Factset’s weekly summary in:

Overall, 58% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 74% have reported actual EPS above the mean EPS estimate, 8% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (70%) average and above the 5-year (67%) average.

In aggregate, companies are reporting earnings that are 6.7% above expectations. This surprise percentage is above the 1-year (+4.8%) average and above the 5-year (+4.4%) average. The Energy (+38.4%), Real Estate (+17.8%), Utilities (+13.6%), and Financials (+9.1%) sectors are reporting the largest upside aggregate differences between actual earnings and estimated earnings.

In terms of revenues, 58% of companies have reported actual sales above estimated sales and 42% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year average (50%) and above the 5-year average (54%).

In aggregate, companies are reporting sales that are 0.8% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.6%) average.

The blended earnings growth rate for the third quarter is 1.6% this week, which is above the blended earnings decline of -0.5% last week [and above the estimated decline of -2.2% at the end of the third quarter (September 30)].

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to 4.9% [+3.3% last week] from 1.6%.

At this point in time, 57 companies in the index have issued EPS guidance for Q4 2016. Of these 57 companies, 36 have issued negative EPS guidance and 21 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 63%, which is below the 5-year average of 74%.

Guidance so far is right in line with Q3’16 guidance one month after Q2 and slightly better than at the same time last year when 70% of the 56 companies that issued guidance for Q4’15 guided down.

Guidance by industry has changed however. More Health Care companies have guided down this year (9 vs 4) while Consumer Discretionary (5 vs 11) and IT (4 vs 9) companies are more upbeat this year.

In all, the Q3 earnings season is turning out stronger than expected which validates the better guidance noted here throughout September. At +1.6%, Factset’s estimate for Q3 is 3.5 percentage points better than one month ago. Thomson Reuters now sees Q3 EPS up 3.0%, also 3.5 percentage points better than one month ago.

Q4 estimates are being trimmed down however but not too significantly. TR’s estimate is now +7.4% vs +8.3% on Oct. 1.

Trailing 12-month EPS are now $116.77 (TR) and are seen reaching between $117.86 (TR) and $118.52 (Factset) after Q4’16. On these basis, the Rule of 20 P/E is 20.4 after Q3 and 20.2 using the mid-point estimate of $118.20 after Q4.

The S&P 500 Index is thus near fair value (2078 after Q3 and 2104 after Q4).

Inflation, Long Quiescent, Begins to Stir The core rate of inflation remains below the Fed’s 2% target, but economic circumstances suggest it is headed upward, which could mean that securities priced for low inflation will be repriced and that savers dependent on interest can look forward to better returns.

(…) Data released Friday showed that core inflation, which excludes food and energy, reached a two-year high of 1.7% in the third quarter, according to the Fed’s preferred measure. Other data found stirrings of wage acceleration.

The intellectual case for low inflation is also showing cracks. Central banks now openly entertain, and even welcome, inflation bubbling over 2%. (…)

Since early July the U.S. 10-year Treasury yield (which moves in the opposite direction to price) has climbed half a percentage point to 1.85%. Yields in other countries have risen somewhat less. 

Most of this increase reflects a reappraisal of the inflation outlook. The behavior of inflation-protected bonds suggests that in early July, investors expected U.S. inflation to average 1.4% over the coming decade. As of Friday, that had risen to 1.7%. (…)

Core inflation, according to the Consumer Price Index, is already above 2%. Using the Fed’s preferred index, it is 1.7%, but that may be artificially depressed by technical factors related to the measurement of medical costs.

You first heard that one here. But let’s move on:

Zero to negative rates are crushing banks’ lending margins, which could undermine their ability to lend. One reason bond yields now are rising is a belief that the ECB and BOJ want to protect their banks from further pressure. (…)

Governments in Britain and Japan have relaxed their budgets, and many think the U.S. is likely to as well, regardless of who wins the presidential election.Morgan Stanley predicts fiscal policy will add to growth in the developed economies next year, for the first time since 2010. (…)