Truck Orders Sank in September Faced with a weak freight market, trucking companies aim to reduce capacity
Orders for new big-rig trucks fell 27% in September compared with a year earlier, to the lowest level for that month since 2009, as the freight market struggled to reduce capacity amid tepid shipping demand. (…)
Jeff Tucker, chief executive of Haddonfield, N.J.-based freight broker Tucker Co. Worldwide, said shipping demand has expanded somewhat in the early part of the fall but that capacity remains generally plentiful. (…)
The U.S. trade deficit in goods and services increased to $40.7 billion during August from an unrevised $39.5 billion in July. The Action Economics Forecast Survey expected a $40.0 billion deficit.
Overall exports increased 0.8% (0.7% y/y) following a 1.9% rise. Exports of goods rose 0.6% (0.7% y/y) after a 3.1% jump. (…)
Total imports increased 1.2% (-1.2% y/y) after a 0.7% decline. Imports of goods rose 0.6% (-2.5% y/y) following a 1.0% drop. Petroleum product imports increased 2.2% (-12.5% y/y), but the price per barrel of crude oil fell to $39.38 from $41.02. Nonpetroleum product imports rose 0.5% (-1.5% y/y). (…)
EUROPE RETAIL SALES DEFLATE
In August 2016 compared with July 2016, the seasonally adjusted volume of retail trade fell by 0.1% in both the euro area (EA19) and the EU28, according to estimates from Eurostat, the statistical office of the European Union. In July the retail trade volume increased by 0.3% in the euro area and by 0.5% in the EU28.
In August 2016 compared with August 2015, the calendar adjusted retail sales index increased by 0.6% in the euro area and by 2.1% in the EU28.
The sales deflation goes beyond the 0.1% August drop. The July data was actually revised from a +1.1% jump to a more normal +0.3%. What a difference a month makes! In fact, core sales actually declined 0.3% in July rather than being up 0.4% as released last month. On a YoY basis, July core sales were up 2.1% rather than +3.2% as originally reported.
Assuming August numbers are minimally reliable, the last 3 months show a +1.6% annualized growth rate following –0.4% in the previous 3 months. Last 6 months: +0.6%. Note that these are in real terms.
Here’s the YoY trends in total sales volume from The Daily Shot:
French retail sales were especially soft.
UK ready to borrow to fund infrastructure spending Autumn Statement to confirm move away from reliance on cheap money to boost economy
Three Risks to the Global Financial System as Debt Hits Record Levels An unprecedented era of ultralow interest rates and feeble growth has led to a record buildup in global debt levels. Here are three risks to the global financial system.
(…) Anemic global growth is “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” the emergency lender warned. (…)
First, European banks are facing a chronic profitability crisis. (…) The IMF estimates that the recent plunge in bank equity price could curb lending until 2018. It also conducted a survey of more than 280 banks covering most of the banking systems in the U.S. and Europe to see if an economic recovery would be enough to propel them into long-term profitability. While a large majority of U.S. banks passed, nearly one-third of Europe’s banking system flunked.
(…) Those banking duds—representing $8.5 trillion in assets—remain weak and unable to generate sustainable profits even if growth picks up in the fund’s stress test. (…)
European banks also need to restructure to become more efficient. (…) closing down one-third of the branches across the region and moving more clients to digital telling would cut operating expenses by $18 billion. (…)
Many emerging markets need their financial systems to bolster their capital buffers to handle those losses, it warns. (…)
China’s debt levels make most emerging markets look like pocket change. Many economists, including at the IMF, say the government’s balance sheet is clean enough it could handle a shift of those liabilities from the financial sector in a crisis situation. But, even if that’s true, it doesn’t mean it won’t create havoc in the economy, causing a much steeper deceleration that could hit global growth. (…)
Shiller’s Powerful Market Indicator Is Sending a False Signal About Stocks This Time A close look at a Nobel Prize winner’s valuation metric shows that the market isn’t as highly valued as it appears
(…) The CAPE is now at 27. That is about where it was in 2007, before the financial crisis, and it is well above its 50-year average of 20. The only times the CAPE has been higher were during the 2000 bubble and bust, and just prior to the 1929 crash, according the data compiled by Mr. Shiller.
(…) Wharton professor Jeremy Siegel says that accounting-rule changes have pushed the recent earnings lower, and that has made the CAPE artificially high relative to its history.
Mr. Shiller uses S&P 500 earnings under generally accepted accounting principles, or GAAP. (…) The problem is that GAAP isn’t a stable concept, and has been revised multiple times. In 1993, for example, banks were required to mark to market a greater portion of their holdings. In 2001, accounting rule makers changed the rules on goodwill. In both cases, Mr. Siegel says, the changes lowered GAAP earnings, even though there were no changes in the underlying businesses.
An alternative CAPE, constructed by The Wall Street Journal, uses the same methodology as Mr. Shiller, but relies on a more consistent earnings measure: The Commerce Department’s quarterly data on total U.S. after-tax corporate profits. Then for prices, it uses Federal Reserve data on the total value of the U.S. stocks, rather than the value of the S&P 500.
The result: Stocks look much cheaper than Mr. Shiller’s data suggests.
The Commerce Department profit figures are based on corporate tax and financial data. Unlike GAAP, they follow a consistent standard over the decades. So the corporate profits-based CAPE isn’t bedeviled by shifting standards as Mr. Shiller’s S&P-based CAPE is.
As of the end of the second quarter, according to the latest data available, the corporate-profits CAPE was at about 19—just above its 50-year average of around 17. By contrast, it was 39 at its peak during the tech bubble and 24 at the market’s peak in 2007.
The crucial fact here is that the two measures tracked each other almost perfectly for decades until 2008, when banks and other businesses, required to follow the latest GAAP rules, suffered huge write-downs that cut earnings. The Commerce Department’s measure, which hasn’t changed, treats bad-debt expenses, asset write downs, and loan-loss provisions as capital losses that reduce the value of corporate assets, rather than cutting earnings. Since both of these measures rely on 10 years of earnings, the disparity stemming from the financial crisis has persisted.
One disadvantage of using the Commerce Department figures, Mr. Shiller says, is that they include profits of nonpublic companies, like the local dry cleaner. And while you can buy the S&P 500, the Federal Reserve measure of U.S. stocks’ total value “is not an investment you can make.”
But there are more disadvantages: e.g.: bad-debt expenses and loan-loss provisions are generally true operating costs. Depreciation expense in actual tax filings is often different than that for shareholder reports. How about pension expenses? The Commerce figures also include U.S. profits of foreign companies. Globalization and varying tax laws have materially impacted reporting at the national level.
But here is the thing: From the early 1960s through 2008, the two CAPE measures move nearly lockstep with one another. It is only after the financial crisis that the two measures diverge, with the corporate-profits CAPE rising much more slowly than Mr. Shiller’s measure does. That jibes with Mr. Siegel’s view that changes to GAAP have pushed Mr. Shiller’s CAPE readings higher.
And here’s TINA!
A bigger issue, says Mr. Campbell, is that just because the CAPE is high doesn’t mean that stocks aren’t a better value than comparable, safe investments. Back in 2000, there were great alternatives to expensive stocks, such as 10-year Treasury inflation-protected securities offering a government-guaranteed yield of 4 percentage points above inflation. Today those bonds offer no premium. While stocks are currently expensive, Mr. Campbell says, it isn’t clear that they are a worse investment than their alternatives.
For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasurys and cash, and when it was low it put more into stocks.
He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.
“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.
Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.
CAPE has other problems as I often explained since 2009. This is the latest piece on it:
Coming to a North American company near you:
From Barclays’ Christophe Boulanger and Dominik Winnicki on the pension deficit risk building in QE’d Europe:
As evident in the end-June 2016 corporate results, the rise in pension benefit obligations (PBOs) and pension deficits is a broader theme for European corporates. Overall, pension deficits for the more-than 100 companies that we have screened are up 16% since endFY2015 and are likely to increase further in the July to December 2016 period given the continued fall in discount rates on the back of declining long-term yields that are not offset by returns on plan assets.
More importantly, we believe that such a trend is unlikely to improve in 2017 given quantitative easing policies (QE) by the European Central Bank and the Bank of England that will likely keep corporate yields low in the medium term.
(…) Finally, the really fun if somewhat obvious bit — cash contributions are likely to increase which means dividends will probably have to go in the other direction:
Increase in deficits is despite companies having made substantial contributions to their pension schemes; recent analysis2 suggests FTSE 100 companies paid £13.3bn into their defined benefit pension schemes in 2015. It is worth noting that this compares with £53bn of dividends having been paid in 2015 by FTSE 100 companies with a pension deficit3 .
Any rise in cash contributions is likely to translate into cuts in dividend payments, as highlighted by our equity colleagues… which in turn could put pressure on share prices and affect market sentiment. Also, rising cash contributions will be funded out of operating cash flow generation which, in turn, will likely reduce free cash flow generation, a negative trend for rating agencies.
Rising contributions also hit earnings…normally in Q4…