The National Activity Index from the Federal Reserve Bank of Chicago increased to -0.14 during September from -0.72 in August, revised from -0.55. The three-month moving average deteriorated to -0.21, and remained in the narrow band maintained since early last year. During the last ten years, there has been a 76% correlation between the Chicago Fed Index and the q/q change in real GDP.
The Obama administration projected on Monday that premiums would rise sharply next year for mid-range plans and quantified how many consumers will have fewer options after three big insurers abandoned marketplaces at the core of the reforms. (…)
The projected premium rises far exceeded those of previous years: in 2015 premiums edged up 2 per cent and they increased 7 per cent this year.
According to the health department, monthly premiums for a typical 27-year-old on a mid-range plan will rise from $242 this year, before subsidies, to $302 in 2017. (…)
GLOBAL MANUFACTURING PICKING UP
Yesterday’s flash PMIs from Markit were pretty upbeat. (Chart via The Daily Shot)
Retailers Rushed to Hire for Holidays, a Sign of Tight Labor Market Data from job-search site Indeed.com shows retailers, and the warehouse and logistics firms they compete with for seasonal labor, started searching for temporary workers a month earlier than in recent years.
(…) Last year, more than one in four retail workers hired in the fourth quarter of 2015 started their jobs in October, the highest share on records back to the 1930s. (…)
The holiday-shopping season is starting before Halloween for many consumers, rather than the traditional day after Thanksgiving. There are fewer workers available, due to unemployment holding around 5% for the past year. And retailers are facing tougher holiday-hiring competition from logistics firms and distribution centers, which have grown along with e-commerce. (…)
Weekly wages for workers at the 25th percentile—someone who makes roughly $14 an hour for a full-time job—have increased 4% in the third quarter from a year earlier, compared with a narrower 3% increase for the median worker, according to the Labor Department. (…)
Competing with retailers that can offer discounted products, UPS is paying bonuses to bring back former temporary workers. The logistics firm offered Kyle Gregory, 19, more than a $1,000 incentive to return for about three weeks of work at UPS’s global air hub in Louisville, Ky. (…)
China’s Aggressive New Deal Makers: $199 Billion This Year and Counting HNA Group, which agreed to buy a 25% stake in Hilton Worldwide, is part of a new generation of Chinese deal makers snagging overseas assets in high-profile areas like movies, airplanes and hotels.
Concerns about disorderly deleveraging in China
China’s credit intensity has roughly doubled since the 2009 financial crisis according to the IMF. In other words, it now takes twice as much credit (compared to pre-2009) to generate an additional unit of GDP. By the same token, corporations have seen their debt to earnings ratio increase markedly in recent years. That’s bad news for China’s banks because of the increased potential for defaults. Adding to credit risks, and hence potential losses for banks, is the proliferation of shadow banking products. As today’s Hot Charts show, about half of the stock of shadow credit products is now high yield and hence high risk. So, the threat of cascading defaults in the world’s second largest economy should not be underestimated. (NBF)
(…) “This debt overhang represents one thing and one thing only: a pervasive constraint on Canada’s economic growth potential,” David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. said by phone from Toronto. “When you get to levels on total debt that makes even the Italians blush, you know you’re in a straitjacket.” (…)
SPEAKING OF DEBT OVERHANG
AT&T is stretching out its debt/ebitda ratio to a historical AT&T high of 2.7x paying top dollars for TWX which has a return on assets of 6.2% vs 4.3% for T. Good thing interest rates are where they are now.
(…) This time, Moody’s Investors Service and S&P Global Ratings Inc. are cutting companies slack on mergers and acquisitions, an analysis of credit-ratings data by Bloomberg News found.
Over the past year and a half, both have bumped up their ratings by two, three or even six levels on a majority of the biggest deals, the analysis found.
Moody’s and S&P don’t dispute those findings, which are based on ratings guidelines posted on their websites. But the firms say a by-the-numbers approach overlooks one of their most valuable assets: human judgment. Both make clear that their analysts have leeway to nudge ratings up or down, based on a company’s track record and their confidence in management’s commitment to reduce indebtedness. (…)
In 2015 alone, U.S. companies borrowed a record $1.6 trillion in the bond markets, with $258 billion of that going to finance acquisitions by investment-grade companies, Barclays Plc says. According to Morgan Stanley, corporate America is now more leveraged than ever.
“You have some very large companies that are getting the benefit of the doubt from ratings agencies and from the market,” says Jerry Cudzil, head of U.S. credit trading for TCW Group, which manages $197 billion in assets. (…)
“Sometimes the ratings agencies give companies the benefit of the doubt that they can achieve the debt reduction that the company has articulated,” said Joel Levington, a former S&P director and now head of credit research for Bloomberg Intelligence. (…)
Hmmm…(chart below via FT Alphaville)
Germans are more cautious:
Germany Inc. Sits on $500 Billion in Cash as Outlook Sours German companies are sitting on a half-trillion dollars of cash but are reluctant to invest it in their own country, potentially threatening the country’s competitive edge and European economic growth.
Germany’s nonfinancial businesses have saved more than they have invested for the past seven years, piling up about €455 billion ($500.4 billion) in cash and deposits, German central bank data show. (…)
Corporate savings, added to those of German households and the government, mean the country overall saves far more than it invests, and lends the excess savings abroad. Last year that imbalance—called the current-account surplus—reached 8.5% of gross domestic product, or €257 billion. It is forecast to increase this year. By comparison, the U.S. and the U.K. ran current-account deficits last year. (…)
(…) “Now rates are rising, so earnings must begin to grow once again or equity prices will suffer,” says Nicholas Colas, chief market strategist at Convergex. “That’s not opinion; it’s just math.” (…)
So a return to profit growth in the third quarter is far from a done deal. What’s more, there is a risk the resumption of the rate rising cycle could give extra impetus to the dollar, hitting the earnings of multinationals with significant business outside the US. The dollar index is near its highest level since February. (…)
The Business Conditions Survey, published by the National Association for Business Economics, showed an easing in U.S. unit demand last quarter. The diffusion index reading (rising minus falling) fell to 22.0 from 25.5. While these figures show improvement from Q1’16, unit demand has been slowing since early 2014. Forty-three percent of respondents reported rising demand versus the 2013 high of 62.5%. This slowdown was accompanied by slightly weaker employment growth. The jobs index was little changed in Q3 at 18.6, and lower than the Q2’14 high of 31.3. A fairly steady 33.3% of firms raised job levels, but an increased 14.7% lowered them. Capital spending plans weakened. The index level of 19.4 was down q/q, and lower than the Q4’14 peak of 46.3. A sharply lower 31.2% of firms raised spending versus 51.2% at the Q4’14 peak.
Pricing power remained constrained by the slowdown in final demand. The prices paid index stabilized q/q at 11.5, but was below the 2011 reading of 29.0. A fairly stable 20.8% of firms raised prices, but an increased 9.4% lowered them. At the same time, a tighter labor market led to firmer earnings for workers. The net rising index for wages & salaries rose to 42.6, up sharply from 7.1 in Q3’13. Forty-five percent of firms raised compensation, triple the percentage three years ago. The combination of moderate pricing power and increased labor costs depressed earnings. The profits index declined slightly last quarter and has trended sideways for a year. These readings are sharply below the strength registered in Q4’13 when a net 26.2% of respondents earned more.
One third of the S&P 500 market cap in:
- 123 companies (32.8% of the S&P 500’s market cap) have reported. Earnings are beating by 6.5% while revenues are surprising by 0.7%.
- Expectations are for revenue, earnings, and EPS of 2.4%, -0.5%, and 1.6%, respectively.
- EPS is on pace for +5.9%, assuming the current beat rate for the remainder of the season. This would be +9.6% excluding Energy. (RBC)
But the current 76% beat rate will come down. The 96% beat rate in Financials will decline. Ex-Financials, the current 71% beat rate is more normal and the beat is +4.5%. The other fact is that the revenue beat rate is 44%, dropping to 35% ex-Fins. In all, so far so good but it seems wise to wait a little before celebrating.
Four Nations Are Winning the Global War for Talent The world’s highly skilled immigrants are increasingly living in just four nations: the U.S., U.K., Canada and Australia, according to new World Bank research highlighting the challenges of brain drain for non-English-speaking and developing countries.
(…) Despite efforts of non-English-speaking nations to attract high quality workers, almost 75% of the total OECD highly skilled workforce in 2010 lived in the four main Anglo-Saxon countries—almost 40% in the U.S. alone. Around 70% of engineers in Silicon Valley and 60% of doctors in Perth, Australia, were foreign-born in 2010.
“The U.S. has received an enormous net surplus of inventors from abroad, while China and India have been major source countries,” the study noted. In the last third of the 20th century, for instance, immigrants won 31% of all Nobel prizes—of whom more than half of these were at U.S. institutions. (…)