Month: February 2017

U.S. New-Home Sales Rose 3.7% in January New home sales rebounded in January after a steep decline in December, an indication that the new-construction market remains on the path to recovery despite bumps along the way.

Purchases of newly built, single-family houses, which account for a small share of overall U.S. home sales, increased 3.7% from December to a seasonally adjusted annual rate of 555,000 last month, the Commerce Department said Friday.

The data was clouded, however, by a margin of error of 18.5 percentage points that is much larger than the reported increase. A 15.8% increase in Northeast sales led the pack last month, but that figure had a margin of error of 79.3 percentage points. (…)

The 12-month rolling total of new homes sold, which helps smooth out some of the monthly volatility, is up 12% year-over-year, according to Ralph McLaughlin, chief economist at Trulia.

“We’re seeing new-home sales climb pretty solidly month after month,” he said. New-home sales are now at about 85% of their 50-year norm, according to Mr. McLaughlin, although that doesn’t account for population growth. (…)

Single-family construction climbed 1.9% in January, while multifamily construction tumbled 10.2%.

Inventory of new homes available for sale climbed sharply in January to the highest level since September 2009 (…)

Executives at Toll Brothers said on a recent investor call that contracts for new homes were up 42% in January compared with a year earlier. (…)

  

(Haver Analytics)

• Sales were up 5.5% year-over-year in January,  However, January and February were the weakest months last year on a seasonally adjusted annual rate basis – so this was an easy comparison. Note that these sales (for January) occurred after mortgage rates increased following the election. (CalculatedRisk)
• The Census Bureau’s mid-month population estimates show a 72.6% increase in the US population since 1963. Here is a chart of new home sales as a percent of the population. (Doug Short)

• The cost of rent in the US is expected to keep rising faster than the rate of inflation or wages. The biggest increases are taking place in the “affordable” multifamily rentals (i.e. those for working households – labeled “Workforce”). (The Daily Shot)

Source: Fannie Mae, @joshdigga

Mall Closures Ripple Through Small-Town America

(…) Specialty retailers such as the Limited and department stores such as Sears and Macy’s in recent months have announced plans to close hundreds of stores nationwide and slash jobs as online shopping takes a growing share of revenue. (…)

Malls in smaller U.S. cities are often linchpins of local economies and their struggles can have a ripple effect, from jobs and tax revenues to the fortunes of logistics and transportation companies that provide trucking and inventory support for stores. Creditors who invest in mortgage securities tied to troubled malls face the risk of default. (…)

Economic Surveys Show Deep Splits in Confidence Along Party Lines Since the election of President Donald Trump, consumer confidence and sentiment surveys that ask participants about the health of the economy have seen their responses divided like never before along partisan lines.

 

(…) Three big drivers of business enthusiasm have been hopes for corporate tax reform, less regulation and the prospect of major infrastructure spending that could flood manufacturers and construction firms with work. Treasury Secretary Steven Mnuchin has said that tax reform could take until August. Regulations could also take years to roll back. Meantime, the details of an infrastructure package have yet to emerge, and even once enacted such projects take a notoriously long time.

Investors, like Republicans, are inferring in Mr. Trump a high probability of success despite obstacles he faces. The stock market is up more than 10% since the election. Andrew Liveris, chief executive of Dow Chemical Co., participated in a roundtable of business leaders who met with Mr. Trump last week. Afterward, he said “to have the U.S. government speak the language of business is a completely new experience.”

In the end, expectations will need to square up with the economy’s real performance.

• Many Americans Disapprove of Trump but Are Open to His Agenda, Poll Finds WSJ/NBC News poll shows negative views at a historically high level for a new president but support from a ‘critical middle’

Source: Gary Cohn says no go on border adjustment tax

Gary Cohn, chief economic advisor to President Trump, told a group of CEOs this morning that the White House does not support the House GOP version of a border adjustment tax, according to an attendee.

The comment was made while Cohn was being interviewed by The Carlyle Group CEO David Rubenstein, at a private event hosted by The Business Council in Washington, D.C. It also comes less than 24 hours after Trump indicated some support for the House language, in a conversation with Reuters.

UPDATE: The White House is disputing this report, issuing the following statement: “There is no daylight between Gary Cohn and the President. His comment was taken out of context as it was part of a broader conversation about the proposals that are connected to border adjustability. At no point during this conversation did Gary make a statement of support or opposition to the House border adjustability plan.”

The White House declined to make audio of Cohn’s comments available to Axios, citing the confidentiality of the Business Council session.

Hmmm…This is bordering on inside information.

Anyway, where will the money come from to finance the tax reform?

• Stockman: “After March 15 Everything Will Grind To A Halt”

• Trump to Propose Significant Increase in Defense Spending President Trump’s first budget will seek a sizable increase in military funding but won’t make changes to the largest future drivers of government spending: Social Security and Medicare. He is expected to give agencies their proposed budget allocations on Monday.

• No cuts to U.S. entitlement programs in Trump budget: Mnuchin U.S. President Donald Trump’s first budget proposal will spare big social welfare programs such as Social Security and Medicare from any cuts, Treasury Secretary Steven Mnuchin said in an interview broadcast on Sunday.

Bank Lending Signals Caution

Total loans and leases by U.S. commercial banks are currently rising at an annual pace of about 5%, based on weekly seasonally adjusted data from the Federal Reserve. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016.

The deceleration has been broad-based across business, real estate and consumer lending and is at odds with the idea of a stronger economy and rising sentiment. The slowdown has been particularly stark in commercial and industrial lending, which was growing at around 10% in the first half of last year, but is now up just 5.7% from a year earlier.

There are two possible causes, says Barclays analyst Jason Goldberg. One is that companies are selling more bonds to lock in cheap financing before rates rise. (…)

The other, more worrisome explanation is that political uncertainty is causing companies and banks to put off big decisions until the outlook for trade and tax policy is clearer. The lending slowdown began showing up clearly just before the election last year. (…)

Nobody should be surprised that companies put some spending projects on hold pending the eventual tax reform.

World Trade Flows Grew at Slowest Pace Since Financial Crisis International trade flows grew at the slowest pace since the financial crisis in 2016, but there were signs of a modest pickup as the year drew to a close.

The Netherlands Bureau for Economic Policy Analysis said on Friday that the volume of exports and imports of goods was 1.2% higher than in 2015, marking a slowdown from the 2% rate of growth recorded in the preceding year and the smallest rise since volumes crashed in 2009.

However, there were signs exports and imports might be reviving, with volumes up 1.1% in the final three months of the year compared with the third quarter, almost double the rate of increase in the three months to September. (…)

Over the longer term, world trade has usually grown at 1.5 times the rate of total economic output. During the period of rapid globalization in the 1990s, trade grew at twice the rate of economic output.

However, it appears to have grown more slowly than total output in 2016. (…)

“The rise of protectionism is more likely to accelerate than slow down,” Raoul Leering, head of international trade research at ING Bank, said. “The uncertainty around possible import tariffs by the U.S. also leads to a ‘wait and see’ attitude of companies with regard to offshoring, another driver of trade.” (…)

Amid much gloom, there are some positives for world trade. An international agreement to streamline the movement of goods across borders came into force Thursday, cutting trade costs by 14.3%, according to the World Trade Organization. The Trade Facilitation Agreement should make it more affordable for smaller firms to engage in trade. (…)

NBF adds this:

Emerging markets saw industrial output outpacing exports by the largest margin in four years. Unless all of that extra output was absorbed by domestic demand (which is unlikely), the stagnation of exports means already-bloated inventories grew further in emerging economies. As today’s Hot Charts show, the ratio of industrial production to exports at the end of 2016 was close to levels reached during the Great Recession of 2008-09. That could cap production and hence economic growth in emerging markets in the early parts of 2017.

• Trump team looks to bypass WTO dispute system Unilateral trade sanctions would test a pillar of the US-built global economic order

The Trump administration is exploring alternatives to taking trade disputes to the World Trade Organisation in what would amount to the first step away from a system that Washington helped to establish more than two decades ago. (…)

Since being established in 1995 the WTO has become the pre-eminent venue for resolving trade fights between member countries, which its proponents say has helped prevent destructive trade wars. While the US would remain a WTO member under the Trump administration’s plans, the officials’ move reflects the sceptical view many of them have of an institution they see as a plodding internationalist bureaucracy biased against US interests. (…)

• GE’s Immelt Sees New Era of Globalization as Protectionism Grows

INFLATION WATCH

• Eurozone Finally Finds Itself Free of Deflation

For the first time in almost four years, none of the eurozone’s 19 members was in deflation during January, an encouragement to the European Central Bank in its long struggle to lift inflation to its target and keep it there.

The European Union’s statistics agency Wednesday confirmed an earlier estimate that showed consumer prices in the currency area were 1.8% higher than a year earlier, a jump from the 1.1% inflation rate recorded in December 2016 and within touching distance of the ECB’s target, which is close to, but below 2%. (…)

In inflation-averse Germany, prices were 1.9% higher than a year earlier in January, amplifying calls for an end to ECB stimulus. The central bank has said it won’t consider a tapering of its stimulus programs until it is clear that inflation will remain around its target, even after energy prices have stopped rising. That would requires a pickup in the pace at which prices of other goods and services are rising. However, there were few, if any, signs of a buildup in underlying inflationary pressures during January. The core rate of inflation, which excludes energy, food, alcohol and tobacco, was unchanged at 0.9%, and lower than in January 2016. (…)

Something strange happened in January. MoM food and energy prices rose but prices of just about everything else collapsed, including services prices.

• Canadian CPI surprised to the upside as inflation strengthens globally. (The Daily Shot)

• UK’s retailers are planning a sizeable price increase, driven by the pound’s weakness. (The Daily Shot)

Source: @Not_Jim_Cramer

• U.K. Retail Sales Fell Again in January

(…) retail sales contracted in January by 0.3% from the previous month, the Office for National Statistics said Friday, dragging the annual rate of growth down to 1.5%, the weakest expansion in more than three years. (…)

The January slowdown was driven to a large extent by rising prices for fuel and food, the ONS said. Sterling has lost around 15% against the dollar since the referendum result, a decline that is fueling a surge in inflation: Consumer prices rose 1.8% in January, the fastest rate of growth in 2 ½ years, and the Bank of England expects annual inflation to overshoot its 2% target within months. (…)

Average wages after inflation grew by merely 1.4% in the three months to December, the slowest pace of growth in two years. (…)

EARNINGS WATCH

• With 92% of the companies in the S&P 500 having reported Q4’16, Factset calculates that 66% of S&P 500 companies have beat the mean EPS estimate and 52% of S&P 500 companies have beat the mean sales estimate.
• Earnings Growth for Q4’16 is 4.9% vs +3.1% expected on Dec. 31 2016. Thomson Reuters/IBES is at +7.7% for Q4.
• So the Q4 earnings season started with a bang but ended only so-so with the beat rate well below last year’s 71% and the EPS surprise totalling +1.8% (+2.9% last week), much lower than the 1-year (+4.4%) average and below the 5-year (+4.2%) average. TR’s surprise factor is at +2.2%.

• Earnings Guidance for Q1 2017 shows that 67 S&P 500 companies have issued negative EPS guidance and 31 companies have issued positive EPS guidance. IT companies provided 34 of the 98 warnings with 18 of the 34 being positive. Ex-IT, 51 of the 64 companies providing guidance have guided negatively (80%).
• Factset now sees Q1’17 EPS up 9.3%, unchanged from last week but down from +12.5% on Dec. 31. TR is at +10.5% for Q1’17.

• Interesting to see Industrials’ Q1 estimates down from +0.6% last Dec. 31 to –5.7%. This while the sub-index rose 16% since Nov. 8 and 5% since Dec. 31.
• TR’s tally shows that estimate revisions remain somewhat negative for S&P 500 companies but are deteriorating at a faster pace for the all U.S. companies.

Something needs to change course on this chart from Lance Roberts:

The Rule of 20 P/E is now 22.3. Did you miss DEEP INTO THE TWILIGHT ZONE?

SENTIMENT WATCH

• Stocks are Frothy, but There’s No Bubble Stocks have soared but except for valuation there are few signs of a bubble. That doesn’t mean the market can’t fall.

(…) But other than paying high prices, investors aren’t behaving at all the way they typically do during bubbles.

One hallmark of a bubble is that stock trading becomes frenzied. In 1999, trading volume rose sharply, and dot-com stocks made up to 20% of the shares exchanging hands. But trading is looking pretty staid at the moment—indeed, daily volume since Mr. Trump was elected is below its year-earlier level.

Another bubble tell: Leverage. When irrational exuberance take hold, investors buy more stock using borrowed money in hopes of magnifying their gains. Margin debt is up, but as a share of the stock market’s value it has remained steady. In the dot-com bubble, it shot higher. (…)

Joe Public is generally late at the party and is the one pushing volumes and indices higher near the peaks. But Joe is already up to his ears in equities per this Ned Davis chart (via Evergreen/Gavekal):

WHEN INVESTORS HAVE HIGH STOCK ALLOCATIONS, LOW RETURNS ARE INEVITABLE

But Joe is busy moving away from expensive mutual funds to ETFs and robots which contribute to the trend:

• How Dangerous Is a Stock Market of Mindless Robots? Could the millions of people investing on autopilot be pushing an already expensive market even higher?

(…) Four leading robo-advisers — Betterment, Schwab Intelligent Portfolios, Vanguard Portfolio Advisory Services and Wealthfront — have roughly doubled their assets in the past year, to $77 billion.

In 2016, 82% of new retail investments coming through financial advisers (more than $400 billion) went into index funds and ETFs, according to Broadridge Financial Solutions, which helps process such trading.

All told, U.S.-based exchange-traded portfolios have amassed $2.6 trillion, says ETFGI, a research group in London. Target-date funds hold $915 billion, according to Morningstar, the investment-research firm.

We — including financial journalists, like me — have created a new breed. Today’s investors aren’t what the financial analyst Benjamin Graham described as “enterprising,” or willing to put time and energy into the search for bargains.

Instead, investors buy and hold (or at least intend to) regardless of whether entire markets are undervalued or overpriced.

“There’s an automaticity of investing here,” says the Investment Company Institute’s chief economist, Brian Reid, “where the vast majority of assets seem to stay in place.”

In short, the moralistic and puritanical view of investing that has prevailed for decades — how well you succeed at it is determined by how hard you work at it — is being replaced by an agnostic model in which you hope to succeed by clicking and letting it ride.

Benjamin Graham also warned that “there are no sure and easy paths to riches on Wall Street or anywhere else.” So it’s tempting to conclude that when we make investing effortless — and, frankly, mindless — we make it more dangerous.

In the late 1960s, Wall Street strategists argued that a flood of money from pension plans would drive stocks irresistibly higher. The favorite shares were called “one-decision stocks”: Your only choice was how much of them to buy. You’d never need to consider selling. The 37% crash of 1973-74 stifled that argument. (…)

“GURU” STUFF:

From Barron’s interview with Davis Rosenberg:

• Last year, the first of the boomers turned 70, and there will be 1½ million boomers turning 70 in each of the next 15 years. That is where the wealth and power still reside. But the other part is that some of the data shows that half of the boomers now heading into retirement have savings of $100,000 or less. In this segment of the population we have a savings crisis. A lot of these people have taken on student debt to help their children and grandchildren.
• The markets have given the administration the benefit of the doubt. The question is, how much patience does Mr. Market have, because it is very clear that there is no agreement on the border-adjustment tax, there is no broad agreement among House Republicans about whether tax reform should be revenue neutral, and if not, how far would we drive the deficit up?
• When you get three things together—a sub-11 VIX [the CBOE Volatility Index], an 18 forward multiple, and 60%-plus bulls in Investors Intelligence— and you look at the history, you’ll see that upside to this market is extremely limited. Volatility and uncertainty are underpriced. There will be better buying opportunities this year. Are we going into a bear market? No. We will have a flattish year, with a tremendous amount of volatility. Fiscal policy is as tapped out as monetary policy is.

More from Rosy via Lance Roberts’ Visualizing 10-Reasons For Caution.

Gundlach expects U.S. 10-year T-note yield to drop below 2.25 percent Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Friday he expects the yield on the benchmark 10-year U.S. Treasury note to drop below 2.25 percent as global investors seek safety.

(…) “There is a stealth flight to safety going on. German bond yields are leading the way down,” Gundlach said in emailed comments. “Gold is rising. Speculators remain massively short bonds and the market is going to squeeze them out.” (…)

Gundlach noted: “Stocks are out of synch with the stealth flight to safety. Lots of hope built in.” (…)

• Bond Market Is Flashing Warning Signal on Trump Reflation Trade The U.S. bond market is parting ways with the stock market—a red flag for investors who piled into the reflation trade.

Lessons From the Oracle: Warren Buffett’s Annual Letter, Annotated

TECHNICAL STUFF

I am not a big fan of technical stuff but Lowry’s does intelligent analysis. Their latest comment is very bullish: their demand/supply calculations show expanding demand and contracting supply, their market breadth measure is positive among all caps and their new highs vs new lows trends show “few signs of a weakening primary uptrend”.

I pay attention to the 200-day m.a.: it is still rising but the step back to the mean is getting steeper. Financials (18.4%) and IT (12.4%) are particularly high vs their 200-d. m.a.

Lance Roberts has this chart on the same gap measure:

And this other one:

The chart below brings this idea of reversion into a bit clearer focus. I have overlaid the 3-year average annual real return of the S&P 500 against the inflation-adjusted price index itself.

Historically, we find that when price extensions have exceeded a 12% deviation from the 3-year average return of the index, the majority of the market cycle had been completed. While this analysis does NOT mean the market is set to crash, it does suggest that a reversion in returns is likely. Unfortunately, the historical reversion in returns has often coincided at some juncture with a rather sharp decline in prices.

Facing Criticism, Drug Makers Keep Lid On Price Increases This year, pharmaceutical companies didn’t raise prices for as many drugs as last year and imposed fewer boosts of 10% or more, worried about the potential for a political and public backlash. Among the critics they face is President Trump.

About 5.5% of the increases reached the 10% level. A year ago, 15% did, and two years ago, 20% did. Even so, the median drug-price increase was little changed from last year, at 8.9%, still far above the U.S. inflation rate of around 2%. (…)

In all, producers raised the U.S. list prices of 2,353 prescription drugs in January. That was about a quarter fewer than in January 2016, according to Raymond James, which based its analysis on prices known as the “wholesale-acquisition cost.”

In the drug industry, “price increases have become a substitute for innovation,” said the CEO of Inc.,Leonard Schleifer, in an interview. “If we continue to go crazy with price increases, the government will have to step in.” Regeneron hasn’t raised prices on its three drugs since their launch. (…)

The industry has moved to restrain price increases before. Early in the Clinton administration, worried about a risk of price controls, the main pharmaceutical-industry trade group pledged to limit increases to the consumer inflation rate.

Such self-policing “has never been long-lasting,” Goldman Sachs wrote in a note to clients this past September, adding: “Price increases have become an industrywide practice, especially since 2010, when reliance on higher price increases” for revenue growth intensified.

Exclusive: Wal-Mart launches new front in U.S. price war, targets Aldi in grocery aisle Wal-Mart Stores Inc is running a new price-comparison test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi and other U.S. rivals like Kroger Co , according to four sources familiar with the moves.