The automakers will report April vehicle sales on Thursday, May 1st. Sales in March were at a 16.3 million seasonally adjusted annual rate (SAAR), and it appears sales in April will be above 16 million (SAAR) too.
Here are a few forecasts:
From J.D. Power: April New-Vehicle Retail Sales Showing Growth, With Consumer Spending at Record-Level Pace
New light-vehicle retail sales are expected to reach their highest levels for the month of April since 2005, according to a monthly sales forecast developed jointly by J.D. Power and LMC Automotive. … Total light-vehicle sales in April 2014 are expected to reach 1.4 million units, a 4 percent increase from April 2013. [16.1 million SAAR]
Note: In April 2014, there was one more selling day than in April 2013 (26 days vs. 25 last year).
From Edmunds.com: Car Sales Settle into a Groove in April, Says Edmunds.com
Edmunds.com … forecasts that 1,401,606 new cars and trucks will be sold in the U.S. in April for an estimated Seasonally Adjusted Annual Rate (SAAR) of 16.2 million. … The forecast anticipates that the auto industry will enjoy its best April performance since dealers sold 1,444,587 vehicles in April 2006.
From TrueCar: April SAAR to Hit 16.2 Million Vehicles, According to TrueCar; 2014 New Vehicle Sales Expected to be up 8 Percent Year-Over-Year
New light vehicle sales in the U.S. (including fleet) are expected to reach 1,382,000 units, up 7.5 percent from April 2013 and down 10.0 percent from March 2014. … Seasonally Adjusted Annualized Rate (“SAAR”) of 16.2 million new vehicle sales is up 9.2 percent from April 2013 and down 0.5 percent over March 2014.
Inflation Expectations Hold Steady—For Now
According to Friday’s consumer sentiment survey put out by Thomson-Reuters and the University of Michigan, consumers think inflation will be 3.2% a year from now, little changed from expectation readings so far this year. (Consumers almost always think inflation is running higher than the government’s official measures. The consumer price index, for instance, shows prices are up just 1.5% in the past year.)
Changes in gasoline prices tend to color how consumers view inflation. That’s not a surprise since gas prices are very visible and drivers tend to fill up frequently. Prices at the pump have been rising lately. Add in the price jump for some grocery items—most notably beef and pork—and it would not be surprising if inflation expectations edge up in coming months.
Sentiment among CEOs, based on Bloomberg’s excellent Orange Book index of their executive comments, had reached 14 month high levels in mid-April as everyone was optimistic about a post-weather pent-up-demand bounce in everything from car-buying to burger-flipping. As Bloomberg’s Rich Yamarone notes, optimism was the most widespread in the housing, automotive and transportation industries.
The last week has seen the ugly reality hit home as Sentiment collapsed at its fastest pace since the government shutdown and dropped to 5-month lows. Common pessimistic issues include: unfavorable currency exchange rates, higher-priced food and uncertainties in Russia and Ukraine.
News this week that tax receipts had risen an annual 7.2% in March and 3.7% during the first quarter—faster than the 3.3% rise economists had expected for the full year—has sparked a debate about whether to lighten one of the world’s heaviest household tax burdens.
Peter Ramsauer, a member of Chancellor Angela Merkel‘s alliance of conservative parties and chairman of parliament’s economics committee, said in a recent interview with the Bild newspaper that it was high time ordinary Germans were rewarded for their hard work.
Economists have latched onto the conversation, with many blaming high taxes and social security contributions for the fact that consumption in Europe’s largest economy has remained anemic despite record-low unemployment and respectable rates of growth.
Combining income tax and other levies on wages that fund the country’s welfare system, Germany had the second-highest tax burden on labor in 2013 among the 34 members of the Organization for Economic Cooperation and Development. (…)
Advocates of tax cuts in parliament say an easy way to do this would be to address the issue of bracket creep, whereby workers whose pay barely tracks the rate of inflation can slip into higher tax brackets and end up worse off. (…)
Both conservative and left-leaning members of Ms. Merkel’s cross-party coalition have now spoken in favor of tackling bracket creep, the main questions being when to do it and how to plug the hole this would blow in the budget—either through fresh debt, spending cuts or higher taxes on the rich.
The government sounded a cautious note this week, saying planned increases in welfare spending meant there would be no money to return to taxpayers this year or next. “At present…we don’t see any leeway that would allow us to tackle the problem,” said government spokesman Steffen Seibert.
Thirteen countries have increased indirect tax rates since January 2013 while none has cut them, according to a survey of about 130 countries by KPMG, the professional services group. It said: “Around the world, countries have shifted and continue to shift to indirect tax, rather than direct tax, to boost revenues”.
Corporate tax rates rose in nine countries but fell in 24. KPMG said in most countries, rates appeared to have stabilised after a decade of decline, although most tax authorities were attempting to increase revenues by pursuing more audits and investigations.
(…) “The increases in indirect tax rates are arguably evidence of it becoming the ‘tax of choice’ for governments around the world who are looking to raise much needed income.” Its attractions included its low cost of collection. (…)
Indirect tax was also becoming increasingly complex, as a result of constant changes to rules and rates, combined with an “increasingly aggressive and adversarial” approach to its collection and payment.
KPMG said companies were facing growing pressure to disclose to tax authorities what they were paying in tax and where those taxes were being paid.
It said country-by-country reporting of tax payments, already mandatory for companies in the extractive industry and the banking industry in the EU “will grow on a global basis over the next decade”.
It also urged companies to respond to increased public scrutiny of their tax affairs with greater transparency over how much they were contributing to society through tax. It said: “Do not become complacent: this issue is not going away.”
Asia’s Export Engine Sputters For decades, Asia fueled its development by selling products to the West. That engine is now sputtering, threatening to sap the region’s economic expansion.
Combined exports from Asia’s four export powerhouses—China, Japan, South Korea and Taiwan—slid 2% in the first three months of this year from the same period last year.
China’s drop is particularly striking. Beijing reported Friday that its first-quarter current-account surplus, which measures all trade and one-time transfers, shrank to a three-year low. (…)
This sluggishness reflects a sharp shift in the global economy. For decades, going back to the 1960s, Asian economies led by Japan, then South Korea, Taiwan and China, became the world’s factory floor, marshaling cheap labor to propel a wave of exports.
Today, it is unclear whether exports can still provide that oomph. Overall growth is slowing in many Asian nations, forcing policy makers to ponder whether demand from their own consumers can fill the void. (…)
Theories for the shift proliferate. Prominent among them: The U.S. recovery this time is different. In the five years since emerging from recession, growth in all goods and services in the U.S. has averaged just 1.8%, half the pace of the previous three expansions. (…)
Growth in U.S. consumer spending, meanwhile, has been stuck at roughly 2% for more than two years as Americans pay down debt, compared with well over 3% a decade ago. That means less demand for Asia’s exports, which are dominated by manufactured goods, especially electronics.
Imports by the U.S. from China, Japan, South Korea and Taiwan grew by just 1% in 2013, down from 13% in 2004.
Another theory for the export slump: The fruits of Asia’s successes—higher wages, better living standards—have made it too expensive as a manufacturing hub. That has been true for years in Japan, Taiwan and South Korea as they moved up the value chain. Today, their car makers and electronics firms have set up facilities overseas to benefit from cheaper wages.
Now, even China appears to be losing business in lower-end manufacturing as wages rise and exporters of clothes and cheaper electronics shift to less costly countries such as Vietnam and Bangladesh.
For these less-developed nations, the export path remains open if they can supply enough workers with the education and skills to seize it. But investors in Vietnam already complain of a shortage of skilled workers, underscoring the challenge to even poorer nations like Myanmar, Cambodia and Laos.
Elsewhere in Asia, leaders are addressing the challenge of weaning their economies from exports. (…)
The problem for Asia is that structural overhauls often put a brake on economic growth before they pay off. (…)
To juice exports, policy makers in several Asian countries have nudged their currencies lower recently to make their goods cheaper abroad.
The U.S. Treasury Department has criticized China’s moves to decrease the value of the yuan 3% so far this year. The IMF said this month that government interventions may have pushed South Korea’s won 8% below its real market value.
But the more Asian exporters try to find an escape by weakening their currencies, the higher the risk of a currency war.
For the fourth year in a row, consensus expectations for European companies’ earnings growth at the beginning of the year have proved wildly over-optimistic.
In the last four weeks, consensus earnings forecasts for Peugeot, Rémy Cointreau and Air France-KLM have all been downgraded, by 40 per cent, 11 per cent and 8 per cent, respectively, according to Bloomberg. (…)
Thomson Reuters’ IBES consensus forecasts for European earnings growth in 2014 have moved from 13 per cent at the start of the year to 8 per cent. (…)
A strong euro, wobbles in the emerging markets from Turkey to South Africa, a US swathed in snow, not to mention rising geopolitical tension between Russia and the west over Ukraine all provided reasons for gloom during the first quarter of 2014. But investors should nevertheless take with a pinch of salt the number of companies reporting that they have “beaten” expectations, given that these have fallen so sharply over the quarter.
Even so, just over half the 101 companies of the 374 Stoxx600 European companies that have reported so far on their first quarter performance have disappointed consensus earnings expectations, according to Bloomberg.
The last four years are not the only examples of analysts being over-bullish.
“Going back 25 years, analysts have been too optimistic about earnings growth in 20 years out of the 25 and by 8 percentage points on average over the whole period,” said Mr Nelson. (…)
SENTIMENT WATCH
Fifty-six percent of Big Money respondents call themselves bullish or very bullish about U.S. stocks today, down from 68% six months ago. The percentage of poll respondents who say they are neutral has swelled to 35% from 24% six months ago and 19% a year ago. Only 8% of respondents self-identify as bears in the current poll, the same percentage as last fall.
Seventy-three percent of Big Money managers consider the market fairly valued, up slightly from last fall. Another 18% say stocks are overvalued, versus 14% in our prior survey. More than 40% predict that the market’s price/earnings multiple will expand in the next 12 months, as investors become even more willing to pay up for earnings growth.
Seventy-one percent of Big Money managers predict that stocks will be the best-performing asset class in the next 12 months, while 12% look for the biggest gains to come from real estate, and 5% expect cash to be No. 1. Over five years, 81% of managers favor equities, 8% like real estate best, and 6% say that commodities will outperform everything else.
On a geographic basis, 60% of the managers expect the U.S. to do best in the next year; 23% think Europe will shine brightest, and 14% look for the biggest gains to come from emerging markets. Expectations differ over five years, however, when almost half the managers expect emerging markets to be back on top.
The Big Money crowd has little affection for gold, with 66% calling themselves bearish on the yellow metal. Their year-end consensus forecast for gold is $1,326 an ounce, up just 3% from last week’s $1,293.
They reserve their greatest disdain, however, for bonds, which have enjoyed a storied run and could deliver diminishing returns in the future, especially when the Fed begins to raise interest rates again. Almost 90% of poll participants are bearish on the investment prospects for U.S. Treasuries, with 80% downbeat on U.S. corporate issues. More than half the managers—55%, to be exact—expect their fixed-income portfolios to generate negative total returns in the next 12 months.
Nearly 80% of managers expect the Fed to start raising interest rates in 2015, with most eyeing the year’s second or third quarter as the kickoff period.
Another 7% see the change in policy coming in the first quarter of 2016, although 8% don’t expect a rate hike until after 2016, given what they see as the economy’s still-precarious state.
Alarmingly, 54% of managers predict that share prices will slide when the Fed raises rates again.
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Highflying Small Caps Get Clipped Last year’s blistering rally in shares of smaller companies may have cooled off, but many investors say the group still appears pricey.
(…) this year, the Russell 2000 is down 3.5% while the S&P 500 has gained 0.8%. Even the Nasdaq Composite Index, which took a drubbing from a dive in biotechnology and technology stocks, performed better than the Russell, declining 2.4%.
Last week, when the S&P 500 fell less than 0.1%, the Russell lost 1.3%.(…)
The Russell 2000 is at trading around 19 times the expected earnings of its components for the next year, according to Russell Investments. At the start of 2013, the earnings multiple on the Russell was 15.1.
Current valuations are well above their long-term averages. Since the start of 1994, small caps have traded at an average price/earnings multiple of 16.9, according to Russell. Over the last five years, the average has been 15.8. (…)
However, individual investors haven’t yet soured on small U.S. stocks. Traditional mutual funds investing in small caps have taken in $3.1 billion this year, according to Morningstar, on top of the $16.4 billion last year. (…)
Large speculators such as hedge funds are betting $2.8 billion this month that theRussell 2000 Index will fall. That’s the most since 2012 and the highest versus average levels since 2004, according to data compiled by Bloomberg and Bank of America Corp. (…)
Valuations in the Russell 2000 rose above levels from the 1990s technology bubble. While small-cap shares are usually the first to benefit when economic growth picks up, the selloff reflects a loss of faith by professional investors in the five-year equity rally. (…)
The Russell 2000 last month reached a valuation of 10.8 times its members’ annual earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That was the highest since at least 1995 and compares with an average weekly ratio of 7.7 times Ebitda, the data show. The valuation was at 10.2 at the end of last week.
The Russell 1000 Index for larger stocks such as Apple Inc. and Exxon Mobil Corp. trades at 8.7 times Ebitda, close to the highest since 2001. The small-cap index carries an 18 percent premium relative to the large-cap measure, after reaching 23 percent in March and climbing to 26 percent in September, according to the data.
What concerns you about corporate profit margins?
Corporate profits are the mother’s milk of stock prices. First, we’ve had this lengthy improvement in corporate productivity, and that’s likely near complete. We’ve had years of fixed-cost reductions by corporations, and that’s also likely over, because they’ve cut to the bone. If the employment market gradually tightens, labor costs will rise, pressuring margins. Both interest expenses and effective tax rates will have to rise as central banks normalize monetary policy and the U.S. sees the need to reduce its deficit. And a very costly regulatory policy is likely to continue, increasing corporate costs. And finally, the quiescent capital-spending cycle will ultimately be awakened. With that, amortization and depreciation costs will ascend. (…)
At another important top, in early 2000, the market leadership rotated from high tech to value stocks—exactly what has happened in the past two months. Leadership changes are often the sign of a market correction or bear market.
What in particular will pressure the markets?
Disappointing global economic growth, weaker-than-consensus earnings, and a contraction of the price/earnings multiple, compared with a 25% expansion last year. Those will be the culprits for a negative return this year. The consensus view is missing, among other things, the vulnerability of the middle class, which provides an important source of economic growth. It’s missing the economic vulnerability of our young people. It’s missing our addiction to low interest rates, both in the public and private sectors. It’s missing the consequences of higher rates and the risks to profit margins, probably my biggest concern. And it’s missing the widening gap between the haves and have-nots—and the economic and social consequences over time.
Another Way to Gauge the U.S. Economy Gross output takes into account intermediate transactions overlook by gross domestic product.
How often have we been told that consumer spending accounts for more than two-thirds of the economy, based on the measure called “gross domestic product”? That two-thirds share would be news to many job holders, since most of us don’t earn our money from enterprises that sell directly to consumers.
Of the 125.3 million job holders in the private sector, just 15.3 million are in retailing. Add the millions of others who directly serve consumers in other ways, and you’ll still find that those who work in businesses that sell to other businesses (or to the government) constitute the majority.
The vital importance of business-to-business transactions in the U.S. economy has been captured in a data series released on Friday by the Bureau of Economic Analysis, called “gross output.” BEA Director Steve Landefeld, whose 19-year stewardship has led the agency in many creative directions, told me last week that while he believes gross output is of value at the industry level, he advises against using aggregate GO as a substitute for aggregate GDP.
He does, however, obligingly provide estimates for aggregate GO in the newly released tables. As of 2013’s fourth quarter, the nominal value of U.S. GO came to $30.1 trillion. In contrast, nominal GDP ran at $17.1 trillion, with consumer spending accounting for 68.2% of it. But if we think of gross output as “the economy,” consumer spending accounted for just 38.7%, seemingly a better approximation of reality.
Landefeld’s main objection to aggregate GO is that it commits the sin of double- and even triple-counting.
To see why, imagine a simple economy in which the only output is bread. The GDP of the bread economy would simply tally the final sales value, in dollars, of all the loaves produced, adding whatever investment there might be in plants and equipment to support production. But on a GO basis, we’d also tally the various stages of B-to-B transactions needed to get the bread to consumers. First, farmers grow the wheat and sell it to millers, who grind it into flour. Then they sell the flour to bakers, who turn it into bread that they sell to retail outlets. Finally, the retailers sell the bread to consumers. And, of course, other transactions also take place, since the bread must be wrapped in something.
GO includes the value of final sales, plus the dollar value of all intermediate transactions. Hence, the double- and triple-counting, compared with GDP. Regarding that point, Landefeld raises another objection. Let’s say the bread industry suddenly undergoes a spate of vertical integration, with bakers buying the farms that grow the wheat and the mills that produce the flour. In that case, many intermediate cash transactions would disappear, and GO would decline. In fact, as Landefeld points out, the opposite has been happening. A move to greater outsourcing has increased the number of intermediate transactions, artificially boosting gross output.
No such declines or gains could happen to gross domestic product. But Landefeld feels that as long as GO is confined to the industry level, the advantages of viewing an industry up close outweigh the disadvantages of double-counting.
WHILE ALL OF THESE OBJECTIONS are valid, there is still value to GO on both the aggregate and industry level. Economist Mark Skousen can be credited with pioneering the concept of gross output in his 1990 book, The Structure of Production (see his op-ed article on this topic in the April 22 Wall Street Journal).
Among other things, Skousen notes that GO acts as a more sensitive seismograph in registering the shock of business cycles. During a downturn, intermediate-goods industries are struck especially hard, with consumer spending satisfied from the drawdown in inventories. So, for example, the fall in real GO during the recession of 2007-09 was 8.7%, compared with a 4.3% decline in real GDP over the same period.
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