U.S. Light Vehicle Sales Weaken
Total sales of light vehicles declined 3.4% during November (-1.3% y/y) to 17.48 million units (SAAR) from 18.09 million in October, according to the Autodata Corporation. Sales have fallen 5.9% from the September high.
Light truck sales declined 3.9% (+4.1 % y/y) to 11.08 million after a 2.0% October drop. Domestically-made light trucks fell 4.7% (+2.1% y/y) to 9.05 million units following a 2.1% decline. Imported light truck sales eased 0.3% (+13.6% y/y) to 2.03 million units, remaining near the record high.
Trucks’ share of the U.S. vehicle market was little-changed m/m at 63.4% in November, but was higher than 51.2% ten years earlier.
The passenger car market also weakened as sales fell 2.5% (-9.4% y/y) to 6.39 million units, the lowest level in three months. Domestically-produced passenger car sales were off 1.1% last month (-8.3% y/y) to 4.70 million units after a 4.1% decline. Sales of imported passenger cars dropped 6.0% (-12.3% y/y) to 1.70 million units on the heels of a 2.6% decline.
Imports share of the U.S. vehicle market held steady m/m at 21.3%, but was up from 19.9% during all of 2015. Imports share of the passenger car market fell to 26.5%, and recently has been little-changed. Imports share of the light truck market strengthened m/m to 18.4%, up from 12.7% in 2014.
U.S. November PMI signals robust manufacturing growth
November survey data indicated improved operating conditions across the US manufacturing sector. The upturn was supported by solid, albeit slightly weaker, increases in output and new orders. Staffing levels meanwhile rose at a robust pace, despite the rate of job creation softening since October. However, signs of capacity pressures persisted, with backlogs of work rising again. Output charges rose at the fastest pace since December 2013. Input prices also rose at a quicker rate that was steep overall. Business confidence was robust, and reached its highest since January 2016.
The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.9 in November, down from 54.6 in October. The latest index reading signalled robust, albeit slower, overall growth in the manufacturing sector. The latest upturn was in line with the long-run series average.
Goods producers increased their output at a rate only slightly below that seen in October. Anecdotal evidence suggested that the rise was due to greater order volumes and robust client demand.
New orders received by manufacturers rose at the second-fastest pace since March in November. Panellists linked the latest upturn to more favourable demand conditions, and noted more orders from domestic and foreign clients. Furthermore, export sales rose at a rate that, though moderate, was the second-fastest in 15 months.
The level of outstanding business at manufacturing firms increased at an accelerated pace that was the most marked since April. Employment levels, meanwhile, grew at the second-strongest rate seen since June 2015 in November.
Average prices charged by manufacturers rose further in November, with the pace of inflation accelerating to the fastest in almost four years. Anecdotal evidence suggested the increase was due to greater cost burdens which were largely passed on to clients. Input price inflation also quickened since October and was steep overall. Survey respondents commonly stated that components costs rose due to logistical delays.
Buying activity at goods producers grew at the strongest pace since February as firms adapted to larger new order volumes. Pre-production inventories also increased amid reports of stockpiling.
Output expectations among goods producers remained robust in November, with positive sentiment improving to its highest since January 2016. A number of panel members linked greater optimism to larger client bases and planned expansion into new markets.
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Manufacturing Expands at Slower Rate in November A gauge of U.S. manufacturing activity cooled modestly for the second straight month in November, but the reading still shows a strong factory sector.
(…) The Institute for Supply Management on Friday said its manufacturing index fell to 58.2 in November, but remained solidly in a growth mode. (…)
The easing of the sector’s expansion last month was driven by a decrease in inventories and a slower rate of growth in deliveries from suppliers and export orders. Employment growth cooled just slightly.
But other components of the index show continued strength for manufacturing. Overall new orders are rising at faster rate, and production also sped up. (…)
Of the 18 manufacturing industries tracked, 14 grew last month, the report said. The machinery sector was particularly strong. Just two contracted; wood products and petroleum and coal products. (…)
IHS Markit’s manufacturing PMI output index exhibits an 89% correlation with the Fed’s official measure of production but is available almost a month ahead of the official numbers.
Global manufacturing growth accelerates to 80-month high
November saw the upturn in the global manufacturing sector strengthen, with rates of expansion in output, new orders and employment all hitting multi-year highs. Price pressures remained elevated, however, with input costs and output charges rising at accelerated and above long run average rates.
The J.P.Morgan Global Manufacturing PMIâ„¢ posted 54.0 in November, up from 53.5 in October and its highest reading since March 2011. The headline PMI has signalled expansion for 21 consecutive months.
Business conditions improved across the consumer, intermediate and investment goods sectors. The strongest expansion was signalled at intermediate goods producers and the slowest in the consumer goods category.
Growth remained sharper (on average) in developed nations compared to emerging markets. The euro area was a bright spot, with its PMI rising to a near-record high. Rates of increase also strengthened in Japan (44-month high), the UK (51-month high), Australia (8-month high) and Canada (2-month high). Growth slowed slightly in the US, but remained solid overall.
In the main emerging nations, growth eased to a five month low in China, but accelerated in India (fastest in over a year), Brazil (81-month high) and Russia. Mexico returned to expansion after contracting in October.
Global manufacturing production expanded at the quickest pace since February 2011, supported by a similarly rapid increase in new order intakes. There was also a bounce in international trade flows, as growth of new export business hit a near seven-year high.
Strong demand tested capacity, leading to a further solid increase in employment. The pace of job creation was the steepest in six-and-a-half years, with higher staffing levels registered in almost all of the nations covered by the survey. Notable exceptions were job losses in China, South Korea and Russia.
Price pressures remained elevated in November. The rates of inflation in input costs and output charges were the sharpest registered since May 2011. Both price measures were higher (on average) in developed nations compared to emerging markets.
Prices Begin to Rise in Deflation-Wracked Japan Here is one sign of how robust the world economy is getting: Even in deflation-wracked Japan, some companies believe conditions are strong enough to raise prices.
(…) Data released Friday showed that core consumer prices rose 0.8% in October compared with the same month a year earlier, a faster pace than September’s 0.7%. The figure was negative as recently as last December. (…)
Since the working-age population is shrinking, the overseas demand is driving a severe labor crunch for employers. In October, there were 155 jobs available for every 100 job seekers, according to data released Friday, the strongest showing in more than 43 years.
“Upward pressure on prices stemming from the rise in wage costs has been mounting,†said Bank of Japan Gov. Haruhiko Kuroda in November. (…)
Part-time pay grew by 2.3% in September from a year earlier, outpacing the overall rise in wages of less than 1%. Even with an influx of foreign workers, competition to secure workers for fast-food restaurants and construction sites is fierce. Some companies are finding that they need to promise more job security and career options to workers, especially women, who were previously considered disposable “irregular†workers. (…)
Canadian Economic Growth Slows in Third Quarter
Canada’s gross domestic product, or the broadest measure of goods and services produced in an economy, rose at a 1.7% annualized rate in the third quarter to 1.85 trillion Canadian dollars ($1.44 trillion), Statistics Canada said Friday. (…)
That marks a moderation in expansion from the second quarter, after GDP increased 4.3% versus an earlier estimate of 4.5%.
A moderation in growth was widely expected. Canadian exports fell 2.7% in the July-to-September period on a nonannualized basis, due mostly to disruptions at automobile factories as companies performed maintenance work or retooled production lines to accommodate new models; and a labor strike at General Motors Co.’s factory in Ingersoll, Ont. (…)
Offsetting the steep drop in exports were consumer spending, which rose 1% as households increased their outlays on both services and goods, and a pickup in business inventories, to C$17.16 billion in the third quarter from C$12.14 billion in the previous three-month period. (…)
Friday’s Canadian data also indicated GDP in September advanced 0.2% from the previous month, versus the consensus 0.1% call. The energy sector rebounded after declines in three straight months, climbing 1.1% from the previous month. Industrial production rose 0.4%.
A surprisingly strong report on Friday showed more Canadians found new jobs than in any month since April, 2012 – driving the unemployment rate to its lowest mark since before the financial crisis rocked the economy last decade.
The Canadian dollar rose by more than a cent against its U.S. counterpart as Statistics Canada released its November labour-force survey results, revealing an unemployment rate of 5.9 per cent, down from 6.3 per cent in October. That’s the lowest since February, 2008, thanks to 79,500 new jobs added last month. Meanwhile, Canada added 390,000 jobs over the 12 months through November – the biggest year-over-year gain since November, 2007.
That growth, up 2.1 per cent, is entirely attributable to 441,400 new full-time jobs, the statistics agency said. For the month of November, it was a rise of 49,900 part-time jobs that drove the stellar gains, though the survey’s month-to-month data tend to be volatile. (…)
Really surprising and suspect.
“If the employment data are to be viewed as believable, productivity must be taking a real negative hit here,” Mr. Rosenberg wrote. He also warned that November’s month-over-month 1.1-per-cent fall in average hours worked weekly would have the same effect as losing 130,000 jobs – offsetting November’s official gains “by a country mile.”
French-Canadian media La Presse reported last week that a food processor had to terminate production of 55,000 fresh meals per week for Québec grocery stores because the plant, located some 40 miles West of Montreal, could not find workers. The company posted 120 openings. It received ZERO applications.
If this is the Canadian reality, the BOC will follow the Fed on the interest rate path. Especially given that trend:
Source: Matthieu Arseneau, National Bank of Canada (via The Daily Shot)
EARNINGS WATCH
At this point in time, 107 companies in the index have issued EPS guidance for Q4 2017. Of these 107 companies, 71 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 66% (71 out of 107), which is below the 5-year average of 74%.
During the first two months of the quarter, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) dropped by 0.7% (to $34.74 from $35.00) during this period. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.3%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.3%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 4.3%.
In fact, the fourth quarter of 2017 marked the smallest decline in the bottom-up EPS estimate for the first two months of a quarter since Q2 2011 (+1.5%).
The estimated earnings growth rate for the fourth quarter is 10.5% this week, which is slightly higher than the estimated earnings growth rate of 10.4% last week. If the Energy sector were excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 8.3% from 10.5%.
The estimated (year-over-year) revenue growth rate for Q4 2017 is 6.4%. If the Energy sector were excluded, the estimated revenue growth rate for the index would fall to 5.6% from 6.4%.
From Thomson Reuters/IBES:
TECHNICALS
Lowry’s Research is not worried by last week’s “tech wreckâ€, noting that Demand keeps rising broadly while Supply is waning. Such conditions have “historically provided the optimal period for new buying.â€
Gavekal’s Anatole Kaletsky provides some fundamental support:
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Four Reasons Why the Bull Market Has Far to Go Investor exuberance seems perfectly rational, given low interest rates and synchronized global growth.
What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run. There are at least four reasons for such optimism.
First and foremost, the world economy is firing on all cylinders, with the U.S., Europe, and China simultaneously experiencing robust economic growth for the first time since 2008. Eventually, these simultaneous expansions will face the challenge of inflation and higher interest rates. But, given high unemployment in Europe and spare capacity in China, plus the persistent deflationary pressures from technology and global competition, the dangers of overheating are years away. (…)
A second reason for confidence is that the financial impact of zero interest rates and the vast expansion of central-bank money, known as quantitative easing (QE), are much better understood than when they were introduced following the 2008 crisis. (…) The policy has produced positive results. (…)
The Fed’s experimentation points to a third reason for optimism. By demonstrating the success of monetary stimulus, the U.S. provided a road map for other countries to follow, but with long and variable lags. (…) While the Fed is raising rates, Europe and Japan are planning to keep theirs near zero, at least until the end of the decade. That will moderate the negative effects of U.S. tightening on asset markets around the world, while European unemployment and Asian overcapacity will delay upward pressure on prices normally created by a coordinated global expansion.
This suggests a fourth reason why the global bull market will continue. While U.S. corporate profits, which have been rising for seven years, have probably hit a ceiling, the cyclical upswing in profits outside the U.S. has only recently started and will create new investment opportunities. So, even if U.S. conditions become less favorable, Europe, Japan, and many emerging markets are entering the sweet spot: Profits are rising strongly, but interest rates remain very low.
(…) When this optimistic shift goes too far, asset valuations rise exponentially and the bull market reaches a dangerous climax. Some speculative assets, such as cybercurrencies, have reached this point, and shares in even the best companies may experience temporary setbacks if they run up too fast. But for stock markets generally, valuations aren’t yet excessive, and investors are far from euphoric. So long as such cautiousness continues, asset prices are more likely to rise than fall.
BTW, you should be aware of the following facts regarding profits in Europe, courtesy of Thomson Reuters/IBES:
- Third quarter earnings are expected to increase 1.7% from Q3 2016. Excluding the Energy sector, earnings are expected to decrease 2.2%.
- 271 companies in the STOXX 600 have reported earnings to date for Q3 2017. Of these, 46.5% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
- In aggregate, companies are reporting earnings that are 4.3% below estimates, which is below the 4% long term (since 2011) average surprise factor.
Eurozone profits are just not “rising stronglyâ€, just yet anyway…even though the economy is in better shape.
Also be aware that we have entered the twilight zone valuation wise. Equities can get even more expensive, as they have before, but the upside gets gradually less rewarding compared with the downside risk from a valuation standpoint:
A reminder:
Another reminder: you can now park your cash at nearly 2.0% for 2 years. One year at 1.6%. We went from TINA to TIAA (There Is An Alternative) in 2017:
It looks like the “120 Yield Spread†is also warning us more loudly (A Powerful Combo: the Rule of 20 and the “120 Yield Spreadâ€):
You may also want to consider these charts which suggest that marginal demand for equities is unlikely to get any better. In fact, sensible people, especially the aging baby boomers, should consider reducing their exposure to equities.
(Source: Ned Davis Research via Steve Blumenthal)
Bob Farrell’s wisdom:
1. Markets tend to return to the mean over time When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually.
5. The public buys the most at the top and the least at the bottom That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
6. Fear and greed are stronger than long-term resolve Investors can be their own worst enemy, particularly when emotions take hold.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (“Nifty 50” stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is going to happen As Stovall, the S&P; investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Tax Bill & Shrinkage Tantrum
(…) We expect that the cumulative effect of these tax bill changes will take the deficit to 100% of the GDP of the nation in the “out years.†Which year that happens is irrelevant! It is the trend that counts. And that trend is up and will be accelerating after the tax bill passes and starts to be phased in. (…)
There will be a final tax bill. There will be a rising deficit that will eventually pressure interest rates higher. The Fed balance sheet shrinkage exacerbates this transition.
Lastly, a “shrinkage tantrum†probably lies ahead. When, and how serious a tantrum it will be, we cannot yet know.
On his way to New York for three fundraisers, Trump told reporters that the corporate tax rate in the GOP plan might end up rising to 22 percent from 20 percent.
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Congress Achieves the Impossible on Tax Reform Republicans have managed to make a terrible plan worse.
Flynn Plea Escalates Russia Probe Former national security adviser Mike Flynn is cooperating with the probe of Russian election meddling, admitting to lying about calls with Moscow’s ambassador before Trump’s inauguration, contacts that prosecutors said were coordinated with top transition officials including Jared Kushner.
(…) The statement of offense filed Friday suggests Mr. Flynn’s cooperation may have already produced valuable information. The document says that Mr. Flynn was directed by “a very senior member of the Presidential Transition Team†to call the Russians and other foreign governments to try to persuade them to delay their vote on or defeat the U.N. resolution. (…)
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Kushner Is Said to Have Ordered Flynn to Contact Russia
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Did Flynn’s Plea Deal Just Disprove Election Collusion This whole charade with former National Security Advisor Mike Flynn reeks of desperation and makes clear that Mueller’s team has an empty hand.
A house in south London, a vineyard and a “fully vegan†tattoo parlor are among a rush of businesses offering to accept bitcoin. But so far, few are buying, in a dearth that may have been made worse by the currency’s recent surge and could hamper its development as a regular currency.
Enter the ‘petro’: Venezuela to launch oil-backed cryptocurrency(…) “Venezuela will create a cryptocurrency,†backed by oil, gas, gold and diamond reserves, Maduro said in his regular Sunday televised broadcast, a five-hour showcase of Christmas songs and dancing. (…)
Ironically, Venezuela’s currency controls in recent years have spurred a bitcoin fad among tech-savvy Venezuelans looking to bypass controls to obtain dollars or make internet purchases. (…)
