Month: October 2014

U.S. HOUSING ON THE MEND

Pending Home Sales Post Small Gain The number of contracts signed to buy previously owned homes rose only slightly in September after an August decline, a sign the housing recovery remains uneven.

Pending sales of existing homes increased 0.3% to a seasonally adjusted index level of 105 in September from August, the National Association of Realtors said Monday.

August pending sales fell 1% from the month before. The decline was unrevised in Monday’s release. Pending home sales were up 1% last month from September 2013.

September’s small monthly gain was somewhat weaker than other measures of the housing market that showed signs of recent strength.

Sales of newly built homes rose in Septemberto touch their fastest seasonally adjusted pace since the recession ended, the Commerce Department said Friday. The Realtors’ closely watched barometer of existing-home sales, reported last week, increased 2.4% in September to reach the best pace of the year. That report measures sales after contracts close. (…)

Let’s wrap up housing looking at the last 3 months, once again proving that national data can mask the reality observed locally:

• Existing single-family home sales have flattened but mainly because of a weaker Midwest market which may be because of softer crop prices.
• Pending home sales jumped 3.2% MoM in July, dropped 1.0% in August and rose 0.3% in September. While choppy, sales are up 2.5% in the last 3 months. Again, the Midwest was very weak, with sales dropping every month for a cumulative -3.7% decline in 3 months. Meanwhile, Northeast +4.4%, South +3.8% and West +5.8%.

In truth, the U.S. housing sector is getting better. 

New Homes’ Problem: Price The gap between the more expensive median price of newly built homes and that of resales has exceeded $70,000 for most of the economic recovery, the widest spread since the Commerce Department and the National Association of Realtors started tracking the figures in 1968.

(…) “Builders are making a conscious decision to sell fewer homes at higher prices than to sell more homes at lower prices.”

Builders have focused on building larger homes because of demand trends. In short, better-heeled buyers have been the most active segment in recent years, while entry-level buyers have sat it out. Thus, builders constructed fewer homes, keeping profit margins high by making those homes large and expensive. That focus contributed to the median price of new homes increasing by 24% from 2009 to 2013, outpacing the 14.7% gain in the median resale price in the same span.

Entry-level buyers, meanwhile, have been sidelined by tepid job and wage growth, mounting student-debt burdens and tight mortgage-qualification standards. With that segment accounting for much less of the market than usual, new-home sales so far this year are tracking at about 65% to 70% of their annual average since 2000.

On Friday, the Commerce Department reported that sales of new single-family homes rose 0.2% in September from the prior month to a seasonally adjusted annual rate of 467,000. That monthly figure marks a 17% gain from a year earlier. However, a broader perspective shows the new-home market has slowed to a crawl; sales in the first nine months of this year rose just 1.7% from the same period last year. Sales increased by 16.6% in 2013 from 2012. (…)

The National Association of Home Builders estimates that each new single-family home constructed creates three full-time jobs for a year. In turn, home construction typically accounts for 5% of U.S. gross domestic product, but it has contributed as little as 3.1% of late amid the industry’s malaise.

There are early signs that entry-level buyers are starting to return to the market, but they are finding few new homes in their price range. Many are turning to resales instead, real-estate agents say. (…)

Another factor favoring resales: location. Some buyers want to live closer to city centers, while most home construction takes place in the suburbs. “Location and price point are driving buyers to resales,” said Tony Baroni, a real-estate agent at Keller Williams Realty in the Tampa, Fla., area who represented the Andersons.

(…) David Crowe, chief economist for the National Association of Home Builders, noted that builders are starting to sell more inexpensive homes. Last month, 31% of new homes sold were priced at $200,000 or less, compared with 28% in September 2013, Commerce Department data show. (…)

Gas at $3 Carries Rewards—and Risks Gasoline prices have dropped below $3 a gallon at most U.S. gas stations, delivering a welcome lift to American consumers and retailers. But the related oil-price drop has a thorny underside: It is threatening to slow the nation’s energy boom.

(…) oil prices, which have fallen 25% since mid-June, tumbled below $80 a barrel on Monday—before recovering to close only slightly lower at $81 on the New York Mercantile Exchange—after Goldman Sachs cut its oil forecasts for the first quarter of 2015 to $75 a barrel for the U.S. benchmark. Prices climbed as high as $107.26 a barrel as recently as June when tumult in the Middle East rattled markets about potential supply disruptions.

But the latest drop is spurring debate among economists over how much falling prices will squeeze domestic producers, a reflection of the far-reaching implications from the nation’s energy resurgence. (…)

The oil and gas extraction industry accounts for 1.7% of U.S. gross domestic product, which is one-half percentage point higher than its average since 1976, according to J.P. Morgan economists. (…)

As long as oil prices remain at or above $80 a barrel, production is profitable for all but 4% of U.S. wells, according to the International Energy Agency. Analysts generally agree that production would slow only if prices fell below $75 a barrel. (…)

Of course, the biggest beneficiaries of lower prices are American consumers. A rule of thumb holds that every one-cent drop in energy prices is worth $1 billion in annual household consumption nationwide.

Middle-class families could feel considerable breathing room from lower prices. In 2012, families with income below $50,000 spent an average of 21.4% of their income on energy, nearly double the share in 2001, according to economists at Bank of America Merrill Lynch.

“There has never been a time, nor will there be a time, where a drop in energy prices doesn’t add spending power to the consumer,” said Gluskin Sheff’s Mr. Rosenberg. (…)

Let’s also remember that the U.S. remains a net oil importer.

Oil steadies as Barclays joins Goldman in cutting price forecast

Like Goldman and everybody else, they sure did not see this one coming!

Big drop in gasoline prices will boost consumption

(…) The price of retail gasoline fell its lowest level since 2010 last week. If prices were to remain unchanged between now and the yearend, the decline would be an annualized 24% in Q4, bringing the cumulative drop in H2 2014 to a massive 28%.

As today’s Hot Charts show, the last time U.S. households experienced a relief of this magnitude at the pump during the expansion phase of an economic cycle was 2006. This is a big deal because gasoline normally accounts for 10% of total retail sales. Discretionary spending stands to benefit substantially from the sharp drop in gasoline prices and the good performance of labour markets (UI claims dropped to a 14-year low last week). (NBF)

Problem is consumers ain’t spending any more so far:

Weekly chain store sales have been weakening since mid-August and are showing no signs of turning up just yet. Weekly sales have declined in 3 of the last 5 weeks for a cumulative drop of -0.4%. Official retail sales data are likely to come in weaker than expected for October.

 

THE CHINESE SYNDROME

China’s ‘new normal’ for consumption Multinationals and official retail data tell different story

While multinationals have been bleating about tumbling sales in China, official retail data from the world’s second-biggest economy tells a more robust story. What gives?

Consumer goods manufacturers Unilever, Nestlé, and Colgate-Palmolive all reported declines in China sales in the third quarter to the end of September, with Unilever’s China sales down 20 per cent in value terms.

China’s National Bureau of Statistics, meanwhile, says retail sales grew 12 per cent in the first nine months of 2014, down modestly from 13 per cent last year.

But analysts say the official data conceal a sharper consumption slowdown. Sales by the 100 largest retail enterprises grew just 0.1 per cent in the year to September – down from 10.1 per cent in the same period last year, according to the China General Chamber of Commerce, an industry association. (…)

China’s leadership has embraced the goal of increasing the role of consumption in driving overall economic growth, while pulling back on investment. In reality, economists say both investment and consumption will slow in the coming years. Rebalancing will occur if consumption slows more gradually than investment.

The risk is that the investment slowdown, especially the sluggish property market, drags consumption down with it. Consumption last year accounted for just shy of half of China’s economic output, of which household consumption made up 36 per cent and the government the balance.

Reliable data on overall household consumption are hard to come by in China. Analysts say the official data on retail sales are an imperfect gauge of consumption because they include some government purchases and may also count some wholesale transactions. (…)

Kantar Worldpanel, the consumer research group, forecasts that growth in fast-moving consumer goods – including toiletries, soft drinks and toys – will slow to 5.5 per cent this year from 15 per cent three years ago.

The slowdown at Unilever and its foreign peers is due in part to cyclical factors such as destocking, which are likely to have run their course by early next year. Foreign brands have also lost market share to local rivals, according to Kantar data, but the underlying trend of slower consumption is not going away. (…)

China Fake Invoice Evidence Mounts as HK Figures Diverge The gap between China’s reported exports to Hong Kong and the territory’s imports from the mainland widened in September to the most this year, suggesting fake export-invoicing is again skewing China’s trade data.

China recorded $1.56 of exports to Hong Kong last month for every $1 in imports Hong Kong registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg. Hong Kong’s imports from China climbed 5.5 percent from a year earlier to $24.1 billion, figures showed yesterday; China’s exports to Hong Kong surged 34 percent to $37.6 billion, according to mainland data on Oct. 13.

While China’s government has strict rules on importing capital, those seeking to exploit yuan appreciation can evade the limit by disguising money inflows as payment for goods exported to foreign countries or territories, especially Hong Kong. The latest trade mismatch coincided with renewed appreciation of China’s currency, leading analysts at banks and brokerages including Everbright Securities Co. and Australia & New Zealand Banking Group Ltd. to question the export surge. (…)

CEBM Research also sees Chinese data problems:

The monthly data shows that YTD industrial value added (IVA) dropped substantially during Q3. The YTD IVA growth was 8.8% at the end of June, and it slowed to 8.5% at the end of September. YTD value-added growth for secondary industry stayed flat at 7.4%. The industrial sector is the major component of secondary industry.

Normally the value added of the secondary industry moves in the same direction as industrial value added. Based on the IVA figure, the YTD value added of secondary industry would appear more likely at 7.2% or 7.3% rather than the released 7.4%. It is difficult to explain this difference at the moment. If there is no error in the monthly IVA data, we would guess the actual GDP growth rate in Q3 is lower than 7.3%.

CEBM adds:

We stick with our model which predicts further slowdown in hard indicators in Q4. The Q4 GDP Y/Y may slow to around 7.1%.

But says no further major stimulus coming:

During a press conference, the spokeperson from the NBS emphasized the importance of “recognizing the new normal scientifically, and to positively adapt to the new normal”. This suggests that the government has little incentive to significantly loosen policies to boost growth. What the policy makers are hearing is: 1) there has been progress made towards structural transition, and the service industry has a bigger share in GDP than secondary industry; 2) employment levels are still good. This explains why there has not been an RRR cut or benchmark interest rate cut up until now.

At the same time, there is also another guideline to consider: what the government wants is a managed slowdown rather than a free fall. This explains why the government has chosen to use many targeted policy moves recently. There has been a change in the monetary policy orientation since the beginning of the year. Last year, the objective of monetary policy going forward appears to have been a push towards deleveraging and guarding against future risk. The subsequent policy moves were consistent with this mandate.

This year, the objective switched to stabilizing demand and guarding against a systematic outbreak of the debt crisis. In January, the PBoC introduced the SLO and SLF, which essentially provided the banks with a liquidity guarantee to separate the debt issues of the enterprises from the liquidity crisis of the banks. In Q2, facing the slowdown in Q1, the government reacted with starts of infrastructure projects and acceleration in fiscal spending, along with targeted RRR cuts. In Q3, the fiscal spending appeared to have run out of power, and local level governments proceeded with loosening the property purchase restriction policies, which did not cause a
strong boost in home sales.

The PBoC reportedly provided 500 bn RMB of SLF funding to the 5 major banks in light of low loan issuance and the slowdown in August. At the end of September, the PBoC came out with guidance to loosen mortgage loan issuance, and in October, the PBoC was reported to inject more liquidity to joint-stock banks.

We anticipate that the government will stick with these two policy orientations during Q4: 1) no broad loosening in the absence of imminent risk of breakdown, and 2) managing the trajectory of slowdown to avoid a disordered fall. The annual central economic forum in December will establish the mandate for the 2015.

(…) As a result, the policy environment in 2015 looks to be similar to what it is right now. We may see the growth further slow to around 7%.

Japan’s Retail Sales Increase Most in Four Months

Sales climbed 2.7 percent in September from August when they rose 1.9 percent, the trade ministry said today in Tokyo. For the third quarter, sales were up 1.4 percent from a year earlier after a 1.8 percent drop in the second quarter.

After spending 2 weeks in Japan, I can attest that the economy is not weak. Stores are packed and buzzling, hotels are full. From our hotel corner room in Tokyo, I could count 13 cranes in the immediate horizon.

StanChart Cautions on China

(…) The Asia-focused bank said third-quarter operating profit dropped 16% to $1.53 billion from $1.83 billion, and reversed earlier guidance by saying second-half operating profit would be lower than last year’s. (…)

Bad loans and other impairments soared in the third quarter, to $539 million from $289 million, in part because of clients hit by weak commodity markets. Standard Chartered said it is “watchful” in China, as well as in India and of commodity exposures more broadly, in a toning down of Chief Executive Peter Sands ’s bullish stance this year on China. (…)

Here’s what Peter Sands really said:

“We have to be watchful on how we manage our exposures simply because there is so much going on in the Chinese economy.”

More central banks stimulation:

• Sweden’s central bank cuts rates to zero
• Vietnam Cuts Key Interest Rate to Boost Lending, GDP Growth

Apple boosts R&D spending by a third Rise comes as company rolls out initiatives including Apple Watch

(…) In its annual report published on Monday, Apple said R&D costs in its 2014 financial year were $6bn, or 3.3 per cent of revenues, up from $4.5bn last year, at 2.6 per cent of revenues. That matches the 3.3 per cent of revenues that Apple put into R&D in 2007, although in absolute terms its research budget has grown more than sevenfold in the seven years since its breakthrough iPhone went on sale.

The latest figures mark a 76 per cent increase from 2012, when Apple’s R&D spending was $3.4bn, which at 2.1 per cent marked a recent low point relative to sales. (…)

Apple’s capital expenditure also has leapt in the past year, from $7bn in 2013 to $11bn, according to its annual report. Apple predicts capital expenditure will rise to $13bn in fiscal 2015.

BTW, Apple is not alone in boosting capex. I presented the facts in BACKING BUYBACKS On October 2nd. More facts from Ed Yardeni:

EARNINGS WATCH

More than half way into the season, RBC Capital’s tally:

• 57.2% of the S&P 500’s market cap (220 companies) has reported. So far, earnings are beating by 4.5% while revenues have surprised by 0.6%.
• Expectations are for revenue, earnings, and EPS growth of 3.8%, 6.6%, and 8.8%, respectively. Assuming an historical beat rate, EPS is on track to come in near 10%.

Scotia Capital adds:

• Commodity weakness is negatively impacting Energy and Materials profitability, with Q3 EPS falling 6% and 7%, respectively, from Q2.
• Revenues are up 2.1% sequentially and 6.8% YOY, marking the fastest pace of revenue expansion since 2011. Profit margins are flirting with the Q2/14 record high of 10.1%.
• Wall Street forecasts for Q4 and 2015 were on the high side and have started to come down to reflect those headwinds. Q4E EPS has declined 2.4% to US$31.53
  since June and 2015E EPS has been revised 1% lower to US$130 over the same period. Negative revisions are likely to continue for some time, which could lift anxiety. However, bottom-up forecasts tend to be revised lower over time and upcoming quarters should be no exception.

Funds buckle up for redemption surge Outflow pressure prompts managers to bulk up on liquid assets

Bad Market Timing Fueled Wealth Gap Millions of Americans inadvertently made a classic investment mistake that contributed to today’s widening economic inequality: They bought stocks high and sold low.

(…) New research from the Federal Reserve and the University of Michigan shows the role that panic about the market played in widening wealth inequality.

The Fed’s Survey of Consumer Finances shows that among the bottom 90% of households by wealth, families bailed out of the stock market between 2007 and 2010—the central bank’s study is conducted every three years—and between 2010 and 2013. The total share with stockholdings declined by 4.4 percentage points. That’s the equivalent of 5.4 million households selling stocks, even as the market rebounded. Only households in the top 10% have been increasingly likely to own stocks. (…)

That’s also the finding of new research from economists Bing Chen and Frank Stafford at the University of Michigan. They plumbed the Panel Study of Income Dynamics, a survey that tracks the same households over time, to evaluate the factors behind their fluctuating incomes and wealth.

Households with the highest education and strong portfolios to begin with were likely to keep buying stocks during the decline, they found. Those with less education and smaller account balances were more likely to sell during the downturn.

When the subsequent rebound happened, the already rich got even richer.

The finding holds even after controlling for job loss or mortgage distress, meaning some families simply sold at the wrong time. Even those that outearn 80% of other families—an income of about $120,000 a year—are 5% less likely to own stocks now than in 2007, according to the Fed’s survey. (…)

Wealth inequality in the U.S. has many causes, some of which precede the recent booms and busts, and the new research doesn’t quantify exactly how much the stock-market timing contributed to it. The widening gap in incomes stretches back nearly 31/2 decades. Long-term unemployment rose in the recession and has yet to recover. And the decline in real estate hit many middle-class families that stored much of their wealth in their homes.

In addition, many households never owned stocks to begin with. Among those with earnings in the bottom fifth, for example, 89% don’t own stocks, up from 86% in 2007.

There are signs that investors may now be returning to stocks since the latest Fed survey was conducted. Last year was the strongest for inflows into stock mutual funds since 2004, according to the fund tracker Lipper. (…)

Store Workers Earn Less Today Than in 2004 (Adjusting for Inflation)

When adjusted for inflation, the average earnings of nonsupervisory retail worker was lower in September, $14.46 an hour, than it was the same month in 2004, $15.20 an hour.

Across the broader economy, the recovery has yet to feature meaningful wage growth. The U.S. has added to payrolls each month for nearly four straight years. But on an inflation-adjusted basis, private-sector average hourly wages were lower last month than they were the same month in 2010.

And now this:

Newest Workers for Lowe’s: Robots

Lowe’s Cos. is introducing robotic shopping assistants at an Orchard Supply Hardware store in San Jose, Calif., in late November. Lowe’s, which acquired Orchard Supply last year, says this is the first retail robot of its kind in the U.S.

The OSHbot will greet customers, ask if they need help and guide them through the store to the product. Besides natural-language-processing technology, the 5-foot tall white robot houses two large rectangular screens—front and back—for video conferences with a store expert and to display in-store specials. The head features a 3-D scanner to help customers identify items. OSHbot speaks English and Spanish, but other languages will be added.

OSHbot, co-created by Lowe’s and startup Fellow Robots, is “solving a big problem,” said Kyle Nel, executive director of Lowe’s Innovation Labs. It is a way to bring more shopping convenience and some of the benefits of e-commerce into a physical store. The company will have two robots working, he said. (…)

As customers follow OSHbot to the correct aisle, they will see ads for in-store specials on its back screen as they pass various departments, communicated through in-store beacons. Customers who need help with, say, a specific type of plumbing project can initiate a video conference on OSHbot’s front screen with available experts at any Orchard store.

OSHbot also can help customers match a certain-size nail or hinge with a 3D-scanner and determine immediately if the part is in stock. In the future, OSHbot may be able to create the part with a 3-D printer, said Marco Mascorro, CEO of Fellow Robots, based in Mountain View, Calif.

To navigate the Orchard store, OSHbot uses lasers to sense its surroundings, the same light detection and ranging system, also called Lidar, used by Google Inc.GOOGL +0.18% ’s autonomous cars. OSHbot creates a map of its surroundings using technology called simultaneous localization and mapping that it can refer to later. By matching the map it creates to the Orchard Supply map of where products are located in the store, it can lead a customer to a specific hinge or hammer.

(…) The International Federation of Robotics estimates sales of more than 400 robots world-wide between 2014 and 2017 that serve as guides or information providers in places such as supermarkets, exhibitions or museums. (…)

One hurdle robot makers have faced is making them affordable.(…) The components OSHbot uses are pricey. For example, Lidar systems that help robots to navigate cost roughly $50,000, although there are new smaller units hitting the market for about $7,000, said Ms. Keay.

Still, as the technology matures and becomes more affordable, Ms. Keay expects robots to appear not only in retail, but restaurants and other kinds of businesses as well. In August, Starwood Hotels & Resorts Worldwide Inc. introduced a room-service robot at its Aloft hotel in Cupertino, Calif. “I think we’re going to see a rush of companies wanting to be the first [in their industry] to have robots,” Ms. Keay said.