Orders for durable goods rose 4% in March, the Commerce Department said Friday, but the rise was due entirely to a surge in purchases of airplanes and cars. Outside of the volatile transportation sector, demand for big-ticket items fell 0.2%, prolonging a six-month swoon in orders [totalling –5.5%] for long-lasting products.
Perhaps most troubling, a closely watched measure of business spending on equipment and software—a bellwether for companies’ willingness to expand their operations—fell for the seventh straight month in March. (…)
Nondefense capital goods orders excluding the volatile aircraft sector slipped 0.5% (-4.0% YoY) and were 6.7% below the August peak. This comes after a revised 2.2% drop in February, previously at -1.1%, which was the biggest decline since July 2013.
Some economists now estimate that the nation’s gross domestic product grew at a paltry 1% annual rate, or less, from January through March. (…)
Much of the latest decline in business spending appears to be tied to cutbacks in the energy industry. (…)
Another factor hurting investment include the strengthened dollar, which has made U.S. products more expensive globally and hurt exports. And some economists believe unusually cold weather, coupled with disruptions linked to a West Coast port strike, contributed to the first-quarter slump.
(…) There were hints of higher spending by consumers, with demand for computer products up 11% and autos up 5.4%.
But most other types of purchases fell. Throughout the whole first quarter, overall orders for durable goods rose just 0.1% compared to the same three-month period in 2014. (…)
Reuter’s adds:
Pointing to prolonged weakness in manufacturing, which accounts for about 12 percent of the U.S. economy, unfilled orders for core capital goods fell for a second straight month in March after barely rising in January.
“We have not seen the full ramifications of the strong dollar and the drop in oil-related investment, so that could continue to play out,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. “The focus is now on services and consumers in the hope that they are going to pick up the tab. So far we are not seeing signs of that.”
“With winter behind us, we expect above-trend growth to resume in the second quarter and continue for the rest of 2015,” writes Mary Daly, senior vice president and associate director of research at the San Francisco Fed, in a recent research note.
“Accommodative monetary policy along with ongoing improvements in credit market conditions, asset values, and household incomes related to the strong labor market all are expected to help sustain this solid growth.”
Fed officials have generally become less optimistic about U.S. growth prospects in recent weeks. As recently as March 1, Ms. Daly’s boss, San Francisco Fed President John Williams, was sticking to his estimate that U.S. gross domestic product would finally hit a 3% annual growth rate for first time in this recovery. By March 23, he had revised that forecast down to 2.5%.
At their March policy meeting, Fed officials downgraded their 2015 economic growth forecast to 2.3%-2.7%, from their estimate in December of 2.6-3.0%. They will next update their forecasts at their meeting in June.
But the expected Q2 snap-back has not happened in manufacturing as per Markit’s flash PMI:
April data indicated slower growth momentum for the U.S. manufacturing sector, with production volumes and incoming new work both expanding at weaker rates than in the previous month.
Survey respondents generally cited softer new business gains, especially from international markets. Measured overall, new work increased at the weakest pace for three months, while export sales dropped for the first time since November 2014. A number of manufacturers noted subdued demand from clients across Europe, in part reflecting the stronger US dollar exchange rate. (…)
Manufacturers indicated a slower expansion of input buying during the latest survey period, which in turn contributed to a softer increase in pre-production inventories.
BTW, the K-C, N.Y. and Richmond Fed surveys all weakened in contraction territory April. Only the Philly Fed survey perked up at a low level but new orders were flat.
The Q2 snap-back is also not showing in Evercore ISI company surveys which has declined in each of the last 3 weeks.
This is a growing problem:
China is also showing no signs of a re-acceleration at the end of Q1. Railway freight, electricity consumption, container throughput and car sales are weaker in March than their Q4’14 and their Jan-Feb average data points.
Over in Asia, survey data show both China’s and Japan’s manufacturing sectors in contraction. Albeit only modest, the downturns are a particular worry given the huge stimulus programme currently underway in Japan and efforts made by the Chinese authorities in recent months to address the slowdown.
The Japanese PMI showed the first deterioration of business conditions for a year in April, with orders dropping for a second straight months. The concern is that goods producers are seeing order books deteriorate despite the steep depreciation of the yen, which should in theory be helping boost overseas sales. Export growth in fact slowed in April, while domestic demand fell.
The PMI for China likewise signalled the worst decline for a year, and has now registered declines for two second successive months. The downturn was led by weaker domestic demand, with exports rising (albeit only very slightly) for the first time in three months. (Markit)
Let’s summarise:
- U.S. exports are weak and weakening on a stronger dollar; “April export sales dropped for the first time since November 2014”;
- Japan exports are rising in the 5% range YoY (in units) but new export orders are “increasing at a slower rate” in spite of a very weak Yen;
- China exports are also rising slowly with “slowing new export orders”;
- German manufacturers “reported a slight increase in foreign orders” in April in spite of a weak Euro;
- France’s “manufacturers’ new export orders fell at the sharpest rate in six months in April”.
Strong or weak currencies, world exports are clearly not strong nor are they showing any momentum into April. Must mean something about world demand!
Speculators pulled bearish oil bets at the fastest pace on record as Saudi Arabia renewed strikes on Yemen and U.S. output slowed.
Hedge funds reduced their short position in West Texas Intermediate crude by 32 percent in the seven days ended April 21, driving the net-long position to the highest since July, U.S. Commodity Futures Trading Commission data show. (…)
U.S. drillers have idled 56 percent of oil rigs since October, according to Baker Hughes Inc.
That helped bring down crude production, which dropped to 9.37 million barrels a day in the seven days ended April 17, the lowest level in six weeks, according to preliminary data from the Energy Information Administration.
In the same week, U.S. refineries used 16 million barrels a day of crude, the highest seasonal level in weekly data going back to 1989. Plants have increased crude demand by an average of 915,000 barrels a day in May through July over the past five years. The higher rates will help meet growing fuel demand. The EIA this month increased its estimate for 2015 gasoline consumption by 70,000 barrels a day. (…)
BTW, if you missed the last Bearnobull’s Weekender, you missed a good article on oil.
Brent crude futures have risen $20 from January’s low to $65 a barrel LCOc1. That’s a 45 percent increase. WTI futures CLc1 have jumped $15 from March’s low to $58 a barrel. That’s a rise of almost 40 percent.
(…) No fewer than 27 central banks around the world have eased monetary policy to some extent this year in a battle against deflation, slowing growth or both. (…) All have been in response to the fall in inflation rates and inflation expectations driven by the 60 percent collapse in oil prices over the latter part of last year. (…)
Economists at UBS estimate that a $15 rise in oil would raise U.S. inflation by 0.6 percentage points over the next year, $25 would equate to 1.0 percentage point and $35 would add 1.4 percentage point.
Their equivalent estimates for the euro zone are: a $15 rise adds 0.5 percentage point to headline inflation, $25 equates to 0.8 percentage point and $35 equals 1.1 percentage point. (…)
Two-year inflation expectations have risen to 1.6 percent from -0.16 percent as recently as mid-January (…)
EARNINGS WATCH
(…) US earnings nonetheless are beating lowered expectations. Some 73 per cent of companies have surpassed analysts’ estimates, according to FactSet, in line with the five-year average.
Conversely, revenues are running below expectations. Some 53 per cent of companies have missed estimates. The five-year average shows 58 per cent beating expectations. (…)
In contrast with US multinationals, a weaker euro has proven a boon to European corporates, which must translate dollar earnings in North America back into the euro. L’Oréal, the French cosmetics behemoth, put 8.9 percentage points of its 14.1 per cent sales gain down to currency swings — or more than €500m. (…)
But better than expected US earnings of late have underpinned US stocks. That has come even though a blended rate of reported results and estimates shows a year-over-year decline of 2.8 per cent in earnings and 3.5 per cent for revenues in the first quarter, which would be the worst showing for both since the aftermath of the financial crisis in the third quarter of 2009, FactSet data show.
In the run-up to the latest profits season, US companies with large overseas operations underperformed those that are primarily domestic. Now the reverse is happening. Since the end of March, shares of companies with less than 50 per cent of sales in the US have risen 2.6 per cent versus 1.6 per cent for the broader S&P 500 and 1.2 per cent for companies that get most of their sales in the US.
Here’s the rundown from the horse’s mouth. You will see that it is important to read more than Factset’s first few paragraphs:
Overall, 201 companies in the S&P 500 have reported earnings and revenues to date for the first quarter. On the earnings side, 73% of the companies have reported actual EPS above the mean EPS estimate and 27% of the companies have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is equal to the 5-year (73%) average.
In aggregate, companies are reporting earnings that are 4.7% above expectations. This surprise percentage is above the 1-year average (+4.1%), but below the 5-year average (+5.4%).
Seven sectors have recorded an increase in earnings growth since the end of the quarter due to upside earnings surprises. Six of these seven sectors have recorded an improvement in growth of 3 percentage points or more since March 31, led by the Materials (to -1.7% from -6.1%) sector. Three sectors have recorded a decrease in expected earnings growth during this time due to downside earnings surprises and downward revisions to earnings estimates, led by the Industrials (to 3.1% from 5.3%) sector.
However, on the revenue side, 47% of the companies have reported actual sales above the mean sales estimate and 53% of companies have reported actual sales below the mean sales estimate. The percentage of companies reporting sales above estimates is below the 5-year average (58%).
In aggregate, companies are reporting sales that are 1.2% below expectations. This surprise percentage is well below the 1-year (+1.1%) average and the 5-year (+0.7%) average.
Due in part to more companies missing sales estimates than beating sales estimates, the blended sales decline is larger today (-3.5%) compared to the start of the quarter (-2.6%). On the other hand, due in part to more companies beating EPS estimates than missing EPS estimates, the blended earnings decline is smaller today (-2.8%) compared to the start of the quarter (-4.6%).
OK. Investors are relieved that earnings are not as terrible as feared. But here’s what most media seem to have missed:
At the company level, Bank of America is not only the largest contributor to earnings growth for the sector, but also for the S&P 500 as a whole. The company reported actual EPS of $0.27 for Q1 2015, compared to year-ago EPS of -$0.05 in Q1 2014. The loss reported by Bank of America in Q1 2014 included a litigation charge of $0.40. If this company is excluded, the blended earnings growth rate for the sector would fall to 5.5% from 12.5%, while the blended earnings decline for the S&P 500 would increase to -4.1% from -2.8%.
Zacks Research adds:
The roughly $3.6 billion year over year positive swing in Bank of America’s (BAC) total earnings is a big contributor to the sector’s strong growth numbers. But it will be unfair to credit Bank of America for all of Finance’s growth thus far. Others like J.P. Morgan (JPM), Goldman Sachs (GS) and Citigroup (C ) showed genuine earnings growth on the back of improved capital markets businesses even though the interest rate backdrop continues to be challenging. The regional banks have been unable to show the same growth momentum that we saw from the bulge-bracket firms.
So while aggregate results show that the blended earnings decline for Q1 2015 of -2.8% is smaller than the estimate of -4.6% on March 31, most of the relief comes from BAC.
Zacks’ tally on the first 135 S&P 500 companies illustrates the impact banks are having in Q1:
That said, it remains that, so far, 7 of the 10 sectors are showing better than expected results (+1.9% on average for all sectors ex-Financials) even though 8 of the 10 sectors have reported weaker than expected revenues:
Importantly, if the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 5.6% from -2.8%.
Confused?
EPS growth all S&P 500 companies: –2.8%
Ex-BAC: –4.1%
Ex-Energy: +5.6%
Ex-BAC, ex-Energy: +4.2%
If we use +4.2% as a normalized growth rate for non-energy equities, it compares reasonably well with +6.4% in Q4’14. Given that revenues are growing at 2.6% (ex-Energy), corporate America continues to display an amazing ability in controlling costs. The long-awaited margin squeeze is not happening just yet.
On the other hand, the breadth is not great. Health Care (+14.8%) and Financials (+12.5%) are the only strong sectors.
Now add the forex impact to get even more confused:
Hence the market of stocks, and not a stock market, we’ve been having in recent months.
Looking to Q2’15, analysts are now expecting earnings to decline 3.6%, worse than the –2.0% they were expecting on March 31st. This is in spite of the fact that company guidance remains quite reassuring:
At this point in time, 39 companies in the index have issued EPS guidance for Q2 2015. Of these 39 companies, 26 have issued negative EPS guidance and 13 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the second quarter is 67%. This percentage is slightly below the 5-year average of 69%.
And better than the 70.6% negative guidance at the same time last year when 36 of 51 companies had issued negative guidance.
Are equity investors finally getting comfortable with expensive stocks even with weakening earnings?
We are still within the 3-year channel. Are you afraid of heights?
If so, check your margin?
(…) The reality so far is that eurozone (operating) profits over the past 12 months, as recorded by index compiler MSCI, have just fallen below the bottom reached after Lehman’s failure brought down the global economy.
Compare the falling profits (the red line) with the forecast, in blue: analysts expect things to turn around in the next year. If things improve as expected, eurozone shares still don’t look cheap on a forward price/earnings basis, as Short View discussed this morning (there’s a video, too, with two extra charts).
On a longer-term view, if profit margins rebound to something approximating pre-crisis norms then the eurozone looks much better value than the US; this shows up in a lower Shiller PE, which looks at price against 10 years of earnings.
But so far all this remains in the realm of forecasts: actual earnings have yet to turn, and have come in well below what was forecast a year ago. At some point those earnings will need to arrive to keep eurozone shares up.
In a note out this morning titled We Are Full of Bull, he gives three reasons why:
Firstly, we expect a 2014 economic replay. We think the economy in the US will accelerate in the 2nd and 3rd quarters as a number of temporary and tactical issues that impacted Q1 abate. Secondly, we think the bottom-up consensus earnings expectations are too low. This has happened only 6 times in the last 39 years, and never before mid-cycle. While the sample size isn’t statistically significant, the multiple typically has expanded when the bottom-up numbers have risen. Our top-down forecast is $124 in 2015 EPS for the S&P500, vs. the bottom-up expectations of $119. Thirdly, we don’t see sentiment on US equities as ebullient and we like the fact that net hedge fund exposures in the US appear to be exactly in line with 5-year averages, and sentiment about other equity regions is clearly more positive than for the US. That’s a good setup for meaningful appreciation.
And on valuations, Parker writes:
Moreover, it is hard to argue that the US equity market is in a bubble when the valuations of government bond yields, select corporate bond yields and other asset classes (Hong Kong, London, New York, Silicon Valley, and South Beach homes, to name a few) are clearly more stretched. Not to mention the valuation of men’s ties and women’s purses, which have inflated at 20% per annum for a decade.
There you go! Now you know it all and we are all full of bull…
