Month: June 2015

U.S. New-Home Sales Rise to 7-Year High

New-home sales increased 2.2% over the month to an annual rate of 546,000, the Commerce Department said Tuesday. That marked the best month of sales since February 2008, and it followed an 8.1% surge in sales in April. (…)

The months’ supply of new homes—reflecting how long it would take to exhaust all homes on the market at May’s sales pace—fell to 4.5 last month from 4.6 in April and 5 in March.

Sales varied by region. New-home purchases surged in the Northeast and climbed in the West, but fell in the Midwest and South.

  

Total new home sales are up 18.6% YoY in May. Sales are up 27.3% YoY in both the South and the West but are unchanged in the Northeast and down 14.3% in the Midwest. These two regions only account for 20% of new home sales (2012-14 average).

By contrast, existing home sales have been the strongest in the Northeast and the Midwest through May.

The stronger tailwind behind housing is this:

The total number of new households increased by 1.4 million y/y through March. This growth rate has exceeded the 1.0 million mark since October 2014. That’s the good news. The bad news is that all the new households are renting rather than buying their homes. The total number of homeowners peaked at 76.5 million during Q4-2006. It was down to 74.0 million during Q1-2015. The number of households who are renters rose 9.3 million since Q2-2004 from 32.9 million to 42.2 million. (Ed Yardeni)

The fact remains that first-time buyers seem to be a lot more active. They accounted for 32% of sales in May from 30% in March-April and 27% last year. Employment growth in the 25-34 age group is now +3.5% YoY, more than double the U.S total.

U.S. Durable Goods Down, Businesses Remain Cautious

New orders for durable goods—products such as computers and trucks designed to last at least three years—decreased a seasonally adjusted 1.8% in May from a month earlier, theCommerce Department said Tuesday. April durable goods orders fell a revised 1.5%, compared with the previously reported 1% decrease. (…)

Through the first five months of the year, overall orders are down 2.2% compared to the same period in 2014. (…)

Excluding the transportation sector, orders rose 0.5%.

Another volatile sector, defense, helped push the headline figure higher. Excluding defense, durable orders fell 2.1%.

But a key measure of business investment rose for the second time in three months. Orders for nondefense capital goods excluding aircraft—a proxy for company spending on equipment and software—increased 0.4% in May. The figure was down 0.3% in April.

But up 1.6% in March. Last 3 months: +1.7% or 7.0% annualized.

Ikea Will Raise U.S. Minimum Wage to $11.87 to Retain Workforce

Ikea Group, the world’s largest furniture retailer, will raise the hourly minimum wage it pays workers in the U.S. by 10 percent to $11.87, seeking to keep employees from moving to other merchants that have boosted pay recently.

The increase, which takes effect Jan. 1, follows a 17 percent boost to $10.76 an hour this year. The 2016 raise will affect 32 percent of Ikea’s hourly retail staff, along with some workers in distribution, the company said Wednesday. (…)

After the increase, the average hourly pay rate at its 43 U.S. stores will be $15.45.

The living wage in New York’s Kings County, where Ikea’s Brooklyn store is located, is $14.30 an hour for a single childless adult, according to the MIT calculator. It’s $13.71 for the New York metro area.

Wal-Mart to impose charges on suppliers as its costs mount

Wal-Mart Stores will begin charging fees to almost all vendors for stocking their items in new stores and for warehousing inventory, raising pressure on suppliers as the world’s largest retailer battles higher costs from wage hikes.

The company said it started informing suppliers about the fees and other changes to supplier agreements last week. The changes, which also include amended payment terms, will affect 10,000 suppliers to its U.S. stores. (…)

The move marks a shift of sorts by Wal-Mart, which unlike other retailers has sought to limit such fees in return for demanding suppliers give it the lowest price, said Kurt Jetta, head of consumer and retail analytics firm Tabs Group Inc.

    “It is not the way Walmart has done business in the past,” Jetta said. “This approach suggests that they are seeking areas to offset their increased investment in wages, as well as offset their lack of organic revenue growth.” (…)

U.S. Subprime Auto Loans Stretched to Seven Years Stoke Concern

Of the subprime vehicle loans bundled into securities, 73 percent now exceed five years, up from 64 percent during the first three months of 2014, according to data from Citigroup Inc. Loans as long as seven years are increasingly being put into more bonds as auto-finance companies and Wall Street banks sell the securities at the fastest pace since 2007. (…)

A debt offering recently marketed by American Credit Acceptance LLC demonstrates some of the risks. About one-third of the 14,628 loans in the deal are tied to borrowers with credit ratings under 500 according to the Fair Issac Corp. grading system known as FICO — or with no score at all, according to a prospectus obtained by Bloomberg. The company is charging interest rates of between 27 and 28 percent for almost one-third of the borrowers, and more than half of its loans exceed five years. (…)

Loans have been getting longer for prime borrowers as well. The percentage of loans exceeding five years in those securitization pools has grown to 47 percent from 38 percent in 2006, according to Citigroup data. (…)

CHINA: From the PBoC 2Q15 Survey of bankers: ratings for both the industry climate and loan demand fell to the weakest over the last 10 years.

This from Deutsche Bank:

Foreign Reserves Slip in Emerging Markets, Raising Risks Central banks in emerging markets are running down foreign-currency reserves at the fastest pace since the financial crisis, reducing some countries’ capacity to weather potential shocks.

Total foreign-exchange reserves in emerging countries are estimated to have dropped $222 billion to $7.5 trillion during the first quarter, according to a Wall Street Journal analysis of International Monetary Fund data. The 3% decline in reserves would be the biggest percentage loss for a quarter since the first quarter of 2009.

Despite the drop, total foreign reserves still are hovering around record highs for emerging countries, giving observers confidence that they are, overall, in a relatively strong position to withstand external shocks in periods of stress. Some countries, such as Russia, have been rebuilding their reserves after significant declines. Total foreign reserves are able to cover about 11 months of import needs for these countries, according to IMF data, while a rule of thumb for adequacy is six months.

(…) the drop has been limited to a handful of countries that hold the largest amounts of reserves. (…)

Turkey, South Africa, Malaysia and Indonesia are among vulnerable countries whose reserves have fallen below their short-term external financing needs, according to the Institute of International Finance. (…)

Part of the recent reserve decline was due to a broad-based dollar rally. (…)

Nearly half of the decline—$113 billion—was in China, which faces shrinking trade surpluses and growing capital outflows. Its central bank was also seen to have propped up the value of its currency by selling dollars, driving its foreign reserves down to $3.7 trillion.

Russia’s reserves also fell last quarter, as the central bank attempted to bolster its currency amid lower oil prices and sanctions. But Moscow managed to arrest the reserve’s decline, and it resumed purchasing dollars recently. Saudi Arabia, Nigeria and Malaysia also suffered steep reserve losses due to reduced revenues from commodity exports. (…)

Greek problems mask the rising risks in Italy and France

Italy and France face mounting problems of high debt, slow growth, unemployment, poor public finances, lack of competitiveness and an inability to undertake necessary adjustments. Reductions in energy prices combined with low borrowing costs and a weaker euro, engineered by the European Central Bank, cannot hide deep-seated and unresolved problems forever.

Italian total real economy debt (government, household and business) is about 259 per cent of GDP, up 55 per cent since 2007. France’s equivalent debt is about 280 per cent of GDP, up 66 per cent since 2007. This ignores unfunded pension and healthcare obligations as well as contingent commitments to eurozone bailouts.

Italy is running a budget deficit of 2.9 per cent. Government debt is around €2.6tn, approaching 140 per cent of GDP. French public debt is above €2.4tn, or 95 per cent of GDP. The current budget deficit is 4.2 per cent of GDP. France’s budget has not been balanced in any single year since 1974.

Italy’s economy has shrunk about 10 per cent since 2007, as the country endured a triple-dip recession. Italy’s unemployment is more than 12 per cent, with youth unemployment about 44 per cent. French GDP growth is anaemic, with unemployment above 10 per cent and youth unemployment of more than 25 per cent.

Trade performance is lacklustre. Italy’s current account surplus of 1.9 per cent reflects deterioration of the domestic economy rather than export prowess. France’s current account deficit is about 0.9 per cent of GDP, reflecting a declining share of the global export market.

Italy and France’s problems are structural, rather than attributable to the eurozone debt crisis. High wages, inflexible labour markets, generous welfare benefits, large public sectors and restrictive trade practices are major issues.

In the World Economic Forum’s competitiveness rankings, Italy and France ranked 49th and 23rd respectively, well behind Germany (fourth) and Britain (10th). In World Bank studies, Italy and France rank 56th and 31st in terms of ease of doing business. Transparency International ranks Italy 69 out of 175 countries in perceived levels of public corruption, comparable to Romania, Greece and Bulgaria.

The lack of competitiveness is exacerbated by the single currency. Italy and France faced a 15-25 per cent overvalued currency until the recent decline in the euro. Denied the historically preferred option of devaluation of the lira or franc to improve international competitiveness, both countries have relied increasingly in recent times on debt-funded public spending to maintain economic activity and living standards. (…)

France and Italy may not be able to avoid a financial crisis. Real GDP would need to increase at more than twice projected rates to stabilise and then reduce government debt-to-GDP ratios.

Alternatively, deep reductions in fiscal deficits would be required to start deleveraging. The necessary fiscal adjustment of about 2 per cent of GDP would be self-defeating, creating a familiar cycle of lower growth, rising budget deficits and higher borrowings.

A weak economy and low inflation will ultimately cause debt to increase beyond critical levels, triggering a climactic moment. (…)

Gavekal agrees. Things are only getting worse…

…because of a lack of competitiveness…

…currently masked by Draghi’s weakening of the euro which cannot erase the fundamental debt problem…

…which will only get worse as the population ages…

The Rise of the Triple-Digit Stock

Hmmm…