Temp-Worker Freeze Bodes Ill for Economy One of the labor market’s early warning systems—the number of temporary jobs being created month to month—may be flashing trouble. Recent recessions have come after a peak in temp hirings, and a new post-recession peak appears to have been notched in December.
Hiring by staffing agencies has ground to a halt so far in 2016, a worrisome sign because the category fell off before a broader job-market slowdown ahead of the past two recessions. Many economists look at the sector as a leading indicator because cautious firms tend to first hire temps when an expansion begins and dismiss those nonpermanent workers when they sense the economy is faltering. (…)
More than one in 50 U.S. workers were employed as temps at the end of 2015, eclipsing a record set in early 2000. At that prior peak, the unemployment rate was near a cyclical low and payrolls were growing steadily, albeit at a slightly slower rate than the prior two years. By spring 2001, the economy was in recession.
“It’s the first sector that really begins to lose jobs,” said Donald Grimes, a labor economist at the University of Michigan. “If you start seeing those numbers go negative, you’ve got a real problem.”
The temp sector has shed 27,400 jobs since December, a reversal from the preceding five years, when the temporary-help category grew five times as fast as overall employment. That suggests the sector, which did add jobs in April, bears careful watching, especially because the slowdown comes alongside other red flags. (…)
Temp workers also are paid less, on average, than their permanent peers. The average hourly wage for temporary help workers was $16.83 in March, compared with $25.45 for all private-sector workers. (…)
Short-term projects and less-loyal workers can be a recipe for volatility. The average tenure for a temp employee was 10.7 weeks last year, down from 11.3 in 2014, marking the shortest engagement time since 2003, according to the American Staffing Association. The industry group said the shorter tenure could be an indication temps are more quickly converting to full-time work. About one-third of temps are offered permanent work.
Volatility in the sector can make the leading indicator hard to read.
“When temp employment is moving sideways, as it is now, it could mean 
things are frothy and firms are jumping straight to permanent hires,” said Erik Weisman, economist at MFS Investment Management. “
Or it could signal we’re on the precipice of a downturn and firms don’t want to hire, and even start firing temp workers.”
Evercore ISI’s survey of Temp companies seems to have peaked last January but has yet to show a clear negative trend.
CHINA’S IMPLOSION
Following up on Certain Uncertainties, excerpts from China’s Communist Party goes way of Qing Dynasty as debt hits limit by The Guardian’s Ambrose Evans-Pritchard:
(…) The rot in the country’s $7.7 trillion bond markets is metastasizing. Bo Zhuang from Trusted Sources said more than 100 firms cancelled or delayed bond issues in April due to widening credit spreads.
Ten companies have defaulted this year, with the shipbuilder Evergreen, Nanjing Yurun Foods, and the solar group Yingli Green Energy all in trouble this month. But what has really spooked markets is the suspension of nine bonds issued by the AA+ rated China Railways Materials, the first of the big central SOE’s to signal default. “This has greatly weakened investors’ long-standing expectation of implicit government support,” he said.
Bo Zhuang said investors have poured money into bonds in the latest frenzy. The stock of corporate bonds has jumped by 78pc to $2.3 trillion over the last year. It is the epicentre of leverage through short-term ‘repo’ transactions, and it is now coming unstuck.
“The experience with the stock market shows how difficult it can be to contain a reversal in leveraged bets. In our view, a bond market crisis would be much more destructive,” he said.
With luck, the rest of us outside China will have three or four more months to order our own affairs before the storm gathers. Whether it is bumpy landing, a hard landing, or a crash landing, depends on who the “authoritative person” in Beijing turn out to be.
Now consider that new home prices are up 34% YoY in April in China’s Tier 1 cities. THIRTY-FOUR PERCENT! These are not developing small towns. Prices jumped 63% in Shenzhen, 34% in Shanghai, 20% in Beijing, and 18% in Hefei. Helicopter money literally searching for homes. From CNBC:
(…) In Beijing, where schools go, money follows.
In 2014 the Chinese capital changed policy; enrollment in public primary schools would be based entirely on students’ home addresses, not their entrance exam results.
Since then, Chinese parents, who’re already inclined to spend big when it comes to their children’s education, have rushed to purchase properties close to the city’s top schools.
Peter Zeng, 36, is preparing his five-year-old daughter to attend one of the best schools in Beijing. In September Zeng spent nearly 3.95 million yuan ($610,000) on a 46-square-meter (495 square-foot) apartment in the school district of Zhongguancun No.3 Primary School, a well-known school in Beijing.
Zeng, who calls himself white-collar middle class, told CNBC that his family lived in another three-bedroom apartment in the city and had no plan to move; purchasing the new apartment was solely to ensure his daughter would be admitted to the well-known school.
“We are not going to live there because the one-bedroom is too small,” Zeng said. “I’m planning to rent it out, and then, apply [for] home mortgage loans for further investments.” (…)
This is $13,260/sq. m. ($1232/sq.f.).
While the boom is extreme in major Chinese cities, prices in smaller cities have remained sluggish, or have even fallen.
The latest data showed that China had unsold housing inventory equivalent to 720 million square meters, of which 70 percent was in third- and fourth-tier cities, Xinhua reported at the weekend, citing Pan Gongsheng, the PBOC’s deputy governor.
“What happened is that housing purchases didn’t catch up with the construction boom,” said Ji. “Inventories have been built up in lower-tier cities by smaller developers, and now they don’t get cash flow going.” (…)
In an effort to resolve housing gluts in lower-tier cities, more than 100 cities in China have initiated measures including tax cuts and cash subsides to encourage rural dwellers to move to cities and buy urban properties.
However, many have questioned the effectiveness of such policies.
“It’s impossible to depend on farmers to digest inventories,” said Yang. “They simply can’t afford it!” (…)
Beijing has stepped up its battle against bad debt in China’s banking system, with a state-led loans-for-bonds scheme surging in value by about $100bn in the past two months alone.
The government-led programme, where banks trade short-term loans to local government companies in exchange for bonds with longer maturities, soared in value to hit more than $220bn by the end of April, up from about $120bn at the start of March, according to data from Wind Information.
Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website. (…)
Chinese media reported that up to Rmb4tn had been approved in 2016 for the loans-to-bonds swap.
Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.
That programme has been hailed a success in that it relieved the pressure on local governments that were forced to take out bank loans to proceed with public works projects in the absence of municipal bond markets. (…)
The programmes are just two fronts in Beijing’s battle against bad debt.
The state-controlled asset management companies that bailed out the country’s four national commercial banks 15 years ago have become increasingly active over the past two years in buying up portfolios of bad debt. Regional asset managers run by provincial governments are doing the same business on a local level. (…)
(…) Iran’s Deputy Oil Minister Rokneddin Javadi told Iran’s Mehr news agency on Sunday his country had no plan to halt a rise in oil production and exports.
He said Iranian crude exports, excluding gas condensates, were at 2 million barrels per day (bpd) and would reach 2.2 million bpd by the middle of summer. (…)
EARNINGS WATCH
Factset’s weekly summary:
Overall, 95% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 71% have reported actual EPS above the mean EPS estimate, 8% have reported actual EPS equal to the mean EPS estimate, and 21% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above both the 1-year (69%) average and the 5-year (67%) average.
At the sector level, the Consumer Staples (85%), Materials (85%), and Health Care (82%) sectors have the highest percentages of companies reporting earnings above estimates, while the Energy (53%) and Utilities (55%) sectors have the lowest percentages of companies reporting earnings above estimates.
In aggregate, companies are reporting earnings that are 4.2% above expectations. This surprise percentage is equal to both the 1-year (+4.2%) average and the 5-year (+4.2%) average.
In terms of revenues, 53% of companies have reported actual sales above estimated sales and 47% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year (50%) average but below the 5-year average (56%).
At the sector level, the Health Care (68%) sector has the highest percentage of companies reporting revenues above estimates, while the Utilities (14%) and Energy (34%) sectors have the lowest percentages of companies reporting revenues above estimates.
The blended earnings decline for the first quarter is -6.8% this week, which is smaller than the blended earnings decline of -7.1% last week.
The blended earnings decline for Q1 2016 of -6.8% is smaller than the estimate of -8.8% at the end of the first quarter (March 31). Seven sectors have recorded an increase in earnings growth during this time due to upside earnings surprises, led by the Consumer Discretionary (to 19.5% from 9.7%) and Materials (to -14.4% from -22.1%) sectors. Three sectors have recorded a decrease in earnings growth since the end of the quarter due to downside earnings surprises and downward revisions to earnings estimates, led by the Energy (to -107.2% from -103.0%) and Financials (to -12.3% from -8.9%) sectors.
If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to -1.6% from -6.8%.
The blended revenue decline for Q1 2016 is -1.5%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.4% from -1.5%.
At this point in time, 103 companies in the index have issued EPS guidance for Q2 2016. Of these 103 companies, 73 have issued negative EPS guidance and 30 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 71%, which is below the 5-year average of 74%.
At the same time in Q1’16, we had 78 negatives and 19 positives. So far so good. Only 2 sectors have worse negatives this quarter than last: Consumer Discretionary (16 vs 10) and Financials (8 vs 4). The last 2 weeks were particularly difficult for CD companies with 6 additional negatives, followed by IT (+4) and HC (+4).
Estimates for the next 3 quarters are not worsening just yet. Thomson Reuters sees Q2 EPS down 3.5% while Q3 and Q4 are up 2.5% and 9.8% respectively. As I mentioned before, this Q4 estimated growth is pretty iffy (i.e. heroic) since it assumes that margins return to their 10.5% peak level from 10.0% in Q4’15. Revenues are expected to rise 4.2% YoY in Q4 after –0.2% in Q1, 0% in Q2 and +1.5% in Q3. Analysts must know something nobody else knows.
Economists are obviously not aware of any positive turn as revealed by this Ed Yardeni chart:
A valid question here: to what extent do equity analysts rely on their economists for the macro-economic forecasts supporting their micro analysis? Maybe analysts are simply playing the odds that economists are about to be positively surprised. After all, it has been 16 months since the economy surprised positively, the longest stretch of negative surprises since City has been publishing the index in 2003. Many economists must be wondering if it is them or the economy that’s deranged.
We need to come back to this shortly.
While the total amount of cash and other investments on the books at nonfinancial companies rose 1% last year to $1.84 trillion, total debt grew roughly 15% to $6.6 trillion, according to new research from S&P Global Ratings.
Both are record amounts, however there is a striking disparity in the cash positions of the more than 2,000 nonfinancial companies studied.
“The punchline is that the liquidity profile is not as good as it seems,” said Andrew Chang, a credit analyst at S&P Global Ratings and co-author of the study. Lower-rated companies may have trouble refinancing their debt as interest rates rise.
The top 25 cash holders, or about 1% of the companies, control more than half of the total cash, or 51%. That’s an increase from 38% five years ago. (…)
All told, the study shows the top 25 cash holders have a cash-to-debt ratio of 153% and cash grew by 8% in 2015.
Leaving aside the prosperous 1%, the overall corporate outlook becomes less rosy. Debt rose $730 billion for the remaining 99% last year, while cash declined by $40 billion. (…)
Combined, these companies hold just $900 billion in cash and $6 trillion in debt. That puts their cash to debt ratio at 15%, the lowest it’s been in the past ten years.
Investment grade issuers in the group have a cash-to-debt ratio of 17%. The ratio for speculative-grade issuers is 12%, according to the study. (…)
SENTIMENT WATCH
Stocks, Bonds Expected to Weather a Fed Rate Increase Stocks and debt markets appear ready to absorb the next Fed rate boost without descending into turmoil, fund managers say.
(…) One reason, they say, is that the dollar and oil are both offering markets much more comfort than they did as recently as last year.
After rising significantly over the past two years, the WSJ Dollar Index, which measures the greenback against a basket of currencies, is down 2.9% for 2016, relieving pressure on the earnings of large U.S. companies and the finances of many emerging-market nations that have borrowed in dollars. Oil has rallied 82% from its 2016 low amid supply disruptions, taking pressure off U.S. energy producers and likely limiting further ripple effects from the crude collapse.
A sharp selloff in stocks and bonds during the first six weeks of the year largely stemmed from fears the U.S. could be headed into recession. But several recent gauges of U.S. economic health, measuring industrial output, housing sales and consumer prices, have shown growing momentum. Wages have picked up after a long period of stagnant growth, but inflation broadly appears soft, likely giving the Fed room to raise rates only gradually.
These factors, together with the declines over the past month in stock and bond prices, mean the market can handle a well-telegraphed rate increase, many investors say—the only kind most analysts believe the Fed would dare attempt. (…)
Investors Check Out of Europe Fund managers are pulling cash out of European markets in response to the continent’s fractious politics, ultralow interest rates, weak banks and relentless economic malaise.
