Month: May 2018

NFIB: RECORD LEVEL OF SMALL BUSINESSES EXPERIENCING PROFIT GROWTH

Strong sales:

Selling prices are accelerating past recent highs but compensation is rising faster:

Although the new tax law will impact profits this year, much of the current improvement is due to gains in operating profits and stronger sales. Sales gains from stronger growth fall to the bottom line before costs such as rising labor costs catch up. Overall, the new tax law and the strong economy are very supportive of profit improvements.

U.S. Consumer Credit Usage Slackens

Consumer credit outstanding increased $11.62 billion (5.0% y/y) during March following a $13.63 billion February rise, revised from $10.61 billion. It was the weakest monthly increase in six  months. During the past ten years, there has been a 51% correlation between the y/y gain in consumer credit and y/y growth in personal consumption expenditures.

Nonrevolving credit usage grew $14.22 billion (5.1% y/y) after a $14.15 billion rise. Revolving consumer credit balances plummeted $2.60 billion (+4.8% y/y), undoing strength at the end of last year. 

Something I pointed out from recent PMI reports:

Global Trade Is Already Weakening, War or Not

Some important global trade indicators are suddenly pointing downward. Chinese data for April may have looked fine, with exports up 3.7% on the year in yuan terms after falling 9.8% in March. Still, that rebound was likely thanks to the late Lunar New Year holiday in 2018: In seasonally adjusted terms, export volumes fell 2% on the month, Capital Economics estimates—the worst decline in nine months. Exports from Korea, another Asian trade bellwether, declined in April—the first drop since October 2016. (…)

Key manufacturing purchasing managers’ indexes have also started stuttering: U.S., eurozone, Chinese, Japanese and South Korean PMIs all appear to have peaked between December and February, although all—apart from Korea—are still expanding. (…)

BTW:” If history is any guide semiconductor sales growth will moderate substantially over the coming months following South Korean exports lower.” (@GS_CapSF)

Good News for Low-Wage Workers, Bad News for Profits A shrinking pool of less-educated workers will put the pinch on companies that rely on them.

(…) Workers with a high school education or less, who have borne the brunt of stagnant pay and unemployment for a decade, are in high demand. In April the unemployment rate for people 25 years and older with a high school education or less was 4.7% versus 5% a year earlier. That was near the lowest levels in over a decade.

Companies like Tyson Foods are being forced to pay workers more. The meat producer said Monday rising wages and bonuses cut into its profit in the quarter ended March 31. According to the Labor Department, about three quarters of workers at companies like Tyson have a high school education or less. (…)

The labor force for people with a high school education or less—everybody with a job, plus everybody looking for work—was 46 million in April. That compares with 51 million when the last recession started in 2007.

One factor behind the decline is that more young people are continuing their education beyond high school. Another is that with baby boomers retiring, many less-educated workers are now exiting the job market. (…)

Hotel operator Chatham Lodging Trust said payroll and benefits costs were up 7% from a year earlier. “We can either raise wages to where we’re competitive or lose well-trained employees to other hotels or other industries such as fast food and warehousing,” explained Chatham operating chief Dennis Craven.

The labor pool of less-educated workers is being further squeezed by a smaller number of illegal immigrants, who tend to have low education levels, and an increased share of college-educated immigrants. (…)

About the only thing that companies may be able to do is pay more. Enough to draw unemployed workers into the workforce. Or enough to convince them to move to where the jobs are. Or enough that people who have spent time in college will take the job. No matter what, it is going to cost.

Like in the USA:

Canada’s rental housing growth outstrips home ownership Increasing demand for rentals and falling percentage of home ownership is driving rent prices higher and deepening Canada’s housing affordability woes

• Owning Is the New Renting: Homeownership Trends Upward as U.S. Loses Renter Households (In the Apr. 27 Daily Edge)

Smets: ECB Could Take Steps to Phase Out QE This Summer The European Central Bank is likely to move over the summer to gradually phase out its bond-buying program, perhaps announcing a decision after its July 26 policy meeting, the ECB’s Jan Smets said.

@biancoresearch

Dimon Says Prepare for 4% Yields

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said it’s possible U.S. growth and inflation prove fast enough to prompt the Federal Reserve to raise interest rates more than many anticipate, and it would be wise to prepare for benchmark yields to climb to 4 percent.

“It might force the 10-year up” if the Fed boosts short-term rates more than expected, Dimon said in an interview with Bloomberg Television’s Stephen Engle in Beijing, referring to the yield on 10-year Treasury notes. “You can easily deal with 4 percent bonds and I think people should be prepared for that.”

As long as rates climbed because the U.S. economy was in good health, the move would amount to “normalization,” Dimon said.

With the Fed paring back its balance sheet and the federal government increasing its borrowing, the U.S. will have to finance by the end of the year “$400 billion a quarter — that’s a lot, that’s a huge shift from the past,” Dimon also said. Along with cutbacks in bond purchases by other central banks, it “may cause more volatility, higher rates in a way we don’t fully understand” given the exit from quantitative easing is unprecedented, he said. (…)

Leveraged emerging market stocks hit the rocks Heavily indebted companies suffer sharp sell-off amid rising dollar and bond yields

(…) Since mid-March, emerging market companies with an interest coverage ratio of below one, meaning cash flow from underlying operations is less than their interest costs, have fallen 12.5 per cent on average, according to the Institute of International Finance, an industry association. (…)

• TOPSY CURVY: SMALL IS NOT THAT BEAUTIFUL

U.S. Dealmaking Surges in First Three Months of 2018

U.S. deal values for the first quarter of 2018 jumped nearly 13% to $531 billion up from the previous three-month period, reaching the highest amount since the final quarter of 2016, according to a report by the accounting firm released last week.  The total number of deals also rose 6% to 3,670. (…)

During the first three months of the year, there have been 26 deals valued over $5 billion, up from nine during the first quarter of 2017, Mr. Moldenhauer said. (…)

PwC’s report also noted that more than 1,000 U.S. deals in the first quarter of 2018, roughly a third of the total number of deals in the period, reached across sectors. Companies are often looking to bring technological capabilities in-house when striking such deals, the report said. (…)

There will be a lot more deals as tax reforms gives great incentives to companies to acquire as I wrote in January:

The 100% first year depreciation on new assets allowed in the new tax law is well known. What has not been much in the media is that, for some rather strange reason, Congress has modified the old version of the law to allow the bonus depreciation on used assets as well, as long as it is the taxpayer’s first use of the property. (§168-k) (Journal of Accountancy (https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-businesses-201718071.html1))

In other words, companies will now be able to fully write off the value of qualifying assets acquired in a corporate takeover.

Pretty major stuff! Corporate assets are now worth 21% more in a takeover.

Return on capital gets a big boost even against current valuations.