Month: May 2018

CONSUMER PRICE INDEX – APRIL 2018

• The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in April on a seasonally adjusted basis after falling 0.1 percent in March, the U.S. Bureau of Labor Statistics reported today.
• The index for all items less food and energy rose 0.1 percent in April.
• The all items index rose 2.5 percent for the 12 months ending April; this figure has been mostly trending upward since it was 1.6 percent for the period ending June 2017. The index for all items less food and energy rose 2.1 percent for the 12 months ending April. The food index increased 1.4 percent, and the energy index rose 7.9 percent.

U.S. Producer Prices Edge Up 0.1% U.S. producer prices edged only slightly higher last month, a possible sign inflation pressures in the economy remain relatively modest.

(…) From a year earlier, producer prices advanced 2.6% last month, the smallest annual increase since December. (…) Excluding the volatile food and energy categories, producer prices advanced 0.2% in April, matching economists’ expectations. (…)

This Haver Analytics table covers the full spectrum of the PPI and just about everything is accelerating. Core Final Demand is up at a 2.8% annualized rate in the last 3 months, +3.0% in the last 2 months. Core Goods: +3.2% and +3.6% respectively.

Company Costs Are Rising, but Getting Shoppers to Pay More Is Hard Businesses are facing higher costs for everything from fuel and freight hauling to steel to accounting services

(…) Intermediate prices for processed goods—a proxy for the cost of goods such as metals, paint and fuel—rose 4.7% in April from a year earlier, the Labor Department said. In that category, gasoline prices were up 14.6% from a year earlier and steel mill products were up 7.4%. Intermediate services prices—everything from warehousing costs to security guards—rose 3.1% from a year earlier. In that category truck transportation of freight was up 6% from a year earlier.

Those input costs for businesses were rising faster than business charges to their customers, which were up 2.6% in April from a year earlier, the Labor Department said. (…)

Some manufacturers believe they will be able to pass along costs to consumers without much resistance.

“When we get big slugs of inflation like we’ve got this year, those conversations aren’t easy, but they are successful,” James Loree, CEO of tool maker Stanley Black & Decker Inc., said in an April call with analysts. “We’re in business to make money, and in order to do that, we have to achieve price increases to offset some of that inflation.”

Venezuela’s Brewing Oil Shock May Be Bigger Than Iran’s Two threats could further disrupt Venezuelan oil exports, possibly taking as much crude off the market as the renewal of Iran sanctions.

(…) S&P Global Platts estimates the country’s recent crude production was 1.41 million barrels a day, at least a 30-year low except for a crippling 2002-2003 strike. And over half a million barrels below what it was a year ago. (…)

The first situation is playing out in the Dutch-administered islands of Curaçao and Bonaire, where Venezuela’s state oil company owns refining and storage facilities. U.S. producer ConocoPhillips is attempting to take physical control of those facilities after winning an arbitration award against Venezuela for seizing its assets in 2007. Venezuela appears to be telling its suppliers not to ship oil to these facilities for fear ConocoPhillips will seize that too, potentially shutting down refining.

The second situation would play out if the U.S. halts exports to Venezuela of a product called diluent, which allows the thick oil to be transported. Such a move would imperil half or more of the country’s remaining production. U.S. Vice President Mike Pence has already called the presidential election a sham.

Energy economist Philip Verleger estimates the Conoco spat could cost Venezuela as much as 500,000 barrels a day in exports, which is the upper end of the estimated impact of reimposed Iranian sanctions. An embargo could hurt even more. Don’t look east for oil’s next wild card, look south.

Luxury home sales plummet in Toronto, Vancouver Toronto sales were down 68%, while they declined by 38.2% in Vancouver

The Stock Market’s Reaction to Earnings Is All Wrong None of the excuses to explain the malaise in equities amid strong profits hold water.

(…) Another widely expressed view is that stocks are historically expensive, so any retreat just represents more reasonable valuations. It has been repeated so often that it must be true, right? The data show the exact opposite. (…)

The estimates indicate the market is trading at 16.8 times projected 2018 earnings and 15.2 times projected 2019 earnings. Those compare with the market’s average multiple of 16.7 over the past 50 years.

That average multiple was calculated over periods of both low inflation and low interest rates and high inflation and high interest rates. Since prevailing interest rates remain exceptionally low historically, a better comparison would be those periods when inflation was comparable to today’s rate of about 2 percent. In those periods, the P/E multiple for the market averaged around 19.5 times. On this basis alone, one should infer stocks are actually about 14 percent cheap and even cheaper based on 2019 earnings estimates. (…)

Looks like some people are waking up to the effect inflation has on P/E multiples. In case you missed this in the May 7 Daily Edge:

Trailing EPS are now $139.97 per Thomson Reuters. Normalizing for a full 12 months of tax reform (assuming 7% average accretion), trailing earnings are $146.75 and set to exceed $150 after Q2 if current estimates are met. On that basis, the Rule of 20 P/E is 20.2 (19.8 after Q2).

The yellow line below is the Rule of 20 Fair Value [(20 minus inflation) X Trailing EPS]. Currently at 2625, it would rise to 2685 after Q2 and its continued upward slope might prevent a big slippage below 20 like happened in early 2016 (to 18.3). Earnings should keep winning the race against inflation for another 6-9 months, keeping the slope positive.

Being right in the middle of their 15-25 valuation range, equities are now neutral per the Rule of 20 (equal upside to downside).

Using the straight, conventional P/E without considering inflation shows that the current 18.1 trailing P/E remains well above its 13.7 long-term median, even after dropping from 21.7 in January. The P/E would be 17.7 using trailing EPS after Q2 and 16.1 using 2018 EPS of $161, still considerably above its median.

The only two extended periods since WWII when inflation stood consistently below 3.0% were from mid-1958 to mid-1966 and since 2013. In both periods, the trailing P/E generally fluctuated between 16 and 19, averaging 18.2 between 1956 and 1966 (inflation averaged 1.4%) and 17.8 since 2013 (inflation averaged 1.9%). Note that the sum of average P/Es and inflation was 19.6 and 19.7 respectively, once again validating the Rule of 20 as the best gauge for earnings multiple given fluctuating inflation rates over time.

In effect, considering inflation, the current P/E in the 18 range is very much in line with previous valuations during similar inflation periods.

In all, equities are thus currently fairly valued, meaning that the valuation risk is fairly balanced offering similar upside potential and downside risk within the range of normal earnings multiples.

The 7% market setback since January 26, coupled with the 15% advance in trailing earnings, have effectively quickly restored valuations from overvalued to fairly valued. If earnings keep rising faster than inflation, sentiment and liquidity will make equity markets oscillate around their ascending fair value.

TECHNICALS WATCH

Lowry’s says that “Supply continues to contract, with the Selling Pressure Index reaching a new low for the bull market today at 117. With the S&P 500 approaching its Apr. 18th recovery high, however, strong Demand will likely be needed to extend the rebound rally.”

The S&P 500 closed through the upper side of the wedge yesterday, bumping against its flattening 100d m.a., on meagre volume.

Record Buybacks Help Steady Wobbly Market U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits.

S&P 500 companies that have reported earnings for the first three months of 2018 have bought $150 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. About 80% of S&P 500 components have reported so far.

That is on pace for the biggest amount in any quarter, based on data going back to 1998. (…)

Cash-rich companies are also increasing dividends swiftly. S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks. (…)

The share count in the S&P 500 Index has declined 0.7% YoY at the end of March 2018. The quickest decline rate was in 2016 at –1.7% YoY. Since the most recent peak in 2011, the share count has declined 5.8%. During the same period, operating EPS have grown 31.6%.

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