U.S. Housing Starts Rebounded in August
Housing starts rebounded in August, rising 3.9% m/m (17.4% y/y) to 1.615 million units at an annual rate. Starts in July were revised up to 1.554 million from 1.534 million. The August rebound was much larger than expected by the Action Economics Forecast Survey, which looked for 1.545 million starts.
The August rebound was due entirely to a rise in multi-family starts. Starts of single-family homes fell 2.8% m/m (+5.2% y/y) to 1.076 million from 1.107 million in July, revised down slightly from 1.111 million. Starts of multi-family units jumped up 20.6% m/m (+52.7% y/y) to 539,000 in August from 447,000 in July, revised up from 423,000.
Building permits rose 6.0% m/m (13.5% y/y) in August to 1.728 million, their second consecutive gain, from 1.630 million in July, revised down slightly from 1.635 million. Permits to build single-family homes edged up 0.6% m/m (-0.1% y/y) to 1.054 million, their first monthly increase in five months. Permits to build multi-family homes jumped 15.8% m/m (44.3% y/y) in August to 674,000 on top of a 10.2% monthly gain in July. (…)
But there is this other chart from the U.S. Census Bureau: that green line, completions, is flat while permits and starts are rising.
Hence the huge backlog of “unstarted” authorized housing units:
The above charts is for total housing units. Here’s the chart on singles: not quite as large a backlog, but still an unusual backlog. Reasons: material shortages (windows, lumber, flooring, etc.)
- Homebuilder Pulte Takes Hit With Key Materials Hard to Find The Atlanta-based company, which previously said it had deliberately restricted home sales as it struggled to acquire windows and lumber, now expects to report 7,000 closings in the third quarter, down from a range of 7,300 to 7,600, according to a statement Wednesday. The company also cut its guidance for the full year.
China’s Weak Holiday Spending Shows Impact of Covid Controls Travel over the three-day Mid-Autumn Festival holiday was at 87% of the level recorded during the same period in 2019, with people making 88.2 million trips, Ministry of Culture and Tourism data showed. Tourism revenue reached 79% of 2019’s level, suggesting that consumers weren’t confident to spend or were making cheaper trips.
Whether Evergrande is a Lehman or not, it will keep impacting China’s housing sector (25% of the economy) for a while as TS Lombard writes:
A different risk, though, is facing the entire property sector: potential new home buyers will be increasingly reluctant to advance their life savings to other real estate firms in pre-sale deals, particularly if they no longer expect housing prices to rise. And since such firms currently depend on pre-sales for over half of their financing, a the ongoing slowdown in property activity will be exacerbated next year.
Evergrande Isn’t a Lehman. Now for the Bad News State planning might have the tools to avert a debt crisis; the price may be a severe slowdown in economic growth.
(…) As BCA Research Inc. shows, non-financial corporate debt in China is now on an even bigger scale than Japanese corporate debt before its economy ground into crisis in the 1990s. This chart also provocatively draws comparisons with the peak in debt for South Korea and Thailand in the late 1990s, on the eve of the Asian crisis. If mishandled, it isn’t alarmist to raise the question of a potential Lehman-scale crisis in China:
(…) Evergrande is in a serious mess. But people with the tools to clean up the mess are on the case. (…)
The downside is that the government reserves the right to get in the way of a company making a profit, or to grab returns that shareholders might have expected were coming to them. State planning might well have the tools to avert an all-out debt crisis; sad experience over many decades suggests that it is a lot less effective at spurring consistent and strong economic growth. Communist planners want their economy to grow, and have no desire to spark a crisis. To an extent, their interests are aligned with those of private sector investors. But that alignment is far from perfect. (…)
Chinese shares have traded at a discount to the MSCI World Index for almost a decade now, as confidence has been diluted. The major growth scare of 2015 saw the discount deepen. But in the last few months, a combination of the party’s crackdown on the private sector and the growing problems with Evergrande have led Chinese stocks to trade at the biggest discount of the modern era:
Meanwhile, the link between China and the rest of the emerging world has been sundered. For all of this century, emerging markets traded in effect as though they were an extension of China. Commodity exporters in Latin America, and the companies that supplied China in the Asia-Pacific, all rose and fell with the country’s fortunes. But the last few years have shaken that. China is now being traded very differently from the rest of the emerging market complex.
First, China’s management of the pandemic (even though it originated there) while other emerging countries were stricken drove massive outperformance. In the last few months, mounting alarm about the Communist Party’s behavior, along with the developing Evergrande situation, has seen a massive correction. At this point, China’s stock market has done scarcely any better than the rest of the emerging markets this century:
If belief in beneficent Marxist capitalist planners was always misplaced, it’s still open to question whether the pendulum has moved too far. China is the only country other than the U.S. that hosts some seriously potent internet platform companies meriting comparison to the giant U.S. “FANG” stocks, such as Amazon.com Inc., Microsoft Corp., Apple Inc., and Alphabet Inc. Chinese companies like JD.com Inc., Alibaba Group Holding Ltd. or particularly Tencent Holdings Ltd. have enjoyed sales growth in the same stratosphere as the FANGs. But they don’t command anything like the same multiple of earnings. (…)
A Lehman event should be avoidable. But a big slowdown in broader growth is harder to avert, and Evergrande makes a slowdown look even more likely. Investors are braced for such a slowdown in China now. Depending on how Evergrande is handled, it may be necessary to price in a milder or more severe slowdown in the world’s second-largest economy. That is its greatest significance.
- John Authers’ concerns are echoed by Rabobank: “As a consequence, Evergrande can perhaps be seen not so much as a potential crisis trigger but rather a symptom of a broader policy shift which threatens Chinese growth as politics dominate economic considerations.” (Reuters)
- Gavekal discusses the known unknowns as nonbank financial institutions such as trusts, reportedly 45% of Evergrande’s interest-bearing liabilities, could fail and smaller and weaker property developers could find themselves without financing.
- The FT: Evergrande and the end of China’s ‘build, build, build’ model
Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity
(…) China’s central bank injected 120 billion yuan into the banking system through reverse repurchase agreements, exceeding the 30 billion yuan of maturities on Wednesday. (…)
“I think we may be seeing a temporary reprieve with some repayments aiding to provide a better-than-expected situation than many would expect,” said Jun Rong Yeap, a market strategist at IG Asia Pte. “This also comes along with some injection of short-term funds by the PBOC, which suggests that they are monitoring the situation closely and are ready to step in if the economy comes under risks.” (…)
Still, analysts were left grasping for details after the Evergrande unit didn’t specify how much interest it would pay or when. Some were speculating the company struck a deal with noteholders to postpone interest payments without having to label the move a default. (…)
The China Business News, owned by the state-run Shanghai Media Group, urged authorities to manage the pace of tackling risks in the property sector and set up a “fire wall” between the industry and the financial system, in a Tuesday editorial. (…)
High Quits Rates, Poaching: U.S. Firms Are Plagued by Turnover
MGM Resorts International will hire 500 to 800 people during a week, only to lose 300 to 400 others, its chief executive officer recently said. In restaurants, there’s a new buzz word for employees who leave after a few days to go work elsewhere: “ghosting coasting.” And at the warehouses of grocery supplier SpartanNash Co., turnover has nearly tripled from historical rates to 70%.
“It really is a war for talent,” SpartanNash CEO Tony Sarsam said in an interview. “About 10% of our hires now don’t show up for the first day. People are getting multiple offers at the same time, and then they’re cherry picking.” (…)
For employers, it means higher salaries to keep workers from leaving and lower revenue because of the lack of staff. In a self-feeding loop, the sign-on bonuses and other incentives many businesses are offering to attract applicants are fueling churn. (…)
The Federal Reserve’s latest Beige Book was full of examples across the country of how retaining employees is a growing problem for businesses. One metalworking firm told the Cleveland Fed that a quarter of its staff has been with the firm for three months or less. A company in the hospitality sector told the San Francisco Fed that nearly half of new employees leave after a month or two. (…)
Walmart Inc. is investing $1 billion over five years to pay tuition costs to help retain existing workers, and Charles Schwab Corp. announced a special 5% pay increase for most employees last month. Kohl’s Corp. is doling out bonuses as much as $400 for hourly employees who work for the department store through the holiday season. (…)
Current high quit rates are normally seen at much lower unemployment rates (right scale, inverted), an indication that better jobs are plentiful. People quit for better conditions, and end up being replaced at higher costs overall, including training.
Rising corporate costs are either absorbed through lower margins or passed through higher prices.
Refinitiv notes that “when we compare the 21Q3 pre-announcement data to August 3rd (when we first started to receive 21Q3 guidance data), there is a slight increase in the proportion of negative instances of pre-announcements. (…) the N/P ratio has increased from 0.5 to 0.7 over this period. A higher N/P ratio indicates a greater degree of negative pre-announcements issued by companies.”
Ed Yardeni illustrates trends in 2022 EPS growth estimates by sector. It will be interesting how these trends evolve post the Q3 earnings season and conf. calls. Three sectors are currently negative for 2022.
(…) Thousands of hospitality workers who were stuck at home during pandemic lockdowns have decided to change careers or start their own businesses, leaving behind a restaurant life that, many say, has always been plagued with low pay, difficult working conditions and a lack of long-term stability. (…)
According to Statistics Canada’s monthly labour survey, employment in food services and accommodation climbed to a pandemic-era high this summer of more than one million people. But that’s still 150,000 fewer than before the pandemic, and much of the gap can be illustrated by the record number of unfilled jobs: 129,000 in June, the most recent month for which data is available. (…)
BUY THE DIP IMPULSE
JPM’s Marko Kolanovic is buying this dip:
(…) our fundamental thesis remains unchanged, and we see the sell-off as an opportunity to buy the dip. We remain constructive on risk assets and last week upgraded our S&P 500 price target, given expectations of a reacceleration in activity as the delta wave fades and better than expected earnings. Risks are well-flagged and priced in, with stock multiples back at post-pandemic lows for many reopening/recovery exposures; we look for Cyclicals to resume leadership as delta inflects. We expect the S&P 500 to reach 4,700 by the end of 2021 and to surpass 5,000 next year. (The Market Ear)
GS’ David Kostin also sees the S&P 500 at 4700 by year-end.
But the technicals remain unappealing. This was a broad sell-off with no place to hide, even in defensive sectors. Breadth and momentum continue to deteriorate.
Large caps are testing their (still rising) 100dma…
…while small caps are now testing their (still rising) 200dma.
