U.S. Initial Unemployment Insurance Claims Unexpectedly Rise
Initial claims for unemployment insurance rose to 286,000 (-67.7% y/y) during the week ended January 15 from 231,000 in the prior week, revised from 230,000. It was the highest level of filings since the third week of October. Estimates in the Action Economics Forecast Survey averaged 213,000 claims for the latest week. The 4-week moving average of claims rose to 231,000 from 211,000 in the previous week. These figures cover the survey week for January nonfarm payrolls and they rose sharply from December’s survey week. (…)
In the week ended January 1, the not seasonally adjusted total number of continuing weeks claimed in all programs rose to 2.129 million from 1.949 million in the previous week.
J.P. Morgan’s Job Tracker recently stabilized at a low level:
U.S. Existing Home Sales Decline in December
Existing home sales declined 4.6% (-7.1% y/y) to 6.180 million units (SAAR) in December after rising to 6.480 million in November, revised from 6.460 million, according to the National Association of Realtors (NAR). For all 2021, sales averaged a record 6.132 million, up 8.4% from 2020. The Action Economics Forecast Survey expected a fall in sales to 6.42 million units in December. These data are compiled when existing home sales close.
The decline in existing home sales included a 4.3% fall (-6.8% y/y) in single-family home sales to 5.520 million from 5.770 million in November. Sales of condos and co-ops weakened 7.0% (-9.6% y/y) to 660,000 from 710,000.
Sales declined across the country. Sales in the West weakened 6.8% (-10.2% y/y) to 1.230 million following a 1.5% November gain. In the South, sales declined 6.3% (-5.3% y/y) to 2.770 million in December after rising 4.0% in November. Sales in the Midwest fell 1.3% (-2.6% y/y) to 1.500 million after a 0.7% November improvement. Sales in the Northeast were off 1.3% (-15.7% y/y) to 750,000 after holding steady in November.
The median price of an existing home increased 1.0% (15.8% y/y) to $358,000 in December. During all of 2021, the median price rose 16.5% to $343,992 after gaining 9.4% in 2020. In the West, prices were fairly steady last month (8.4% y/y) for a second month at $507,100. December home prices in the Northeast rose 0.8% (6.3% y/y) to $384,600. Prices in the South rose 2.1% in December (20.2% y/y) to $323,000. In the Midwest, prices eased 0.8% last month (+10.0% y/y) to $256,900. The price data are not seasonally adjusted.
The number of existing homes on the market dropped 18.0% (NSA) in December to 910,000 units (-14.2% y/y). The supply of homes on the market fell to 1.8 months in December. That was well below the high of 4.6 months in May 2020. These figures date back to January 1999.
States Are Swimming in Cash Thanks to Booming Tax Revenue and Federal Aid New York, California, Florida are among the states planning big one-time investments in worker bonuses, tax rebates and paying down debt.
(…) Along with the tax rebates and bonuses, states are paying down debts and pension obligations and investing in short-term infrastructure projects. In addition, states’ reserve funds have reached a record level of nearly $113 billion for the 2021 fiscal year, the budget officers’ association said. (…)
RECESSION WATCH
Follow up on my Jan. 17 post: Don’t Be Fooled!
(…) Unless Americans start splurging on goods again (can they really?), the economy will fight a sizeable inventory overhang, forcing liquidations and production curtailments. At the end of November, wholesale and manufacturing inventories were 15.3% and 8.9% above their pre-pandemic levels respectively. Retail inventories were 5.8% lower but with floating goods coming their way and weak sales, they are likely to put the brakes on new orders until their stocks are normalized.
Many producers will be caught by surprise. (…)
The North American steel market is in for some rough months ahead, with excess supplies, rising inventories and shrinking demand, according to the head of Stelco Holdings Inc. Steelmaker shares fell.
“It’s a falling knife,” Stelco Chief Executive Officer Alan Kestenbaum said Thursday in an interview. “The question is when does it go the other way and where are we in the economic cycle? I think it turns at some point, but I don’t know where it bottoms out.” (…)
The situation is especially negative delivering into the automotive and construction sectors, with those industries reporting inventories are rising and customer demand is drying up, the head of the Hamilton, Ontario-based steelmaker said.
(…) it’s pretty clear what’s happening: significant oversupply and significant shrinkage of demand right now and you’re seeing it in the inventory numbers,” he said.
Steel shipments in the U.S. and Canada have plunged 17% since August and inventories have climbed 15% in the same period, according to data from the Metals Service Center Institute. Benchmark steel prices are down more than 26% since touching an all-time high at the end of August. And analysts at Bloomberg Intelligence said inflationary pressures and demand slowdown could make it harder for steel sector stocks to outperform in 2022.
“I don’t think there will be a choice but for people to acknowledge in the next couple weeks we’re in a difficult environment,” Kestenbaum said.
A well-supplied North American steel market sits in stark contrast to other industrial metals that are currently surging in price. Investors are worried supplies of aluminum, nickel and copper are dwindling across the globe, leaving consumers without material necessary to make enough of everything from beer cans to washing machines and automobiles. The price of steel, currently about $1,440 a ton, is still well above recent historical levels of about $840 a ton.
The same post started with the sharp drop in online sales: “The big surprise was in the November/December period when online sales dropped 10.2% from October, -11.4% in real terms. On a YoY basis, real online sales declined 4.6% in the last 2 months of last year. This is a big deal (…)”. Today:
- Analysts Chop Shopify Targets as E-Commerce Growth Slows Analysts from Deutsche Bank, Credit Suisse and Roth Capital Partners have cut their targets this week, citing lower online sales trends as more shoppers head back to physical stores.
No! It’s not because “more shoppers head back to physical stores”. Control sales fell 3.1% MoM in December after -0.5% in November. “The American consumer simply slacked off during the 2 most important months of the year.”
- Middle-Class Americans Are Feeling the Pain of Inflation Everywhere Inflation is worrying middle-income Americans, with 49% choosing the threat of rising prices as the largest economic challenge facing the U.S. in 2022, according to a Primerica survey.
(…) Some 68% of people surveyed said their income is falling behind the cost of living, and slightly less expect their economic prospects to be worse (28%) or the same (38%) this year. Primerica’s U.S. Middle-Income Financial Security Monitor polled 925 adults who earned between $30,000 and $100,000 in 2020.
Inflation seemed to be everywhere respondents turned. People noticed rising costs the most on groceries and gas (about 90%), as well as on local home prices (87%), restaurants and bars (80%), new or used cars (81%), health care (74%), taxes (72%), entertainment (66%), rent (60%) and child care (44%).
Rising prices were the second-most common personal concern among respondents at 33%, following physical health at 38%. Worries about paying for groceries rose to 19%, up from 12% in a similar September 2020 survey.
In a separate survey by Quicken Inc., 71% of respondents ranked inflation among the top 3 issues causing them the most worry. It was followed by new Covid-19 variants, disruptions in the supply chain and a stock market crash. Two areas that tend to top worry lists — retirement and job security — fell to the bottom of the list of concerns.
In the Primerica survey, nearly 90% of those polled expect the prices of household items to continue to increase. (…)
BTW: Goldman Sachs significantly raised its oil price forecasts through 2023 “on expectations that higher prices will be needed to resolve current market imbalances”. GS sees Brent at $93 and $105 in 2022 and 2023 respectively.
BTW: In the most-recent fourth quarter, premium from renewing business surged 9.2%, Travelers said, reflecting higher insured amounts and rate increases. Travelers has begun increasing car-insurance rates in some states and has requests for increases pending at state insurance departments in others. On the home-insurance side, Mr. Klein said Travelers is seeking rate increases, as well, to deal with higher labor and materials costs in rebuilding, and it is increasing customers’ coverage values to reflect the higher costs.
BTW: “Global employment growth slowed to a three-month low in December, in part reflecting ongoing problems in recruiting or retaining suitable staff, often resulting in higher wages and salaries, notably in Europe (especially the UK) and in the US. The number of service providers reporting increased costs due to rising staff wages and salaries hit the highest since 2007 globally in December, helping sustain global service sector cost inflation at a rate only slightly shy of November’s 13-year high.” (Markit)
A world shaped by supply We’ve entered an era where supply constraints are the driving force of inflation rather than excess demand. This will likely bring more macro volatility and force policymakers to live with higher inflation. (BlackRock)
Here’s a critical supply shocker: The U.S. labor force will grow by a mere 0.2% a year from 2024 to 2031, the Congressional Budget Office estimated in July.
Bank of England to raise rates again in February as inflation surges
RISK DOWN:
- Oil, Global Stocks Fall as Investors Cut Risk Global stocks, crude oil and cryptocurrencies fell, as investors continued to fret about the prospect of higher interest rates and cut risk across asset classes.
- Bitcoin drops to five-month low as investors dump risk assets
- Netflix, Peloton Bring Pandemic-Stock Era to Shuddering Halt
- The SPAC Ship is Sinking. Investors Want Their Money Back. One of the pandemic’s hottest trades is cooling down, as the hype surrounding ‘blank-check’ companies gives way to reality. The threat of tighter regulation is looming, and high-profile stumbles have taught investors some tough lessons.
John Authers on the recent market action:
First, this selloff was above all indiscriminate. It has all the hallmarks of a top-down move to get out of equities. Second, the collapse into the close suggests miserable sentiment. Faced with an up market after a couple of tough days, people could have delighted that “buy the dip” was in force, and jumped on the bandwagon. Instead, they decided this was an opportunity to get out.
The retail crowd is still buying the dips when pros are selling the rallies:
On a more positive note, JPM notes that on a single stock level retail has been very active in buying financials.
Yesterday and just about everywhere today:
Jeremy Grantham Doubles Down on Crash Call, Says Selloff Has Started
Jeremy Grantham, the famed investor who for decades has been calling market bubbles, said the historic collapse in stocks he predicted a year ago is underway and even intervention by the Federal Reserve can’t prevent an eventual plunge of almost 50%.
In a note posted Thursday, Grantham, the co-founder of Boston asset manager GMO, describes U.S. stocks as being in a “super bubble,” only the fourth of the past century. And just as they did in the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, he’s certain this bubble will burst, sending indexes back to statistical norms and possibly further.
That, he said, involves the S&P 500 dropping some 45% from Wednesday’s close — and 48% from its Jan. 4 peak — to a level of 2500. The Nasdaq Composite, already down 8.3% this month, may sustain an even bigger correction.
(…) Today, I feel it is just about nearly certain.”
In Grantham’s analysis, the evidence is abundant. The first sign of trouble he points to came last February, when dozens of the most speculative stocks began falling. One proxy, Cathie Wood’s Ark Innovation ETF, has since tumbled by 52%. Next, the Russell 2000, an index of mid-cap equities that typically outperforms in a bull market, trailed the S&P 500 in 2021.
Finally, there was what Grantham calls the kind of “crazy investor behavior” indicative of a late-stage bubble: meme stocks, a buying frenzy in electric-vehicle names, the rise of nonsensical cryptocurrencies such a dogecoin and multimillion-dollar prices for non-fungible tokens, or NFTs.
“This checklist for a super bubble running through its phases is now complete and the wild rumpus can begin at any time,” Grantham, 83, writes in his note. “When pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history.” (…)
Under these conditions, the traditional 60/40 portfolio of stocks offset by bonds offers so little protection it’s “absolutely useless,” Grantham said. He advises selling U.S. equities in favor of stocks trading at cheaper valuations in Japan and emerging markets, owning resources for inflation protection, holding some gold and silver, and raising cash to deploy when prices are once again attractive.
“Everything has consequences and the consequences this time may or may not include some intractable inflation” Grantham writes. “But it has already definitely included the most dangerous breadth of asset overpricing in financial history.”
As much as I respect Jeremy Grantham, a great value investor, I have often criticized his focus on mean reversion which often takes no account of significant changes in some long-term fundamental variables. For example, he was insistent in 2011-13 that profit margins would mean revert and drag equities much lower.
Instead, the rapid growth in high margins software companies, underway since 2000, changed the aggregate profitability landscape, justifying higher price-to-sales ratios. (Next chart from Ed Yardeni with my channel. Next, next chart from CPMS/Morningstar with my channel).
Grantham’s 2500 target on the S&P 500 is not impossible. It would take the conventional P/E ratio to 12x at current trailing profit levels. A big recession might set profits back 25% to the $155 level, 16x on 2500. Assuming inflation back to 2% then, that would be a Rule of 20 P/E of 18x.
But I doubt that such a big recession can occur given the state of consumer finances:
The big wildcard: inflation.
This is similar to what happened in 2014-15 when a steadily rising number of stocks were getting sold heavily while the index made new highs. It didn’t bottom until half of all stocks were in bear markets. (…)
