Month: November 2023

National Association of Credit Management

(…) in a marked change from recent prior months of the CMI survey, credit managers are sounding the alarm
on account performance, ranging from more accounts delinquent, poor application quality, and more bankruptcies. (…)

• Half of the six unfavorable factor indexes deteriorated in the November survey which records credit
  performance for the prior month; the index for filings of bankruptcies led with a decline of 2.6 points to an index value of 47.8, its lowest level since June 2020.
• The index for accounts placed for collection deteriorated by 1.0 point to 44.6, its 18th month below 50
  points the lowest level recorded for this factor index.
• The index for the rejections of credit applications declined 1.0 point in the November CMI survey to a level
  of 48.7, the third consecutive month of decline for this index.

“It’s almost like a switch was flipped in the comments provided by survey respondents,” said Cutts. “We went from a gradual subsiding of comments regarding supply chains to sort of random comments and then this month they all aligned on worry about account performance.

The US Courts reports filings of bankruptcies and year-to-date through September their data show a 39% increase in business bankruptcies over 2022. While the level is not yet fully back to pre-pandemic it won’t be long before business failure surpasses that mark at this rate.” (…)

“Respondents in this month’s CMI survey representing companies in the manufacturing sector stated that orders are slowing and payments slowing even more, not at all in line with the news reports indicating a strong economy,” Cutts said. (…)

“The Service Sector CMI index is managing to stay in expansion but there is a troubling narrative emerging in the unfavorable factors indexes,” said Cutts. “Not only are all of the factors in contraction, some are deeply so and have been for a long while.

More accounts are beyond terms, more and more are being referred to collections, disputes over invoices are increasing—these are all signs that businesses are stressed. (…) The only bright spot is that dollar collections are still strong once the hammer is brought down on customers.”

“Service sector respondents to the CMI survey noted that more bankruptcies and business closures. As the cost of money increases, we are likely to see more accounts stretching their terms and being less responsive as they work to conserve cash. Unfortunately for credit managers it means their work is getting harder and harder.”

• US Leveraged Loan Default Rate Pushes Above 3%

Six defaults in the last 30 days have brought the US trailing twelve month (TTM) leveraged loan default rate back above 3%, Fitch Ratings says. Operational issues and free cash flow challenges, in tandem with elevated leverage, high interest expense and weak liquidity, pushed several issuers to file Chapter 11 or engage in distressed debt exchanges (DDEs) to address near-term maturities.

The U.S. Leveraged Loan TTM Default Rate stands at 3.0% by volume and 3.5% by issuer count in October, up from 2.9% and 3.4% in September. YTD default volume as of Nov. 20 is $49.7 billion from 61 issuers, compared with $25.1 billion from 23 issuers over the same period in 2022. There were six defaults over the past month, four of which were DDEs and two were issuers in healthcare. (…)

• Fannie and Freddie Serious Delinquencies in October: Single Family Declined, Multi-Family Increased

Ed Yardeni:

The bond market liked today’s Beige Book, the collection of regional surveys of economic activity conducted by each of the 12 Fed district banks. While Q3’s real GDP growth was revised up to a red hot 5.2%, the latest survey from October 6 to November 17 was more like a cool beige color. Six of the 12 Fed banks reported slight declines in economic activity. Two others were “flat to slightly down.” Demand for labor “continued to ease, as most districts reported flat to modest increases in overall employment,” the Beige Book said. Wages also grew a bit more slowly. Price increases “largely moderated” across the country, the Beige Book found, and “most districts expect moderate price increases to continue into next year.”

Eurozone inflation drops much more than expected again in November

Headline inflation fell from 2.9 to 2.4% in November, while core inflation dropped more, from 4.2 to 3.6%. This shows that signs of an imminent victory on inflation are mounting for the European Central Bank. When will they dare to admit so themselves? We expect a first rate cut before the summer

The decline in inflation was seen across the board in November. Energy inflation is still driven by significant base effects (-11.5% year-on-year), and food inflation dropped from 7.4 to 6.9% year-on-year. Goods and services inflation also both fell significantly, to 2.9% and 4% year-on-year, respectively.

In fact, on a monthly basis, core inflation was negative.

We always expected inflation to drop significantly in the final months of the year, but the process of disinflation is happening even more quickly than we expected, particularly for core inflation, where expectations were for price pressures to remain more stubborn.

But weak demand and quickly fading supply-side problems have set core inflation on a much quicker path down than thought a few months ago. Taking the monthly pace of price increases seen in the past three months, core inflation will drop below 2% well before the end of next year. While we think that might be a bit optimistic given the remaining price pressures coming from wages, for example, it does show that inflation is now much more benign than earlier in the year.

For the ECB, signs of an imminent victory on inflation are mounting. The central bank worries about factors like wage growth and possible spikes in the energy market that could put inflation on a higher path again. But current monetary policy is sufficiently restrictive as bank lending data out earlier this week showed that the effects of higher rates are impacting lending significantly. Also, there is still a lot more of the impact of tightening to come as interest payments are still increasing. The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer.

China Factory, Services Activity Shrink in Snag for Recovery Services sector gauge records first drop below 50 this year

The official manufacturing purchasing managers index fell to 49.4, the second straight month of contraction, according to a Thursday statement from the National Bureau of Statistics. While economists expected a decline in the index, the number was lower than estimates.

A gauge of non-manufacturing activity — which measures the construction and services sectors — unexpectedly eased to 50.2, barely clearing the 50 mark above which indicates expansion. An underlying measure of services activity fell to 49.3, the first contraction for that gauge this year. (…)

A sub-measure of new orders placed with Chinese factories dipped to a five-month low of 49.4 in November, with a shrinkage in new export orders even worse, according to the NBS. The sub-gauge of employees was entrenched in contraction at 48.1.

The government has in recent months worked to support activity by ramping up bond sales for infrastructure investment. A gauge of construction activity rose in November to 55 from 53.5 the prior month, the NBS data showed. (…)

• China’s Home Sales Spiral Despite Backstop Plan for Developers

The value of new home sales among the 100 biggest real estate companies fell 29.6% from a year earlier to 390.19 billion yuan ($54.6 billion), according to preliminary data from China Real Estate Information Corp. on Thursday. That follows a 27.5% decline in October.

Sales were down 4.1% from a month earlier. The top 100 developers’ aggregate annual sales are expected to fall 15% from 2022, according to the report. (…)

China’s home prices fell the most in eight years in October, signaling the property slump is worsening even after the government ramped up efforts to revive demand.

The WSJ adds:

China’s huge real-estate sector is mired in a protracted downturn, putting the squeeze on consumer confidence and households’ willingness to spend. House prices fell in 70 major cities at a faster clip in October than a month earlier, while nationwide the amount of new home sales measured in floor space was around 20% lower than a year earlier. (…)

The November sales were also 4% lower than October, ending a short-lived period of sequential growth. Traditionally, September and October are the busiest months for property sales in China, as developers often offer discounts around the mid-autumn festival and weeklong national holiday. CRIC estimated that new home sales from the top 100 developers in 2023 will be down 15% from 2022, to their lowest level in recent years. (…)

• China Investment Bank Bans Displays of Wealth CICC also asks analysts to avoid negative macro market commentary.

Analysts at China International Capital Corp. are barred from sharing negative comments about the economy or markets in both public and private discussions, according to an internal memo sent to the research department this month and seen by Bloomberg News. Employees should also avoid wearing luxury brands or revealing their compensation to third parties, the memo said.

The directive underscores the increasing level of self-scrutiny at Chinese financial institutions after authorities lashed out this year at bankers’ “hedonistic” lifestyles, and ordered them to comply with President Xi Jinping’s “common prosperity” drive. It also highlights concern among international investors that China is increasingly restricting access to transparent data and research in the world’s second-largest economy. (…)

Among recent examples of pushback against negative commentary, Goldman Sachs Group Inc. analysts attracted a wave of criticism in July after publishing a bearish report on Chinese banks. (…)

At least two other major investment banks have given verbal guidance to analysts over the past year barring them from making negative comments on the domestic economy or bragging about their pay, people familiar with the matter said, asking not to be identified discussing private information. A Shenzhen-based brokerage discouraged its economists from discussing topics including deflation and the yuan exchange rate, one of the people said. (…)

Sales over U.S. Thanksgiving weekend hit record on big discounts, online boost

Deep discounts on everything from beauty products and toys to electronics during the Thanksgiving weekend enticed U.S. shoppers to splurge about $38 billion online, signalling a strong holiday shopping season even as economic uncertainty swirled.

Online consumer spending jumped 7.8% during Cyber Week, or the five days from Thanksgiving through Cyber Monday, according to data from Adobe Analytics, outstripping initial expectations for a  5.4% rise. (…)

More than 200 million shoppers made purchases both in-store and online during the Thanksgiving weekend, the National Retail Federation (NRF) said on Tuesday, representing a near 2% increase from last year and surpassing the trade association’s estimates of 182 million. (…)

On an average, consumers spent $321.41 on holiday-related purchases, including toys, electronics and gift cards during the Thanksgiving weekend, compared with $325.44 last year, the NRF data showed. (…)

Online shoppers rose 3.1% to 134.2 million during the Thanksgiving weekend, making up for a slight dip in the number of customers who visited brick-and-mortar stores. The period saw about 121.4 million in-store shoppers, down from 122.7 million in 2022, according to the retail body. (…)

According to Salesforce, which derives its benchmarks for online traffic and spending from data flowing through its Commerce Cloud e-commerce service, U.S. shoppers spent about $70.8 billion online, representing a 4.1% increase from 2022, during the Thanksgiving weekend this year.

A record $940 million worth of purchases were made through BNPL on Cyber Monday, surging 42.5% from last year and trouncing Adobe’s earlier estimate for an 18.8% jump, as consumers took advantage of the flexible payment option.

Payments firm Block noted BNPL transactions through Afterpay surged 19% over the weekend, adding that online shopping cart sizes were 3.9 times bigger than in-person shopping.

Klarna also said it saw a 29% increase in orders placed by U.S. shoppers on Black Friday.

Credit card usage has been roughly in line with labor income growth…

… The problem, as shown in this next chart, is financing costs which have doubled since the end of 2021 and are 55% above their pre-pandemic level. Personal interest payments now represent 2.7% of disposable income, up from 2.0% pre-pandemic and getting close to previous strangle points (dash).

But the financial stress has accelerated since June as Americans reverted to credit cards to offset their slowing income:

The compounding of higher credit balances with higher interest rates is quickly eating into disposable income. In September alone, personal interest payments jumped 7.2% from August and are now 32% above their December 2022 level, before student loans interest payments resumed in October. Disposable income is up 5.6% YtD.

This financial reality won’t go away anytime soon. in fact, it will get worse better getting better. If Americans don’t curb their spending this holiday season, they will have to after Christmas.

Delinquency rates on all credit card loans have shot up above their pre-pandemic level though remain well below 2001 and 2008 levels… but not for smaller banks. The last data points are September 2023.

The Conference Board’s consumer confidence survey reveals a sharp turn on job availability suggesting higher unemployment ahead (h/t @MikaelSarwe):

OECD Warns Global Economy Risks Losing Momentum OECD sees 2.7% global GDP growth in 2024 versus 2.9% in 2023

Growth is losing momentum in many countries and won’t edge up until 2025, when real incomes recover from the inflation shock and central banks will have begun cutting borrowing costs, the Paris-based organization said. (…)

Moreover, the OECD said the risks to the forecast are tilted downwards amid heightened geopolitical tensions, an uncertain outlook for trade, and the risk that tight monetary policy could hurt firms, consumer spending and employment more than expected.

“Inflation is easing, but growth is slowing,” OECD Chief Economist Clare Lombardelli said in a statement. “We are projecting a soft landing for advanced economies, but this is far from guaranteed.” (…)

The OECD said that even as headline measures of inflation have declined, gauges of core prices are proving sticky — and monetary policy must remain restrictive until there are clear signs underlying pressures are durably lower.

It expects rate cuts in the US will only begin in the second half of 2024, and not until the spring of 2025 in the euro area. (…)

A “challenging fiscal outlook” is confronting many governments as debt-servicing costs rise, the OECD warned. To meet demands from aging populations and the climate transition, it said countries need to make stronger efforts in the near term to create space for future spending. (…)

Here’s S&P Global’s growth forecasts:

Wells Fargo’s numbers:

Debt-laden China’s local governments scramble to rescue small banks with $21 billion in special bonds

Local governments in China have sold record amounts of so-called special bonds this year to inject capital into struggling smaller banks, as authorities seek to contain spillover risks from a deepening property crisis and a sputtering economy.

Special-purpose bonds are a form of off-budget debt financing used by local governments in China, with the proceeds raised typically earmarked for specific policy goals, such as spending on infrastructure projects.

Local governments plan to use the proceeds of the latest bond sales to purchase equity or convertible bonds from smaller banks, most of them state-owned, effectively recapitalising them, according to the deal prospectuses.

The governments have raised 152.3 billion yuan ($21.05 billion) via such bonds so far in 2023 to replenish the capital of small and medium-sized banks, according to data from the official China Electronic Local Government Bond Market Access.

But total funds raised so far are modest compared to the banks’ needs, analysts say.

China’s small, regional banks would need to address a capital shortfall of an estimated 2.2 trillion yuan based on a scenario where up to 20% of regional lenders face capital inadequacy, according to an October report by S&P Global Ratings.

Highlighting Beijing’s push to avoid a financial crisis like the one in 2008, the value of special-purpose bonds issued this year is already more than double the 63 billion yuan issued in 2022, and is the highest on record since such instruments were introduced in 2020 to help smaller lenders impacted by the COVID-19 pandemic. (…)

“It is important to avoid any failures of even the smallest institutions, as a single failure could generate knock-on effects and spread financial contagion to other financial institutions,” said Gavekal Dragonomics researcher Zhang Xiaoxi. (…)

Smaller regional banks are the weak links in China’s $61 trillion financial sector, due to their industrial, sectoral and geographical concentration, opaque governance, and lack of stringent regulatory oversight.

As of end-September, China’s rural commercial banks reported a 3.18% non-performing loan ratio with city commercial banks at 1.91%, data from the NFRA showed, higher than the average of 1.61% in the banking sector.

Many analysts believe the real amount of soured loans is far higher.

Smaller Chinese banks face greater challenges in raising funds to replenish their balance sheets compared with their large peers, because of their lower creditworthiness, limited operating scope and risk profiles. (…)

Insiders Are Buying Up Stocks in Sign November’s Equity Rally Has Room to Run

In a month where $5 trillion has been added to share values, Goldman Sachs Group Inc.’s corporate clients showed a “big tick up” in repurchase activity. Same thing at the buyback desk at Bank of America Corp., which just had the busiest week of execution orders in the firm’s data history.

The people in charge of the businesses are in buying mode, too. Corporate executives and officers have snapped up shares of their own firms in November, with the ratio of buyers to sellers set to touch a six-month high, according to data compiled by the Washington Service.

As of Monday, almost 900 corporate insiders have purchased their own stock in November, more than double the previous month. While the number of sellers also rose, the pace of increases was smaller. As a result, the buy-sell ratio jumped to 0.54, the highest level since May.

The buying impetus pales next to March 2020, when insider buyers outnumbered sellers by a ratio of 2-to-1 at the exact bottom of the pandemic crash. Still, the bullish stance is a departure from July, when stocks climbed and insiders rushed to dump stocks. That exit proved prescient as the S&P 500 sank 10% over the following three months. (…)

After refraining from buybacks earlier this year, American firms are now embracing them. Repurchases among BofA’s clients have stayed above seasonal levels for three weeks in a row, including one in which a record $4.8 billion was bought, according to data compiled by the firm’s strategists including Jill Carey Hall and Savita Subramanian.

Corporate buybacks will likely be running at $5 billion a day until the market enters an earnings-related blackout on Dec. 8, according to Scott Rubner, a managing director at Goldman, who has studied the flow of funds for two decades. Once the blackout window opens, the flow may drop by 35%, he estimates.

Source: BofA

That may set the stage for choppy trading in the short term, especially after fast-money managers such as trend followers boosted stock holdings, making them more inclined to trim exposure should things go sour, Rubner warns.

“Corporate demand will start to fade next week,” the Goldman veteran wrote in a note. “Then the pain trade moves to the downside, no longer upside.”

Viewed in a wider lens, however, buybacks can still offer support. By the tally from Goldman strategists including Cormac Conners, US firms have announced roughly $900 billion of share repurchases this year, poised for the third-highest annual total on record. (…)

“There are plenty of profitable and growing companies outside of the Magnificent 7 that have languishing stock prices this year,” he said. “Insiders could be chomping at the bit to buy these under-performers now on hopes of that we could see a reversal next year, with smaller companies beating the megacaps.”

Which goes right into RBA’s alley:

Following up on yesterday’s Daily Edge from RBA:

Magnificence beyond the Magnificent 7

(…) the fundamentals of the Magnificent 7 aren’t uniquely superior, and the breadth and depth of other growth opportunities seems historically large and attractive. We’ve described the attractiveness of the stocks outside the seven as a once-in-a-generation opportunity to invest in this broad and ignored group.

Narrow leadership is typically the result of deteriorating fundamentals in the broader market. When the profits cycle decelerates, investors gravitate to the fewer and fewer companies that can maintain growth during an increasingly adverse backdrop. Leadership narrows as fundamentals deteriorate, and growth becomes scarce.

With that in mind, the Magnificent 7’s significant outperformance might be justified if they were truly unique. Unfortunately, that is not the case. Rather, it increasingly seems investors’ enthusiasm for these seven stocks is a reflection of today’s speculative, momentum-driven market. But investors’ myopia has resulted in tremendous opportunities elsewhere.

There are more than 7 growth opportunities in the world…

In order to determine if there really are more than 7 growth stories in the equity markets, we did a screen of US companies having forecasted year-to-year earnings growth of 25% or more. 25% is an arbitrary, but widely accepted growth hurdle often used by growth investors.

As shown in Chart 2, 82 US companies passed our growth screen, which certainly demonstrates the universe of growth stocks is much larger than the Magnificent 7. More importantly, only 3 of the Magnificent 7 companies actually passed the screen and they ranked only #25, #72 and #74.

It’s pretty clear there is nothing particularly unique about the Magnificent 7’s fundamentals. Rather, price momentum and excitement around the story alone seems to be luring investors to the stocks.

…and they’re not even predominantly mega caps…

Investors are currently concentrating mostly on the largest stocks, and some do indeed pass our screen, but there are two critical points embedded in Chart 3:

First, our analysis suggests that investors’ myopic focus on the Magnificent 7 may be causing them to ignore other large cap growth stocks. The median year-to date performance of the remaining 79 stocks that passed our screen was just 7%, highlighting the neglect of other stocks with similar earnings growth momentum.

Second, smaller stocks within the MSCI US universe comprise nearly 60% of the growth stocks passing our screen. These stocks seem to be more fertile ground for growth than the mega caps.

…and they’re not all Tech!

Growth opportunities exist in sectors other than Technology. Chart 4 shows the sector composition of the companies that passed our growth screen relative to that within the MSCI US Index. Traditional growth sectors, like Consumer Discretionary and Communications, are overweighted in our screen, but Energy actually ranks higher than does Technology, and Real Estate and Materials are nearly identical to Tech.

Overweight “everything else”

Investors focus on this narrow group of stocks and their resulting dominance in major cap-weighted indices has caused an extreme lack of diversification in many classic investment vehicles. RBA’s role since inception has been to provide diversification and exposure to ignored investment opportunities.

The Magnificent 7 don’t appear as unique as their outperformance would suggest. At the same time, other sectors’, sizes’ and countries’ (i.e., everything else) fundamentals appear under-appreciated. We continue to believe that “everything else” presents a once-in-a-generation investment opportunity. Chart 5 represents the diversification we offer in that our portfolios are significantly underweight the Magnificent 7, but overweight just about “everything else.”

Investors seem to be shunning the benefits of diversification to trade individual stocks. History suggests that isn’t a prudent decision for building wealth.

EVs

A new study from the University of California, Berkeley’s Energy Institute at Haas finds a “strong and enduring correlation between political ideology and U.S. EV adoption.” About half of EVs registered as of last year were to “the 10% most Democratic counties, and about one-third to the top 5%,” the study notes. This suggests “it may be harder than previously believed to reach high levels of U.S. EV adoption.” (WSJ)

Charlie Munger, Titan of Investing, Dies at 99

• It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. (Warren Buffet)
• “I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell to fish.'” — “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business,” 1994 speech at USC Business School
• Now about 95% of [newspapers are] going to disappear and go away forever. And what do we get in substitute? We get a bunch of people who attract an audience because they’re crazy …. I have my favorite crazies, and you have your favorite crazies, and we get together and all become crazier as we hire people to tell us what we want to hear. This is no substitute for Walter Cronkite and all those great newspapers of yesteryear. We have suffered a huge loss here. It’s nobody’s fault. It’s the creative destruction of capitalism, but it’s a terrible thing that’s happened to our country.” — 2022 Daily Journal Annual Meeting