Year: 2023

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

China’s central bank pledges to support domestic demand

(…) “Prudent monetary policy should be precise and forceful, with greater emphasis on cross-cyclical and countercyclical adjustments, enriching the monetary policy toolbox,” the bank said.

The bank added it would “further unblock the monetary policy transmission mechanism”, enhance the stability of financial support for the real economy and keep prices “reasonably stable”. (…)

The bank said it would guide financial institutions to resolve local debt risks and noted there was urgency for faster economic transformation.

“Supply and demand dynamics in the property market have greatly changed,” the central bank said.

The bank said it would keep the yuan — which has come under pressure on the foreign exchange market this year — “basically stable” and strive to foster a sound monetary and financial environment.

• China Seen Unleashing $319 Billion of Special Bond Quota Early Authorities expected to unleash 60% of 2024’s allowance early

(…) That implies the overall size of the next year’s special local bond quota — primarily meant for infrastructure investment — could total 3.8 trillion yuan, according to Bloomberg calculations based on figures provided in the report. That would equal this year’s quota.

The Chinese government’s decision to release the quota early would signal President Xi Jinping’s commitment to bolstering economic growth through infrastructure spending. It also suggests policymakers won’t scale back on local governments’ special bond issuance, even as they ramp up sovereign bonds to fund construction. (…)

China increased its headline deficit to the largest in three decades last month, by issuing an additional one trillion yuan of new special sovereign bonds for infrastructure spending. Some economists expect Beijing to set the deficit ratio at a relatively high level next year.

China’s basic problem (charts from Ed Yardeni):

• Declining population: It declined by 850,000 during 2022, the first decline since 1961.

• Recurring problem:

• Beijing bourse tells ‘major shareholders’ to refrain from selling, sources say

The Beijing Stock Exchange has de facto implemented a new policy that prevents major shareholders of companies listed on the bourse from selling stock, worried that such sales could douse a long-desired rally, three people familiar with the matter said on Monday.

The bourse said in a statement to Reuters on Tuesday that talk of such a policy was “not factual”, and there was “no change to the spirit of relevant published guidelines”.

A “major shareholder” is one with a stake of 5% or more and is required to make a public filing with the relevant stock exchange before selling shares, according to rules for China’s bourses.

The Beijing exchange has been rejecting those filings, said the people who were not authorised to speak to media and declined to be identified.

It was not immediately clear how long this new policy would remain in place, they added.

The bourse had said separately in a statement on Monday morning ahead of this Reuters article that it was closely monitoring trading to ensure normal market order.

The so-called window guidance – where directives are made orally without written documents – is aimed at protecting the rally, the sources said.

One noted that without the guidance, the share price surge “could prompt institutional shareholders to reduce their holdings which could knock the index down again.”

The Beijing bourse currently houses 232 companies with a combined market capitalisation of 366 billion yuan ($50 billion).

By comparison, the Shanghai bourse is home to 2,256 firms worth 47 trillion yuan in total, while almost 3,000 companies listed in Shenzhen have a total market capitalisation of 31.9 trillion yuan. The Shanghai Composite Index (.SSEC) is up 0.4% this month, while the Shenzhen Composite Index (.SZI) is down 0.8%.

John Authers: Here’s a Weight-Loss Plan for the Magnificent Seven

(…) Between them, they account for 28.9% of the S&P 500.

This chart from Apollo Group’s Torsten Slok compares an “S&P 7” index with an S&P 493 that includes all the rest. The gap is astonishing:

We’ve been here before. Whenever the market gets dominated to this extent by a group of companies that are using technology to do capitalism better than anyone else, burst investment bubbles tend to follow. Slok also offered this chart comparing the valuations of today’s big seven with the multiples people were prepared to pay for the biggest “Nifty 50” stocks in 1972, and tech stocks in the internet bubble of 2000:

(…) Retail traders are still alive and well, even if they don’t seem to have gained much in the way of common sense. Their presence can doubtless be felt in the Magnificent Seven. Just this month, they have piled into the shares of bankrupt companies like WeWork Inc. and trucking company Yellow Corp. But the force has waned. Retail traders last month sold nearly $16 billion in stocks, according to S&P Global Market Intelligence, a selloff that reveals fading enthusiasm from day traders.

But if the excitement over memes has gone, retail traders have found other places to go — such as zero-day stock options. August data show that they likely make up at least 30% of the volume in contracts tied to the S&P 500 that expire within 24 hours — and possibly up to 40% — according to Cboe Global Markets. Long-termist this isn’t. (…)

Some related charts from Goldman Sachs:

FYI: P/E ratios vs Net Margins: I often plot these 2 series to see how current P/Es compare with history and assess how the company’s margins trends reflect on its market dominance and sustainability (management quality). Note that dash lines reflect consensus forecast EPS and margins. Charts from Morningstar/CPMS.

• NVDA: P/E is historically high on trailing EPS but low on forecast. High and fast rising sales and margins.

Data: FactSet; Chart: Axios Visuals

• MSFT: High P/E and high and rising margins.

• META: “Reasonable P/E. Low but recovering (?) margins.

• AMZN: P/E is historically high on trailing EPS but low on forecast. Recovering (?) margins.

• AAPL: Is 31x reasonable? Sustained high margins.

• GOOG: Cheap? Volatile margins. How about the forecast?

• TSLA: 65x! Declining margins.

GOLD:

I personally don’t invest in gold, can’t understand it. This does not help!

“Gold is trading above $2,000, widening its divergence with US real yields (chart shows inverted 10-year TIPS yield).”

Source: @TheTerminal, Bloomberg Finance L.P.