Electricity Consumption

U.S. HOUSING

• Home Builders Remain Downbeat U.S. home builders remained downbeat in May, reflecting a housing market struggling to regain traction well into the spring selling season.

An index of builders’ confidence in the market for new single-family homes fell one point to a seasonally adjusted 45 in May, the lowest level in 12 months, the National Association of Home Builders said Thursday.

The monthly decline was driven by builders’ negative view of current sales conditions. However, their expectations for sales in the next six months improved, as did builders’ assessment of traffic from potential buyers. The index declined by one point in the South and West, but held steady in the Northeast and Midwest.

This is the most important stat from this survey. No sentiment, just hard facts, boots on the ground in the middle of housing prime time:

More hard facts showing that unless many, many cash buyers show up, you should not hold your breath for a housing turnaround anytime soon:

Notwithstanding support from mild weather and a supposedly improving labor market, May 9th’s MBA index of mortgage applications for the purchase of a home plunged by -12.5% from a year earlier. By contrast, early May 2013’s comparable serial comparison showed a 10% yearly increase for homebuyer mortgage applications.

Basically, the growth of employment income was not great enough to compensate for a climb by MBA’s effective 30-year mortgage yield from the 3.73% of the four-weeks-ended May 10, 2013 to the 4.55% of the four-weeks-ended May 9, 2014. (Moody’s)

• Squeezed middle behind US housing slump A dip in home sales could threaten a fragile economic recovery

Much yadi, yadi, yada in this FT article until this:

(…) Although the US economy has added several million jobs in the last few years, there has been little incomes growth for the average American, and that may have reduced housing demand. New household formation has been exceptionally low, with many adults in their 20s and 30s continuing to live with their parents.

That helps to explain some of the divergent trends in the housing market. For example, builders are putting up much bigger homes, to cater to wealthy Americans who are doing well, which helps to explain why the number of starts is low.

“If you look at the average size of a new single family home then we’re at an all-time high,” says Ms Meyer. The average new home now covers around 2,700 sq ft – even larger than before the housing crash.

The demand for homes is also highest in affluent cities, such as San Francisco, that also have the toughest restrictions on building, leading to rising house prices, but no equivalent rise in activity to boost the overall economy and comfort Ms Yellen. (Chart fro Minack Advisors)

Here’s the debate among money managers:

• Miller Wagers Gundlach’s Bearish Housing Position Loses

Bill Miller said investor Jeffrey Gundlach and real estate billionaire Sam Zell are wrong about housing.

Gundlach, the chief executive officer of DoubleLine Capital LP, and Zell, chairman of landlord Equity Residential, predict fewer young people will buy homes, further driving down the U.S. ownership rate. Miller, the stock picker who beat the Standard & Poor’s 500 Index for a record 15 years, said he’s so confident lending and housing will rebound that he’s betting on mortgage insurers, homebuilders and subprime servicers.

“Anytime there’s a cataclysm, people always say it’s never going to come back,” said Miller, 64, sitting outdoors at a table overlooking Baltimore’s harbor. “I don’t believe there’s been a secular change in demand for housing. People may just rent longer than they otherwise would have before eventually buying.” (…)

Miller, who can recall how the stock market performed on many days as far back as the 1980s, said he remains upbeat on housing because banks are beginning to ease lending requirements.

In March, credit standards were the loosest in at least two years, according to a Mortgage Bankers Association index. The measure, based on underwriting guidelines, rose to 114 from 100 when it started in 2012. Wells Fargo & Co. (WFC), the largest U.S. home lender, last month cut its minimum credit score for borrowers of Fannie Mae and Freddie Mac-backed loans to 620 from 660. And earlier this week, the Federal Housing Finance Agency, which oversees the two government-backed mortgage companies, unveiled plans to spur lending by reducing the risk to banks of having to buy back loans that default.

“The housing recovery is far less robust right now than it’s ever been historically coming out of a recession,” which means there’s so much room for improvement, said Miller. “That’s the opportunity and also what gives rise to the confusion” among investors, he said. (…)

Earlier this month at the Sohn Investment Conference in New York, Gundlach recommended betting against an exchange-traded fund that tracks an index of homebuilders because declining affordability will reduce housing demand. Gundlach said in an e-mail that he doesn’t expect a significant increase in housing starts.

“You have a huge fraction of 18- to 34-year-olds who are unemployed and they also are much less interested in homebuying,” Gundlach said May 6 during an interview with Matthew Winkler, editor-in-chief of Bloomberg News, in New York. “Most of these people have been scarred by the housing collapse.”

The share of Americans who own their homes was 64.8 percent in the first quarter, the lowest since 1995, according to a Census Bureau report last month. That’s down from 65.2 percent in the previous three months and 69.2 percent at its peak in 2004.

Zell said in April at the Milken Institute Global Conference in Beverly Hills, California, that the rate may fall to as low as 55 percent as Americans postpone getting married and having children.

“The deferral of marriage has such a staggering impact on real estate and I just don’t think people focus on it,” Zell said at the conference. (…)

This isn’t the first time Miller has bet heavily on an optimistic outlook. His 15-year streak leading the Legg Mason Value Trust to better returns than the S&P 500 ended in 2006. His performance worsened as he wagered on financial stocks during the credit crisis, prompting a 55 percent decline in his fund in 2008. In 2012, Miller stepped down from the Value Trust, while staying on as the manager of the Opportunity fund. (…)

  Some more interesting facts for this debate:

As long as incomes grow sufficiently, lax mortgage loan standards might be tolerable. However, in view of how the current recovery suffers from the slowest growth by employment income of any upturn since the Second World War and because income growth has been skewed toward higher-income individuals and older Americans, employment income may be especially vulnerable to the next, inevitable recession.

Here’s a change that favors a worsened age distribution of income. One of the more stunning characteristics of the current recovery is the jump by the employment of Americans aged 55-years and older from April 2004’s 15.7% of household- survey employment to April 2014’s record 22.0%.

In fact, the current labor market recovery has been skewed toward the workforce’s oldest age cohort. For example, April 2014’s 4.0% cumulative increase by household-survey employment since the end of the Great Recession was unevenly divided between a meager 0.5% rise in the employment of those aged 16 to 54 years and an 18.3% advance in the employment of those aged 55 years and older. In turn, the upsides for US household expenditures and Treasury bond yields may now be limited by the degree to which subpar income growth has been skewed toward older Americans having a relatively lower propensity to spend.

Unprecedented demographic change may be having a more profound effect on financial markets than most investors realize. Consider how just 10-years ago, the number of Americans aged 65 years and older grew by 340,000 annually, while the number aged 16- to 64-years expanded by a much larger 2.33-million. Today’s situation is radically different, as the number aged at least 65-years expands by 1.54-million annually and the working-age population rises by a smaller 880,000. This ongoing shift in the age distribution of the US population complements expectations of relatively slow rates of growth for economic activity and price inflation and comparatively low Treasury bond yields. (Moody’s)

U.S. Industrial Production Falls 0.6% U.S. industrial production fell sharply in April, though weather-related distortions may have muddied the gauge of output.

(…) The decline in industrial production was largely the result of a 5.3% fall in utility output from elevated levels in the prior months. Unusually cold weather had caused a spike in Americans’ demand for gas and electricity to heat their homes.

Manufacturing, the biggest and most closely watched component of industrial production, fell by 0.4% in April. But that, too, was likely distorted by weather factors.

After stalling in December and January because of harsh weather, U.S. factories came roaring back to life in February and March in an attempt to make up for lost production. March’s gain was revised upward to 0.7% from 0.5%. An average gain of 0.3% for the first four months of the year puts manufacturing growth back close to its monthly average last year. (…)

Two Federal Reserve banks released Thursday gauges of May manufacturing activity in their regions. The Federal Reserve Bank of Philadelphia said its index of factory output fell slightly this month after surging in April, while the New York Fed’s Empire State survey showed activity picking up sharply.

“Overall, this morning’s Philly and Empire manufacturing reports continue to suggest further strengthening in manufacturing sector activity in May,” said Gennadiy Goldberg, strategist at TD Securities. (Chart from Haver Analytics)

Hong Kong Growth Cools to Slowest Pace Since 2012 on Exports Hong Kong’s economy grew in the first quarter at the slowest pace since a contraction in 2012 because of weakness in exports.

Gross domestic product expanded 0.2 percent from the previous three months, the government said in a statement on its website today. That was less than the 0.4 percent estimate in a Bloomberg News survey of 11 economists.

MORE ON CHINA’S SLOW AND SLOWER

April electricity consumption in China was flat with March, seasonally adjusted. The first 4 months of 2014, electricity was up 5.2% year-to-date. That’s weaker than in any year back thru the 2008-09 global meltdown. April does not look like it was an upturn month for China’s economy. (ISI)

EU Car Sales Growth Slows The recovery of car sales in the European Union remained intact in April, but growth in demand slowed considerably after a strong first three months, according to industry data.

European Union new car registrations, which mirror sales by dealers, rose 4.6% to 1.09 million vehicles in April, the European Automobile Manufacturer’s Association, or ACEA, said Friday. The report reveals a sharp slowdown in demand after sales rose nearly 11% in March, caused in part by early Easter holidays and a 4% decline in sales in Germany, Europe’s biggest car market.

In the four months to the end of April, EU car sales increased 7.4% to 4.34 million vehicles. That suggests that the recovery in Europe is still intact, but car sales are still down 20% from the same period in 2007 when EU car sales totaled 5.4 million vehicles. (…)

European car markets may be bouncing back from low levels, but still not in a fully-fledged recovery. Car sales in Spain, for example, grew at a stellar 29%, largely on discounts and government cash-for-clunkers subsidy.

Analysts say that on average European dealers are offering discounts of at least 10% and as much as 40%. That means that any rise in car sales is bought at a high price for manufacturers.

French car maker Renault SARNO.FR -3.49% grew fastest in April, posting a 16% increase in unit car sales.Volkswagen AG VOW3.XE +0.29% , Europe’s largest car maker by revenue, achieved growth of 4.4% across its entire fleet, driven by higher sales of its Audi,NSU.XE -0.16% Porsche, SEAT and Skoda brands. However, sales of VW brand cars, its largest business, declined 0.2% in April.

The turnaround at General Motors Co. GM -1.66% ‘s Opel unit continued in April, as sales of Opel and its U.K. subsidiary Vauxhall rose 8.1% in April, raising Opel’s market share to 6.8% in the four months to the end of April. But Opel is offering the steepest discounts in Europe, analysts said, which suggests it may be difficult for the GM subsidiary to maintain that pace of growth.

Global Growth Worries Climb Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next.

Europe, China, U.S. housing…and now, inflation, where the Fed wants it at 2.0% Y/Y is seen as “complicating matters for the Fed”.

(…) Yields on bonds issued in big developed markets continued to fall Thursday. Yields on German bunds with 10-year maturities sank to 1.307%, their lowest level in a year, while yields on 10-year U.S. Treasury notes fell to 2.498%, the lowest level in six months. (…)

Complicating matters for the Fed are signs that inflation is heading back toward the Fed’s 2% goal after running below that for nearly two years. The U.S. consumer-price index rose 2% in April from a year earlier, a notable pickup from a 1.5% pace in March and a 1.1% pace recorded in February.

EARNINGS WATCH

Guidance Spread Finishes Positive

The first quarter earnings season came to an end today with Wal-Mart’s (WMT) report this morning.  One positive takeaway is that more companies raised guidance than lowered guidance this season.  Just barely though.  Below is a chart showing the quarterly spread between the percentage of companies raising guidance minus lowering guidance.  Heading into this earnings season, we were riding a ten-quarter streak of a negative guidance spread (more companies lowering than raising).  While it barely finished in positive territory this season, we finally broke the negative guidance streak that has plagued the corporate world since the third quarter of 2011. 

As I wrote in SELL IN MAY? YOU MAY BE SORRY! on May 12,

In fact, 26 companies have positively preannounced for Q2 so far. This is the highest absolute number of positive preannouncements since Q1’13 (24) which was reached after 106 companies had preannounced (vs 88 so far).

This is pretty significant: one, we know that companies are inherently wary of over-promising, knowing very well the cost of under-delivering. Two, Q2 estimates currently assume a breakout of corporate margins as this Factset chart illustrates. The fact that corporations are not trying to reign in these estimates is positive.Mean-reversion remains elusive…