Luxury Cars Drive Auto Sales Higher America’s taste for pricey automobiles hit its stride in April amid low gasoline prices and favorable lending terms, with buyers paying on average hundreds of dollars more for a light vehicle than in the same period a year ago.
Industry researcher Autodata Corp. estimates seasonally adjusted annual sales at 16.5 million in April, below what analysts initially expected but far exceeding April 2014’s 16.05 million pace. Overall, U.S. sales rose 4.6% to 1.45 million for the month, Autodata said.
Pickups and SUVs, far more profitable for the industry than passenger cars, hit 54% of April U.S. sales, three percentage points higher than a year ago. (…)
Researcher J.D. Power & Associates estimates the average transaction price topped $30,000 in April, 2% higher than a year ago and 10.4% higher than April 2010, when the industry was digging out from recession.
Ford said the average price paid for F-series pickups in April was a record. The $42,600 average was “an incredible number…up more than $3,200” from a year ago, said Ford’s sales chief Mark LaNeve.
The trajectory is supported by less discounting, but the foundation for the higher prices is longer-duration loans.
In an industry where 36-month terms once were standard, it now is common to see loans spanning seven years. (…)
Edmunds.com senior auto analyst Jessica Caldwell said new car loans in April averaged 67.8 months—the longest average in history. (…)
AutoWeb’s Mr. Harley said car makers “have learned that people are fixed on monthly outlays.” If a dealer can lower the monthly payments a buyer will walk out of the store and “realize that they spent $5,000 or $10,000 more than they initially planned to.”
The charts from CalculatedRisk illustrate the difficulty to clearly break the 16M annualized rate as Milleniums continue to balk at owning cars.
Momentum in the building sector has weakened significantly. The value of construction put-in-place slipped 0.6% during March following no change in February, revised from -0.1%. Year-to-year growth of 2.0% follows gains of roughly 6.0% during 2013 and 2014. A 0.5% March rise had been expected in the Action Economics Forecast Survey.
The growth slowdown in private construction activity has been pronounced. Building eased 0.3% in March following a 0.3% rise. The y/y gain of 2.9% is down from 8.0% last year. Residential building activity declined 1.6% following little change in February. Negative y/y growth of 2.6% compares to a 5.1% rise last year and a 20.4% 2013 increase. Single-family building activity fell 1.8% (+7.8% y/y) after a 1.1% decline. Annual growth had been 10-30%. Multi-family building dropped 2.1% (+23.4% y/y), the first fall since July. The y/y gain of 23.4%, though still firm, is down from a one-third increase in 2014. Spending on improvements declined 1.0% and was down by one-quarter versus last year.
Total construction spending was –1.8% in Q1 (-7.4% a.r.). Private construction was –0.3%.
(…) Song said that while the government doesn’t target any specific level for the won, it could “fine-tune” movements to ease any “herd behavior” in the currency. The won has gained about 40 percent against the yen since Japanese Prime Minister Shinzo Abe took office in late 2012. It’s up about 17 percent versus the euro and little changed against the dollar over the same period, according to data compiled by Bloomberg. (…)
Shipments to Japan fell 12.6 percent in April from a year earlier while exports to Europe dropped 11.9 percent.
The latest activity “nowcasts” shown in detail below indicate that the global economy has continued to slow down more than consensus forecasts projected, though forecasters continue to believe that this slowdown will prove temporary. (…)
The sole bright spot is the eurozone, where activity growth has improved slightly further to 1.8 per cent, following an encouraging pick-up earlier in the year. The gap between US and eurozone growth has, for now, disappeared completely.
Overall, the growth rate of the global economy has therefore slowed further, according to our models. Our estimate of activity growth in the major advanced economies plus China, which we use as a proxy for global activity, has dropped to 3.0 per cent at the end of April, from 3.7 per cent a month ago. This measure of global activity has now broken below the roughly 4 per cent rate that had been established since mid 2014.
(…) Activity growth needs to recover markedly in the next few weeks if a generalised downgrade to global growth forecasts for the 2015 calendar year is to be avoided. (…)
Despite continuing weak data reports, consensus economic forecasts show a rapid rebound to above-trend growth of 3.3 per cent in 2015 Q2. It is very likely that growth will rebound sharply in 2015 Q2, but it is less obvious that the rebound will be sufficient to avoid yet another year of downgraded growth forecasts, compared to the optimism shown in the consensus projections published at the start of the year.
My colleague Juan Antolin Diaz tracks two measures of US activity that summarise the “state of the economic cycle” (…). According to his models, the probability that the economy is now in a state of strong expansion has dropped from 70 per cent in December 2014 to under 40 per cent now. Over the same period, the probability that the economy is in recession has risen from zero to 14 per cent – still low, but not entirely negligible.
The persistent tendency for US growth to disappoint consensus economic forecasts can be attributed to one or both of two underlying causes: weak aggregate demand, owing to a demand-side form of “secular stagnation”; or a permanent slowdown in productivity growth, reducing potential output growth by more than most economists have yet understood. The Fulcrum activity models are not designed to distinguish between these two alternative hypotheses, but the models do detect a large slowdown in the long term growth rate of the US economy from 3.3 per cent in 2003 to 2.3 percent now.
Ultimately, the behaviour of US inflation will distinguish between the two competing hypotheses, and the Federal Reserve will have to set policy accordingly. On this matter, there are finally some indications that wage inflation may be rising after many years of hovering around 2 per cent.
A continuation of disappointing GDP growth, along with rising wage inflation, could increase the markets’ focus on the weakness of the supply side of the US economy in coming months.
The regular monthly graphs and tables showing our latest readings on global activity are as follows:
U.S. Firms Shoulder Rising Debt U.S. companies and consumers are on a borrowing binge, but stock and bond bulls point to data, such as strong profit margins, that suggest the corporate debt pile is manageable.
Net leverage for highly rated U.S. nonfinancial companies, a measure that tracks debt less cash as a multiple of annual earnings, was 1.88 times at the end of 2014, according to Morgan Stanley data. That is up from 1.63 times at the end of 2007, on the eve of the financial crisis.
But the ratio of companies’ earnings to their annual interest expense was 11.02 times, up from 9.43 times at the end of 2007, according to Morgan Stanley, indicating greater capacity to service obligations. (…)
U.S. corporate-debt issuance so far this year has jumped to $609 billion, from $568 billion in the same period last year, according to recent figures from Dealogic. (…)
Junk-rated firms, with ratings double-B-plus or below, are borrowing at an elevated pace, sometimes a warning sign for analysts who track market cycles. The trailing 12-month default rate for junk-rated U.S. companies was 1.9% at the end of March, Moody’s Investors Service said, compared with nearly 15% during the financial crisis. (…)
In March, stock-market margin debt hit $476.4 billion, the highest level in records going back more than 50 years, according to the New York Stock Exchange. (…)
When the economy is good, high debt loads can seem manageable to the inexperienced eye. Moody’s has been around for a while:
Falling capacity utilization explains wider spreads
Alongside the decline in exports, the fall in the capacity utilization rate indicates why high yield spreads are significantly above last year’s lows (Figure 3). In April of 2007 the capacity utilization rate reached a seven-year high of 80.8% as the high yield spread stood at an exceptionally tight 266 bp just a month before reaching the record daily low of 233 bp. Though profits began to slip in the first half of that year, growing industrial sector orders and output gave hope that demand would support stronger business returns. With the current 2015 capacity utilization rate of 78.4% trailing last year’s high of 79.8%, investors must await for stronger data to see the potential of rising sales and profits. But with the high yield spread now 116 bp above last year’s low of 323 bp, a broad-based upsurge in corporate profits does not appear imminent.
Without stronger production, the exceptionally mild default trend of recent years is not guaranteed to hold. Since reaching a localized peak of 3.7% in September 2012, the US high yield default rate generally declined, and now stands at the well below average rate of 1.9%. Yet the recent slide of the capacity utilization rate supports Moody’s Investors Service’s projection for the default rate to rise to a three-year high of 3.1% one year from now (Figure 4). General constraints on profitability, elevated spreads, and the struggles of the oil sector bring upside risk to the default rate. Aggressively levered firms can find their debt unsustainable as output and sales fail to meet projections.
If you just just skimmed Gavyn Davies’ piece above, perhaps you should read it carefully…
EARNINGS WATCH
Overall, 72% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 71% have reported actual EPS above the mean EPS estimate and 29% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (75%) average, but equal to the 5-year (73%) average.
However, the companies that are reporting upside earnings surprises are surpassing estimates by much wider margins (+6.2%) than average. This surprise percentage is above the 1-year average (+4.1%) and the 5-year average (+5.4%).
As a result of the upside earnings surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q1 2015 is -0.4%, which is smaller than the estimate of- 4.7% at the end of the first quarter (March 31).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 7.5% from -0.4%.
In terms of revenues, 46% of companies have reported actual sales above estimated sales and 54% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is below both the 1-year (59%) average and the 5-year average (58%). If 46% is the final percentage for the quarter, it will mark the lowest percentage of companies reporting sales above estimates for a quarter since Q3 2012 (41%).
In aggregate, companies are reporting sales that are 0.5% above expectations. This surprise percentage is below the 1-year (+1.1%) average and the 5-year (+0.7%) average. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 2.6% from -2.6%.
At this point in time, 63 companies in the index have issued EPS guidance for Q2 2015. Of these 63 companies, 41 have issued negative EPS guidance and 22 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the second quarter is 65%. This percentage is slightly below the 5-year average of 69%.
Importantly, only 63 companies have pre-announced so far, 9 fewer than at the same time last year, and the negative pre-announcement ratio is much better than last year’s 74% at the same time. Hence,
The Q2 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 1.9% (to $28.83 from $29.39) during the month. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 2.6%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 1.3%. During the past ten years,
(40 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 2.0%. (Factset)
All in all, with 75% of results in, corporate America keeps surprising by its resiliency. Never mind beat rates, the fact is that Ex-Energy, EPS are up 7.5% during a pretty lousy economic period which produced a weak 2.6% revenue growth rate while the employment cost index was up 2.8% YoY.
S&P’s tally reveals that Q1’15 EPS are now seen reaching $26.96, up from $26.67 last week. Estimates continue to be shaved for the next 2 quarters however. Trailing 12-m EPS are expected to decline from $112.65 after Q1 to $111.94 after Q2, $112.34 after Q3 and $117.30 after Q4, the last quarter potentially benefitting from the large pension charges ($1.05) that hit Q4’14 results and which will depress trailing EPS until Q4’15 are in next March (assuming no more pension charges). S&P rightly treats pension expenses as operating costs, unlike most other aggregators.
