Q2 BOUNCE WATCH
- Rail volume trends
U.S. GDP grew 0.2% in the first quarter of 2015, according to the first preliminary estimate from the Bureau of Economic Analysis. If rail carload traffic is any guide, the second quarter isn’t starting off any better. In April 2015, just 5 of the 20 carload commodity categories tracked by the AAR saw gains compared with April 2014. That’s the fewest since October 2009, when just one commodity saw an increase.
Excluding coal, U.S. carloads were down 1.7% in April 2015 from April 2014; excluding coal and grain, carloads were down 1.4%.
Seasonally adjusted total U.S. rail carloads were down 0.7% in April 2015 from March 2015.
Total carload and intermodal volume in April 2015 on U.S. railroads was down 0.4% from April 2014. Year-to-date total volume was up 0.01% over the same period in 2014.
The problem is that inventories have swelled following poor Christmas sales…
…which hurts new orders which edged up a meaningless 0.1% in March following 5 negative months totalling –5.1%…
…only cars are showing some positive order trends…
This last chart from the AAR sums up the situation: manufacturers have produced much more than they shipped in recent months. Given the high correlation, something significant must happen shortly. Either shipments turn up sharply or production stops.
- Container exports
In March export container shipments dropped for the third time this year. The 17.1 percent fall in March was the largest drop thus far, bringing the total decline to 29.6 percent for the first quarter. The 2015 pattern is deviating from what we’ve seen in the last few years, falling all three months. The index level is also substantially lower than the last two years, indicating that U.S. container exports have fallen since 2012.
The Institute for Supply Management’s Purchasing Managers Index (PMI) for New Export Orders declined 3.1 percent in March, a statistic that tracks with the export drop in March. In April, however, the PMI New Exports Orders rose 8.4 percent, signaling an increase next month. (Cass)
Meanwhile in China, CEBM Research’s survey reveals that
Looking at the external demand picture, [Chinese] container freight respondents reported that month-over-month shipment volume has stabilized, however on an annual basis shipment volume in April dropped.
On lending activity in China:
Looking at the commercial banking sector, roughly half of the commercial bank branches surveyed at the end of April reported credit issuance fell. Commercial banks are cautious to lend due to the negative economic outlook, falling local government enterprise revenue, and subsequent concerns about borrower ability to service debt. In the current environment, commercial banks are hesitant to call-in loans made to medium-scale or small-scale enterprises. However, at the same time, commercial banks are also unwilling to expand their scale of lending.
It seems the PBoC is pushing on a string.
OIL
Goldman Sachs Doesn’t Believe the Oil Rally has Legs
The investment bank estimates that the global oil market will be oversupplied by 1.9 million barrels a day in the current quarter, the largest quarterly stock build this year, according to a report.
“We therefore view this rally as derailing this rebalancing and setting the stage for sequentially weaker prices,” the bank says.
Goldman is not the first major forecaster to predict a possible double-dip to prices. Bank of America Merrill Lynch has recently said that oil prices could fall from $63 a barrel at the end of the second quarter to $54 a barrel in the third. Barclays BARC.LN -0.96% also warned that the recovery faces headwinds as the global oil supply is still exceeding consumption and the supply cuts necessary to balance the oil market aren’t being made fast enough.
According to Goldman, the supply and demand balance points to only a gradual decline in the already elevated crude inventories in 2016 as production growth from low-cost producers such as Saudi Arabia, Iraq and Russia offsets the strong demand growth and declining production from other markets such as the U.S.
Further, while the active U.S. oil rig count – a proxy for activity in the industry – has declined by close to 60% since a peak in October, Goldman says that the curtailment is not large enough yet to put production on a persistent downward trend. (…)
Keep in mind that none of these experts saw the initial drop coming.
OPEC meets in less than a month. This was likely not in the Saudi forecasts:
(…) despite the swift fall in oil prices and the U.S. rig count, signs of a slowdown in production are mixed so far. In a report this past weekend, Morgan Stanley said more than four-fifths of the E&P companies it covers either met or beat production forecasts in the first quarter, while a dozen raised full-year guidance. (WSJ)
But look what the Saudis are doing (via FT Alphaville):
And finally this:
One other important observation from Goldman is the connection they see between not just oil prices and excess hydrocarbons in the system, but excess capital itself.
From the note:
Our bearish view has been driven by two surpluses: excess hydrocarbons but just as importantly excess capital. Apart from January, access to capital has been remarkably smooth with HY energy debt issuance back to accounting for 20% of US issuance and the equity market absorbing $12 bn of equity issuance since February without a glitch. This led some producers to comment on a lesser need to deleverage given strong funding liquidity.
Conclusion: Who has actually cut production lately? Yet Brent prices are up 40% from their January low. Must be demand…but world economies are weak…
Moody’s cuts Canada’s outlook, warns of stubbornly high unemployment
Moody’s Investors Service is the latest to weigh in on Canada’s lame economy, cutting its forecast and warning today that unemployment will remain elevated.
The U.S. credit rating agency’s outlook brings it more into line with other forecasters, projecting economic growth of 1.5 per cent to 2 per cent this year and next because of the oil shock and a softer-than-expected U.S. performance. (…)
“In Canada, investment by the oil and gas extraction sector accounted for 17.7 per cent of total capital expenditure and 3.6 per cent of GDP in 2014,” Moody’s said. (…)
SENTIMENT WATCH
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Bunds!
It took 102 trading days for 10-year Bund yields to rally from 68bp to their all-time low of 7bp on April 20th.
It took just 15 days after that to jump back to 68bp again.
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Bubble Trouble In Nasdaq’s Baby Tech Companies (Alliance Bernstein)
(…) The tech investing scene has never been more youth obsessed. Publicly traded tech companies that are less than four years old are trading at nearly nine times sales—a 40-year high—while the premium to their older counterparts has exploded.
(…) Our basket of young companies currently makes up a third of all technology firms with valuations above $1 billion, a level only surpassed during the late 1990s. But there’s one glaring difference: the number of privately held startups has skyrocketed to 67, or half of our nursery group, versus a peak of eight (or 6%) in the fourth quarter of 2000 (Display). Many investors may be unaware of the important trends developing in this less transparent part of the technology market.
These tech babies are being raised in relative affluence, thanks to an outpouring of venture-capital (VC) funding, which had reached a run rate of $26 billion by year-end 2014. This was the largest annual influx in 14 years and exceeded 1999 levels of $22 billion (though it’s still half the dotcom-era peak of $52 billion at the end of 2000). These youngsters are taking full advantage of the friendly funding environment. Roughly 82% of our private nursery companies have raised capital in the past 12 months, up from 62% for the same period a year earlier.
This funding pipeline is supported by a growing ecosystem of veteran VC leaders, incubators and angel investors, as well as the dramatic shift among return-hungry investors of all stripes into private-equity funds. The major lure is exposure to the next generation of rapid Internet growth. While Internet companies account for just 13% of all older tech companies in the public realm, they make up a whopping 78% of all public companies in our nursery today.
(…) In our analysis, the publicly traded nursery stocks are selling at more than eight times sales, already a peak outside of the dotcom bubble. The privately held nursery companies, however, are currently valued at an average multiple of nearly 25 times sales. Combined, the valuation comes to 15 times sales, a substantial hurdle for future investment success.
(…) What’s more, only 17% of the newly minted tech companies in 2014 were profitable at the time of their IPOs, slightly above the 14% last seen at the height of the dotcom bubble in 2000. To many, this scene feels uncomfortably familiar. (…)
Pablo Picasso set a record when his 1955 painting of a harem of colorfully dressed women, “Women of Algiers (Version O),” sold for $179.4 million at Christie’s—the most ever paid for a work of art at auction.
Verizon to Buy AOL for $4.4 Billion
The younger crowd may not remember that AOL acquired Time Warner for $182 Billion in January 2000…
Equities bouncing:
(