A major shift in the flow of money around the globe is driving down the euro at a rapid clip, boosting the U.S. dollar and leaving smaller countries to struggle with the consequence of an extraordinary flood.
(…) The diverging paths of European and U.S. monetary policy have been a catalyst for European savers and investors to reallocate their portfolios away from Europe and into the U.S. in search of returns.
Big central banks appear to be following suit, with China and the oil-rich Middle Eastern countries that had poured some of their foreign reserves into euros changing course. (…)
Since the ECB brought in negative deposit rates in June, more cash has flowed out of the eurozone to buy foreign stocks and bonds than has flowed in, ECB data show. Recently, a steady trickle has become a torrent. In the final quarter of 2014, the gap was €124.4 billion ($134.35 billion). (…)
The starkest consequences of these flows have been seen in the eurozone’s small neighbors. The Danish central bank has cut interest rates four times this year to discourage foreigners from piling into the krone. To keep the currency, which is pegged to the euro, from climbing, it has printed huge volumes of kroner to sell for euros.
Switzerland was so swamped by inflows that the central bank abruptly lifted its cap on the Swiss franc in January, leading to a dramatic one-day surge of more than 40% in the franc’s value. (…)
The rush into the dollar has also fueled a rally in U.S. Treasurys despite expectations that the Fed will raise interest rates this year. Foreign investors increased their holdings of Treasury bonds by $374.3 billion in 2014, Federal Reserve data show. That trend has continued this year. (…)
But the pace of foreign-currency accumulation among these big central banks has slowed in recent years, according to the International Monetary Fund, which monitors the composition of central banks’ reserves.
The share of reserves held in euros peaked in 2009 at nearly 28%, IMF data show. In the third quarter of 2014, the most recent data available, it fell sharply to 22.6%. (…)
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Euro money funds turn red Negative yields spread across Euro money market funds
Yields on virtually all euro-denominated money market funds aimed at institutional investors are likely to turn negative in the next two weeks, according to the industry’s trade body.
The yields on funds that specialise in holding eurozone government debt have already turned negative as returns on sovereign debt issued by countries such as Germany, France, Finland, the Netherlands and Ireland have fallen below zero.
However, with corporate debt yields and bank deposit rates also increasingly turning negative, yields on “prime†funds, which can invest in a broader range of assets, are also about to go sub-zero, according to the Institutional Money Market Fund Association. (…)
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US companies sell record euro debt Lured by lower borrowing costs and weaker euro as ECB begins QE
SHAKY HOUSING FOUNDATIONS
Housing weakness is a risk in both the U.S. and China. Analysts are generally optimistic animals. They can also be quite creative in their ways of looking at the future. Two examples:
- Will the China Housing Market Crash?
This is from Andy Rothman (Matthews Asia):
China’s residential property market is significantly softer now. But I believe there is very little risk of a crash. House prices are stabilizing in China, and by 2H15 are likely to rise again on a year-on-year (YoY) basis. But keep in mind that because of the base effect, prices are likely to fall YoY at a steeper rate through much of 1H15, leading to a growing chorus of predictions of a housing crisis.
Median new home prices, according to the National Bureau of Statistics (NBS) have been falling on a month-on-month (MoM) basis for eight consecutive months, but the pace of the decline is slowing: in December and January the median MoM price change was -0.4%, an improvement on the -0.5% fall in November, the -0.7% fall in October and -1% decline in September.
On a YoY basis, median new home prices in the government survey were down 5.4% in January, compared to -4.5% YoY in December, -3.75% YoY in November, -2.6% in October and -1.1% in September. Prices have been falling on a YoY basis for five months, and—because of the base effect (prices rose more than 9% last January and were up more than 5% YoY every month through May 2014)—even if the MoM price fall continues to shrink, the YoY decline would continue to worsen in the coming months. This is why it is important to look at both the MoM and YoY trends, and understand the base effect. Market sentiment is likely to be unnecessarily pessimistic through 1H15.
I understand the base effect, but I also understand sequential trends. The good thing is that the MoM negative trend has slowed from last fall. The not so good thing is that the negative trend has stopped slowing in the last 2 months and prices are continuing to drop at a 5% annualized pace. Buying a house in a falling market requires courage and faith. We are talking big numbers here in real yuans. And the media are unlikely to help in coming months:
As the extent of the YoY decline in new home prices increases over the coming months—due to the base effect, even as MoM prices are likely to improve—the media may further trumpet the “China collapse†story.
This housing story rests on weak foundations.
Let’s see how Goldman Sachs handles the U.S. housing outlook (via ValueWalk):
Recent data showed that the homeownership rate has reached its lowest level in 20 years. Goldman Sachs notes that the speed of the decline appeared faster between 2013 and 2014. The 1.2% drop was the largest since the bureau started recording the homeownership rate in 1980. Yet
Goldman Sachs Research said the declining homeownership rate is comparable to the rising unemployment rate, which may be deemed encouraging news for the labor market if it is driven by higher labor force participation.
Goldman Sachs Research believed that the declining homeownership rate does not mean that the housing market recovery is slowing. The research firm explained that the homeownership rates could be low or high for the right or wrong reason.
The research firm explained, “Mathematically, homeownership rate is the ratio of the number of home-owning households to the total number of households.â€
Goldman Sachs said the housing demand is weak if a low ownership rate was caused by a small numerator such as fewer home-owning households. On the other hand, if a low homeownership rate is driven by a large denominator such as more households, it indicates a strong housing demand.
To clarify its point, Goldman Sachs further explained, “If there only one household in the economy and this household owns its home; the homeownership rate would be 100%, but the total housing demand is only one unit. If there is one million household in the economy and all of them rent, the homeownership rate is 0%, but the total housing demand is one million units. In this extreme example, the 0% rate implies much higher aggregate housing demand than 100% homeownership rate.â€
Goldman Sachs Research noted that the latest decline in the homeownership rate was due more to the increasing number of renters than to the decreasing number of homeowners.
The research firm emphasized that the situation supports its view that the U.S. housing recovery is ongoing. It also expects the household formation and homebuilding to normalize over the coming years.
Well, there’s a math lesson for all of us! I wonder if Warren Buffett will want to invest in housing stocks after reading this research report which, by the way, was written by a university graduate and, no doubt, reviewed by an experienced head of research. Anyway, there are two relevant charts from the report:
According to the “analysisâ€, the lower the home ownership rate, the more bullish we should be on housing demand, unless it is decreasing for the wrong reasons. In layman’s terms, this is called potential latent demand. Never mind if one of the reasons is that the ownership rate got too high in the first place, for the wrong reasons, and that it has settled back to its previous normal rate, for the right reasons. Never mind also if demographics might not really support a rising ownership rate in the foreseeable future.
This is not meant to dismiss any investment appeal from housing, just to vent my frustration…
Drilling Data Bolsters Oil
(…) The number of oil rigs fell by 41 to 825 last week, according to oil-field-services firm Baker Hughes Inc. The number of oil rigs has fallen by more than 40% since the start of the year.
Analysts, however, caution that a reduction in the number of rigs doesn’t immediately translate to a fall in U.S. output, which is currently running at a multiyear high of 9.4 million barrels a day.
“What we’re seeing so far is that the drop in rig counts isn’t having a serious effect on supplies,†said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, adding that he doesn’t expect production growth to slow until the second half of the year.
Much of the oil-production growth in recent months has been due to increased efficiency in drilling, analysts say. “The entire industry is repricing as costs decline and further efficiency gains are made,†Goldman Sachs said in a note Friday. The bank expects production growth to slow to 230,000 barrels a day by the fourth quarter of 2015 due to the drop in rig counts. (…)
But NBF drilled a little deeper:
So far, the lower rig count has been more than offset by increased productivity at existing wells, helping lift U.S. crude oil production to new highs. A change might be just around the corner. According to the U.S. Department of Energy, the drop in rig counts has been such that production from new wells in April is expected to be in line with the ever rising depletion rate at existing wells (about 325,000 barrels per day). If the Department is right, that would mark the first time in over four years that U.S. crude oil production fails to increase.
(…) Mr. Al-Naimi said that Saudi Arabia was currently producing around 10 million barrels of crude a day. At that rate, the Kingdom is producing the most crude oil since July, when oil prices started collapsing. Saudi Arabia’s output was 9.7 million barrels a day in February, according to OPEC data. (…)
Negotiations over Iran’s nuclear program are another source of worry for the oil market. U.S. and Iranian negotiators are hoping to seal a tentative political agreement before an end-of-March deadline. This could pave the way for increased Iranian oil exports.
While Iran is unlikely to add significant volumes of crude before year-end, about 500-700 thousands of barrels a day of new exports could flood the market by 2016, materially delaying any recovery, said Adam Longson at Morgan Stanley. (…)
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Oil Price Drop Hurts Business Investment Prospects for an uptick in business investment this year are facing a major drag: The collapse in oil prices is spurring significant cutbacks for the energy-production industry.
(…) Business capital spending rose 6% last year due to gains from a broad base of U.S. industries. The drag from energy this year could cut that growth rate in half in 2015, according to economists at Goldman Sachs.
Moreover, equity analysts at the bank estimate capital spending globally by energy companies in the S&P 500 will fall 25%, leading to the first annual decline in overall capital investment by big businesses in many sectors since 2009. Already, energy companies in the S&P 500 have announced about $8.3 billion in spending cuts. (…)
Between 2009 and 2014, investment in structures and equipment for oil- and gas-field exploration accounted for 70% of net industrial investment in the U.S., according toJason Thomas, director of research at Carlyle Group. That represented about $245 billion in investment last year, or 11% of total nonresidential investment.
Still, such investment accounts for a relatively small slice of the U.S. economy, or less than 2% of gross domestic product.
Economists at J.P. Morgan expect energy capital spending cutbacks to subtract 0.3 percentage point from GDP growth this year. The boost from cheaper oil to consumer spending, which accounts for two-thirds of GDP, should add one percentage point, according to the J.P. Morgan forecast. (…)
Excluding energy, capital spending will grow 4% for S&P 500 companies this year, said Tobias Levkovich, chief U.S. equity strategist at Citi. That would mark the sixth straight annual gain in business investment for the sectors excluding energy and finance. (…)
EARNINGS WATCH
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q1 2015 is -4.8% today, down from an expectation of growth of 4.0% at the start of the quarter (December 31).
The estimated sales decline for Q1 2015 of -2.8% is below the estimate for growth of 1.6% at the start of the quarter.
Looking at future quarters, analysts are expecting year-over-year declines in earnings to continue through Q215, and year-over-year declines in revenue to continue through Q315. Despite the estimate reductions, analysts are looking for record level EPS to resume in Q4 2015.
All ten sectors have recorded a decline in expected earnings growth since the beginning of the quarter due to downward revisions to earnings estimates, led by the Energy, Materials, and Consumer Discretionary sectors.
The Energy sector has witnessed the largest increase in the expected earnings decline (to -63.5% from -29.5%) since the start of the quarter.
If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 3.1% from -4.8%. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 3.2% from -2.8%.
Companies have also lowered the bar for earnings for Q1, as 83 companies in the index have issued negative EPS guidance, while just 16 companies have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 84%, which is well above the 5-year average of 68%.
But guidance is nonetheless in line with Q1’14 which was at 84.1% at the same time last year. In fact, the actual number of negative pre-announcements declined from 90 last year to the current 83. This is surprising to me given the apparent weakness in retail sales, exports, the continued strength of the USD and the sharp drop in Evercore ISI company surveys during Q1. Read on:
Market of stocks
For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 0.0%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -11.6%. The estimated sales decline for the S&P 500 is -2.8%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 0.6%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -10.2%.
The estimated earnings growth rate for the S&P 500 (ex-Energy) is 3.1%. For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 5.9%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the estimated earnings decline is -1.3%.
The estimated sales growth rate for the S&P 500 (ex-Energy) is 3.2%. For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 4.1%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the estimated sales growth rate is 0.9%.
The Q1 earnings season will thus be a 3-legged animal: Energy company’s earning will crater some 65% YoY; non-energy multinationals’ earnings will decline 1-2% and non-energy domestic companies will enjoy a 6% earnings gain. The resulting limping camel will report a 5% profit drop. Investors know about the headwinds hitting the first two groups. The risk lies with domestic companies if the U.S. economy gets into another slowdown. Consider that housing has yet to rebound, car sales have plateaued and auto production schedules are weak in Q1. Here’s the sectorial outlook as per Factset’s tally:
The “official†S&P data show that 2015 estimates keep getting shaved. Trailing 12-m EPS, $113.04 after Q4’14, are seen declining to $112.47 after Q1’15 and $112.120 after Q2. Full year estimates are now $118.28, down 0.5% from the estimate at the end of February.
Dizzying Pre-IPO Tech Values Spurred by Rush of Hedge-Fund Money
Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said. (…)
Mutual funds and hedge funds have elbowed into late rounds, both to boost returns and to ensure they can buy blocks of shares in IPOs as competition for tech offerings intensifies. Mutual-fund giants Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management Co. and hedge funds Coatue Management and Tiger Global Management took part in at least 37 pre-IPO funding rounds totaling $5.55 billion from 2012 to 2014, according to Pacific Crest Securities, a Portland, Oregon-based technology investment bank and IPO underwriter. (…)
Investors of all stripes poured $59 billion into U.S. startups last year, according to Seattle-based research firm PitchBook Data Inc., the most since the dot-com era. Late-stage companies received two-thirds of it, with a record 62 firms raising money at valuations of $1 billion or more, almost three times as many as in 2013. About half the investors weren’t venture-capital firms, PitchBook data show.
Pension money also is pouring in. Government and corporate pension funds, a key source of financing for leveraged buyouts, have reaped gains selling private-equity holdings since 2012. They are redeploying some of those profits in late-stage and growth funds, including vehicles created by early-stage venture-capital firms to meet the demand. (…)
Russia delivers nuclear warning to Denmark Ambassador threatens Copenhagen over joining Nato missile shield
Russia has threatened Denmark with a nuclear strike if it takes part in Nato’s missile shield, in some of the most incendiary comments yet directed at a member of the military alliance.
Russia’s ambassador to Denmark wrote in a newspaper opinion piece that the Nordic country had not fully understood the consequences of signing up to the Nato missile defence programme.
“If it happens, then Danish warships will be targets for Russia’s nuclear weapons. Denmark will be part of the threat to Russia,†Mikhail Vanin wrote in Jyllands-Posten.
The dramatic threat cranks up further Russian pressure on countries in the Baltic region. Russian aircraft have violated the airspace of Estonia, Finland and Sweden and were involved in two near misses last year with passenger aircraft taking off from Copenhagen. (…)
Nicolai Wammen, Denmark’s defence minister, said in August: “That Denmark will join the missile defence system with radar capacity on one or more of our frigates is not an action that is targeted against Russia, but rather to protect us against rogues states, terrorist organisations and others that have the capacity to fire missiles at Europe and the US.â€
Denmark has tried to take a more restrained tone than some of its neighbours such as Sweden, which is not a Nato member, whose foreign minister warned that Swedes felt “truly afraid†of Russia. Helle Thorning-Schmidt, Denmark’s prime minister, told the Financial Times in November: “In terms of our territory we are not worried. We keep our heads calm and the cockpit warm.â€
The warning to Denmark came in the same week that Swedish intelligence claimed that one in three Russian diplomats in the country were spies. Wilhelm Unge, chief counter-espionage analyst at Sweden’s Sapo intelligence agency, said: “We see Russian intelligence operations in Sweden — we can’t interpret this in any other way — as preparation for military operations against Sweden.â€