Today: Capex are clearly rising in the U.S. Earnings beat but oil will bite in Q4.
Weak Durable-Goods Orders Stir Concerns on Growth
Orders for durable goods fell 1.3% in September from the prior month to a seasonally adjusted $241.63 billion, the Commerce Department said Tuesday. It was the second straight monthly decline. Economists had expected a 0.7% increase.
A key measure of business investment in the report suggested worries about global growth could be weighing on U.S. businesses. Orders for nondefense capital goods excluding aircraft, a proxy for spending on equipment and software, fell 1.7% in September. (…)
Some economists lowered their forecasts for growth in the third and fourth quarters based on Tuesday’s report on durable goods. TD Securities now expects third-quarter growth of around 3.2%, down from an earlier estimate of 3.5%, and fourth-quarter growth of between 2% to 2.5%. The forecasting firm Macroeconomic Advisers raised slightly its forecast of third-quarter GDP growth to 3.6% from 3.5% based on shipments data in the durable-goods report, but lowered its fourth-quarter forecast to 2.4% growth from 2.7%.
This is an important but highly volatile stat that moves in spurts. Monthly data declined in 5 of the first 9 months of 2014 but the total increase so far this year is +8.1% (10.8% annualized). Last 4 months: +3.9% (+12.2% annualized). Capex is growing very nicely in the U.S.
EARNINGS WATCH
U.S. Earnings Reassure as Growth Lags America’s companies have a message for markets: Don’t panic yet. Though growth remains weak, the largest U.S. companies as a group are reporting better earnings.
(…) the largest American companies as a group are reporting better third-quarter earnings, thanks in large part to rising demand in the U.S. for everything from beer cans to trucks to heating and cooling systems. (…)
Third-quarter earnings are expected to rise 8.1% from the same period a year ago for the 500 largest U.S. companies by stock-market value, according to Thomson Reuters. That reflects actual results from half of those companies and estimates for the rest. It would be the strongest third-quarter growth in three years, though slower than this year’s second quarter. Revenues, meanwhile, are on track to rise 3.8%. (…)
Executives at other companies have also pointed to signs of rising demand in the U.S. such as improved employment, a rebounding housing market, and even indications that consumer confidence is returning. That momentum is expected to continue into the fourth quarter, boosting earnings again even as revenue growth slows slightly, according to Thomson Reuters. (…)
Colgate-Palmolive Co. , which makes toothpaste, pet food and other products, predicted accelerating U.S. demand, and Southwest Airlines Co. said bookings for November and December were good, with no apparent harm from concerns over Ebola or the economy. Flowserve Corp., which makes pumps and valves for the energy and other industries, said Friday that it expected North American refinery upgrades, pipeline construction and other activity to remain strong, despite lower oil prices.
It isn’t all roses. Companies like telecom giant AT&T Inc. and drug maker Merck & Co. reduced sales targets for the year, and crane maker Terex Corp. lowered its earnings forecasts for the rest of the year. Those offering guidance for next year’s profits present a mixed picture: Nearly as many had lowered projections as had raised them, according to Wells Fargo analysts on Monday. And U.S. retailers, many of which have yet to report results, remain under pressure. Discounter Family Dollar Stores Inc. said it faced fewer store visits and more sales of low-margin food, tobacco, laundry detergent and other consumable merchandise, though average transaction values rose.
Stagnation in Europe and slower growth in China are tempering forecasts, as is the stronger dollar, which makes American products less competitive and lowers the dollar value of overseas sales. The tone also reflects life during a slow recovery now entering its sixth year in the U.S., in which even good news can be anticlimactic. (…)
Optimism about U.S. demand was often tempered by concerns about other regions.(…) Improved business activity in the U.S. was evident in reports from transportation and shipping companies. United Parcel Service Inc. called third-quarter business-to-business deliveries the strongest in several years and said it expects shipments in December to rise 11% from last year’s already frenzied pace.
Railroad CSX Corp. expects stable to favorable demand in the fourth quarter in 96% of its markets. The company expects coal shipments to increase as utilities build up winter inventories, oil and gas shipments to hold up, and demand to remain strong for building products and for metal in the energy and automotive industries. (…)
Meantime, AutoNation Inc. on Tuesday predicted further growth in car and light truck sales into next year as retail sales of new and used vehicles rose 8% during the third quarter. Alcoa Inc., the aluminum giant, cited strength in the North American market for heavy trucks and trailers as well as improving demand for beer in cans. (…)
ISI says that estimates are now for Q3 EPS rising 6.2% YoY, up from +4.1% on Oct. 10 and +5.2% on Oct. 17. But RBC Capital’s tally as of yesterday night suggests +9.0%:
- This season revenues and earnings have beaten by 0.8% and 4.3%, respectively. While large companies tend to have the greatest impact on the beat rate, strength appears broad based. With 267 companies reported, 200 (~75%) have surprised to the upside on earnings.
- 64.8% of the S&P 500’s market cap has reported. Expectations are for revenue, earnings, and EPS growth of 4.0%, 6.8%, and 9.0%, respectively. Assuming an historical beat rate, EPS is on track to come in near 10%.
Note that this is in spite of a 7.8% YoY decline in commodity-sensitive companies’ EPS so far in Q3. The 12 U.S. energy companies that had reported 2 days ago showed a 28% YoY increase in EPS as the drop in oil prices will really only bite in Q4.
Energy groups bruised by oil price tumble Drop in cost of crude by 25% since June bites into profits
(…) The effect could be even greater in the final quarter, since the oil price has been falling more sharply since the end of September than it did in the three prior months.
Crude has dropped 25 per cent since mid-June, driven lower by surging supplies of shale oil from the US and a slowdown in global demand, particularly in China, the world’s second-largest petroleum consumer.
Some are predicting that it could fall even further. Goldman Sachs forecast on Sunday that oil will average $85 a barrel in the first quarter of 2015, down from an earlier forecast of $100. Brent, the international benchmark, was trading up 22 cents on Tuesday at $86.06 a barrel.
Instead of reducing output to boost prices, some members of Opec, the oil producers’ cartel, which gathers next month for a hotly-anticipated meeting, have been discounting exports in order to defend market share.
“We are going to wait until Opec has met and until we are significantly through the fourth quarter before taking definitive action,” Mr Gould said, referring to future spending plans.
The price fall has been a boon for consuming nations, especially the US. The International Monetary Fund has said that a $20-a-barrel oil price decline could translate into a 0.5 per cent increase in world gross domestic product: if economic confidence were improved as a result, that figure could rise to 1.2 per cent.
But for oil producing nations, it is bad news. Mexico was forced to redraft part of its 2015 budget after the price fall upended its revenue assumptions. The economies of Brazil and Russia have also been badly hit by the slump.
BP reported that underlying replacement cost profit, analysts’ preferred measure of performance, fell 19 per cent to $3bn in the three months to September, compared with $3.7bn a year ago.
At BG underlying earnings fell 29 per cent to $759m in the three months to September, from $1.07bn a year earlier, in part due to lower production in Egypt and Kazakhstan.
BP’s Mr Gilvary insisted the company’s balance sheet “can more than comfortably handle a period of $80 a barrel (oil)”. “We have a lot of flexibility to withstand low oil prices,” he said. BP’s strategy was aimed, he added, at providing “resilience through periods of oil market volatility”.
But he stressed that $80 a barrel was the threshold at which BP typically sanctions projects, in an indication that any further slide in prices could impact its future investments.
BP also said there were some advantages in the low oil price. Leasing rates for rigs in places like the Gulf of Mexico could fall, easing cost pressures on big oil companies. “I think a period of $80-$85 a barrel offers more opportunities for us than threats,” Mr Gilvary said, adding that these could include asset acquisitions.
Why the Drop In Oil Prices Caught So Many By Surprise It’s not just Wall Street banks such as Goldman Sachs Group Inc. that got it wrong. Energy consultants and even the U.S. government didn’t foresee the sharp slide in oil prices, which have tumbled 25% since June. What did they miss?
(…) The risk of discord within the Organization of Petroleum Exporting Countries and the possibility that violence in some oil-producing nations wouldn’t interfere with oil production.
For the past three years, oil production in the U.S. has been booming but Brent, the global oil benchmark, has largely held above $100 a barrel. That’s because sanctions on Iran and unrest in Libya, Nigeria and elsewhere kept oil off the market, allowing supply and demand to stay balanced even as U.S. production grew. Heading into this year, it looked like a pretty good bet to assume that supplies outside the U.S. would stay constrained, and many analysts called for Brent to hold above $100 again in 2014.
This summer, those assumptions fell apart as Libyan production came roaring back, Kurdish output looked set to rise and Iraqi exports held steady despite an insurgency. At the same time, weak demand in China and the eurozone came into view. The combination of these factors pressured prices lower.
Then, the widely shared assumption in the oil market that OPEC would collectively cut production to keep prices high started to look shaky. Saudi Arabia, the world’s biggest oil exporter, has indicated in recent weeks that it is comfortable with a lower oil price, and prices have fallen in response to these signals. (…)
The U.S. Energy Information Administration was also caught by surprise. The agency, which releases month-by-month forecasts, called for Brent to average $102 a barrel this month in the forecast released in December. By July, the EIA was saying that Brent would average $110 a barrel in October. In its latest forecast, released Oct. 7, the EIA settled on a $97 a barrel average for this month.
But as EIA Administrator and former Deutsche Bank analyst Adam Sieminski joked in a presentation in New York last week, his forecasts have been right only about 60% of the time.
Brent is currently trading around $86 a barrel and has averaged $88.42 a barrel so far this month, according to Factset.
Well, they were also all wrong on most other commodities. But don’t worry, there are very good reasons for all these wrong calls…
Bloomberg’s Rick Yamarone:
The Economist had a series of interesting commentaries this past week, with the article on the winners and losers of cheap oil especially insightful. After
reading this, I made a few calls to experts in the oil, energy and drilling sectors, and I now believe that the price of oil could return to $65 per barrel. Global conditions
are deteriorating, demand is waning and supply is growing. The economics argue for cheaper oil.
We shall see…
The ‘Other’ Recession Indicator Is Flashing Red
As Evergreen Gavekal notes, the ratio of coincident-to-lagging conference board indices has an admirable record as a recession forecaster… and is at its lowest level since Sept 2009.
Tell me, how long did you really look at that chart and what did you see that supports Gavekal’s statement that this indicator has an “admirable record as a recession forecaster”.
If there is one thing this admirable chart forecasts is the end of recessions…