U.S. CONSUMERS EARN AND SPEND
Personal income increased 0.3% in August following a 0.5% July rise, revised from 0.4%. Strong average hourly earnings lifted wages & salaries by 0.5% (4.1% y/y), +6.6% annualized in the last 2 months.
Disposable personal income increased 0.4% after a 0.5% rise. The 3.6% y/y gain was the strongest since February. In real terms, take-home pay rose 3.2% y/y but +4.2% annualized in the last 2 months.
Personal consumption expenditures increased 0.4% (3.5% y/y), the same as in July which was revised from 0.3% (+4.8% a.r. last 2 months). In real terms, the 0.4% gain in spending was the strongest in three months bringing the last 2 months +4.2% a.r.. Real durable goods purchases jumped 1.2% (5.5% y/y), helped by a 2.1% surge (2.4% y/y) in motor vehicle purchases.
The personal savings rate fell to 4.6% from 4.7%, revised from 4.9%.
Illustrating the rising confidence consumers have on their income prospects, real expenditures on durable goods have accelerated sharply throughout 2015. They are up at a 6.6% annual rate this year, +8.7% in the last 4 months!
This is important with U.S. consumers accounting for nearly 70% of the economy and for a meaningful chunk of world demand. See IS THE FED IN LEFT FIELD, AGAIN? if you missed it.
BTW: Goods vs services economy: wages in goods-producing industries are down $9.7B in the first half. They are up $90.4B in services-producing industries.
U.S. Pending Home Sales Decline Sharply
The National Association of Realtors (NAR) reported that pending sales of single-family homes declined 1.4% during August (+6.7% y/y) following an unrevised 0.5% July gain. Expectations were for a 0.4% increase according to Bloomberg.
Sales declines spread through most of the country. In the Northeast, sales fell 5.6% (+8.0% y/y). Sales in the South moved 2.2% lower (+5.3% y/y) and in the Midwest sales eased 0.4% (+6.2% y/y). Moving 1.8% higher were sales in the West (9.3% y/y).
Stop and go pattern: Sept-Dec 2014: –1.7% a.r.. Jan-Apr 2015: +26% a.r..May-Aug 2015: –5.9% a.r. (Chart from Doug Short)
ATA Trucking Index decreased 0.9% in August
American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index declined 0.9% in August, following a revised increase of 3.1% during July. In August, the index equaled 134.2 (2000=100), down from 135.3 in July. The all-time high of 135.8 was reached in January 2015.
Compared with August 2014, the SA index increased 2.1%, which was below the 4% gain in July. Year-to-date through August, compared with the same period last year, tonnage was up 3.3%.
Fed’s Dudley: Still Likely on Track for 2015 Rate Rise
Currencies of Commodity Producers Fall
OIL
Morgan Stanley Has Given Up on Energy StocksMorgan Stanley downgraded the sector to market weight, indicating the supply glut in oil may not improve for another year, at a minimum, and that investors will likely find a better entry point in six to nine months. (…)
A scary thought for the remaining oil bulls: Parker posits that oil is perhaps much more like natural gas than is currently acknowledged, implying that meaningful upside from current levels might not be on the horizon. (…)
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Credit Suisse: Hitting Rock Bottom(…) If prices are to rise, then, it’s going to have to be either the United States or other non-OPEC producers that will cut production – and finally American producers appear to have begun to do just that. The number of active oil rigs in the United States has fallen from some 1,600 in December 2014 to 644 in late September. There can be a considerable lag between when rig counts begin to fall and when production drops, but the disconnect can’t last forever.
Already, a rolling measure of the oil supply coming out of four major shale oil plays in the United States shows that production has been declining since June. Stuart points out that the data finally began to show that overall U.S. oil production rolled over in the second quarter of this year, and he expects the decline to continue until the middle of 2016.
Credit Suisse’s energy team believes the WTI price will stay below $55 a barrel until the second quarter of 2016 – precisely so that cash-flows stay low enough and so that energy companies will have to cut production. They don’t expect prices to rise above $65 a barrel, enough for supply outside the US to grow again, until 2018. Credit Suisse believes Brazil, Canada and North Sea producers such as the United Kingdom and Norway will face declining production in 2016, while Russia may see a slight increase.
Supply, of course, is only one side of the price equation. Global oil demand has been growing, and Stuart believes it will begin to outpace supply – 95.4 billion barrels to 95.1 billion barrels – in the fourth quarter of 2015. Much of the acceleration of demand-growth is coming from the U.S. and Europe, where economic growth is expected to sustain in the coming months. Credit Suisse believes European oil demand will increase 1.6 percent in 2015, a marked about-face from the 1.4 percent contraction in 2014, while U.S. demand is expected to grow more than twice as fast this year (1.9 percent) as it did last (0.8 percent).
Even in China, Stuart points out that demand has continued to expand over the last few years and months, despite the country’s economic slowdown. Credit Suisse believes that Chinese leaders are committed to additional stimulus to stabilize growth, but the failure of such efforts and a subsequent nosedive in economic activity in China and the rest of Asia pose the biggest risk to the bank’s energy forecast. For now, it seems as though increasing global demand and tightening supply will slowly start to push prices higher next year. Just don’t expect $100 a barrel anytime soon.
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Oil rises as tighter U.S. market offsets Asia woes Oil prices rose on Tuesday after evidence of tightening supplies in the United States, the world’s biggest oil consumer, outweighed concerns over the health of the Chinese economy.
But the outlook for the U.S. economy looks brighter and oil supply there appears to be tightening with data estimating a drawdown of over 1 million barrels last week from the Cushing, Oklahoma delivery hub for U.S. crude.
Current data show that output fell from a peak of 9.6 million barrels a day in April to 9.3 million barrels a day in June. The latest monthly data, which will include the first production figures for July, are due Wednesday. (Chart from Scotia Capital)
Allow me to reproduce the OIL segment from my Sept. 2 NEW$ & VIEW$, reminding you that the next update on oil shipments by train will be released by the AAR next Friday.
A big debate is whether U.S. shale production is declining. Monday, the DOE released monthly figures for crude oil supply and disposition for the month of June. Total U.S. crude oil production declined by 104,000 bpd from May to June and prior months (Jan-May) production figures were revised by ~40,000-130,000 bpd lower. Here’s Raymond James’ summary:
Monthly crude oil production averaged 9.296 MMbpd in June, down 104,000 bpd from the newly-revised April figure of 9.400 MMbpd (which in turn was revised lower by 111,000 bpd). The largest component of the sequential decline was lower-48 onshore production falling by 95,000 bpd (offshore PADD 3 & 5 and Alaska were down a combined 9,000 bpd) on top of a revised 74,000 bpd decline in May. On a state-by-state basis, Texas showed the largest sequential decline, with production falling by 66,000 bpd in June.
With this month’s introduction of the new data set, production data for the months of January to May have been revised – all of them lower, by between 40,000 bpd and 130,000 bpd.
Regular Bearnobull readers will recall that timely and never revised data from the Association of American Railroads have been showing declining rail shipments of petroleum products since April (see the OIL segment in my Aug. 10 New$ & View$)
U.S. Class I railroads originated 111,068 carloads of crude oil in the second quarter of 2015, down 2,021 carloads (1.8%) from the first quarter of 2015 and down 21,189 carloads (16.0%) from the third quarter of 2014, which is the peak quarter for rail crude oil originations.
I added this simple math:
YoY, the drop in Q2 crude oil traffic was 18.4%, confirming that U.S. shale oil production entered a downtrend during Q2 which seemed to intensify in July given that carloads of crude oil and other petroleum products sank 13.6% YoY after -7.3% in June, +0.5% in May and -1.1% in April. Weekly average carloads in July 2015 were 13,582, the lowest since October 2013. (…)
BTW, Raymond James adds this:
Total product demand was estimated at ~19.6 MMbpd for June, up from ~19.1 MMbpd in May but down from the implied weekly demand figures. Importantly, gasoline demand increased by ~1.5% sequentially to just under 9.4 MMbpd (up 4.0% y/y), implying impressive growth for the biggest driver of total U.S. demand. Additionally, continued strength in the weekly figures implies that our forecast from January for 3% demand growth for gasoline in 2015 may well prove conservative.
India’s RBI Cuts Key Interest Rate More Than Expected India’s central bank cut its key interest rate more than markets expected and for the fourth time this year amid optimism Indian inflation rates will remain low.
Reserve Bank of India Governor Raghuram Rajan cut the repurchase-agreement rate by 0.5 percentage point to 6.75%. That brings the total easing by India’s central bank to 1.25 percentage points since the beginning of the year. (…)
Mr. Rajan noted in the policy statement that inflation hit a nine-month low in August, and that despite the monsoon shortfall and the uneven distribution of seasonal rains, food inflation pressures have been contained by the government’s supply-management policies.
“Since our last review, the bulk of our conditions for further accommodation have been met,” Mr. Rajan wrote in his policy statement. He also noted that underlying economic activity remains weak. (…)
The central bank said Tuesday it is marking down its growth forecast for this fiscal year, which ends in March, to 7.4% from 7.6%. (…)
Airbnb Crimps Hotels’ Power on Pricing Hoteliers are seeing less-than-optimal results as many compete head on with home-rental company Airbnb on rare events that draw huge crowds like Pope Francis’ visit to the U.S. last week.
(…) In New York City, Airbnb listings last week reached nearly 20,000 during the pope’s visit, according to Airdna, a Santa Monica, Calif.-based firm that analyzes Airbnb data.
Since New York has about 116,000 hotel rooms, according to data tracker STR Inc., Airbnb increased the city’s lodging supply by about 17%. Philadelphia saw a nearly 16% increase in accommodations last week, including the more than 7,000 listings from Airbnb. In Washington, D.C., Airbnb listings were less of a factor, adding only about 2.5% of inventory. (…)
The pope’s visit isn’t an isolated case. Hotels in Louisville, Ken., saw a surge in competition from Airbnb listings during the Kentucky Derby, while hotels in Palm Springs, Calif., experienced the same around the Coachella Valley Music and Arts Festival, according to Airdna.
Lodging analysts say hotels rely on these popular one-time or annual events to get some of their highest room rates of the year. But with the pop-up room supply from home-rental companies, hoteliers are finding it increasingly difficult to maximize profits for events that attract big crowds.
“It’s sapping their pricing power,” says Stephen Boyd, a hotel analyst with Fitch Ratings. (…)
Morgan Stanley lodging analyst Thomas Allen says his research shows that, in the 25 largest U.S. markets, the impact of Airbnb looks negligible. The number of days when hotels achieved a 95% or higher occupancy level has been rising since 2009. At the same time, he added, the 25% rate premium hotels can charge on nearly-full nights, compared with the average night, is roughly the same as a decade ago, before Airbnb.
Still, many hotel owners say they feel the pinch around tentpole events. Jon Bortz, CEO of Pebblebrook Hotel Trust, told analysts on a recent call that his properties were feeling the impact of Airbnb during certain events, especially those that attract large crowds paying their own way. He cited in particular the Comic-Con International festival in San Diego, where Pebblebrook has an Embassy Suites and a Westin hotel.
While his company used to have an “ability to price at maybe what the customer would describe as sort of gouging rates,” he explained on the call, “I’d say we’ve lost a lot of that ability at this point within the major markets where these events take place.”
Like always, the biggest impact will be during the next downturn…
SENTIMENT WATCH
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Commodity rout or commodity crisis?
Investors are becoming concerned that what has looked like a commodity rout will turn into a full blown-crisis. The 15-month fall in prices is unlikely to be reversed soon, with the Federal Reserve calling time on the cheap-money era and China still struggling to recover from its slump. The drop in commodities is easily seen in copper – viewed as a bellwether for the global economy by some – where the price has dropped through its 200-month moving-average in recent days, a month-end support level that has held since 2004.
Chief U.S. equity strategist David Kostin lowered his year-end price target for the S&P 500 to 2,000 from 2,100, citing slower than anticipated growth from the world’s two biggest economies and lower than expected oil prices.
This drop of nearly 3 percent would be the benchmark index’s first negative year since 2011, though this level also represents upside of more than 6 percent from where the S&P 500 closed on Monday.
Kostin’s team lowered its estimate for calendar year earnings to $109 from $114, which would mark a decline of 3 percent from 2014. (…)
“S&P 500 price-to-earnings multiple fell by an average of 8 percent during the three months following Fed ‘liftoff’ hikes in 1994, 1999, and 2004,” wrote Kostin. “During the same episodes S&P 500 index fell by an average of 4 percent as growing earnings offset the multiple compression.”
Kostin sees liftoff by the Federal Reserve in December as an event that will dampen any so-called Santa Claus rally. Rising bond yields, the strategist reasons, entail that investors will be willing to pay less for each dollar of earnings generated by S&P 500 companies.
“We expect the Treasury curve to bear flatten as short-rates rise at a faster pace than ten-year note yields during the next few years,” he wrote. “Rising bond yields are consistent with lower multiples.” (…)
“Flat is the new up’ will be the 2016 investor refrain.”
Ed Yardeni (my emphasis):
(…) During the current bull market, many of the relief rallies were triggered by central bank moves to provide more liquidity into financial markets. As I observed yesterday, the central bankers may be starting to lose their credibility. In my opinion, investors would have favorably greeted the widely expected Fed rate hike following the September 16-17 meeting of the FOMC. It would have demonstrated the Fed’s confidence in the strength and resilience of the US economy.
Instead, the FOMC passed on doing so, emphasizing for the first time concerns about the global economy and financial system. Yet on Thursday, Fed Chair Janet Yellen said that she still expected a rate hike before the end of the year. Yesterday, FRB-NY President Bill Dudley said the same. The Fed’s transparency makes it transparently clear that Fed officials are clueless. That’s not good for investor confidence.
Yesterday, Dudley said that the US economy is “doing pretty well.” Notwithstanding the recent puzzling hawkishness of the Fed’s two leading doves, they and their colleagues on the FOMC will continue to confront a weak global economy when the committee meets on October 27-28 and December 15-16. They will have to be concerned that combined with the strong dollar, the US economy won’t continue to do so well.
That’s what’s unnerving investors right now. Yesterday’s implosion in Glencore’s stock price was the latest confirmation that the global commodity industry is in a major bust, which is also depressing capital goods producers of mining equipment. In addition, yesterday we learned that profits at Chinese industrial companies plunged 8.8% y/y in August, with losses deepening even after five interest-rate cuts since November and government efforts to accelerate projects. Leading the losers were Chinese coal companies.
I am starting to think that getting a relief rally this time might be more challenging than in the past, when central banks had more ammo and more credibility. If the market’s main concern is the slowdown in global economic growth, there’s not much reason to expect any upside surprise anytime soon. If the US economy remains strong, it is unlikely to be strong enough to lift global growth. Meanwhile, investors may continue to fear that the poor economic performance of the rest of the world will increasingly weigh on the US.
So what will it take to revive the bull given this assessment of the global economic situation? As long as it doesn’t all add up to a global recession, the bull should find comfort in good companies that can continue to find growth in a world of secular stagnation. Commodity users should continue to benefit from the woes of the commodity producers. Valuation multiples are also more attractive now than they were earlier this year. Needless to say, earnings have to keep growing and US consumers have to keep consuming for the secular bull to survive this latest challenge.
The actual low in October 2014 was 1819 on Oct. 15. At that point, the Rule of 20 P/E was 17.95 vs its current 19.1. We are thus back into “lower risk” territory even if not terribly undervalued. The S&P 500 is down 10.4% from its level Aug. 20 level when I went from two stars to one and off 11.8% from its recent peak of 2130. While volatility remains high and this week’s China PMI will likely not help sentiment, current valuations no longer warrant a single star rating. Going to two stars for now…
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Investors Fall Out of Love With Deals The stocks of a number of acquirers have suffered big losses in the past few months following the announcement of a takeover.
(…) The rebukes represent a reversal of an important driver of the mergers-and-acquisitions boom over the past few years, namely a surge in the stock prices of companies announcing acquisitions. Those rising prices had the twin effect of emboldening other buyers and boosting the value of shares that are often used as currency. Should investors continue to punish acquirers, they could add to threats gathering over an M&A market that is running at a near-record pace.
Since July 1, acquirers’ share prices fell 0.6% on average on the first day of trading following the announcement of an M&A deal over $1 billion, according to data provider Dealogic. That would be the first quarterly decline in three years and follows increases of 4% and 5.4% in the first and second quarters, respectively. (…)
“Volatility is never a friend of M&A,” saidGregg Lemkau, co-head of global M&A atGoldman Sachs Group Inc. “If that persists for an extended period of time, people may start to get more anxious.” (…)
Investors have become less accommodating of deals in other ways, too. They balked last week at the terms of two bond sales backing a pair of large recent acquisitions, cable operator Altice NV’s purchase of Cablevision Systems Corp. and chemical company OlinCorp.’s takeover of Dow Chemical Co.’s chlorine-products unit. The bonds ended up being more expensive and raising less cash than the companies had hoped.
Should bond and stock investors lose their lust for M&A deals, buyers could find their financing options limited.
Historically, acquirer share-price declines were the norm. The average buyer’s stock fell most years from 1996 through 2011 as investors cast a wary eye on the risks that come with trying to integrate workforces and systems, retain customers and blend cultures.
They have risen at least 1.4% each year since then, as shareholders began to reward companies using their cash to pursue growth in a sluggish economic environment and as buyers promised to deliver quick profits.
But that old skepticism may be creeping back, in part, analysts said, because some of the worst deals in history were done near the peak of an M&A cycle. (…)
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Debt-Market Tumult Hits Corporate-Bond Sales Bond-market turmoil mounted Monday, as three companies reduced or put off planned bond sales in response to soft investor demand, damped by concerns that a global economic slowdown is taking shape.