THE (SQUEEZED) AMERICAN CONSUMER

• UBS set out to answer a key question about US consumer debt — and their findings are worrying

(…) According to their research, 65%, 36% and 22% of lower, middle, and higher income cohorts are “stressed” in finance speak. That means that their income falls below or just below their expenses. 

In addition, lower and middle income groups are relying more and more on their credit cards, with these groups reporting a higher utilization of credit card debt. (…)

Click on link to see the charts.

• The US mortgage market remains tight as banks’ credit officers and regulators “fight the last war.” (The Daily Shot)

 

Investors’ New Message to Global Governments: Spend More A growing number of investors and policy makers, seeing central banks as powerless to revive an anemic global economy, are championing a resurgence of fiscal spending.

OIL

Bankruptcy Bust: How Zombie Companies Are Killing the Oil Rally Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. But it hasn’t worked out that way.

(…) About 70 U.S. oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of U.S. oil-and-gas output. (…)

This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved, and many energy companies are using it to lighten their heavy debt loads, adapt to lean times and keep producing. (…)

Ultra Petroleum Corp. has yet to emerge from bankruptcy—it filed in April—and it is already planning to add another rig within months and triple its fleet to 10 in about two years. The company has been renegotiating rig contracts and using bankruptcy laws to force pipeline companies to renegotiate other contracts.

“We get to run the company, and we’re trying to do what the bankruptcy rules or law suggests, which is to maximize the value of the company run as a growing concern,” Chief Executive Michael Watford said in an earnings call on Aug. 11. (…)

• Venezuela’s Crippled Crude The decrepit state of aging oil fields is a crucial reason why Venezuela’s output is falling faster than that of any other major oil producer bar insurgency-riven Nigeria, despite having the world’s largest reserves.

(…) Venezuelan crude production shrank 11% to 2.3 million barrels a day in a year to September, according to government figures, and the consulting firm Medley & Associates expects the fall to accelerate in the next 12 months. (…)

• Russian crude production is rising as new projects come online. The “production freeze” with OPEC seems to be just talk for now. (The Daily Shot)

• Oil prices fall as Iraq resists joining output cut

UK retail sales fail to grow for second month running

(…) Retail sales volumes were up 1.8% in the third quarter as a whole, the biggest quarterly increase since the final quarter of 2014, suggesting the consumer appears to have provided an important source of growth to the economy in the immediate aftermath of the EU referendum. Compared to the same period of last year, sales were some 5.4% higher. The data add to the increasing body of news which point to the economy having maintained steady, albeit unexciting, growth in the third quarter.

However, the concern is that we may be starting to see signs that rising inflation, weak pay growth and job insecurity among households are all starting to subdue consumer spending. Sales were flat in both September and August, pointing to a possible fading of sales growth after a decent start to the quarter. Clothing sales suffered in particular in September, down 2.8% on August and down 6.4% on a year ago, potentially due to warm weather meaning people delayed the buying of new autumn seasonal items, though also likely due to rising prices.

According to the latest Markit HFI survey, financial worries rose especially sharply among households where the main earner is employed in the private sector, with government workers perhaps feeling more secure in their jobs due to recent suggestions that government spending may soon start to rise as austerity is reined-back. Private sector employees’ view on their future finances fell to the lowest for almost three years in October, boding ill for retail sales at the start of the fourth quarter.

EARNINGS WATCH

• US profit recession may have come to an end in Q3

(…) The upbeat start to the third-quarter reporting period has not been limited to financials, however. Out of the 107 companies listed on the S&P 500, a broad gauge of large American businesses, that have disclosed figures, about three quarters have logged earnings per share that beat Wall Street estimates, according to data from S&P Global Market Intelligence.

That is roughly the same as the “beat rate” in the second quarter, but above the historic average of 66 per cent, according to S&P. (…)

A sharp pick-up in earnings growth is projected for the final three months of this year, and the first quarter of 2017, with EPS expected to rise by 6 per cent, and 14.7 per cent, respectively. The brighter forecast comes as the the pain caused by a strong US dollar and the sting of the decline in energy prices ease, according to analysts. (…)

Facstet’s weekly summary:

Overall, 23% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 78% have reported actual EPS above the mean EPS estimate, 5% have reported actual EPS equal to the mean EPS estimate, and 17% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (70%) average and above the 5-year (67%) average.

In aggregate, companies are reporting earnings that are 7.0% above expectations. This surprise percentage is above the 1-year (+4.8%) average and above the 5-year (+4.4%) average.

In aggregate, companies are reporting sales that are 0.9% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.6%) average.

The blended earnings decline for the third quarter is -0.3% this week, which is smaller than the blended earnings decline of -1.9% last week. Upside earnings surprises reported by companies in the Financials and Information Technology sectors were mainly responsible for the decrease in the overall earnings decline for the index during the past week.

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to 3.3% from -0.3%.

If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would improve to 4.3% from 2.6%.

At this point in time, 17 companies in the index have issued EPS guidance for Q4 2016. Of these 17 companies, 10 have issued negative EPS guidance and 7 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 59% (10 out of 17), which is below the 5-year average of 74%.

At the same time after Q2, companies were reporting EPS that were 6.7% above the estimates and the blended earnings had improved from –5.5% to –3.7%. Q2 finally ended at –3.2%. Guidance is better so far this quarter since 74% of the 19 companies that had guided at the same time after Q2 guided negatively.

So far, so good for Q3 earnings. I am watching Q4 estimates as companies guide analysts for their yearend numbers which will set the stage for 2017 estimates. From Thomson Reuters’ data, Q4 EPS are now seen up 8.0%, down a little from +8.3% on October 1. All sectors have seen their Q4 estimate lowered except Financials and Technology.

TR’s full 2016 EPS are $117.50 if Q4 estimates are met, unchanged from 2015’s $117.46. Factset’s number is $118.20 for 2016, from $117.97 in 2015.

Using TR’s $117.50 into the Rule of 20 (cheating a little not using trailing EPS) with core inflation at 2.2%, “Fair Value” is 2091 on the S&P 500 Index ((20-2.2)*117.50), 2.3% below the current level.

If so, this would mark the first meaningful uptrend in the Rule of 20 Fair Value (yellow line) since February 2015, a period during which equities displayed much volatility while staying flat end-to-end.

Meanwhile, the economy continues to perform below expectations as this chart from Ed Yardeni shows:

Goldman Cuts S&P500 Earnings Forecasts For The Next Three Years

Canadian dollar falls to 7-month low

Euro hits 7-month low against the dollar

Strategists Still See Scope for Gains in the Dollar

(…) The U.S. currency rose for a third week on renewed bets among investors and traders that the Federal Reserve will find the scope to raise rates by December. At the same time, European Central Bank President Mario Draghi sought to put a halt to speculation that monetary stimulus will be tapered anytime soon, helping extend the dollar’s rally versus the euro and pushing its relative strength against the shared currency beyond levels that often signal an impending reversal. (…)

“In addition to central bank policy, the specter of inflammatory Brexit headlines and the Italian referendum could provide further U.S. dollar tailwinds.” (…)

Futures show a 68 percent chance the U.S. central bank will raise rates by year-end, up from 61 percent a month ago (…).

Sixty-eight percent! Strong odds. But are they supported by objective facts?

The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (the ADS index) is relatively unknown real-time indicator of business conditions for the U.S. economy “designed to track real business conditions at high frequency.” From Advisor Perspectives:

The chart below features a 91-day moving average of this daily index. Why 91 days? The better know cousin index of the Philly Fed’s ADS the Chicago Fed’s National Activity Index. The CFNAI is updated monthly, but the metric that gets the most attention by the Chicago Fed economists is its three-month moving average. They’ve even coined an acronym for it, the CFNAI-MA3. Thus we’ve used 91 days as a comparable smoothing of the Philly Fed ADS index. In the ADS 91-day MMA chart below we’ve highlighted recessions and the value of the smoothed index at recession starts.

The CFNAI is based on 85 economic indicators from four categories:

The advance GDP report for Q3 GDP will be released next Friday.

The NY Fed’s Nowcast stands at 2.2% for 2016:Q3 (left chart) and 1.4% for 2016:Q4.

  

BTW:

US Fitch Fundamentals Index Remains Negative in 3Q16

The US Fitch Fundamentals Index (FFI), a broad measure of credit conditions across multiple asset classes, remained negative during 3Q16. The aggregate index, comprising 10 component indicators, edged higher from the previous quarterly reading, but was negative for the fifth quarter in a row. The result reflects the continuation of a broad pattern of weakening credit trends in the U.S. economy. (…)

The high-yield recovery and corporate default performance indicators remained in negative territory, though scores for both improved quarter over quarter. This reflects some moderation of the adverse ratings and default patterns that appeared over several quarters following the collapse in energy and other commodity prices in 2014.

Stock futures rise as flurry of deal activity boosts confidence

Germany withdraws approval for Chinese takeover of tech group Berlin concerned over China’s appetite for German industrial companies

(…) The German government has withdrawn approval for the €670m takeover of chip equipment maker Aixtron by a group of Chinese investors, amid concern in Berlin about China’s growing appetite for German industrial companies.

The authorities had cleared the deal on September 8 but a spokesperson for the German economics ministry confirmed on Monday that it had made a U-turn and was reopening a review of the sale. (…)