U.S. Housing Starts Rebound to Three-Month High

Housing starts increased 4.8% during June to 1.189 million units (SAAR) from 1.135 million in May, revised from 1.164 million. It was the highest level since February, but still 2.0% lower than one year earlier. Expectations were for 1.168 million starts in the Action Economics Forecast Survey.

Starts of single-family homes improved 4.4% (13.4% y/y) to 778,000 following a 2.5% fall. Multi-family starts, which include apartments & condominiums, increased 5.4% (-22.0% y/y) to 411,000 after a 0.3% dip.

By region, starts were mixed last month. In the Northeast, starts rebounded by nearly one-half, following two months of sharp decline. Starts in the West increased 17.4% (8.9% y/y) to 317,000, the highest level of the economic recovery. In the Midwest, starts declined 5.2% (+26.0% y/y), but the three-month average reached a new high. Starts in the South declined 3.4%, but were up by that amount y/y. Starts have been moving sideways since the middle of last year.

Permits to build a new home improved 1.5% last month (-13.6% y/y), to 1.153 million following a 0.5% rise. Permits to build single-family homes increased 1.0% (5.1% y/y) while multi-family permits increased 2.5% (-34.3% y/y).

The slow grind per Doug Short:

North American Freight Ticks Up in June

The June freight shipments index climbed 1.7 percent. This was 4.3 percent below last year and 7.6 percent lower than June 2014. Stores are already stocking school supplies, which accounts for some of the rise. (…) June’s shipments are in step with patterns that have been observed in the past few years, but are still well below the volume in the last two years. July usually sees a dip in the number of freight shipments, but the first part of July seems to be fairly robust.

From today’s WSJ:

The biggest concern at Volvo right now may be its dwindling order book. The world’s second-largest truck maker reported a steep decline in profit in the second quarter and lowered the outlook for North American sales amid declining freight demand and competition from a lively used-truck market. The WSJ’s Dominic Chopping reports North American truck orders fell 29% year-over-year, helping push overall global orders down 8% in a depressed truck and construction market. Truck orders generally have been in a deep slide this year. ACT Research says North American orders hit a six-year low in June. The group says cancellations reached 29% of the order backlog last year and that 11% of previous orders were canceled in the first five months of this year. There’s little relief in sight: the American Trucking Associations says its measure of shipping demand fell 1.5% from May to June.

IMF Cuts 2016 Global Economic Growth Outlook After Brexit Vote The International Monetary Fund downgraded its forecast for global economic growth as Britain’s vote to leave the European Union weighs on consumer confidence and investor sentiment.

The IMF notched down its global growth estimate for this year and next by 0.1 percentage point, putting 2016 at 3.1% and on par with last year’s pace, the slowest since the financial crisis. The fund expects a mild pickup next year to 3.4% annual growth.

But it warned that a host of threats—including geopolitical turmoil, rising protectionism and terrorist attacks—could push growth into a deeper rut. (…)

A prolonged and acrimonious negotiation could drag down global economic growth to 2.8% this year and next, the IMF said. (…)

The IMF cut prospects for eurozone growth next year across the board, including 0.9 percentage point for the U.K. to 1.3% and 0.4 percentage point for Germany to 1.2%. (…)

The fund also trimmed its forecast for U.S. growth this year by 0.2 percentage point to 2.2% on the back of a weaker-than expected first quarter as a strong dollar and souring energy sector hit the economy. (…) 

Christie’s sees art sales fall 27% in first half of 2016

The London-based auction house, which is celebrating its 250th anniversary, said there was a fall in the number of works priced above £20m at auction. Despite that, smaller ticket sales and transactions conducted online strengthened: there were 36 per cent more new buyers of works between £1m and £5m, and e-commerce jumped 96 per cent. (…)

Sales in the global art market declined 7 per cent over the course of 2015 to $63.8bn, according to the industry benchmark Tefaf Art Market Report. After years of rising prices lured in new buyers, volatility in financial markets last year started to cool demand. For top lots, prices continued to soar, while other items failed to sell. (…)

Christie’s also noted that “demand for masterpieces by top collectors continues”, with 88 per cent of all works costing more than £5m being sold. (…)

In the first half of the year, sales in America totalled £729.8m, down by almost half from the same period last year, Christie’s said. Sales in Europe, the Middle East, Russia and India shrank 12 per cent to £736.5m, while Hong Kong contracted 11 per cent to £256.5m. (…)

SENTIMENT WATCH

Plus ça change…

Read some history before screaming US stocks are in a bubble The history of the ‘Nifty Fifty’ tempers fears that US stocks at record highs are in a bubble

(…) Stocks listed in the US, as represented by the S&P 500, are certainly not cheap compared with their ten-year average price to earnings multiples, but nor are they as staggeringly overvalued as casual observations about a “bubble” would suggest.

(…)  The S&P sits at a trailing price to earnings ratio of about 21 times, or an earnings yield of 4.7 per cent. Based on the last 50 years, this is not eye-poppingly expensive. Those that boldly declare it a “bubble” should cast an eye at the multiple US shares hit during the late-90s tech bubble.

Secondly, those who believe that such a multiple is horrifically expensive should ask themselves what is the correct price that should be paid for shares in quality businesses at this point in time. It is here that the work of the University of Pennsylvania professor Jeremy Siegel on one of the great stock market bubbles of the postwar period becomes illuminating.

At the start of the 1970s investors were prepared to pay a seemingly stupid price for what were then perceived as “one decision — buy and never sell” growth stocks. A group of leading US companies including Xerox, IBM, Polaroid and Coca-Cola were bid up to prodigious valuations.

These stocks, sometimes referred to as the “Nifty Fifty”, hit valuations as high as 80 or 100 or more times their earnings, with Coca-Cola reaching a price to earnings of 46 in 1972, and Johnson & Johnson hitting a ratio of 57 times in the same year. Disney rose to a valuation of 71 times, while Dow Chemical rose to a valuation of 241.

These stocks were clearly in a bubble, and they later crashed back down to earth.(…)

But what did this mean for the poor saps who had bought these stocks at the mega-prices on offer in 1972? Professor Siegel’s study showed that, had they held on for 30-odd years, these seemingly deranged investors would have in fact mostly outperformed the wider US stock market.

The raging bull who bought Coca-Cola at 46 times its earnings in 1972 would have made an annual return 17.2 per cent up to 1996, when Professor Siegel’s study was published, and done very well since. The idiot who purchased Disney at a price-to-earnings ratio of 71 times that year would have annualised a return of 11.7 per cent. In fact, if a foresighted investor had wanted to simply match the performance of the S&P 500 up to 1996 they could have paid a p/e of 92 for Coca-Cola in 1972, and paid 78 times for Philip Morris, which was on sale in 1972 for a multiple of just 24 times earnings.

There are of course the companies in the Nifty Fifty that never made it, such as Polaroid, which was selling at a price to earnings of 94.8 in 1972 and declared bankruptcy in 2008. Here Professor Siegel shows that if an investor had bought and held all of the Nifty Fifty in 1972 at that huge valuation, with all its successes and duds, they would have still made an annualised return of 12.7 per cent, compared with the S&P 500 over the period of 12.9 per cent.

The moral of this is not that all stocks should be bought at any price. Instead, a long-term purchase of a strong business at a reasonable price should reward them. It may be unfashionable to say, but many excellent businesses are still on offer for prices that are not screaming a bubble.

Professor Siegel originally published his paper in January 1995 so his calculations actually covered 23 years. He republished in October 1998 in the AAII Journal concluding that

A portfolio of Nifty Fifty stocks purchased at the peak would have nearly matched the S&P 500 over the next 26 years. Wall Street’s misunderstanding led to a dramatic undervaluation of many of the large growth stocks throughout the 1980s and early 1990s. Stocks with steady growth records are worth 30, 40, and sometimes more times earnings.

Pretty timely as the S&P 500 was then selling at 25x trailing EPS and at 26.4 on the Rule of 20 scale. Investors who bought on the basis of this analysis were likely very grateful to Professor Siegel after enjoying a 38% ride to 1500 in August 2000, assuming they did not hang on to their treasured stocks which lost 45% of their value by September 2002. Mark Hulbert re-used Professor Siegel’s analysis in August 2002 in the NYT to encourage distressed investors to hang on (Did You Buy at the Peak? Hanging On May Still Pay), even though P/Es were then 18.5 (20 on the Rule of 20 scale).

Great timing as equities roared back from 815 to 1550 by October 2007. The S&P 500 Index P/E was then “only” 17.8 even (but 21.3 on the Rule of 20) so why not stay in. After all, we are now at 2150 after visiting 666 in March 2009.

Such academic analysis performed in the comfort of a university study, post facto and without real money at stake, can be so dangerous to investors lacking the luxury of a 25-year wait without the anxiety necessarily accompanying mega-bear market losses. How many people really stay in near the lows and hang in through all the peaks and valleys to provide justification to “buying high”?

Oh! and there is this analysis of Siegel’s analysis by Jeff Fesenmaier and Gary Smith at the Department of Economics at Pomona College in Claremont, California which revealed that there actually never was an official list of “Nifty-Fifty” stocks and that Siegel’s analysis would have concluded differently if another list was used. Their conclusion:

Overall, the Morgan Guaranty list of 50 stocks somewhat underperformed the S&P 500 from December 31, 1972 through December 31, 2001, as did the Kidder Peabody list, with the notable exception of Wal-Mart which was a spectacular success. For both lists, there was a substantial and statistically persuasive negative correlation between a stock’s December 1972 P/E ratio and its annual return over the next 29 years.

The Terrific 24 stocks that were on both lists did substantially worse than the S&P 500. An investor who bought these 24 stocks at the end of 1972 would have had 50 percent less wealth at the end of 2001 than an investor who bought the S&P 500.

Cash Is King and That’s Good for the Rally

Jarred by global events such as the U.K.’s vote to leave the European Union, fund managers were holding 5.8% of their portfolios in cash, according to a survey by Bank of America Merrill Lynch of 195 investors between July 8-14. That’s up a tick from 5.7% in June and is the highest level since November 2001. (…)

When the average cash balance rises above 4.5%, it serves as a contrarian buy signal, according to the survey. (…)

Some of the BAML charts:

Thinking of going contrarian based on these charts? Look at this one from David Rosenberg before taking the plunge:

CETERIS NON PARIBUS

Chinese whispers: the internet of things

The race to connect the billions of machines inside China’s factories with each other and with the internet is heating up. GE, the world’s biggest industrial firm, will launch its “digital foundry” in Shanghai today. Earlier this month, in Beijing, Germany’s Siemens trumpeted its ambitious plans for creating “digital twins” of old-style factories. Cisco, Honeywell and HP, all American technology giants, are also crowding in. Their zeal is understandable. China is the world’s biggest market for device-to-device communications. However, they are up against local firms with excellent technology and better market access. China’s Huawei, one of the world’s biggest firms for telecoms equipment, has come up with an inventive approach involving cheap devices that use very little energy. And China Mobile, the world’s biggest mobile operator, is forging ahead with trials across the country. As ever in China, the biggest prizes will go to the home team. (The Economist)