Gasoline Windfall Fails to Stoke Consumers American consumers are getting a windfall of billions of dollars a week thanks to low fuel prices. The U.S. economy has little to show for it.
The price of a gallon of regular gasoline fell to $2 nationally Sunday and was well below that in much of the country, AAA said, marking the lowest price outside of a recession in more than a decade. As a result, Americans reaped more than $100 billion in savings this year alone, or about $550 per licensed driver, according to the motorists group. (…)
Consumer-spending growth outside of gasoline has decelerated, advancing 3.8% from a year earlier in October, far slower than the comparable 4.9% gain in October 2014, according to Commerce Department data. (…)
The personal saving rate in October hit its highest level in nearly three years. Household credit is expanding at a historically slow pace, a sign many Americans are still paring down debt. (…)
The negative effects tied to falling oil prices, including declining investment in what had been a burgeoning domestic energy industry, may have been stronger than anticipated. Overall business spending has slowed from a year ago, and employment in the energy sector has fallen. (…)
The pullback in spending in the first half of the year was largely attributed to reduced outlays by middle- and upper-income Americans, and those older than 65, according to data from the J.P. Morgan Chase & Co. Institute, which analyzed credit- and debit-card transactions. (…)
Meanwhile, spending among those younger than 35 and those with lower incomes held up fairly well, the J.P. Morgan research found. Those consumers benefit most from low gasoline prices because they tend to spend most of what they earn. (…)
Holiday Shoppers Wait Until the Last Minute for Deals
(…) Almost 60% of consumers polled by market-research firm NPD Group said they hadn’t completed half or more of their shopping as of Dec. 13, up from 50% who said so during the same period last year. (…)
The use of promotions increased 23% during the four weeks through Dec. 12, compared with the same period a year ago, according to DynamicAction, a software-analytics firm that analyzed more than $5 billion in online sales.
Despite the challenges of unseasonably warm weather, and a strong dollar which has dampened spending in the U.S. by tourists, sales seem to be on track. Retail spending from Nov. 1 through Dec. 14 rose 2.4%, up from a 1.8% increase during the same period last year, according to First Data Corp., which analyzed payments at 1.3 million retail locations.
Online sales have continued to post strong growth with sales 13.6% higher from Nov. 27 through Dec. 15 compared to a year ago, according to ChannelAdvisor Corp., an e-commerce-software provider that measures Internet transactions.
(…) Sales at physical stores declined 5.8% from Nov. 1 through Dec. 14, while traffic was down 8%, from a year ago, according to RetailNext, which collects traffic and sales data through analytics software it provides to retailers.
Physical stores will have a chance to make up some of that lost ground this week, given that the majority of retailers have set Monday as the cutoff for placing online orders for delivery by Christmas, according to StellaService, a customer service analytics company.
U.S. Eases 35-Year-Old Real Estate Tax on Foreign Investors
Contained in the $1.1 trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their U.S. counterparts for real estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.
“FIRPTA has historically made direct investment in U.S. property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax-law modification is a game changer” that could result in hundreds of billions of new capital flows into U.S. real estate. (…)
The new law also allows foreign pensions to buy as much as 10 percent of a U.S. publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 percent previously. (…)
The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in U.S. property, he said.
Industrial employment in China falls to lowest level since 2000
(…) Aggregate employment in the industrial sector fell 1.9 per cent year on year in October. By the end of the third quarter, employment growth had fallen to its lowest level on a quarterly basis since 2000, according to analysis by FT Confidential Research, a research service from the Financial Times. (…)
It also appears that any slack in the labour market because of falling demand in the industrial sector is not being taken up by services. The employment sub-index of the official non-manufacturing PMI has been in negative territory since mid-2014.
All this suggests that China’s economy may be reaching its capacity to absorb any further weakening in the industrial sector. (…)
As well as the political concerns over a spike in joblessness, lower levels of employment in the industrial sector are leading to weaker consumer spending. This is undermining the new growth drivers that are supposed to be compensating for a faltering industrial sector. Those parts of the country that are recording the weakest growth in industrial sales are also those reporting the slowest pace in retail purchases.
When industrial employment fell at the end of the 1990s, China had the World Trade Organization dividend and a recently privatised housing market to help raise economic activity and provide new jobs. This time round, new growth drivers are conspicuously absent. Despite the tough talk emerging from Beijing that 2016 will be the year that it gets to grip with its bloated industrial sector, circumstances may dictate a more gentle approach.
Latest facts from China:
- New Home Price Diffusion Index: 47 in October, 54 in November. Existing Home Price Diffusion Index, 61 to 67. ISI’s price index +1.5% MoM, the most in 2 years. Prices are now 2.8% below their all-time peak.
- MNI Business Conditions Survey: 52.7 in December vs 49.9 in November. Last 4 months of 2015: 52.4 vs first 8 months 50.8.
India Lowers Economic Growth Forecast Finance ministry projects growth rate of between 7% and 7.5% for this fiscal year
… down from an earlier forecast of an expansion between 8.1% and 8.5%. The government said the projection comes as global economies face tough times with subdued demand and a fall in manufacturing activities.
The south Asian nation’s economy grew 7.3% last year. (…)
The review said that the fiscal outlook for next financial year looks challenging given a proposed wage rise for government employees.
It projected that retail inflation for this financial year will likely remain at the central bank’s target of around 6%.
The midyear review also stated that the government was on track to achieve this year’s fiscal-deficit target of 3.9% without slashing any planned expenditure.
SURPRISE, SURPRISE!
(The Fed is late to the tightening party:
Wall Street’s Biggest Junk Bond Dealer Weighs In on the Rout
The executive overseeing Wall Street’s top high-yield bond desk says the market for such debt isn’t in a bubble, even as he forecasts sizable losses across the industry in the short term. (…)
“We don’t believe the market is in a bubble,” said Jim Casey, J.P. Morgan’s global head of debt capital markets. “We don’t believe the market is overvalued…you can still make good money in high yield.” (…)
“We do need to get some stability in the market to clear all of this paper,” Mr. Casey said. “We don’t have stability right now.”
Given the recent volatility, Mr. Casey also said that the outlook isn’t good for the so-called “hung” deals that need to get closed by the end of the year. S&P Capital IQ LCD estimates there is about $7.5 billion outstanding in such deals, in which banks are having trouble finding buyers for debt issued to finance buyouts. (…)
After Third Avenue Management LLC barred withdrawals from a junk-bond fund because of its illiquid portfolio, Mr. Casey said he queried his traders and salespeople to find out if other funds were similarly vulnerable.
The answer was largely no, he says, with other firms saying they did have liquidity and could meet redemptions. He said the mood was largely steady as well among the firm’s largest customers, with little panic selling. While prices were dropping, Mr. Casey said, they were on “very thin volumes.”
(…) Of late, Mr. Casey said, his mostly New York- and Houston-based bankers on the natural resources team are increasingly working with distressed energy companies to restructure certain bonds to reduce the debt load. In these deals, called “leapfrog exchange offers,” certain investors agree to trim the amount they are owed in exchange for gaining seniority in the capital structure.
Mr. Casey called it a useful tool for companies in the energy patch and “the next best thing” for investors to getting cash. He said there have been about a dozen such deals this year.
Moody’s Review of BHP’s Credit Rating Piles On Pressure Downgrade possible amid commodities price slide and aftermath of disaster in Brazil; Glencore rating is cut
Moody’s Investors Service said on Friday it was reviewing the credit rating of mining giant BHP Billiton Ltd. for a possible downgrade, ratcheting up pressure on the world’s largest diversified miner, amid tumbling commodities prices and a mining disaster at a BHP joint venture in Brazil.
Moody’s separately cut the rating of BHP rival Glencore PLC by a notch, to just above junk status. (…)
Moody’s lowered its crude-oil price assumption to $43 and $48 a barrel in 2016 and 2017, respectively, and forecast iron ore to average $40 and $45 a ton for those years. Oil and iron ore are BHP’s biggest earnings drivers, with each dollar movement in those two commodities moving the company’s bottom line by about $200 million this financial year, according to the company.
The credit scrutiny for BHP and Glencore follows Moody’s decision last week to downgrade Anglo American, the world’s fifth-largest miner by market value, by a notch, due to weak commodity prices. (…)
Don’t Hold Your Breath Waiting for a Wave of Defaults by American Commodity Companies
(…) Next year also won’t be a time in which the vast majority of these companies will be forced to tap capital markets for funding while they’re in a disadvantaged state, the strategists assert. Quick or current ratios—a measure of companies’ current assets relative to their liabilities—have improved dramatically across the energy and mining industries, in part because the low interest rate environment has enabled companies to refinance their obligations and push maturities further into the future.
“Before oil prices started falling, when liquidity conditions were easy, only one-quarter of the companies in the universe had enough cash on the balance sheet to finance next year’s debt,” the strategists wrote. “Now that number has risen to around 50 percent.”
Energy companies have proved incredibly adept at finding ways to slash costs—often by cutting payrolls—as the selling price of their products came under pressure, the bank asserts. Among U.S. energy and mining companies with high-yield and investment-grade ratings, fewer are generating negative operating cash flow, said Société Générale:
Interest charges are categorized as a non-operating expense, but thanks to the Fed’s zero interest rate policy (ZIRP), servicing debt isn’t too onerous for the time being.
After 2016, however, energy and mining companies are poised to run smack-dab into a maturity wall:
“The U.S. energy and mining companies have extended the life of their debt, and face only $5 billion worth of bond redemptions this year (concentrated in the second-half),” the strategists wrote. “However, redemptions rise quite sharply in 2017, 2018 and 2019, so the sector will need refinancing over this period.”
The implications, if any, for commodity prices is that the scope for forced rebalancing to alleviate supply gluts via shuttered production might be limited in the near term. For segments in which the U.S. is a major producer—namely, oil—this entails that any large-scale adjustments from the supply side might not be a 2016 story. Conversely, operational stress rather than financial stress might be the dynamic that brings oversupplied commodity markets closer to a balance state, as analysts at Goldman Sachs posited.
The market certainly isn’t sanguine about the financial condition of companies that have issued junk debt, with the strategists observing that 7 percent of the U.S. high-yield market has bonds trading at less than 50 percent of par value, but some of the worst-case scenarios getting priced in might be blown out of proportion.
“It may be, then, that investors are more concerned than they should be with the immediate threat of defaults in the U.S. energy sector,” SocGen’s strategists concluded.
THE CANADIAN DOLLAR
Soon, the Bank of Canada may have to raise the level of interest rates. The precipitous fall in the CAD is pushing consumer prices up, the current account and budget deficits needs to finance with foreign capital and Trudeau’s program of infrastructure stimulus should bring about in the least a temporary economic boost.
History is pretty clear that when a country is subject to twin deficits during periods of currency depreciation, central banks often revert to more conservative
policies.On Thursday, the central banks of Mexico, Chile, Saudi Arabia, Bahrain, Kuwait and UAE raised their policy rates. Leveraging monetary policy divergence with the US to support the Canadian economy through a relatively weaker CAD has limits. The Bank of England has signaled that the time to raise rates is drawing near.
As a matter of fact, decoupling is not a good long term policy. The monetary stance of the Bank of Canada will eventually change course if the Canadian monetary authorities want Canada to maintain its AAA credit rating. The large trade deficits and negative interest rate differentials should have an effect on how the monetary authorities will conduct its monetary stance in the future.
Because the adjustments to the above are usually long and complex, it will likely take some time for the Bank of Canada to change its mind about flirting with unconventional monetary ideas such as QE and negative interest rates. Nevertheless, if history is a guide, it will eventually change course. That is, adopt a more conservative monetary policy. (Hubert Marleau, Palos Management)
EARNINGS WATCH
In terms of earnings estimate revisions for the S&P 500, analysts have lowered earnings estimates for Q4 2015 within average levels to date. On a per-share basis, estimated earnings for the fourth quarter have fallen by 3.8% since September 30. This percentage decline is larger than the trailing 5-year average (-3.0%), but smaller than the trailing 10-year average (-4.2%) for approximately this same point in time in the quarter.
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q4 2015 is -4.5% today [-4.3% last week], which is higher than the expected decline of -0.7% at the start of the quarter (September 30). If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 0.8% [unchanged from last week] from -4.5%.
As a result of downward revisions to sales estimates, the estimated sales decline for Q4 2015 is -3.1%, which is also higher than the estimated year-over-year sales decline of -1.2% at the start of the quarter. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.1% from -3.1%.
Factset reports that of the 110 companies that have issued negative EPS guidance for Q4, 84 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 76%, which is above the 5-year average of 72%.
Thomson Reuters’ tally gives 86 negatives and 26 positives so far. At the same date last year, there were 97 negatives and 19 positives. At the same time in Q3’15 (2 weeks before quarter end) there were 93 negatives and 28 positives.
OIL
Siberian Surprise: Russian Oil Patch Just Keeps Pumping
This Bloomberg article deserves to be read in its entirety. A few extracts if you are too busy:
(…) Russia’s unexpected oil bounty this year is the result not of a new Kremlin campaign but of dozens of modest productivity improvements across the sprawling sector. Even pressured by plunging prices, as well as U.S. and European Union sanctions that cut access to much foreign financing and technology, Russian companies have managed to squeeze more crude out of some of the country’s oldest fields. They have also brought new projects on line, offsetting steady declines in its core producing region of West Siberia.
With a rise of 0.5 percent in the first nine months of 2015, Russia hasn’t boosted production as much as its larger rivals, the U.S. (up 1.3 percent) and Saudi Arabia (up 5.8 percent), according to Citigroup Inc. But having ignored OPEC’s calls earlier this year to join efforts to support prices by pumping less, Russia is keeping up with the cartel.
“I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” said Edward Morse, Citigroup’s global head of commodities research. As recently as April, not even the Russian government thought 2015 would break the record. (…)
One side effect of falling oil prices — the 52 percent plunge in the ruble over the last two years — has helped Russian oil producers, chopping their costs in dollar terms since 80 percent to 90 percent of their spending comes in rubles. (…)
“I don’t know what the oil price would have to fall to for things to change dramatically,” Stavskiy said. “We’ve been through $9 a barrel and production continued, so if something like that happens, we know what to do.” (…)
To be sure, few in the industry expect Russia to be able to sustain the current performance for more than a few years. Tax hikes and lack of financing have cut deeply into exploration drilling, which is down 21 percent this year, and handicap the larger new projects that are needed to replace the country’s older fields as they run dry.
“There is, however, only so far such efficiency gains can go and we are probably near the peak of output today,” said Chris Weafer, a partner at consultants Macro Advisory.
In some parts of the Russian oil patch, low prices are already causing pain. At $40 a barrel, “half of our fields could be stopped. Heavy oil, low horizons, mature horizons are all unprofitable at a price of $40-45. We are waiting for better times,” Russneft OJSC Board Chairman Mikhail Gutseriev said in an interview on state television early this month.
Relatively high taxes on oil have actually sheltered the industry from much of the impact of the drop in prices. On crude exports, the government takes nearly everything above $30-$40 a barrel, so companies don’t feel much impact until prices fall below that. (…)
Bashneft and other Russian companies working fields in the Volga River basin — some of the first to be discovered in Russia early in the last century — are benefiting from Soviet inefficiency, he said. “In Soviet times, the idea was: whatever we don’t produce will be left for our children.” (…)
Meanwhile,
Saudi Arabia Said to Weigh Selling Stakes in State-Run Entities
Saudi officials are considering plans to sell shares in state-owned entities and companies, according to two people with knowledge of the discussions, as the kingdom seeks to bolster revenue to counter the plunge in oil prices.
The government may sell stakes in ports, railways, utilities and airports, the two people said. State-owned hospitals may also be privatized as part of Deputy Crown Prince Mohammed bin Salman’s plans to reduce the kingdom’s reliance on oil revenue, one person said. (…)
The kingdom, which relies on oil for at least 80 percent of its revenue, is on course to post a budget deficit equal to 20 percent of economic output this year, according to the International Monetary Fund.
Rather than draw down further on its foreign-currency reserves, Saudi Arabia is expected to cut spending when it unveils its budget this month. (…)
Commenting on the flash PMI data, Chris Williamson, chief economist at Markit said: