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NEW$ & VIEW$ (24 FEB. 2015): Housing; Deflation; Oil; Washington on Bankers

Brussels signs off on Greek reform plan European Commission says measures should be approved

U.S. Home Sales Falter to Start Year Sales of previously owned homes slowed in January, a reflection of the rising prices and tight supplies that could constrain the housing market this year.

Existing-home sales fell 4.9% last month from December to a seasonally adjusted annual rate of 4.82 million, the National Association of Realtors said on Monday, the slowest pace in nine months.

From Haver Analytics:

Single-family home sales fell 5.1% last month (+3.9% y/y) to 4.270 million, also a nine-month low, after a 3.4% rise. Condo and co-op sales declined 3.5% last month (-1.8% y/y) to 0.550 million, the lowest level since March.

The median sales price of an existing home declined 4.1% to $199,600 from $208,200, revised from $209,500. The latest decline was the sixth in the last seven months but prices remained 6.2% higher than last year. The average sales price fell 2.6% (+4.9% y/y) to $248,100, also the sixth decline in seven months.

By region, sales in the West declined 7.1% (+1.0% y/y), the third decline in four months. Sales in the Northeast were off 6.0% (+3.3% y/y), the third straight monthly drop. In the South, sales fell 4.6% (+5.6% y/y), the second shortfall in three months. Sales in the Midwest were off 2.7% (+0.9% y/y), the fourth decline in five months.

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Sad smile This is surprisingly bad and does not bode well for the housing market. Sales have been weak across the U.S. in recent months.

Fingers crossed But CalculatedRisk does the more optimistic calculation:

Inventory is still very low (down 0.5% year-over-year in January). This will be important to watch over the next few months at the start of the Spring buying season.

Also, the NAR reported total sales were up 3.2% from January 2014, however normal equity sales were up even more, and distressed sales down sharply. From the NAR (from a survey that is far from perfect):

Distressed sales – foreclosures and short sales – were 11 percent of sales in January, unchanged from last month but down from 15 percent a year ago. Eight percent of January sales were foreclosures and 3 percent were short sales.

Last year in December the NAR reported that 15% of sales were distressed sales.

A rough estimate: Sales in January 2014 were reported at 4.67 million SAAR with 15% distressed. That gives 701 thousand distressed (annual rate), and 3.97 million equity / non-distressed. In January 2015, sales were 4.82 million SAAR, with 11% distressed. That gives 530 thousand distressed – a decline of about 24% from January 2014 – and 4.29 million equity. Although this survey isn’t perfect, this suggests distressed sales were down sharply – and normal sales up around 8%.

If total existing sales decline a little, or move side-ways – due to fewer distressed sales- that is a positive sign for real estate.

Chicago Fed: Economic Growth Picked Up Slightly in January

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) edged up to +0.13 in January from –0.07 in December. Three of the four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

The index’s three-month moving average, CFNAI-MA3, ticked down to +0.33 in January from +0.34 in December. January’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from economic activity over the coming year.

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The CFNAI Diffusion Index, which is also a three-month moving average, increased slightly to +0.20 in January from +0.16 in December. Forty-eight of the 85 individual indicators made positive contributions to the CFNAI in January, while 37 made negative contributions. Forty-three indicators improved from December to January, while 42 indicators deteriorated. Of the indicators that improved, 14 made negative contributions.

Evercore ISI company surveys have been declining lately. The surveys also reveal that retailers’ pricing power keeps weakening after falling abruptly during the latter part of 2014.

ISI cut its 2015 S&P earnings estimate from $127 to $122 a few weeks ago. Last week it cut it to $120.

Industrial Commodity Prices Stabilize

Supporting the deflation theme:

The industrial commodity price index from the Foundation for International Business and Economic Research (FIBER) improved slightly during the last five weeks following declines which total 13.1% during the last year.

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Selected commodities YoY as of Feb. 19: Cotton: –23.3%, copper: –21.2%, Steel scrap: –39.4%, Lumber: –6.9%, Rubber: –14.5%.

German Consumers Lift Eurozone Economy

(…) German gross domestic product rose 0.7% in the final three months of the year from the third quarter, according to the latest price-, seasonally and calendar-adjusted figures, the Federal Statistics Office Destatis said, confirming its earlier estimate. Consumption outlays made a 0.5 percentage point contribution to GDP growth in the fourth quarter, the data showed.

Investments in machinery and vehicles were the other surprise, increasing 0.4% on the quarter in price-adjusted terms after posting a 1.4% drop in the third quarter. Building investment increased 2.1% on the quarter, which Destatis attributed to growth in both residential construction and public works. Demand for housing in Germany has increased and prices in certain areas have spiked since 2010 due to low interest rates and high liquidity, according to the Bundesbank. (…)

Slide in China land under new development Drop of 25% comes amid growing calls for interest rate cut

Property sales in major cities in the week before the Chinese new year holiday, which officially began on February 18, fell by about 20 per cent from the corresponding week a year earlier.

Turkish Central Bank Cuts All Three Main Interest Rates

Brazil Experts Fear a Two-Year Downturn Economists say nation is likely to suffer first back-to-back decline in GDP since 1930s.

OIL

Oil slide could trigger Opec emergency meeting Growing alarm over impact on members’ economies

Members of Opec have discussed holding an emergency meeting if crude continues to slide, according to Nigeria’s oil minister, in a sign of their growing alarm over the impact of a lower oil price on their economies. (…)

“Almost all Opec countries, except perhaps the Arab bloc, are very uncomfortable,” said Ms Alison-Madueke, who as president of Opec is responsible for liaising with member countries and the producer group’s secretary-general in the event of an emergency meeting. (…)

If the price “slips any further it is highly likely that I will have to call an extraordinary meeting of Opec in the next six weeks or so”, she said in an interview with the Financial Times. “We’re already talking with member countries.”

But market analysts say it is highly unlikely that Saudi Arabia, Opec’s de facto leader, will agree to such a meeting. (…)

Oil rebounds above $59 after Libya’s largest field shuts Brent crude oil reversed early losses to trade back above $59 a barrel on Tuesday as Libya’s largest oilfield stopped production, and as traders awaited U.S. oil inventory data to see whether it would show another large increase.

The Sarir oilfield in Libya shut because of a power cut, in a further blow to exports from the OPEC member.

Oil Prices Rise on Signs of Increased Demand

Energy Aspects, a research consultancy, estimated that global demand for crude reached a record high in December and grew at its quickest pace in 18 months. (…)

Energy Aspects estimates that global oil demand reached a record high of 94 million barrels a day in December. This represents a year-on-year growth of 2.2 million barrels a day, the strongest in the last 18 months. The consultancy sees the momentum continuing so far this year and expects 2015 global demand growth of 1 million barrels a day.

Still, Energy Aspects expects significant short-term pressure for oil prices as current prices aren’t low enough for the market to balance.

“Prices stabilizing at $60-$70 is just high enough to keep U.S. tight oil production growing, albeit at a much lower 0.5 million barrels a day, and not low enough to result in outright project cancellations,” it said. (…)

North Sea Oil Production Continues to Slide Oil production in the British section of the North Sea declined in 2014 amid rising costs, high taxes and low oil prices, underscoring the need for more investment and exploration there, an industry association said.

British North Sea production fell by 1.1% in 2014 compared with the previous year to 1.42 million barrels of oil equivalent a day, the report said. That is down around 70% since the North Sea’s peak in 1999.

Production could reach 1.43 million barrels a day this year if projects proceed as planned. (…)

Capital investment in the U.K. North Sea is expected to fall this year by as much as 36% to £9.5 billion to £11.3 billion from £14.8 billion in 2014 as investment in new projects dries up, Oil & Gas U.K. said.

Big Banks Scrutinized Over Metals Pricing U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets.

The metals investigation, which is in the early stages, broadens the Justice Department’s ongoing scrutiny of banks over manipulation of financial benchmarks. Prosecutors are conducting criminal investigations into the alleged rigging of interbank lending rates and currency markets.

U.S. Presses Mortgage Cases With Morgan Stanley, Goldman Sachs Morgan Stanley and Goldman Sachs Group Inc. are inching closer to resolving U.S. claims that the two Wall Street firms misled investors in mortgage bonds that plummeted in value during the financial crisis.

Sick smile So, all said and done, seems that big banks rig just about everything. So, the next item is nothing to make us cry…

HSBC chief says bankers face double standards Business held to higher account than bishops, says Gulliver

U.S., Iran Explore Option of 10-Year Nuclear Freeze The U.S. and Iran are exploring a nuclear deal that would keep Tehran from amassing enough material to make a bomb for at least a decade, but could then allow it to gradually build up its capabilities again.

NEW$ & VIEW$ (23 FEB. 2015): Earnings Watch

What Greece’s Deal Means, and Where the Obstacles Lie

The agreement announced by the Eurogroup on Friday will allow all parties to claim victory. Greece won four months to design a long-term solution for its problems, permission to propose reforms to its creditors replacing a one-sided conversation with a dialogue — and short-term flexibility on its budget. Euro-area creditors succeeded in maintaining their demands for Greece to post large primary balances in the long run and to commit to reforms approved by the group formerly known as the Troika.

The first potential hurdles come this week as Greece submits its list of reforms. A bevy of institutions will need to sign off, including the European Central Bank, the International Monetary Fund, the European Commission and national parliaments. Other obstacles could upset the harmony during the next four months, namely the approval required from lenders in April on the details of the reforms. (…)

SURPRISE!

The BI chart on Citigroup’s U.S. Economic Surprise Index that I used in last Friday’s post was 2 weeks old as Stewart pointed out. Here’s a more up-to-date chart from U.S. Funds showing worse surprises in the U.S. but better ones in Europe:

Oil’s Plunge Could Help Fuel Its Rebound The more oil prices fall, the more people can afford oil, an effect that can goose demand and ultimately help push prices back up.

As I wrote on Jan.7 (“Buy Low” Time For Oil), time is on the bullish side.

(…) Over the past six months, 53% of vehicle purchases in the U.S. were light trucks or sport-utility vehicles, which tend to consume more gas than cars, according to Commerce Department data. That was the highest share in a decade and up from 51% last June, when oil prices peaked for the year. The Transportation Department estimates Americans drove more than three trillion miles in the 12 months through November, the most since mid-2008 and the biggest annual increase—38 billion miles—in a decade. (…)

Meanwhile,

The U.S. Energy Information Administration reported higher than expected inventories for the week ending on February 13, jumping by 7.7 million barrels. The figures continue to astonish – even as rigs drop at a surreal pace, down 30 percent since October, production continues at elevated levels.

The disparity has opened up a bit of a debate among energy analysts about the utility of using rig counts as a metric to evaluate the status of the U.S. oil industry. Rig counts have been held up as an early marker that provides details about the future trajectory of production. But rigs have become much more efficient and capable of drilling multiple wells, meaning that they no longer provide a linear connection with production figures. Not only that, but there is evidence that many producers are postponing well completions, which could delay oil markets from finding a balance between supply and demand. Reuters says that at current rates, there is a three to four month backlog of wells awaiting completion. The approach is deliberate – given the short-term flood of production followed by a steep drop off, shale wells earn the bulk of their lifetime revenues in the first few months. As such, it makes sense for production companies to wait until prices have rebounded before they sell their valuable resources onto the market. Moreover, by delaying completion, companies can achieve short-term cost reductions. (oilprice.com)

EARNINGS WATCH

Factset:

With 443 companies in the S&P 500 reporting actual results for Q4 to date, the percentage of companies reporting actual EPS above estimates (75%) is above the 5-year average, while the percentage of companies reporting actual sales above estimates (58%) is slightly below the 5-year average. In aggregate, companies are reporting earnings that are 3.7% above expectations. This surprise percentage is below the 1-year (+4.2%) average and below the 5-year (+5.5%) average.

As a result of these upside earnings surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is now 3.5%. This growth rate is above the estimate of 1.7% at the end of the fourth quarter (December 31).

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 6.6% from 3.5%.

As a result of upside revenue surprises, the blended revenue growth rate for Q4 2014 is now 1.9%, which is above the estimate of 1.1% at the end of the fourth quarter (December 31). If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 4.6% from 1.9%.

For Q1 2015, 69 S&P 500 companies have issued negative EPS guidance and 15 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q1 2015 is 82% (69 out of 84), which is above the 5-year average of 68%.

But in line with the ratio at the same time last year.

Looking at the first half of 2015, analysts are now projecting year-over-year declines in both earnings and revenues for both Q1 2015 and Q2 2015, compared to expectations for earnings and revenue growth for both quarters back on December 31.

Most of these downward estimate revisions have occurred in the Energy sector. However, it remains that all sectors are being revised downward with the median growth around the zero mark.

S&P’s tally of the 439 companies that had reported Feb. 19 shows Q4’14 EPS at $26.56, down $0.22 (0.8%) from the previous week and 6% YoY. Trailing EPS are now $112.82, down 1.5% from their level after Q3’14. Keep in mind that S&P treats pension charges as operating costs which reduced Q4’14 EPS by $1.05. Most other aggregators, including Factset, treat these charges as non-operating.

The earnings season, which started strongly, is ending weakly. During the last 2 weeks, 30% of the 118 companies that reported missed their estimate, much worse that the 17% miss rate to Feb. 6. Misses in the last 2 weeks were particularly high in Energy (46%), Consumer Discretionary (38%), Financials (62%) and Telecoms (50%).

Forward estimates keep trickling down: Q1’15 EPS of $26.80 would be off 1.9% YoY. Q2’15 EPS of $29.13 would be off 0.7% bringing trailing EPS to $112.09 after Q2, down another 0.6%.

In effect, trailing EPS peaked at $114.51 after Q3’14. They will have declined 1.5% after Q4’14 and 2.1% after Q2’15 if current estimates are met. The S&P 500 rose 7% since Sept. 30, 2014.

At 2110, the S&P 500 Index is selling at 18.7x trailing EPS and at 20.2x the Rule of 20 P/E, the first crossing above 20 since 2008.

In most previous bull markets, the Rule of 20 P/E peaked in the 22-23 area. To repeat myself (DEFLATING EQUITIES):

Unlike the actual P/E, the Rule of 20 P/E is not at its past normal cyclical high of 22-23, leaving upside potential to the more daring investors. Actually, since trailing EPS are not expected to rise until Q4’15, investors need rising multiples to push prices higher during the next 12 months. Can the ongoing deflationary bout, potentially morphing into outright deflation, provide enough impetus to earnings multiple? After all, if inflation declines from the current 1.5% to zero as many expect, fair P/E under the Rule of 20 P/E rises from its current 18.5 to 20.0, justifying 2282 on the S&P 500 Index, 9% above its current level.

Using round numbers, 2300 seems to be the best we can hope for during the next 12 months given flat earnings. This would take the actual P/E to 20x. The last time this occurred other than in a mania was in 1992 when EPS were rising rapidly. It also occurred in 1961 as investors joined in the Kennedy euphoria. The young, charismatic President quickly loosened monetary policy and boosted the economy after several difficult Eisenhower years. The euphoria lasted until December 1961 when the P/E reached 22.4x (23.1 on the Rule of 20). The 24% slide in the following 6 months brought investors back to reality and P/Es back to 15.6x (17 on the Rule of 20).

Chinese Cars Fall Farther Behind

Two decades ago the most popular car in China was the Xiali, an unassuming sedan that nevertheless lent its buyers a feeling of wealth and success.

Today, more than three-quarters of the new sedans that Chinese customers drive off the lot are foreign-branded cars like Volkswagens and Chevys. (…)

Government data shows that local-brand passenger vehicles accounted for 38% of China’s domestic market in 2014, down from 46% in 2010. For sedans, local brands’ share fell to 22% from 31%.

Foreign auto makers are launching more-affordable cars, entering into what used to be a Chinese redoubt. (…)

Note: Translation is Google’s with obvious oddities…

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Brussels signs off on Greek reform plan European Commission says measures should be approved

U.S. Home Sales Falter to Start Year Sales of previously owned homes slowed in January, a reflection of the rising prices and tight supplies that could constrain the housing market this year.

Slide in China land under new development Drop of 25% comes amid growing calls for interest rate cut

Brazil Experts Fear a Two-Year Downturn Economists say nation is likely to suffer first back-to-back decline in GDP since 1930s.

OIL

Oil slide could trigger Opec emergency meeting Growing alarm over impact on members’ economies

Oil rebounds above $59 after Libya’s largest field shuts Brent crude oil reversed early losses to trade back above $59 a barrel on Tuesday as Libya’s largest oilfield stopped production, and as traders awaited U.S. oil inventory data to see whether it would show another large increase.

North Sea Oil Production Continues to Slide Oil production in the British section of the North Sea declined in 2014 amid rising costs, high taxes and low oil prices, underscoring the need for more investment and exploration there, an industry association said.

Big Banks Scrutinized Over Metals Pricing U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets.

U.S. Presses Mortgage Cases With Morgan Stanley, Goldman Sachs Morgan Stanley and Goldman Sachs Group Inc. are inching closer to resolving U.S. claims that the two Wall Street firms misled investors in mortgage bonds that plummeted in value during the financial crisis.

HSBC chief says bankers face double standards Business held to higher account than bishops, says Gulliver

U.S., Iran Explore Option of 10-Year Nuclear Freeze The U.S. and Iran are exploring a nuclear deal that would keep Tehran from amassing enough material to make a bomb for at least a decade, but could then allow it to gradually build up its capabilities again.

SURPRISE!

Oil’s Plunge Could Help Fuel Its Rebound The more oil prices fall, the more people can afford oil, an effect that can goose demand and ultimately help push prices back up.

EARNINGS WATCH