Chicago Fed National Activity Index Reaches Expansion High

The Chicago Federal Reserve reported that its National Activity Index (CFNAI) for November improved to 0.73 from 0.31 during October, revised from 0.14. It was the highest level since December, 2006. The three-month moving average rose to 0.48, its highest point since May, 2010. During the last ten years, there has been a 75% correlation between the Chicago Fed Index and the q/q change in real GDP.

The driver for the increase was the Production & Income component rising to 0.64, its highest level since May, 2010. The Personal Consumption & Housing series held fairly steady at -0.10. The remaining components eased. The Sales, Orders & Inventories series backpedaled to 0.02. The Employment, Unemployment & Hours figure worked lower to 0.17.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. (Chart from Doug Short)

U.S. Existing-Home Sales Tumble

Existing-home sales declined 6.1% in November from a month earlier to a seasonally adjusted annual rate of 4.93 million, the National Association of Realtors said Monday. That was the lowest level since May.

November’s sales were 2.1% higher than a year ago and followed a particularly strong October, when sales reached their highest level of the year. (…)

The average rate on a 30-year fixed-rate mortgage fell to 3.80% last week, according to Freddie Mac, down from 4.53% at the start of the year.

(…) existing-home sales fell in all four major regions—the Northeast, South, West, and Midwest.

Inventories tightened. The number of homes for sale fell 6.7% in November from a month earlier to 2.09 million. At the current sales pace, it would take 5.1 months to exhaust the supply of homes on the market.

The median sale price for existing homes continued to rise, hitting $205,300, or 5.0% above the year-ago level.

Details suggest a slight shift in the mix of buyers. So-called distressed sales, reflecting short sales and homes in foreclosure, were flat, suggesting fewer investors are snapping up properties. Meantime, the share of sales going to first-time buyers ticked up to 31% last month, the highest since October 2012 but still historically low. (…)

The important point here is that non-distressed sales, normal sales, keep going up while investors are getting out of the market. CalculatedRisk did the math for us:

Sales in November 2013 were reported at 4.83 million SAAR with 14% distressed.  That gives 676 thousand distressed (annual rate), and 4.15 million equity / non-distressed.  In November 2014, sales were 4.93 million SAAR, with 9% distressed.  That gives 444 thousand distressed – a decline of about 34% from November 2013 – and 4.49 million equity.  Although this survey isn’t perfect, this suggests distressed sales were down sharply – and normal sales up around 8%..

Opec leader vows not to cut oil output Ali al-Naimi says even if prices hit $20 a barrel production will not drop

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs.

“It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

He said the world may never see $100 a barrel oil again. (…)

Analysts say that Saudi Arabia is throwing down the gauntlet to all the high-cost sources of crude — from the oil sands of Canada and US shale to deepwater Brazil and the Arctic — in an attempt to face down the threat they pose to its market share. (…)

The International Monetary Fund said on Monday that a prolonged price slump could boost global growth by up 0.7 per cent in 2015 and 0.8 per cent in 2016. China would be the biggest beneficiary, with its GDP boosted by up to 0.7 per cent in 2015 and 0.9 per cent in 2016.

Hmmm…It is true that OPEC’s production costs are very low (Saudi’s are in the $4-5/bbl range) but these countries run large budget deficits which can be seen as “non-operating” costs with little flexibility as Continental Resources’ CEO explains:

However Mr Hamm, one of the leading figures in the US shale oil industry, argued that pressure was building on Saudi Arabia and other large oil-producing countries because of their need to fund expensive social welfare programmes.

“They can’t live with these prices,” he told the Financial Times. “They can talk pretty bravely, until people are knocking on their door.” Either they would voluntarily decide to cut their production, he suggested, or political instability would do it for them. (…)

However, Mr Hamm argues that in this struggle between companies such as Continental and large oil-producing countries, the companies have an advantage because they are more flexible. “It’s easier to adjust a company than a country,” he says.

But Ali al-Naimi does not agree:

But what resources do you have in the country? We have no debt. We can go to the banks. They are full. We can go and borrow money, and keep our reserves. Or we can use some of our reserves.

Ft Alphaville explains:

Which brings us to the only “conspiracy” theory that makes any sense but which has curiously been ignored by mainstream commentators everywhere. It’s the one proposed by energy consultant Chris Cook that suggests that whenever the going gets tough for the likes of Saudi Arabia they have a huge incentive to borrow from banks, using their future production as collateral. In the industry, these sorts of deals are known as prepay structures, and the great advantage for producers is that they are settled in oil volumes not cash, allowing crucial financial reserves to be preserved at all costs.

Oil Prices Rally on China Data Crude oil prices edged slightly higher amid some signs of stronger demand from China, one of the world’s largest consumers of oil.

Adding up apparent demand figures for the main refined products, China showed a year-on-year increase in consumption of 717,000 barrels of crude oil a day, according to analysts at JBC Energy.

“Apparent oil demand in China has continued its run higher over the course of November,” they said. (…)

With oil prices down in the doldrums, analysts at Standard Chartered Bank said in a research note that U.S. shale-oil activity has already taken “a downward lurch.” The trend will continue throughout the first quarter of 2015, “unless there is an unexpectedly early move up in oil prices,” the analysts said.

By the end of the first quarter, the U.S. will be losing more production from old oil wells than it is gaining in production from new wells, “and net growth would likely become negative,” they said.

From the FT:

(…) Across the US shale industry, signs of a slowdown are mounting up. The total number of rigs running in the Williston basin, which includes the Bakken shale of North Dakota where Continental produces most of its oil, is already down 9 per cent from its recent peak in October to 180, according to Baker Hughes, the oil services company. The numbers of rigs running in the Eagle Ford shale and the Permian basin, in the south and west of Texas respectively, have also fallen.

Companies are still generally projecting production growth — Continental, for example, says it expects its average 2015 output to be 16-20 per cent higher than 2014’s level — but by the second half of next year growth is likely to be slow at best.

Iran’s Economy Facing New Perils Plummeting oil prices and the failure so far to conclude a nuclear agreement are dealing a double blow to Iran’s economy as it tries to recover.

Medvedev says Russia could slide into deep recession: RIA

GOLDMAN SEES FALLING P/Es

Goldman Sachs Group Inc (NYSE:GS) says that we are now looking at a ‘regime change’ from steadily rising EPS and PE multiples supercharging market returns over the few years to falling PE for the next couple of years as earnings get a chance to catch up with stock prices. Never ones to be too negative, they point out that slipping PE multiples means that the market will also have better upside potential.

“The drivers of equity returns during the next few years will be reversed: a 10% P/E contraction as the yield curve normalizes but the trajectory of future earnings is much less clear given the range of possible macro scenarios,” write Goldman Sachs analysts David Kostin, Amanda Sneider, and Ben Snider. “We expect during the next four years the P/E multiple will slip by 1-2 points to 15x while investors debate the level of forward earnings given uncertainty around global growth, Fed policy, commodities, and FX.”

Goldman Sachs’ baseline is that the S&P 500 reaches 2100 and 2200 in 2015 and 2016 respectively, assuming the US has 3% GDP growth and that the Fed funds rate rises to 1.6% and 10 year yields rise to 3.5% by the end of 2016. The analysts also assume that Brent crude will average $84 in 2015 and $90 in 2016, partly based on previous rebounds from 60%+ drops in the past few decades. The upside in their forecast comes from the possibility that the Fed keeps rates low or that oil prices don’t rebound, either of which they believe would be net beneficial for the economy (or for asset prices at least).

I hope you found the GS analysis solid and useful…