U.S. Vehicle Sales Surge
Auto buyers were out in force last month, lifting sales of light vehicles to the highest level since July 2006. According to the Autodata Corporation, unit sales of light vehicle sales during May increased 4.6% (8.3% y/y) to 16.77 million (SAAR). The gain recovered a 2.2% April decline and raised sales by 8.9% since December.
Auto purchases improved 6.6% (5.9% y/y) to 8.04 million and nearly matched November’s high of 8.14 million. Sales of domestic autos increased 6.5% (5.7% y/y) to 5.67 million. Sales of imports gained 6.8% (6.2% y/y) to 2.37 million.
Sales of light trucks recovered 2.8% m/m (10.7% y/y) to 8.73 million, raising them to the highest level since April 2007. Imported light truck sales showed notable strength with a 7.8% increase (-2.1% y/y) to 1.06 million. Sales of domestic light truck sales rose a lesser 2.1% (12.8% y/y) to 7.67 million.
Cars on the road in the US are still pretty old
From FT Alphaville:
Chart from the BLS, which adds:
The average age of households’ cars, vans, sport utility vehicles (SUVs), and trucks increased from 10.1 years in 2007 to just over 11.3 years in 2012. Chart 2 shows that the share of newer vehicles (those manufactured less than 5 years earlier than the year shown) dropped by nearly 33 percent from 2007 to 2012 while the share of vehicles 11–20 years old grew by 25 percent over the same timeframe.
In other words, there was a big decline in the share of relatively new cars combined with a big increase in the share of cars very likely to be scrapped soon.
Meanwhile, US light vehicle sales in May climbed at the highest rate in seven years, though such a pace was common throughout the pre-crisis years:
In an earlier post we looked at one of the differences between the auto and housing markets, specifically that credit has flowed much more freely to the former, which is among the several reasons that car sales rebounded more quickly than did single-family homes.
But the two markets also share something in common: favourable cyclical tailwinds amid questionable longer-term secular pressures.
A resumption of household formation growth, so weak in the aftermath of the recession, likely means that the pace of growth in residential investment and construction will be positive for a while, despite the recent worrying pause. But it’s also possible that some of the fall in homeownership since the recession was permanent. If so, and the result is a relatively higher share of people living in apartments, then the amplification effect on the rest of the economy will be weaker than if households were moving into single-family homes.
Similarly, the average age of cars remains high, which means that the pace of car sales shouldn’t fall for a little while, especially given that credit remains so loose in the sector. (Though the growth rate of sales might start to flatten, as Bill McBride notes.) In the longer run, however, American car ownership and driving appears to be declining because of a combination of demographic pressures and shifting preferences, though it is still too early to conclude that this trend won’t reverse.
And the two sectors are linked: as the BLS notes, the rate of vehicle ownership for households in multifamily residences has declined by 6 per cent since 2001, while they have stayed constant for all other households.
U.S. Factory Sector Orders and Inventories Strengthen
New orders to all manufacturers increased 0.7% (4.9% y/y) during April following a 1.5% March advance, revised from 1.1%. A 0.6% rise was expected in the Action Economics Forecast Survey. The gain reflected a 0.6% rise (7.1% y/y) in durable goods orders, led higher by a 13.2% surge (5.8% y/y) in defense aircraft & parts bookings. Factory sector orders excluding transportation rose 0.5% (3.8% y/y), the weakest gain of the last three months. Orders for nondurable goods (which equal shipments) improved 0.7% (3.0% y/y), making up a 0.5% March decline.
Inventories in the factory sector matched expectations and increased 0.4% (2.8% y/y) after a 0.2% March rise.
In all, new orders have increased 16.5% SAAR in the past 3 months and unfilled orders 8.2%.
Walmart’s ‘Made in USA’ push exposes strains of manufacturing rebirth
When Walmart pledged last year to buy an extra $250 billion in U.S.-made goods over the next decade, it appeared to be just what was needed to help move America’s putative manufacturing renaissance from rhetoric to reality.
But suppliers trying to reshore production as part of the initiative by the world’s largest retailer are running into practical problems as they try to restart long-idled corners of U.S. manufacturing.
Companies that make the leap have to grapple with a host of challenges, including a shallow pool of component suppliers, an inexperienced workforce, and other shortcomings that developed during the country’s long industrial decline. (…)
Cindi Marsiglio, the Walmart vice president overseeing the U.S. sourcing push, says the retailer and its existing suppliers have 150 active reshoring projects in various stages of development. For all too many, she says, finding U.S.-made component parts has emerged as a vexing problem. (…)
The issue is so widespread that Walmart is making it the focus of a two-day summit it is hosting in August in Denver. At a similar summit held in Orlando last year, Walmart focused on connecting suppliers with economic development officers from states hoping to lure the new factories.
The retailer says it is especially interested in having factory owners with excess capacity attend the August event – even those that aren’t interested in supplying Walmart directly. The hope is that they can become contract manufacturers to Walmart suppliers looking to produce in the United States. (…)
The forces pulling production back to the United States are powerful and real and include lower domestic energy prices, increasingly competitive wage rates, the benefits of greater automation, and a renewed appreciation for the value of being able to respond quickly to shifting U.S. customer demands. (…)
Walmart declines to say how many products it has introduced as a result of the 18-month-old Made in USA initiative. But the company says consumers can now buy everything from U.S.-made flat-screen TVs, light bulbs and towels and curtains in its stores and on its website. (…)
INFLATION WATCH
The Paris-based Organization for Economic Cooperation and Development on Wednesday said the annual rate of inflation in its 34-member states rose to 2.0% from 1.6% in March, while in the Group of 20 leading industrial and developing nations it rose for a second straight month, to 2.8% from 2.5%. The G-20 accounts for 90% of global economic activity. (…)
According to the OECD, four of its members experienced a decline in prices over the 12 months to April, all of those being in Europe.
(…) But there are signs that the problem is easing outside the currency area. In both the U.S. and Canada, the annual rate of inflation rose to 2.0% in April from 1.5%, while in the U.K. it rose to 1.8% from 1.6%, and in Japan it surged to 3.4% from 1.6%, although that jump was largely due to a rise in the sales tax.
There were also significant pickups in some large developing economies that have in recent years driven global economic growth, and been the leading source of inflationary pressures. The annual rate of inflation rose in Brazil, Russia, South Africa and India, although it eased in China.
-
Eurozone deflation?
(BloombergBriefs)
-
Number of Commodities Up in Price at a Three Year High
In each month’s ISM Manufacturing and Non-Manufacturing reports, respondents to the survey are asked whether or not they are seeing an increase or decrease in the prices of commodities they deal with. In this month’s survey on the manufacturing sector, there was a notable uptick in the number of commodities that were rising in price. As mentioned above, respondents noted price increases in 22 different commodities, which was the highest since May 2011 and up from 12 in April.
While 22 commodities were up in price this month, just four declined. That works out to a net of 18 commodities rising in price which was also the highest level since May 2011. The chart below shows the net number of commodities rising in price going back to 1999 on a three month moving average basis. While the current level is the highest since July 2011, we would note that prior to the financial crisis, these kinds of levels were far from uncommon. That being said, that was also a period where average year/year CPI was running at a rate that was considerably higher than it is now.
-
Wage inflation?
Don’t see wage inflation? Well, we shall see whether Seattle turns to be a leading indicator because the city council there just unanimously voted in a $15 per hour minimum wage. That is a 60% hike. It will be interesting to see if the price of that Big Mac and grande latte stay where they are (if you’re a Fed dove, not to worry, these don’t affect the ‘core’) — have a look at Seattle Approves $15 Minimum Wage, Setting a New Standard for Big Cities on page A15 of today’s NYT. U.S. consumer spending power is coming back too — Gallup’s survey for May showed that shoppers’ average daily spending jumped $10 to $98 — the highest this has been in six years. (David Rosenberg)
Fed Officials Growing Wary of Market Risk Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about.
(…) “It is a problem of their own making. They can’t have it both ways,” said Martin Barnes, chief economist at BCA Research, an investment-advisory firm. “If they want to sustain zero interest rates and push up asset prices, how can they expect to have that with no excesses and no risk taking?”
Some measures suggest the market has taken the Fed’s assurances further than the central bank intended.
Fed funds futures contracts traded on the Chicago Mercantile Exchange indicate investors expect the Fed’s benchmark federal funds interest rate to average 0.6% in December 2015, up from near zero now. That is notably below the 1% rate that is the median of projections released by Fed officials after their March meeting. Futures markets indicate investors expect a 1.6% fed funds rate in December 2016, below the Fed’s own median projection of 2.25%.
Ms. Yellen gently pushed back on the market’s sense of certitude in a mid-April speech at the Economic Club of New York in which she emphasized the unknown. “It is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain,” she said.
But risk premiums on bonds haven’t budged since. (…)
China Economic Activity Remained Sluggish, Real Estate Remains Largest Potential Risk
CEBM’s June survey results revealed that economic activity remained sluggish in May. Industries exposed to real estate showed the weakest sales performance this month.
In upstream industries, steel sales remained weak, especially sales going to project construction. Cement demand was sluggish and prices dropped significantly in several regions. In consumer related areas of the economy the overall picture remains underwhelming. The boom in home appliance sales observed in previous months stalled in May. Department stores and restaurants reported weak sales performance, and most respondents claimed sales were weaker-than-expected. As for external demand, container freight shipments exceeded expectations in May, a possible signal of an improving export environment.
Similar to last month, the major headwind to activity was the real estate sector. According to our survey, sales campaigns ramped up in tier 1 and tier 2 cities, but a subsequent short-term rise in sales performance was not observed. Lackluster new home sales displayed a knock-on effect on used home sales transactions. Due to weak sales, expectations from both real estate developers and agencies for trading volume and transaction price have turned pessimistic. Credit pressure in June will also affect the economic recovery. Without sufficient policy easing and stimulus, property sales will continue along a downward trend. In addition, according to our city commercial bank survey, mortgage rates remain high, deterring potential buyers from starting the application process.
VALUATION CHARTS
This Price/Sales chart from Evergreen Capital Management (via Valuewalk) is scary on its own. The problem is that it is on its own. Charts measuring P/S and P/Bk must be accompanied by charts on profit margins and ROEs to be meaningful. Two stocks may sell at 2x sales but if one company’s net margin is 3% and the other one’s is 5%, the latter’s stock can be seen as better value. Similarly, if a stock was selling at 1.5x sales in 2000 when the company’s margins were 3%, what should we think of the stock valuation in 2014 if it then sells at 2x sales but the company’s margins have increased to 4%?
Here’s a set of charts from CPMS (Morningstar), a software I have been using for a long time so I know its database is reliable. Their U.S. data only go back to 1993.
- This chart plots the P/E (red) and the P/CF of the median CPMS stock universe of over 2000 companies. This larger sample than the S&P 500 Index shows P/E and P/CF ratios near the high end of their historical range (the red dot indicates the P/E based on consensus estimates for 2014).
The second chart shows that profit (red) and cashflow margins for the same median stock have improved very significantly over the years, supporting higher multiples.
- Breaking the CPMS universe in two tiers based on market cap. Tier 1 stocks (largest 1000 caps) appear less expensive…
…especially when considering the huge increase in profitability since 2004.
- Tier 2 stocks look relatively more expensive relative to their history but if profit forecasts are accurate, they look less expensive…
…also after considering their margin expansion:
- Price to Book Value is even more interesting to me because BV is less volatile than sales. Here, one can argue that Tier 1 stocks are on the expensive side: their P/B is at the 2007 peak level and their ROE is lower. The green dot is the ROE if consensus earnings are met in 2014.
- Tier 2 stocks are even less appealing on this metric.
This is really SHOWTIME! for equities and the economy.
This Credit Suisse chart indicates that many investors are boycotting the show!…
…or is it because they have decided to quit gambling altogether?
The Average Russell 2000 Stock Is Down 22% From Its Highs
It’s hard to “fully commit” to this rally given “corroded internals,” warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O’Hara “very disturbed” is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O’Hara notes, investors are ignoring “technical signals that have historically forewarned” of a drop; they’re “jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders.”
And as we noted previously, the negative divergences are mounting…
Breadth is not at all supportive…
h/t Brad Wishak of NewEdge
“Smart money” Flow is decidedly the wrong way…
Bears Tap Out: Assets At Bearish Funds Hit Record Low
The last 3 months have seen that sentiment morph into actual positioning as institutional investors have been net sellers of US equities since April leaving assets in bear funds at record lows.
As FBN’s JC O’Hara notes, it’s a sign of capitulation when there’s no one left to bet on a decline… and remember margin has already rolled over… meaning the levered longs are unwinding too…
Charts: dshort.com and FBN
