Business survey suggests U.S. labor market may have peaked There is an even balance in the share of U.S. businesses reporting decreases and increases in employment for the first time in a decade, a survey showed on Monday, the latest suggestion that the labor market has likely peaked and job growth could slow this year.
“For the first time in a decade, there are as many respondents reporting decreases as increases in employment at their firms than in the previous three months,” said NABE Business Conditions Survey Chair Megan Greene.
“However, this may have been due to difficulty finding workers rather than a pullback in demand.”
The survey is based on the responses of 97 NABE members on business conditions in their companies or industries. It was conducted between Dec. 23 and Jan 8. and reflects conditions in the fourth quarter and the near-term outlook. (…)
FICO Changes Could Lower Your Credit Score
Fair Isaac Corp., FICO -1.39% creator of FICO scores, will soon start scoring consumers with rising debt levels and those who fall behind on loan payments more harshly. It will also flag certain consumers who sign up for personal loans, a category of unsecured debt that has surged in recent years.
The changes will create a bigger gap between consumers deemed to be good and bad credit risks, the company says. Consumers with already-high FICO scores of about 680 or higher who continue to manage loans well will likely get a higher score than under previous FICO versions. Those with already-low scores below 600 who continue to miss payments or accumulate other black marks will experience bigger score declines than under previous models.
Millions of consumers could see their scores rise or fall as a result of the changes, the company said. (…)
Trump Expands Aluminum, Steel Tariffs to Some Imported Products
The Trump administration expanded its trademark steel and aluminum tariffs to cover certain imported nails, staples, electrical wires and some downstream parts that go into automobiles and tractors, among other products. (…)
Some imports of derivative aluminum products would be subject to an additional 10% duty, while some derivative steel products would be slapped with a 25% tariff, he said.
Argentina, Australia, Canada and Mexico were exempted from the additional aluminum tariffs. As for the steel tariffs, exemptions were allowed for Brazil, Argentina, Canada, Australia, Mexico and South Korea. (…)
Pentagon Blocks Clampdown on Huawei Sales Proposed rules making it harder for American firms to sell to Chinese company are withdrawn
The Commerce Department’s efforts to tighten the noose on Huawei Technologies Co. is facing a formidable obstacle: the Pentagon.
Commerce officials have withdrawn proposed regulations that would make it harder for U.S. companies to sell to Huawei from their overseas facilities following objections from the Defense Department as well as the Treasury Department, people familiar with the matter said.
The Pentagon is concerned that if U.S. firms can’t continue to ship to Huawei, they will lose a key source of revenue—depriving them of money for research and development needed to maintain a technological edge, the people said. The chip industry has pressed that argument in talks with government officials. (…)
Huawei is an enormous customer for U.S. high-tech firms. The semiconductor manufacturer Micron Technology Inc., for instance, said in its 2019 annual report that Huawei accounts for 12% of its revenue.
If those companies can’t continue to ship to Huawei, Pentagon officials feared, the firms would fall behind economically and not have the funds to invest heavily in research and development, according to the people. (…)
Separately, the administration is exploring how it could help companies produce hardware that could compete with Huawei on 5G within 18 months, a senior administration official said. Discussions include government and corporate representatives from Japan and other democratic countries, the official said.
That effort would help the U.S. persuade other nations, including the U.K. and Germany, to bar Huawei equipment from their networks, the official said. The U.K. is expected in the week ahead to decide whether to ban use of Huawei equipment, which the U.S. considers a security risk. (…)
State AGs, U.S. Justice Lawyers to Discuss Google Probe: WSJ Attorneys general will meet with Justice Department lawyers this week to discuss separate investigations of Alphabet Inc.’s Google, the Wall Street Journal reported, citing people familiar with the matter.
Taxpayers Decide Some States Aren’t Worth It After the new tax law made it costlier to own a house in many high-price areas, some residents of states such as California, New York and Texas are pulling up stakes.
(…) A turning point was the federal tax overhaul that Congress passed in late 2017. The law made it costlier to own a house in many high-price, high-tax areas, reshaping the economics of homeownership in those slices of the U.S.
Two years after President Trump signed the tax law, its effects are rippling through local economies and housing markets, pushing some people to move from high-tax states where they have long lived. Parts of Florida, for example, are getting an influx of buyers from states such as New York, New Jersey and Illinois. (…)
These changes have the biggest impact on a sliver of the population who have high incomes and live in expensive areas. They tend to have white-collar jobs and the ability to pick up and move. Many own their own businesses, work remotely or are nearing retirement. (…)
EARNINGS WATCH
From Refinitiv/IBES:
Through Jan. 24, 85 companies in the S&P 500 Index have reported earnings for Q4 2019. Of these companies, 68.2% reported earnings above analyst expectations and 23.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 19% missed estimates.
In aggregate, companies are reporting earnings that are 4.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 4.9%.
Of these companies, 64.7% reported revenue above analyst expectations and 35.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 58% of companies beat the estimates and 42% missed estimates.
In aggregate, companies are reporting revenue that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.
The estimated earnings growth rate for the S&P 500 for 19Q4 is -0.5% [-0.3% on Jan. 1]. If the energy sector is excluded, the growth rate improves to 2.4% [+2.0% on Jan. 1].
The estimated revenue growth rate for the S&P 500 for 19Q4 is 4.5%. If the energy sector is excluded, the growth rate improves to 5.7%.
Analysts have been revising downward somewhat more last week.
The estimated earnings growth rate for the S&P 500 for 20Q1 is 5.5% [+6.3% on Jan. 1]. If the energy sector is excluded, the growth rate
declines to 4.9% [+5.5% on Jan. 1].
The 85 companies having reported so far aggregate a +3.1% earnings growth rate, much better than the –0.6% at the same time during Q3’19. Financials are the main contributor to the better start to this season. With close to half of Financials in, their blended growth rate for the quarter is +13.1%, substantially better than the expected –0.5% for all 500 companies. Yet, their beat rate is only 58% and their miss rate 32%. Financials earnings are seen up 11.1% for the quarter, down from 12.3% on Jan.1 and 11.6% one week ago. Financials account for 36% of the 85 reports in at this point.
As it stands now, trailing EPS are $163.13, down from $163.78 at the end of December and from their recent high of $164.43 in August.
We currently face 2 dangerous conditions:
- at 3325, the S&P 500 Index is selling 15.2% above its Rule of 20 Fair Value (2886). Since 1957, excluding the 98-02 dot.com bubble years, the Price/R20FV has exceeded 115% only 9.5% of the time.
- the R20 Fair Value is declining. It peaked at 2952 in June 2019 when trailing EPS peaked at $163.99 (now $163.13) and inflation troughed at 2.0% (now 2.3%).
This unstable condition can only return to its Fair Value 20 mean through either a violent market setback (6 times since 1957) or a gradual restoration in valuations with a sustained rise in Fair Value through higher earnings and/or lower inflation (2 times).
We all have to wish this is more akin to 1992-93 when the S&P 500 Index went from a 15% to 38% overvaluation between June and December 1991 and essentially marked time for 18 months while inflation eased from 4.4% to 3.5%, before gradually climbing to its Jan. ‘94 peak thanks to a 35% jump in trailing earnings which brought the Index back to fair value. During the second half of 1994, the R20 P/E dropped below 20 to allow buying lower-risk equities just before the 1995 strong uptrend. Curbing equity exposure during the period of overvaluation reduced risk at no net cost since stocks did not outperform cash.
The fortunate 1992-93 earnings jump happened thanks to a 7.1% total gain in real GDP, a decline in inflation throughout the period and a 33% increase in corporate profit margins.
At this time, sell-side analysts are “hoping” earnings rise 9.5% in 2020 but we know this is more than likely wishful thinking based on their historical record. Much of the hype in current earnings forecasts and equity prices assume a “more normal” economy post the trade war, higher capex and increased earnings from cyclical companies.
The coronavirus episode is compounding the risk for China’s economy and cyclicals in general. China provides 35% of the world’s total growth.
KKR’s view on 2020 earnings trends is more cautious…
…and warns that equity markets may be too optimistic:
In effect, the recent rebound in Markit’s U.S. manufacturing PMI, unconfirmed by the ISM surveys, needs continued uptrends in new orders (charts from The Daily Shot):
The Conference Board’s LEI warns of an economic slowdown…
Source: @TCosterg (via The Daily Shot)
…totally unaccounted for by equity markets:
Source: @MacroOps (via The Daily Shot)
TECHNICALS WATCH
Lowry’s Research, which has been spot on throughout 2018 and 2019, continues to see signs of strength just about across the board. “While trying to handicap the extent of the market’s next correction is largely an exercise in futility, what does appear certain is that this bull market continues to display signs of health that historically have been consistent with months more and possibly many months more of gains.”
Lowry’s measures of Supply (falling) and Demand (rising) display “the antithesis of a market in the process of forming a significant top.” On Advance-Decline trends, “there is not a whisper of the
Adv-Dec Line divergences that historically appear months prior to a major market top.”
Here’s what Lowry’s was saying at the end of January 2018, when the Rule of 20 P/E reached 23.5 just before the S&P 500 Index corrected 11.8% in a matter of 2 weeks. Right at the peak:
No rally goes on forever (at least so far) and corrections are a normal part of any sustained primary uptrend. Thus, it’s important for investors to recognize the difference between a short-term market top that leads to a correction and the progressive deterioration in market conditions that has, historically, preceded every major market top over Lowry’s 92 year history of bull and bear markets.
And, those key elements are a sustained, months-long uptrend in Selling Pressure and an equally significant downtrend in Buying Power. In addition, divergences between the Adv-Dec Lines and new highs in the S&P 500 have, historically, developed on average 4 to 6 months prior to the final market high. Absent these key elements, any market tops that form in the weeks and months ahead are likely to be short-term in nature and serve as an opportunity for new buying.
Lowry’s then correctly called a market bottom in mid-February. On June 29, 2018, amid investors angst about trade wars and peak earnings, Lowry’s wrote “whatever the accompanying narrative of red flags, the
forces of Supply and Demand appear consistent with prices undergoing a typical short-term pullback
within an ongoing and healthy bull market.”
On September 28, 2018, Lowry’s warned about small caps and weak stocks while maintaining a positive long-term view on equities. On December 14, 2018, it wrote “given current market conditions, cash raised from the sale of underperforming stocks should probably be held awaiting signs of the renewed Demand needed to power a sustained market rally.”
On December 28, 2018, at 16.9 on the Rule of 20 P/E scale, “Overall, the rally on Dec. 26th compares favorably with rallies off significant lows in 2010, 2011 and 2015. (…) Evidence of heavy selling was then quickly followed in each of the earlier rallies by signs of renewed strong Demand (…). Each of these lows was then followed by a sustained rally, with each rally reaching a new bull market high within an average of 4 ½ months.”
Now that we are at 22.7 on the R20 P/E, Lowry’s says “whatever the risk for a near-term pullback, the ongoing signs of strength demonstrated by the bull market suggest that any weakness that might develop would represent only a temporary pause in a primary uptrend with many more months to run.”
Sounds like Lowry’s is seeing a repeat of 1992-93. As this President likes saying, we’ll see what happens.
