EARNINGS WATCH

Today’s WSJ:

Global Stocks Muted Amid Mixed Earnings Reports European stocks and U.S. equity futures ticked higher after a bumper day for first-quarter earnings reports.

Mixed earnings reports?

We have 154 companies in and the beat rate is a huge 81% with a surprise factor of +7.0% (+1.7% on revenues). Half of Industrials have reported: 83% beat with +15.9% surprise factor (+3.2% on revenues)! Amazing!

Q1’18 earnings are now seen up 22.0%. It was 18.5% on April 1st, and 19.9% on April 23rd.

Nothing mixed there.

HOUSING

• Half of Case Shiller Home Price Cities Now at All-Time Highs

• NMHC: Apartment Market Tightness Index remained negative for Tenth Consecutive Quarter

This CalculatedRisk chart suggests that rent growth will keep slowing for a while.

Fed at Odds With Itself as It Eases Bank Rules and Raises Rates

In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth.

At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check. (…)

Those steps will complicate the Fed’s effort to engineer the soft landing of an economy that is already being juiced by tax cuts and government spending increases. (…)

In unveiling a proposal on April 11 to ease leverage limits on Wall Street banks, the Fed and the Office of the Comptroller of the Currency said the step might lower the amount of capital lenders are required to hold in their main subsidiaries by $121 billion. The move would give banks added flexibility to extend credit.

It came on the heels on an announcement by the Fed of plans to revise its bank stress tests and risk-based capital rules. The agency estimated that the action would cut the total cushion that the banking industry has to maintain by $30 billion, though some Wall Street analysts reckon it could free up more than $50 billion in capital. (…)

NAFTA talks reaching ‘crucial moment,’ Freeland says

Toronto foreign-buyer home sales drop to 2.5 per cent of real-estate purchases  The drop in sales to foreign buyers in Toronto is mirrored by a similar slump in the Greater Golden Horseshoe

TECHNICALS WATCH

Quite a day yesterday as the S&P 500 dropped early to its 200d m.a. and bounced 1.1% by the close. Getting near the end of the wedge…

Even though volume has recovered somewhat, Lowry’s says that yesterday’s demand was marginal with Up Volume at 50.6% of total Up/Down Volume and breadth was even weaker as Advancing Issues only made up 44% of Adv-Dec Issues.

WeWork’s first bond raises more than expected Shared office space provider sells $702m of seven-year notes at 7.875 per cent yield

(…) The company’s net loss more than doubled to $933m in 2017, according to bond offering documents, outpacing the group’s 98 per cent annual increase in revenue to $886m. (…)

WeWork began business in 2010 by leasing office space and renting desks to New York’s creative set, touting unusual perks like microbrews on tap and allowing workers to bring pets to the office. It now has 234 locations locations across 22 countries, company documents show, with a portfolio of short-term co-working spaces, mainly leased from landlords on long-term rental agreements.

The size of the issue was boosted by 40% to meet demand which totaled $2.5B according to Bloomberg as nobody seems to care much That WeWork is totally mismatched signing long-term leases which it then sub-leases monthly. Those leases add up to an $18 billion rent bill due through 2023 and beyond, according to bond documents seen by Bloomberg.

“We cannot get comfortable with the company’s financial and operating position, which includes a massive asset/liability mismatch that is usually a recipe for disaster, significant cash burn, cyclically untested real estate business model, and uncertain path to profitability,” Rosenthal said in a report Wednesday entitled “WePass.”

The always sharp Grant’s Interest Rate Observer notes that WeWork, “rated firmly in junk territory (single-B-plus at S&P Global and double-B-minus at Fitch Ratings)” is no les creative in its accounting.

(…) high-yield investor Xavier MacDuff noted on Twitter that 2017 stock based compensation expense of $261 million represented nearly 30% of last year’s $886 million in revenues. Perhaps unsurprisingly, profitability is currently elusive for WeWork. Instead, the company has provided some alternative metrics to consult. For instance, adjusted EBITDA for 2017 footed to negative $193 million. However, “adjusted EBITDA before growth investments” (a.k.a. adjusted adjusted EBITDA) came in at positive $49 million.  Then there’s “Community adjusted EBITDA,” (or, adjusted adjusted adjusted EBITDA) at positive $233 million in 2017. (…)

The FT adds that ““adjusted ebitda” was used to set some leverage requirements under the bond’s covenants” without explaining the usefulness of “adjusted adjusted EBITDA” let alone “Community adjusted EBITDA” which ignores basic expenses like general and administrative, marketing and development costs.

WeRemember…

U.S. New Home Sales Rose in March

Purchases of newly built single-family homes—a relatively narrow slice of all U.S. home sales—increased 4.0% from the prior month to a seasonally adjusted annual rate of 694,000 in March, the Commerce Department said Tuesday.

March’s rise comes on the back of a 3.6% increase in February [to 667,000, revised from 618,000] and upward revisions for both January and February sales rates. (…) Sales rose 8.8% through the 12 months ended in March.     

The number of homes for sale at the end of March grew about 13% from a year earlier, signaling that home construction is beginning to catch up with buyer demand.

The median sale price for a new home sold in March was $337,200, up 4.8% from a year earlier.

 

WEAK RICHMOND FED SURVEY

• April collapse in manufacturing and services:

  

• Manufacturing new orders cratered:

• Manufacturing wages exploding, not in services:

  

• Manufacturing margins squeezed:

MORE MARGINS SQUEEZE

Pain from the tight trucking market is stretching deeper into shipper supply chains this spring. Consumer packaged-goods companies say higher transportation costs are weighing on their earnings as they scramble to get goods to stores and distribution centers, and some see their concerns persisting through the rest of the year. WSJ Logistics Report’s Jennifer Smith writes that freight costs were up 20% year-over-year at Coca-Cola Co.’s North American division in the first quarter, as unusually strong demand from manufacturers and retailers outstripped the supply of available trucks. That’s making it harder and more expensive for companies like Hasbro Inc. HAS 0.16% and Nestlé SANSRGY -0.08% to keep toys, household chemicals and other products moving. The rising costs to start the year come as analysts forecast contract rates for truck transportation could grow nearly 10% this year, costs companies will eventually pass on to consumers. (WSJ)

SENTIMENT WATCH

• How 3% Yields Could Reshape the Investing Landscape

• U.S. 10-Year Yield Breaching 3% Bolsters Calls for Higher Rates

• Treasuries’ March Above 3% Faces Challenge From Stock Slump

• U.S. Investors Just Gave Up on the Bull Market

With equities almost three months removed from the last record, Americans have grown less optimistic that the market will bounce back. For the first time since Donald Trump’s shock election in November 2016, a majority of consumers expect stocks to be lower 12 months from now, according to the latest sentiment reading from the Conference Board. (…)

April’s Conference Board survey capped three months of deteriorating sentiment toward the stock market, with the latest reading pushing the slide to the biggest since the period ended August 2011. That was the height of the debt-ceiling drama that sparked a downgrade of the U.S. credit rating. (…)

TEMPTING?

Tempting to be a contrarian after excessive expectations have corrected per the Conf. Board survey above. But, in reality, expectations have only retreated to zero and are not deep in “buy low” territory.

The same can be said of valuations. “Normalizing” trailing EPS for a full year of lower tax rates (about $145), the Rule of 20 P/E has dropped back to its long term “fair” or median value.

• Gundlach On Gold: “Something Big Is Happening… It’s Getting Exciting”

Picking up where DoubleLine CEO Jeff Gundlach left off yesterday with his Ira Sohn recommendation, which as a reminder was to short Facebook on concerns of regulatory crackdown and go long commodities ahead of a late-cycle inflationary boom, on Tuesday Gundlach spoke at an event for DoubleLine clients and reiterated his late-cycle skepticism, warning that treasuries are still “not attractive” even though the benchmark 10Y yield briefly crossed the key 3% threshold earlier in the day.

The bond king said he is in no rush to buy, well, bonds, because he expects that, based on recent Core CPI prints and the NY Fed underlying inflation gauge, that US inflation will go even higher, sending Treasury prices lower. The fund manager said some indicators are suggesting 3% inflation, and noted that while it might not get there, “something higher than the current rate is sensible.” (…)

Gundlach said that he does not think the yield curve will invert before the next recession. This likely goes to Gundlach’s thesis, which he proposed in January, that in the next recession we won’t see a bid for safety out of stocks and into bonds. In other words “we won’t see a bond market rally.” (…)

First, Gundlach said he thinks that Fed chair Jerome Powell is “not going to bail out the market.” (…)

Second, Gundlach said that the next big move will likely be in gold prices which have broken their downtrend line, and are on the verge of breaking out to the upside. “It’s getting almost exciting…  something big is happening,” he said cryptically.

He then revealed his target, saying that based on classic chart reading, an “explosive, potential energy” of a huge “head-and-shoulders bottom” base was signaling a move of $1,000 in gold prices, and added that “Gold is maintaining an upward pattern above its rising 200-day moving average, which is extremely good.”

But so is the S&P 500 Index:

Lowry’s Research yesterday said that “while NY Comp. Volume jumped to about 3.8 billion shares, Down Volume was a subdued 60% of total Up/Down Volume, suggesting much of [yesterday’s] weakness was due to a lack of buying interest, not to widespread intense selling. Thus, [yesterday’s] decline appears to be part of the truncated rallies and reactions that have characterized market activity over the past two months.”