China Growth Holds Steady With Help From Stimulus China’s economy steadied in the third quarter, clocking in 6.7% growth fueled by easy credit, a hot property market and other stimulus measures that economists say come at the expense of needed restructuring.
(…) Industrial production increased by 6.1% year-over-year in September, compared with 6.3% in August, according to the National Bureau of Statistics. Investment in factories, buildings and other fixed assets in nonrural areas climbed 8.2% year-over-year in the January-September period, edging up from the 8.1% pace for the first eight months. Retail sales, helped by cuts in vehicle taxes, edged up to 10.7% growth in September from a year earlier, compared with 10.6% in August.
Private investment, a major source of concern for policy makers, rose last month after slowing from the start of the year. Investment by private firms grew 2.5% during the January-to-September period from a year earlier, faster than the 2.1% growth in the first eight months, official data show. (…)
Housing sales rose 43.2% in the first nine months of the year from a year earlier. Medium- and long-term household loans, almost all of which are mortgages, accounted for 60% of new loans last quarter, up from 47% in the second quarter and 23% in the first quarter. Authorities in more than 20 cities have introduced restrictions to damp speculation without choking off growth. Investment in property development grew 5.8% in the January-to-September period, accelerating from the 5.4% increase in the first eight months.
- Real growth in disposable income slowed again last quarter and has been below 6% all year.
- New housing-project starts fell 18%, reflecting developers’ lack of confidence in the durability of recent housing-market strength.
U.S. CPI Increase Driven by Energy Costs; Core Weakens
The consumer price index increased 0.3% (1.5% y/y) during September following an unrevised 0.2% rise. It was the strongest increase since April, and matched expectations in the Action Economics Forecast Survey. Prices excluding food & energy notched 0.1% higher (2.2% y/y) after a 0.3% increase. A 0.2% rise had been expected.
From the Cleveland Fed:
Saudi Energy Minister Sees End of Oil-Price Slump
(…) “We are now at the end of a considerable downturn,†Mr. Falih told an audience that included top executives from oil firms such as Exxon Mobil Corp., Royal Dutch Shell PLC and Total SA. (…)
Mr. Falih said the industry needed $24 trillion in new capital spending if it is to meet global energy demands over the next 25 years. Speaking to an audience that included bankers from London’s powerful financial institutions, Mr. Falih, Falih said the reluctance many of them had to lend to energy companies would ease as oil prices rise. (…)
U.S. Home-Builder Sentiment Edged Lower in October U.S. home builders reported a slight drop in optimism in October but sentiment remained elevated, a sign the market for new single-family homes should continue its slow but steady recovery in coming months.
The National Association of Home Builders housing-market index fell two points from the prior month to a seasonally adjusted 63 in October, the trade group said Tuesday. That is the second-highest level of the year, following a September reading of 65. (…)
While two components of the index slipped slightly—the present conditions and the buyer traffic indexes—the measure of forward-looking sentiment ticked up one point to its highest level in a year, and has been above 70 for the past two months.
TRUCKING STILL DOWNHILL
Trucking volume continues to weaken with not even a whiff of upward seasonality. Even worse, autos and housing, perhaps the only ok sectors in 2016, are slowing as well.
After offering a glimmer of ‘less bad’ hope in August (only down 1.1% YoY and up 0.4% sequentially), the Cass Freight Index shipments data in September disappointed, providing hindsight that August only gave us ‘false hope.’ September data is once again signaling that overall shipment volumes (and pricing) continued to be weak in most modes, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels. That said, there have been a few areas of growth, mostly related to e-commerce, with lower levels of expansion being experienced in transit modes serving the auto and housing/construction industries. All of this added up to lower shipment volume in September on a YoY (Year-over-Year) basis, marking the nineteenth straight month of year-over-year decline. Bottom line, the Industrial Recession in the U.S. that began in March of 2015 continues to weigh on overall volumes.
The Cass Truckload Linehaul Index decreased 3.5% year over year in September, representing seven consecutive months of year over year declines. According to analysts at Avondale Partners, softening demand and increasing capacity warrant a pricing forecast of -3% to 1% through mid-2017.
Rate Increases for Health Plans Pose Test for ACA Finalized rates for big health insurance plans show the magnitude of the challenge facing the Obama administration as it seeks to stabilize the insurance market under the Affordable Care Act.
Market leaders that are continuing to sell coverage through HealthCare.gov or a state equivalent have been granted average premium increases of 30% or more in Alabama, Delaware, Hawaii, Kansas, Mississippi and Texas, according to information published by state regulators and on a federal site designed to highlight rate increases of 10% or more.
In states including Arizona, Illinois, Montana, Oklahoma, Pennsylvania and Tennessee, the approved rate increases for the market leader top 50%. In New Mexico, the Blue Cross Blue Shield plan agreed to resume selling plans through the online exchanges after sitting out last year, but has been allowed to increase rates 93% on their 2015 level.
Dominant insurers in Connecticut, Georgia, Indiana, Kentucky, Maine, Maryland and Oregon have been allowed to raise premiums by 20% or more, and rate increases from similarly situated carriers in Colorado, Florida and Idaho are brushing up against that threshold.
Most of the 10 million people who currently get coverage through an insurance exchange such as HealthCare.gov don’t pay the full premiums because they receive subsidies from the federal government that are pegged to insurance prices in their area. As many as nine million people currently buy individual coverage without using the site, but at similar prices, and most of them aren’t eligible for subsidies.
The Obama administration has characterized the year as one of “transition,†in part because insurers priced aggressively low in the opening enrollment periods for coverage under the law, and has pledged new efforts to encourage healthier people to sign up.
Federal officials plan to focus much of their outreach campaign this year on people who qualify for the subsidies toward the cost of their coverage.
“Headline rates do not reflect what most consumers actually pay,†said Marjorie Connolly, a spokeswoman for the Department of Health and Human Services. “Eighty-five percent of Marketplace consumers receive tax credits, and this year, most HealthCare.gov consumers will again have the option to select a plan for less than $75 per month.â€
But in all, the premiums offer the clearest portrait yet of health plans’ assessment of the stability of the individual insurance market on the eve of the fourth, critical, sign-up window for the law.
“The situation is serious,†said Alissa Fox, senior vice president of the Office of Policy and Representation for the Blue Cross Blue Shield Association. “The reason the premiums are where they are is that the people we are covering have serious conditions and they’re using a lot of medical services because of their chronic illnesses. That’s clear. And there’s not enough young, healthy people to balance out those costs.†(…)
For the average American, the year of transition was 2013 when spending on healthcare and insurance began to skyrocket. From Chris wood’s Greed & Fear (tks Gary):
(…) healthcare spending and insurance increased by US$157bn over the past 12 months to August, accounting for 35% of the increase in nominal personal consumption [crushing Americans’ discretionary consumption].
CETERIS NON PARIBUS
China to World: We Don’t Need Your Factories Anymore Chinese manufacturers once bought high-tech materials from overseas firms. Rising expertise means they now shop locally, altering global trade.
(…) Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage point off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades. (…)
Some of that decrease is the result of economic slowdown and a glut of goods—in China and globally. But China also is increasingly turning inward for its manufacturing needs, pushing to substitute local inputs for foreign, especially in plum, high-margin areas such as semiconductors and machinery.
That is disturbing for many global manufacturers, which have ceded low-end production to Chinese rivals but are banking on staying ahead in higher-end goods and ingredients that feature more advanced technology.
“The very high end is still not there,†says Ka Lok Cheung, head of operations in Zhuhai for Germany’s Eckart, noting that local rivals still have trouble maintaining consistent quality in some hard-to-make pigments. “But for many things, they’re really catching up.â€
The value of components and materials imported by China for use in other products fell 15% last year from the prior year, the largest annual decline since the global financial crisis, and it dropped another 14% in the first nine months of this year, according to Wind Info, a Chinese data provider that uses official Chinese customs figures.
Part of that decline is because Chinese exporters have been using less of those imports in their goods, data from an International Monetary Fund study suggests. The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data. (…)
To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for “technological innovation.â€
Biotechnology, aerospace and other high-tech-related exports to China fell 5% this year through September, compared with the same period last year, according to Wind Info, extending a two-year decline. (…)
Because domestic suppliers are 10% to 20% less expensive than foreign ones, says Mr. Huang, who previously worked for a German industrial-coatings company, the shift has been a “game-changer†for GMM. (…)
EARNINGS WATCH
- 57 companies (16.6% of the S&P 500’s market cap) have reported. Earnings are beating by 7.3% while revenues are surprising by 1.2%.
- Expectations are for revenue, earnings, and EPS of 2.4%, -1.3%, and 0.7%, respectively.
- EPS is on pace for +6.8%, assuming the current beat rate for the remainder of the season. This would be +10.4% excluding Energy.
Financials compose 12 of the 57 companies having reported and they surprised by 11.3% with a 100% beat rate. Ex-Financials, the beat rate is 73% so far and EPS are beating by 4.6% per RBC Capital.
YIELD CHASERS, BE WARNED, AGAIN
In HARD HAT ZONE last August, I demonstrated the risk of yield chasing utility stocks at 21x EPS of companies boasting highly leveraged returns on assets of a mere 2.9%.
(…)Admittedly, electric utilities’ margins have expanded tremendously in the past 2 years as coal and natural gas prices have collapsed. But this is a regulated sector, isn’t it?
Yield hunters are thus chasing stocks of utility companies which collectively are achieving historically low returns on their highly levered assets even though the operating and financing conditions are near optimum. The cashflow coverage of their debt is historically low and their dividend payout ratio very high. God forbids a significant rise in coal or gas prices, let alone interest rates. What if regulators wake up and order lower electricity prices for their constituents? Or if solar panels become much more affordable and popular?
Well, could be that crunch time is near:
A November ballot measure backed by Las Vegas casinos and other firms would end the monopoly of the state’s largest utility, NV Energy, owned by Warren Buffett’s Berkshire Hathaway Inc., and create a competitive retail power market where customers could choose their provider. (…)
Power prices in states with restructured power markets rose from 1997 to 2007, according to a 2015 report from researchers at the University of California. But they fell in the following five years—along with falling natural gas prices—while prices in regulated states rose steadily over the 15-year period, the report shows.
About 72% of Nevada voters support the measure, according to a September poll by Suffolk University in Boston. (…)
Switch estimates it is currently paying NV Energy as much as 80% more for green power than it would pay a competitive supplier, said Adam Kramer, an executive vice president at the company. (…)