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Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets Investor pullback has fueled a bond selloff and shaken a nine-year-long rally in stocks
Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap.
Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013, according to U.S. Treasury data. (…)
“Yields are rising to reflect a risk premium, rather than healthy growth,“ said Mark McCormick, North American head of foreign exchange strategy at TD Securities. “People are concerned about how reliable a store of value the dollar is right now.†(…)
Moody’s Investors Service expects the budget gap to grow to 8% of gross domestic product by 2028, from less than 4% now, further weakening the U.S. fiscal position. (…)
Risk Returns to Leveraged-Buyout Market Extra debt rises, use of equity cash drops as government eases rules
Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to seven times the target company’s earnings before interest, taxes, depreciation and amortization, or Ebitda, according to S&P Global Market Intelligence’s LCD. That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda.
In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014. (…)
Some bank officials say nothing has changed with their underwriting process but they have observed competitors being more willing to back highly indebted deals. (…)
In 2007, more than 23% of buyouts had a debt-to-Ebitda ratio above seven times, and the average equity contribution was just 30.9%, LCD data show. (…)
Borrowers are also making bigger adjustments to expected cash flows to account for cost savings and revenue growth than they were before the crisis, according to research firm Covenant Review. That has the effect of making leverage look lower.
Here’s How $260 Billion of Tariffs Are Biting Third-Quarter Profit The trade war is getting real for many more companies.
To get a sense of how the new duties on imports are affecting the economy, Bloomberg compiles the experiences and forecasts of companies around the world. So far, the score is 57 “negative impact†vs 7 “positiveâ€.
Manufacturers See Signs of New Risks Rising costs, a stronger dollar and concerns over growth in China are posing new challenges for U.S. manufacturers.
(…) The earnings reports shook the broader market, which stabilized after Caterpillar executives on a call with analysts offered assurances that the tariff costs and higher inventories of its equipment at dealerships were manageable. “We feel that the business continues to be strong in most of our end markets,†Chief Executive Jim Umpleby said. (…)
Caterpillar said tariff-related costs for this year would likely come in at the low end of the previous range of $100 million to $200 million it forecast. 3M expects the tariffs to push up costs by about $20 million this year and $100 million next year.
3M also said sales of its face masks and other products in China were dropping as economic growth there cools. Paint-and-coatings maker PPG Industries Inc. said last week that demand in China was falling due to lower spending on cars. (…)
Lennox International Inc., a maker of heating and cooling systems, said Monday that it would move some production out of China to avoid those hurdles.
“I’m not sure Chinese tariffs are going to be short-term and so we are taking action to sort of avoid the tariffs by moving to Southeast Asia and other low-cost countries that can meet our requirements,†Lennox Chief Executive Todd Bluedorn said.
Scott Wine, chief executive of boat-and-motorcycle maker Polaris Industries Inc., warned this week of “more severe†costs if the Trump administration implements more duties on Chinese goods.
Harley, meanwhile, said a stronger U.S. dollar had dented its earnings from the international sales the company is increasingly relying on to drive growth. Milwaukee-based Harley said the stronger dollar cost it $7.4 million in the latest quarter. (…)
Caterpillar said it would raise prices on most machines and engines by as much as 4% next year. Last week, paint makerPPG Industries Inc. and consumer goods giantProcter & Gamble Co. said they were raising prices to reflect higher commodity costs. United Technologies Corp. , which makes Pratt & Whitney jet engines and Otis elevators, said on Tuesday it would continue to raise prices across its portfolio next year if tariffs were still in place.
“Ultimately, these tariffs can all get passed on to the consumer in one form or another,†United Technologies CEO Greg Hayes said. The company expects tariff costs of about $53 million this year and $160 million next year.
The conglomerate said its third-quarter profit dropped 7% as higher costs offset an increase in revenue.
Some manufacturers this week have said a nationwide shortage of trucking capacity and rising oil prices are pushing up their transport costs. Others are having trouble finding parts they need to raise production. Heavy-duty truck maker Paccar Inc. said on Tuesday its margin was hurt by parts shortages in North America. (…)
Companies Say They’re Ready to Move Supply Chains From China
Bloomberg cites 12 companies having commented on their supply chain. Only a few are specifically mentioning that some of their China sourcing could be moved into the U.S.. For most of the companies, sourcing out of China means into other low cost countries. At the end of the day, complexity and costs will be rising.
India Plans Trade Deal Talks to Boost Exports to China
Trade Woes Set Up Euro Economy for Disappointing Year-End
Rising trade tensions: closer to a Donald Dark-style protectionist world?
Before Donald Trump’s election victory in 2016, we set out two economic scenarios for the global economy: Trump Lite and Donald Dark. With fiscal stimulus implemented, business confidence close to record highs, GDP growth strong and some radical proposals canned, we are in a Trump Lite world. But with Sino-US trade tensions moving beyond the threat phase and continuing to escalate, we have taken a step towards our Donald Dark scenario.
We have previously likened the trade negotiations to a game of chicken, which we expected the US to win; our China Exposure Index (CEI) suggests that, until recently, investors held a similar view. But since the US first imposed tariffs on imports from China the CEI has tumbled, and is now below 100, lower than it was on the date Donald Trump was elected.
For our Donald Dark scenario to become a reality, other countries would need to adopt restrictive trade measures themselves – this appears unlikely for now. We still expect strong US GDP growth in the short run, but we will be revising our medium-term view in the coming weeks in light of ongoing trade developments. (Fathom Consulting)
EARNINGS WATCH
We have 111 reports in with a 79% beat rate and a +4.0% beat factor. Industrials are in the spotlight this season: 22 of the 49 industrial companies in the sub-index have reported and 77% beat expectations with a +2.7% beat factor (on revenues: 64%, +1.1%).
Blended Q3 earnings are seen up 22.1% (Industrials +17.8%). Q4: +19.6% (was +20.1% Oct. 1). 2019: +10.2% (10.2%).
Trailing EPS are now $155.73, or about $158.25 pro forma the tax reform for 12 months. Full year 2018: $161.84e.
The Rule of 20 P/E is now 19.5 on pro forma trailing EPS, 19.1 using the full year number (reflected in chart below).
This low multiple has held since 2013, except in early 2016 when it slipped to 18.3 which would be 2550 on the S&P 500 on current trailing EPS. Can sentiment hold?