Housing Starts Bounce Back Strongly
Housing starts increased 13.7% in October from the previous month to a seasonally adjusted annual rate of 1.29 million, the Commerce Department said Friday. Residential building permits, which can signal how much construction is in the pipeline, jumped 5.9% to an annual pace of 1.297 million last month.
Economists cautioned against being too optimistic about the uptick, however, because it was driven largely by a 37% increase in multifamily starts, which tend to be highly volatile. Single-family starts rose 5.3% from the previous month.
October starts for single-family homes in the South were at the highest level in a decade, increasing 16.6% from September. September starts were held down by the effects of hurricanes Irma and Harvey. (…)
Looking past monthly volatility, overall starts in the first 10 months of the year were up 2.4% from the same period in 2016. Single-family starts were up 8.4% through October, while multifamily starts were down 9.9%. (…)
The House bill proposes to halve the amount of mortgage interest that is deductible to $500,000 and the Senate bill would eliminate the deduction for state and local taxes, both of which could depress demand for more expensive homes. Provisions in the House bill also could significantly reduce affordable-housing production and have an impact on multifamily construction overall. (…)
Housing did bounce back. But it is not strong (Table and charts from Haver Analytics.)
- Nonetheless, adjusted for the population, residential construction remains soft. (The Daily Shot)
Source: Piper Jaffray
And considering employment levels, housing demand remains very soft:
U.S. Growth Forecasts Are on the Rise
Projections for U.S. economic growth from two Federal Reserve banks have risen in recent weeks. The Federal Reserve Bank of New York on Friday forecast that gross domestic product will rise 3.8% in the fourth quarter, up from a forecast of 3.2% a week earlier.
A separate measure from the Federal Reserve Bank of Atlanta forecast 3.4% growth last week. Research firm DataTrek noted that the rival forecasts are outpacing projections from human economists, who on average expect 2.7% growth for the quarter.
Even if the less optimistic Atlanta Fed model is correct, it would be the best quarter for the U.S. economy in more than three years. (…)
Hurricanes rebound. Will it last?
U.S. Rebuffs China’s Charm Offensive, Edging Closer to Trade War The administration is investigating trade actions against China as it looks to fundamentally challenge Chinese trade practices.
(…) China proposed that during the trip, Mr. Trump and his counterpart, Xi Jinping, unveil a plan to widen foreign firms’ access to China’s vast financial industry, according to people with knowledge of the matter. It was a move previous U.S. administrations had sought for years.
To Beijing’s consternation, according to the people, Washington wasn’t interested. The offer was made a second time during one of Mr. Trump’s meetings at the Great Hall of the People. Hours after Air Force One took off from Beijing, China announced the opening on its own.
(…) The administration is now investigating trade sanctions or enforcement actions against China with the goal of fundamentally challenging Chinese trade practices.
The White House is also trying to invest in the personal relationship between Mr. Trump and Mr. Xi to absorb some of the shock of the coming trade measures.
That helps explain Mr. Trump’s unorthodox blend of tough talk on trade and effusive praise for Mr. Xi in Beijing. In China and around the globe, the White House is aiming to make an asset out of Mr. Trump’s unpredictability, which has been criticized by foreign-policy experts as a destabilizing influence on international negotiations over trade and national security.
“The U.S. now believes that only the threat of unilateral action will compel China to change,†says Scott Kennedy, a deputy director at the Center for Strategic and International Studies, a Washington think tank. (…)
The Trump administration trade team is weighing a half-dozen trade enforcement actions that are aimed directly, or indirectly, at China, with decisions expected by early next year.
The team is looking at invoking a Cold War-era law that was last used in the early 1980s to block steel and aluminum imports in the name of national security. It is also studying dusting off another law last used in 2002 to protect domestic producers claiming to have been damaged by a sudden surge of cheap imports; solar panels and washing machines are goods in focus. (…)
At the same time, Mr. Trump’s trade agency is building a broad case to charge China with “unfair trade practices†by improperly pressuring American companies to turn over valuable intellectual property as the price for entering the Chinese market. (…)
Asked Tuesday at The Wall Street Journal CEO Council about the delays, Commerce Secretary Wilbur Ross said: “Well, the president has indicated that he doesn’t want that to come out until after the tax legislation is dealt with.â€
Republicans’ Sprint to a Tax Overhaul: Public Votes, Private Talk
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Republican Tax Bill Gives Private Jet Owners a Tax Break – Newsweek -
Converging on Tax-Reform Nonsense
Cooler October inflation gives Bank of Canada room to wait on rates
The annual inflation rate decreased to 1.4 per cent last month from 1.6 per cent in September, Statistics Canada said on Friday, in line with economists’ forecasts.
The central bank’s measures of core inflation were also muted. CPI common, which the central bank says is the best gauge of the economy’s underperformance, edged up to 1.6 per cent, while CPI median, which shows the median inflation rate across CPI components, dipped to 1.7 per cent. (…)
CPI trim, which excludes upside and downside outliers, rounded out the central bank’s three measures of underlying inflation and was unchanged at 1.5 per cent.
Merkel faces crisis after coalition talks break down Chancellor’s future in balance as German president calls on parties to end impasse
EARNINGS WATCH
From Factset’s weekly:
Overall, 95% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 74% have reported actual EPS above the mean EPS estimate, 8% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year average (71%) and above the 5-year average (69%).
At the sector level, the Information Technology (90%) has the highest percentage of companies reporting earnings above estimates, while the Telecom Services (33%) and Utilities (50%) sectors had the lowest percentages of companies reporting earnings above estimates.
In aggregate, companies are reporting earnings that are 4.5% above expectations. This surprise percentage is below the 1-year average (+5.1%) but above the 5-year average (+4.2%).
In terms of revenues, 66% of companies have reported actual sales above estimated sales and 34% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year average (61%) and above the 5-year average (55%).
In aggregate, companies are reporting sales that are 1.1% above expectations. This surprise percentage is above the 1-year average (+0.6%) and above the 5-year average (+0.5%).
The blended earnings growth rate for the S&P 500 for the third quarter is 6.2% today, which is slightly higher than the earnings growth rate of 6.1% last week [+3.1% at end of quarter]. Upside earnings surprises reported by companies in the Consumer Staples, Information Technology, and Consumer Discretionary sectors were mainly responsible for the small increase in the earnings growth rate for the index during the past week.
- If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would fall to 4.1% from 6.2%.
- If the Information Technology sector were excluded, the blended earnings growth rate for the remaining ten sectors would fall to 2.8% from 6.2%.
- The Financials sector reported the highest (year-over-year) earnings decline of all eleven sectors at -8.3%. At the industry level, two of the five industries in this sector reported a decline in earnings, led by the Insurance industry (-63%). This industry was also the largest contributor to the earnings decline for the sector. If the Insurance industry were excluded, the blended earnings growth rate for the Financials sector would increase to 6.0% from -8.3%. This sector is also the top detractor to earnings growth for the entire S&P 500. If the Financials sector were excluded, the blended earnings growth rate for the remaining ten sectors would rise to 9.5% from 6.2%.
The blended sales growth rate for the third quarter is 5.9% today, which is slightly higher than the sales growth rate of 5.8% last week [+4.9% at quarter end]. Upside sales surprises reported by companies in the Consumer Staples sector were mainly responsible for the small increase in the sales growth rate for the index during the past week.
If the Energy sector were excluded, the blended revenue growth rate for the index would fall to 4.8% from 5.9%.
At this point in time, 93 companies in the index have issued EPS guidance for Q4 2017. Of these 93 companies, 61 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 66% (61 out of 93), which is below the 5-year average of 74%.
While Factset’s data show Q3 EPS up 6.2%, Thomson Reuters/IBES’ data give +8.2% and Capital IQ’s (S&P) +10.0% (operating). The differences are from the various treatment each aggregator gives to non-GAAP earnings which have been messy in the past 2 years due to items such as pension expenses and asset impairment charges in the Energy industry.
In the past 2 years, I have elected to use TR data in my valuation because of their consistent and sensible treatment of non-GAAP items. It turned out that TR data was also middle-of-the-road compared to Factset and Capital IQ, the latter being the most conservative, thereby providing much lower operating EPS data than other aggregators.
As 2017 closes, the gaps between the 3 main aggregators is also closing. Factset’s 2017 EPS estimate is $131.65, up 10.1%. TR is at $131.36, up 11.2%. Capital IQ is getting closer at $125.15, up 17.8% over a more depressed base.
Looking at 2018 estimates, the gap is almost eliminated with Facset at $145.90, TR at $145.99 and Capital IQ at $144.10. That assumes no significant event causes highly unusual charges next year.
As to the ongoing debate about GAAP and non-GAAP EPS, the gap is also closing after widening to 14% at the end of 2015 as some telecoms incurred large pension charges and most energy companies got hit with asset impairment charges due to the collapse in energy prices. The gap is now 10% and is “expected†to narrow to 8% during 2018.
Share buybacks continue to positively impact EPS. The share count (per Capital IQ) declined 0.9% YoY in Q3, in line with the last 5-year average but slower than the –1.6% average decline since 2016.
Shares of companies that have bought back more than the average amount of their outstanding shares in the past year are trailing the overall market by the biggest margin in a decade. And the dip in investors’ enthusiasm for buybacks seems to be growing lately. The PowerShares Buyback Achievers ETF, which holds U.S. companies that have repurchased at least 5 percent of their shares in the past year, has dropped 2.5 percent in the past month. The S&P 500 Index in the same period is up slightly. So far this year, buyback stocks, as measured by the PowerShares ETF, are up just 10.7 percent, lagging the S&P 500’s 2017 return by 6.6 percentage points.
Before this year, a portfolio of companies that regularly repurchased their shares beat the market in six of the past nine years, sometimes by a wide margin. (…)
Buybacks are on pace to drop 21 percent this year to their lowest level since 2012. (…)
Nonetheless, most people on Wall Street think next year could be a bonanza for buybacks. That’s mostly because of the Republican tax plan, which includes a tax break for companies that repatriate money they have overseas. Most analysts think a good portion of that cash could go to buybacks. Goldman Sachs estimates that buybacks could rise back to nearly $600 billion next year, up $100 billion from its current quarterly run rate. What’s more, while buybacks are down, buyback authorizations are up 18 percent this year, according to Goldman. (…)
Will Heavy Debt Kill the Bull Market?
(…) Are there whispers of Minsky over credit excesses now? The high-yield market has been hinting at such. Some of it may be related to the tax-reform legislation wending its way through Congress, which may curtail debtor companies’ ability to deduct interest expenses. Industries with the least pricing power—broadcasting, telecommunications, and retail—have seen their junk bonds hit hardest, Stan Shipley, Evercore ISI’s capital markets strategist, points out in a client note.
But it might extend further. Stocks of companies with bad balance sheets have begun to lag behind those with strong ones, Albert Edwards, the provocative global strategist at Société Générale, writes in a research report.
“Excess U.S. corporate debt is probably the key area of vulnerability that could bring down the [quantitative easing]-inflated pyramid scheme that the central banks have created,†he asserts. Citing work by his colleague Andrew Lapthorne showing that strong-balance-sheet U.S. stocks have beaten financially weaker counterparts since the beginning of the year, he asks, “Is this a straw in the wind that a bear market is arriving far sooner than most investors had anticipated?†His answer: “It might be.†(…)
Excessive leverage may not cause the bear’s return but it will surely amplify its effect.
(…) Companies with stable earnings and dividends have shepherded gains in November, the first time this year that the two best-performing industries are defensive ones.
So, while this looked like just another boring week in the bull market, it was actually a departure from the first 10 months, when leadership was rotating among cyclical companies. Investors are evincing an appetite for safety even as the market is poised for its longest streak of monthly gains in a decade. (…)
Going by money flows to exchange-traded funds, demand for stocks is slowing down. Halfway into November, U.S. equity ETFs have absorbed about $2 billion of fresh money, a pace that if sustained would put the monthly flow at one of the slowest since the presidential election. Over the past year, these funds attracted an average $18 billion a month. (…)
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A French Challenge to Gundlach’s ‘Disaster’ Bond Theory Veolia is the first BBB-rated borrower actually getting paid to sell new bonds.
A record month for inflows into corporate bonds is “setting up a disaster for when rates rise & `investors’ learn that, yes, these bonds have rate risk” was yesterday’s latest tweeted warning from Jeffrey Gundlach. So what would the billionaire bond manager make of the first BBB-rated borrower actually getting paid to sell new bonds?
French utility Veolia Environnement SA is one of a handful of low-rated borrowers—assessed at BBB or lower by Standard & Poor’s—with fixed-rate debt repayable in three years or longer that trades at yields below zero in euros.
The select gang comprises Affinity Water Ltd., a U.K. water company bought earlier this year by Germany’s Allianz SE, South East Water Ltd. (also based in the U.K.), Italian gas and electricity company A2A SpA, German energy provider Innogy SE and Italian power giant Enel SpA. It seems bond investors trust the steady cash flow available to utilities to compensate for the low ratings of all the companies here.
But on Thursday, Veolia went one better by pulling off the neat trick of persuading investors to pay it directly to borrow, selling 500 million euros of bonds repayable in three years at a negative yield of 0.026 percent—”a first for a BBB issuer,” the company trumpeted in a press release. What’s more, the sale was oversubscribed by more than four times. (…)
If, like Gundlach, though, you’re concerned that the world of fixed-income is in for a rude awakening and that the stress will first show up in the corporate bond market, you’ll probably view it as a last hurrah before reality hits home with a vengeance.
By Steve Blumenthal
Risk is becoming more evident in the markets. Notable since last week’s post are the following:
- High Yield moved to a sell signal (merits watching as HY tends to lead the equity markets). A warning signal? Too early to tell. There have been several false sell signals over the last twelve months; however, it bears watching.
- The Ned Davis Research CMG U.S. Large Cap Long/Flat Index remains moderately bullish but the trend, as measured across 22 sub-industry sectors, has turned down again – the fourth time this year. I expect the index will signal a reduction in large cap stock market exposure from 100% to 80% in the near future. When fewer and fewer stocks are carrying the markets higher, that’s when we should get most concerned. Below you’ll see we are beginning to see such signs.
- Gold remains in a buy signal per our intermediate trend indicators (below). The short-term gold signal also moved to a buy over the past week. We like gold for its diversification benefits and it serves as a hedge against central bank activity.
A Conversation with David Swensen
David Swensen is the iconic manager of the Yale U. endowment fund. Full of smartness and wisdom. (Via Steve Blumenthal)
Click photo for the full interview.