FLASH PMIs
The headline IHS Markit Eurozone Composite PMI® dropped for a second month running at the start of 2022, down from 53.3 in December to 52.4 in January, according to the ‘flash’ estimate. The latest reading indicates the slowest rate of output growth since the recovery from lockdowns in early 2021 began last March.
However, the slowdown masked wide variations in performance by sector. Service sector output growth slowed sharply for a second month running, dropping to its lowest since last April, amid soaring COVID-19 infection rates. The rapid spread of the Omicron variant led to the reimposition of many measures to contain the virus in recent weeks, notably in Germany, France, Italy and Spain, which adversely affected consumer- and hospitality-oriented businesses in particular. According to IHS Markit’s COVID-19 Containment Index, restrictions in January have risen to their tightest since May of last year across the eurozone. Companies also often reported that staff absenteeism due to illness or the need to self-isolate also inhibited activity.
Tourism and recreation activity consequently fell at a rate not seen since last February, with transportation and media work also in decline. However, many other business service providers and financial services firms continued to report solid growth, being less affected by the Omicron wave than consumer-facing industries.
Manufacturing growth meanwhile accelerated to the fastest since last August. Although staffing issues curbed output in some factories, supply constraints eased, helping boost production in many firms. Average supplier delivery delays lengthened to the least extent since January of last year, with fewer items reported in short supply and shipping delays showing signs of easing. Growth was recorded in all major manufacturing sectors, including a second consecutive month of rising production in the auto sector.
By country, business activity rebounded in Germany after a slide into mild contraction in December, registering the strongest expansion since September thanks to a surge in factory production and a return to growth for the service sector. In contrast, growth in France hit the lowest since April, reflecting a near-stalled factory sector and a sharply weaker service sector performance. Meanwhile, growth ground almost to a halt across the rest of the region as a whole amid a renewed contraction of services activity.
The survey gauge of new orders signalled a further expansion of demand, albeit at the slowest rate since the upturn began last March. While new orders for goods increased to the greatest extent since last August, inflows of new business into the service sector slowed to near-stagnation.
Backlogs of work nevertheless continued to increase in both sectors as supply and labour constraints often inhibited efforts to expand output, despite employment once again growing solidly during the month. Manufacturing jobs growth hit the highest since last July, close to all-time highs, though service sector jobs growth waned to the lowest since last May. Overall, the rise in employment was identical to that seen in December.
Average selling prices measured across both manufacturing and services meanwhile picked up to grow at a rate matching the survey all-time high recorded in November. A new record was seen in the service sector as costs were driven higher by energy and wage costs. Prices charged for goods leaving the factory gate also rose at an increased rate, just shy of November’s survey high, though an easing in manufacturers’ input price inflation to the lowest since last April was also reported, linked in part to the alleviating supply crunch.
Finally, future expectations improved marginally for a second month running. Although the Omicron wave dented optimism in the service sector, prospects among manufacturers brightened, with easing supply chain delays helping drive future output expectations to the highest since last June, rising across the region but most notably in Germany.
Japan: Renewed downturn in private sector activity in January
Flash PMI data indicated that activity at Japanese private sector businesses dipped into contraction territory for the first time in four months at the start of 2022. The pace of decline was modest, and led by the sharpest fall in services activity since August, while manufacturers commented on a slight quickening in output growth.
Private sector firms reported that the surge in COVID-19 cases from the more transmissible Omicron variant had hindered client confidence, most notably in customer-facing industries across the service sector as restrictions were re-introduced across various prefectures including the capital Tokyo.
Disruption was also reported in the labour market, where employment levels fell for the first time in a year. Positively, it appeared that price pressures may have peaked at the end of last year, as firms noted a softening in input price inflation for the first time in five months. Finally, firms remained confident regarding the year-ahead outlook for activity in Japan, though optimism waned to the weakest since January 2021.
Your Raise Might Be Stock Investors’ Pay Cut Inflation and wage pressures are about to rain on investors’ parade
(…) The earnings environment over the next year could be a lot different. Most economists forecast that the economy will slow down, that inflation will moderate and that the unemployment rate will keep falling. For companies, that trend translates to sales growth slowing, pricing power easing and wage pressures intensifying. Profits could suffer as a result. (…)
The best outcome might be one where the economy grows faster than economists expect, while productivity really picks up. In that case, sales would climb quickly while workers, operating more efficiently, would be able to produce more. Wages might keep rising, but there would be plenty of money left over to feed the bottom line.
That outcome isn’t impossible. Maybe (…) all the new ways of doing things companies were forced to adopt to keep running during the pandemic will unleash a wave of productivity when the pandemic eases.
But with stocks starting to wilt, recall the old saw: “Hope is not a strategy.”
Productivity always spikes up after recessions. Since 2005, productivity growth has ranged between zero and 2%, in the lower half of its historical range (technology growth and efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity):
‘American idle’
This wonderful headline is from Grant’s Interest Rate Observer, continuing with this:
Credit The New York Post (Alexander Hamilton, founder) with the headline above and the news item below:
On Reddit, the “antiwork” [community] is now one of the social network’s most active and engaged pages, after seeing explosive growth during the Covid-19 pandemic. It currently has more than 1.6 million users, up from 180,000 in October 2020. People post epic text and email screenshots of quitting their jobs, but the real heroes are the so-called idlers—those who stay in jobs doing the absolute minimum while still collecting a paycheck.
The WSJ adds:
- The Underside of the ‘Great Resignation’ The trend toward idleness has been years in the making, says the author of ‘Men Without Work.’ That’s an ill omen for the economy and the culture.
(…) “Male labor-force participation has dropped after most recessions in the postwar era,” Mr. Eberstadt says. “When the economy recovers, it ticks up a little but never gets back to where it was.” In other words, staying out of work even during good times has become an America tradition. (…)
Population aging is a major cause of the drop, with a greater share of Americans now at retirement age. “But the work rate for prime-age people—25 to 54—has also been going down since the turn of the century.” (…)
“In 1961, labor-force participation for prime-age men was at 96.9%,” Mr. Eberstadt says. Since then, “the chart looks more or less like a straight line down.” By November 2021, “the seasonally adjusted rate was 88.2%.” Almost 1 in 8 men is sitting out during his best years.
That may not sound huge, but the drop is unprecedented. “Would we think it was a crisis if the work rate fell below the Great Depression level?” Mr. Eberstadt asks. “Well you can check that box. We’re already there.”
(…) “America has been overtaken by the European Union” Mr. Eberstadt says. “This is not a bad joke.” Thirty years ago, America’s prime-age work rate was “nearly 10 percentage points above Europe’s. Now Europe’s is a couple of points higher than America’s.” The drop reduces household income, corporate earnings and government revenue. (…)
What is filling idle men’s time? “There’s a lot of staying at home, it seems. And what they report doing is ‘watching.’ They report being in front of screens 2,000 hours a year, like that’s their job.” Women again trail the men, but not by much. In 2019 childless women without jobs said they spent seven hours a day in “leisure,” a category dominated by entertainment. (…)
An abundance of streaming movies, videogames and social-media sites consume ever more of most people’s time. “This is not what Marx would have called the ‘higher pursuits’ of leisure,” Mr. Eberstadt says. “There’s something fundamentally degrading about this.”
(…) with almost two open jobs for every unemployed man and woman. Lack of opportunity isn’t the main reason folks are sitting out. (…)
Inflation Poses Risks of Faster, Less Predictable Fed Rate Increases Promises or clues about rate plans are growing harder to deliver
The Federal Reserve is entering an unfamiliar environment at the start of 2022. For the first time in decades, officials are preparing to raise interest rates when inflation is uncomfortably high rather than very low. (…)
Central-bank officials last month penciled in three quarter-percentage-point interest rate increases this year. That would lift their benchmark short-term rate to a range between 0.75% and 1% by the end of the year, from its current level near zero.
They based the projections for the increases on a forecast that sees inflation falling below 3% by December. Some have indicated, however, that if it looks like inflation is on track to stay above 3% by then, they would have to raise rates more aggressively. The goal would be to lift them back faster to a level aimed to slow down hiring and economic growth, which most officials estimate is somewhere above 2.5%.
A faster pace of rate rises later this year could call for increasing rates at consecutive policy meetings, which are scheduled roughly every six weeks—something the Fed hasn’t done since 2006. (…)
Given the uncertainty, officials will also have to debate whether to offer any meaningful forward guidance, the words they use to describe their intentions for interest rates over the next few years.
Forward guidance has been an important part of the Fed’s monetary-policy arsenal for most of the past two decades, a period in which inflation and interest rates have generally been low. (…)
- IMF chief warns world economy faces an ‘obstacle course’ this year Geopolitical tensions, the pandemic, inflation, rising US rates and China’s slowing economy will make for a bumpy ride
- OECD Metrics Show a Broad Slowing Is -and Has Been- in Progress
(…) The OECD constructs these variables in such a way that index levels below 100 indicate slower than normal growth. (…)
Canadian Retail Sales Dropped 2.1% in December on Lockdowns Retailers sold 2.1% fewer goods in December, according to a preliminary estimate released Friday by Statistics Canada. That’s after a 0.7% gain in November and a 1.5% increase in October, the agency said.
- Debt-Strapped Canadians Brace for a Risky Rate-Hiking Cycle Total private and public debt outside of the financial sector, meanwhile, has risen by more than C$1 trillion ($802 billion) to C$8.1 trillion through June last year. That represents about 345% of gross domestic product, the sixth highest among the more than 40 rich economies tracked by the Bank for International Settlements.
EARNINGS WATCH
We have 64 companies in, a 77% beat rate and a +5.8% surprise factor spread across the board. So far, so good. Analysts keep revising up although somewhat less enthusiastically:
Q1’22 estimates are down a little, from +7.5% to +7.0% with full year 2022 estimates seen reaching $223.61, up 8.3%.
With that level, the S&P 500 would be 19.6x forward EPS, where it bottomed in 2002. The R20 P/E would be 25.1, still overvalued with inflation at 5.5%..
The next 2 weeks will be critical.
- Goldman Sachs notes that “Following the release of 4Q results, only six companies in the S&P 500 provided formal near-term guidance for 1Q 2022. Unfortunately, five of the six firms guided below consensus for next quarter, including three of the stocks that actually beat expectations in 4Q. Only Micron Technology (MU) “beat-and-raised. (…) In absolute terms, equity valuations remain high, regardless of the metric used (94th percentile vs. the last 40 years).
Morgan Stanley Says ‘Winter Is Here’ for Stocks If anything, the retreat has further to go, Wilson and his colleagues wrote in a note, borrowing again from Game of Thrones to warn that “winter is here,” with concerns about a slowing economy poised to take over from jitters over Federal Reserve policy as the main force pulling stocks lower.
Investors sell out of IPOs early at record rates as stocks boom Frothy markets are prompting founders and their backers to break the traditional 180-day lock-up period
Has the Nasdaq Finally Caught Up With Reality? The beginning of earnings season is confirmation that investors really do need to be worried about rising cost pressures.
(…) A number of sell-side analysts are making the point that for the last three or four decades, the stock market has carried on doing fine after the Fed started raising rates. And it’s done fine when the 10-year Treasury yield started to rise. But we haven’t had any inflation for the last three or four decades! The picture is very different and that is why it’s hard to make as much sense of what’s going on. We lack recent precedents for what happens when inflation is as uncomfortably high as it is now. And that makes the whole macro picture that much harder to discern. (…)
There’s an old joke about asking for directions in Ireland. They say, “If I were you, I wouldn’t start from here.” That’s what really creates the greatest problem for the Fed. (…)
- Roughly 40% of NASDAQ stocks are down 50%+ from their 52W highs
- Nasdaq 100’s Unrelenting Declines Ring a Dot-Com Bust Alarm Bell
(…) A full week of big down days hasn’t happened since the dot-com bubble burst, first in April 2000 and then in September 2001. Back then, the Nasdaq went on to fall another 28% before the market bottomed roughly a year later. (…)
Down almost 12% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis. (…)
(…) the reason why I believe once the fever breaks, it lasts a long time, is if you wind the clock back, if you look at some of these uber-growth funds back to where they were in early fall of 2020, that means a lot of people haven’t made money, right? Because they chased into them after they peaked.
And the reason why the dot-com analogy is correct is that that means that every time they start to go up, there’s someone that can get out even. And so there’s tremendous selling resistance at higher levels because so many people have lost money. And that to me is very similar to the dot-com bubble, and other bubbles. Once a very speculative bubble breaks, it’s not a V bottom because there’s too many people looking to get out. (…)
In 2000, the Nasdaq had obscene prices. You also had some of these very big-cap tech stocks trading at triple-digit multiples. And when I look at these uber-growth stocks, they’re expensive as they were in 2000, but the main tech stocks, the Nasdaq 100, the big stocks, they’re not as expensive. So I don’t think the (comparison to the) Nasdaq break of 2000 is quite accurate because I don’t think the really big tech stocks are as vulnerable. (…)
But what are the conditions you would look for to be in place to bring that trade back?
A. Well, I think it’s first seller exhaustion, where stocks stop going down on bad news because there’s no one left to sell them. And I’m just not sure we’re there yet. I haven’t seen big capitulation. (…)
Trust but verify: IT P/Es are indeed significantly lower than in the late 1990s. The weighted P/E is 35.5 and the median P/E 25.5 (Chart from CPMS/Morningstar).
Another way to look at this from Ed Yardeni:
TECHNICALS WATCH
The gradual market degradation since summer culminated into a potentially oversold market but selling pressure has clearly overcome buying power even among the larger caps. The S&P 500 ten largest stocks declined 7.1% on average last week vs -5.7% for the weighted index and -5.3% for the equal-weighted index.
The 500 is resting on its 200dma…
…still rising while its 100dma has turned down last Thursday. At -8.8%, not a conventional correction yet.
This is a valuation correction since the Fair Value line (yellow @ 3000) is still rising thanks to strong earnings growth in Q4, more than offsetting rising inflation, so far.
Note that the Rule of 20 P/E always reverts to its “20” mean, either because equities correct the excessive valuation (most of the times) or, occasionally, stocks keep rising but Fair Value rises more rapidly (earnings up /inflation down like in 1971-73, 1975, 1992-94).
Some pundits compare the present period to 2000-2002 when the S&P 500 cratered 46% from 27x to 19.2x (30x to 20x on the R20 scale). Profits dropped 20%. But there was no inflation problem in the late 1990s-early 2000s (highest core inflation was 2.7%). Yet, the Fed hiked the discount rate from 4.5% to 6.0% in less than 12 months.
Note also that 10Y Treasuries were 5.7% when the Fed first hiked. They peaked at 6.8% in January 2000 before slipping to 4.8% when the recession began in early 2001.
With trailing EPS at $207.10, Fair Value would be 3000 given 5.5% inflation. It would be 3625 at 2.5% inflation.
How Robinhood Investors Robbed Themselves Herding into the same stocks made novice investors feel like geniuses, but the party is over and it was predictable
(…) Back in 2020 when millions of mostly young people opened brokerage accounts for the first time while sheltering from the Covid-19 pandemic, it seemed like they could do no wrong, even as some legendary investors could do no right. Dave “Day Trader” Portnoy poked the most revered one of them all to his millions of Twitter followers:
“I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.” (…)
As those who stuck with the 91-year-old Mr. Buffett in rocky 2020 would agree, slow and steady wins the race.
or 
?
- JPM notes that the retail crowd is still buying the dips: “After a slow first few days in January, retail came roaring back and has now bought ~$24B in US equities + ETFs YTD on QDS estimates, 45% higher than at this point in 2021 and ~2x the 2016-21 average. The rolling one-week average daily net bought for the group now sits at ~$2.5B – the highest since Feb. of last year and only the 4th time such a level has been reached on QDS records. Thematically, retail continues to favor Growth with Tech, and Discretionary – plus Financials – the top 3 sectors bought with YTD.”
- Goldman says that: “The very important “Retail Trader” has stopped dip buying, stopped weekly call option buying, stopped taking street short single name upside gamma. What is more, “Retail Outflows” are starting for the first time since opening accounts. Volumes have declined on both index and favorite trading stocks.”
This from The Daily Shot:
Whatever they bought last week, their bids were happily received by a flood of sell orders. Small caps were hit hard and went through a 12-m resistance line very hard. The Russell 2000 is down 19.4% from its November 8 high.
The S&P 600 fared a little better, stopping at its own resistance level but now displaying declining moving averages:
Unlike the Russell 2000, S&P 600 companies must be profitable and offer reasonably liquid stock floats. Their relative trends are another way to measure animal spirits as John Authers shows:
(…) Comparing valuations of the Russell and the S&P indexes is also interesting. The Russell occasionally makes negative profits, so it’s difficult to follow patterns using the price/earnings multiple. The following chart is based on the earnings yield, the inverse of the P/E, in which a higher yield indicates that a stock is cheaper: (…)
Despite its travails of late, the Russell 2000 isn’t cheap. There is further it could fall. But the behavior of the S&P 600 compared to the large-cap S&P 500 is fascinating. Smaller companies generally have more growth ahead of them, and all else being equal, will command a higher multiple. But the 600, for the first time in 20 years, is now significantly cheaper than the 500. Compared to its own history, it’s as cheap as it’s been since the worst of the 2008 financial crisis. On a valuation basis, then, it looks like there might actually be some bargains among smaller companies, which helps explain why there is so much positivity around the value factor at present. Meanwhile, something looks very strange about the multiples that the biggest companies are commanding. (…)
Actually, as Ed Yardeni illustrates, the S&P 600 is as cheap as it’s been since 1999 barring recessions.
I bet that the average investor today would claim that small cap earnings grow more slowly than large companies’. Wrong!
And the same average investor would also assert that small caps are less profitable and less capable of navigating a rising cost environment. Wrong! Small caps’ margins sure got hit relatively harder by the pandemic but no more:
If analysts are right, profits of the smaller 600 will keep outperforming the larger 500:
A recession would negate that.
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