Aircraft Sales Boosted U.S. Durable-Goods Orders in January Orders for long-lasting factory goods climbed last month due to purchases of military and civilian aircraft, overshadowing a weak start to 2017 for business investment in new equipment.
Orders for durable goods—products, like airplanes and dishwashing machines, that are designed to last at least three years—increased 1.8% in January from the prior month to a seasonally adjusted $230.35 billion, the Commerce Department said Monday. Economists surveyed by The Wall Street Journal had expected a 2.0% increase in total orders last month.
(…) Excluding the transportation segment, orders fell 0.2% from December.
A closely watched proxy for business investment in new equipment, new orders for nondefense capital goods excluding aircraft, fell 0.4% in January from the prior month. That was the sharpest one-month drop in the category since September.
Still, the broader trend remained positive. Total durable-goods orders were up 1.4% in January from a year earlier and orders for nondefense capital goods excluding aircraft rose 2.6% compared with January 2016. (…)
We will see if the expected tax reform which would allow businesses to totally expense capex in the first year will incite companies to defer some plans until the reform is effective.
U.S. Pending Home Sales Slip
Pending home sales, which measure how many homes went under contract, fell 2.8% from a month earlier to an index of 106.4 in January, the National Association of Realtors said.
Sales rose 0.4% from a year earlier.
Haver adds that
(…) the pending sales figures were mixed across regions, suggesting the series also may have been affected by weather. For example, the index in the West declined by 9.8% to 94.6, the lowest reading since June 2014, possibly reflecting the heavy rains in California. Meanwhile, pending sales in the Northeast hit a new cycle high of 98.7, amid unseasonably mild winter weather.
But Haver’s own charts reveal a trend beyond the weather, whether one looks at regional or nationwide trends:
Could it possibly be higher house prices and rising mortgage rates?
In all, housing sure does not look like wanting to lead the economy here, does it:
Source: @IIF, @DeanDijour (via The Daily Shot)
And yet, US homebuilder shares are outperforming again on tight housing inventories.
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Millennials Versus the Housing Market
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Millennials are buying homes but many have parental help, survey finds
Car Dealer’s First Overflow Lot in 37 Years Exposes U.S. Pileup
(…) Dealers had about 85 days worth of cars and trucks on hand at the beginning of February — about 22 days more than at the beginning of 2017 and eight days more than a year earlier, according to Automotive News Data Center. (…)
Production cutbacks also have already begun. GM and Fiat Chrysler have eliminated shifts, laid off employees or scheduled days off early this year at plants making slower selling models including the Chevrolet Cruze compacts, Chrysler Pacifica minivans and Buick Lacrosse sedans. (…)
INFLATION WATCH
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U.S. Shale Surge Threatens OPEC Strategy
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Target to take $1 billion margin hit to close gap with rivals, shares sink Target Corp’s full-year profit forecast fell far below market expectations as the retailer said it would take a $1 billion hit to margins in efforts to ramp up its online presence and cut prices to stay relevant amid fierce competition.
With businesses split on U.S. border tax, wider reform looks shaky
U.S. economy slows in the fourth-quarter; consumer spending remains bright spot
Evercore ISI: “Trump Budget Not Happening”
A New Way to Look at Crazy Stock Valuations Valuations have been inflated by a collapse in profits for oil companies
(…) The energy sector stands at more than 30 times Thomson Reuters IBES’s estimate of operating earnings over the next 12 months, higher than any time from when the sector data started in 1995 up to last year—when it briefly reached an extreme of almost 60 times.
(…) investors who rely on the overall valuation of the index as a signal for future returns would be misled if they ignored the collapse in oil-sector profits.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, puts the overall market at 18.1 times this year’s estimated operating earnings. When the energy sector—containing six of the seven S&P companies forecast to lose money this year—is excluded, the forward PE stands at 16.6, a much less frightening figure. (…)
There are both conceptual and practical objections to taking this as a signal that stocks are at a reasonable level. The conceptual problem is that it looks like manipulation of the figures to justify buying shares, a practice with a long and dishonorable history on Wall Street. (…)
The practical issue is more worrying. Even without energy, valuations are pretty high. (…)
I used that same argument one year ago at 1866 on the S&P 500 Index (UPGRADING EQUITIES TO 3 STARS) but the numbers were very different:
(…) But equity markets are even cheaper than they appear. The absolute P/E on trailing EPS is now 15.9, down from a recent peak of 18.2 in December 2014. This compares with a long term average of 13.7 (since 1927 and 1953, 18.5 since 1993). However, the Energy sector P/E is currently 40x because of depressed EPS when it normally is around 12x. This abnormally high multiple artificially inflates the overall S&P 500 Index P/E by about 2 full P/E points meaning that normalizing Energy, equities are actually selling at 13.9x EPS, right on their LT average and very low considering current low inflation and interest rates.
Applied on the Rule of 20, its current 18.0 reading drops to 16.0 with Energy normalized, meaning that fears about a U.S. recession, the oil rout, another banking crisis and the China syndrome have largely been factored in. (…)
Regular readers understand that the Rule of 20 is not a forecasting tool but rather an objective measure of risk and reward. In the current circumstances, the upside is between +13% and +25% while the downside seems limited in a no recession environment.
But that was when Energy earnings were totally depressed, not quite the case anymore (chart on right) unless one sees a much higher oil price ahead.
Ed Yardeni has these P/E charts (on forward EPS) which show that other sectors’ P/E are not low contrary to early 2016:
If we normalize the S&P P/E using a P/E of 12 for Energy shares, the S&P 500 trailing P/E drops from 20 to 18.4 and the Rule of 20 P/E drops from 22.3 to 20.7, far from bargain levels in both cases.
(…) the ironclad law of economic growth is actually quite pliable. Real GDP annual growth of 3.5 percent would occur with 2.5 percent yearly growth in productivity and 1 percent rises in employment, the historic numbers. True, with low fertility rates, the Census Bureau sees the U.S. population rising just 0.2 percent a year by 2026, even with net immigration of 1.3 million annually over the next decade.
Nevertheless, the labor participation rate — the percentage of the population over 16 that is employed or actively looking for work — had plummeted to 62.9 percent in January from the 67.3 percent peak 17 years earlier. So 4.4 percent of the potential workforce, or 11.3 million people, have departed. About 60 percent were retiring postwar babies, but many are returning or staying in jobs past normal retirement ages because their health is better than their predecessors’ and because they need the income. Postwar babies have been notoriously poor savers throughout their lives. The participation rates of those over 65 are actually rising, not falling, as is normally true for seniors.
Also increasingly looking for work are youths who stayed in school during the dark Great Recession years and are now better educated and attracted by expanding job openings. In addition, skills to meet available jobs are being provided by apprenticeship programs that combine two-year college degrees with on-the-job training. German manufacturers brought this system with them to their factories in the U.S. Southwest, and it is increasingly being emulated by U.S. firms.
Trump’s threats of mass deportation of undocumented immigrants have been scaled back. They now target those with criminal records and other suspects. And with cooler heads in Congress, U.S. immigration policy may end up mirroring Canada’s with a point system aimed at admitting those with the skills this country needs.
Trump’s planned deregulation and lower corporate tax rates may spur capital spending, but the correlation between the growth in capital expenditures and productivity gains is low, sometimes negative. More machines alone don’t spur efficiency. More important, productivity-enhancing new technologies grow explosively, but since they start from essentially zero, it takes decades before they move the productivity needle significantly. Aside from those yet to be developed, today’s well-known technologies such as robotics, additive manufacturing, biotech and self-driving vehicles are no doubt still in their infancy.
The argument that protectionism inhibits economic growth is also suspect. Sure, eras of rapid global economic growth are also periods of strong foreign trade advances, but do trade gains stimulate economic activity or the reverse? You can’t prove causality with statistics. If you beat a drum every time there is a total eclipse of the sun, it will go away. No causality, but 100 percent correlation.
Also questionable is the robots-will-eliminate-workers theory. A recent McKinsey study found only 5 percent of 800 occupations and 2,000 job tasks are likely to be entirely automated. Instead, half of current jobs will be changed significantly, forcing employees to adjust. At the same time, automation may hike global productivity by 0.8 percent to 1.4 percent per year during the next half century.
The catalyst for the return to rapid economic growth will, no doubt, be a huge fiscal stimulus program. Voters who are mad as hell after a decade or more of no growth in real incomes elected Trump and the Republican Congress, and politicians will respond. It will take two or three years to come to fruition, but look for huge infrastructure outlays and large increases in military spending. Stocks don’t normally discount that far ahead, but maybe that’s what leaping equities are anticipating, despite all the uncertainty in Washington, the nation and, indeed, the world.
Here’s what Shilling wrote in his always excellent Insight of Feb. 2017:
We continue to look for massive fiscal stimuli and rapid economic growth in reaction to voters mad as hell over a decade of no purchasing power growth, but that’s only after the two or three years it takes for Congress to act; increased defense spending to occur and infrastructure outlays to work their way through the states that actually spend the money. We also wrote that the Fed, zealous for fiscal stimuli since monetary policy is impotent, would buy the resulting surge in new Treasury debt to keep leaping bond yields from offsetting the effects of increased government spending—helicopter money.
We also noted that Congress stands between Trump and fiscal spending, but the President is relatively free to pursue the principal goal that got him elected, protectionism. So it would be international actions first and fiscal stimuli later, we argued. So far, that’s the way it’s unfolding.
Fiscal action is on hold while Trump escalates the ongoing trade war with China, plans a Mexican wall and tightens immigration policy. So the Trump trades are being reconsidered with stabilized Treasury bond prices, flat oil prices and stocks moving sideways after the Dow Jones Industrial Average’s much-ballyhooed breakthrough to 20,000 failed to hold.
These recent actions make us more confident over the long-run investment themes we laid out last month, although we continue to urge caution and large cash holdings in portfolios. (…)
Uncertain equity prices. They are expensive in relation to corporate earnings, and those earnings are not based solidly on revenue gains but on cost-cutting, which appears to have run its course. As noted earlier, investors jumped the gun on the revival of rapid economic growth. Markets anticipate, but it’s probably too early to discount fiscal stimuli that will take two or three years to materialize. Nevertheless, equity bull markets don’t die of old age, and the current one may continue until terminated by a financial shock or by central bank restraint.