Pending Home Sales Fall in August The number of homes in the U.S. that went under contract fell in August to the lowest level since January, the latest sign the housing market lost momentum in recent months.
Pending home sales, reflecting tentative purchases of previously owned homes, fell 2.4% in August. Pending sales have fallen for three of the past four months and are down 2.0% in the last 3 months or –8.2% annualized. They are down 0.2% YoY.
Sales have been very weak across the U.S. except in the Northeast where sales jumped 5.3% in the last 3 months and are up 5.9% YoY. (Chart and table from Haver Analytics)
The Daily Shot is not too worried:
However, that result from the National Association of Realtors (NAR) is simply wrong. As everyone knows, home sales in the US are extremely seasonal, and NAR does a terrible job in their “seasonal adjustments” – often making the month-to-month movements meaningless. Instead, the association should learn from the energy industry which constantly deals with seasonal patterns.
When comparing the index with the previous two years without the silly seasonal adjustments, US pending home sales are actually doing well for this time of the year.
U.S. GDP Growth Increase Revised Up; Business Investment Grew
Economic growth during Q2’16 was revised higher to 1.4% (SAAR, 1.3% y/y) from 1.1% estimated last month and 1.2% in the advance report.
Business fixed investment increased at a 1.0% rate (-0.5% y/y), revised from a 0.9% decline. Structures outlays declined 2.1% (-5.6% y/y), revised from -8.4%. Equipment outlays declined 3.0% (-1.7% y/y), revised from -3.7%. Industrial equipment outlays grew 9.5% (2.5% y/y), revised from 9.1%. Information processing equipment dropped at an unchanged rate of 4.9% (+4.1% y/y). Intellectual property product spending gained 10.4% (5.9% y/y), revised from 8.6%.
The increase in consumer spending was little changed at 4.3% (2.7% y/y). It was the strongest increase since Q4’14. Durable goods purchases jumped at a 9.8% rate (4.8% y/y). Nondurable goods spending gained 5.7% (3.0% y/y). In the services sector, spending increased 3.0% (2.3% y/y).
As Heavy-Truck Sales Go, So Goes the Economy
(…) In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years.
Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.
Brian Wesbury, chief economist at First Trust, says August’s plunge could reflect comparatively narrow economic problems like reduced domestic oil production and slackening mining activity. He also said that regulatory issues might have played a role if sales through mid-2015 were boosted by new requirements on trucks’ antilock braking systems. In that case, the August drop-off would just represent a return to normalcy. (…)
Deutsche Shares Tumble as Clients Reduce Exposure Some Deutsche Bank clients, among them several influential hedge funds, have moved to pull billions of dollars from the bank amid concerns about its stability and their exposure.
(…) The funds have taken steps to withdraw securities or cash from the bank, dial back their trading activities or both, the people said. They include AQR Capital Management LLC, Capula Investment Management LLP, Citadel LLC, Luxor Capital Group LP, Magnetar Capital LLC and Millennium Management LLC. (…)
“Our trading clients are amongst the world’s most sophisticated investors,” Deutsche Bank said in a statement. “We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.” (…)
Many said they were reminded of the 2008 financial crisis, when big hedge funds pulled accounts from prime brokers at firms like Bear Stearns, helping precipitate their decline. “That is at the back of everyone’s minds,” said one hedge-fund manager whose firm has dialed back its exposure to Deutsche Bank recently.
Deutsche Bank has repeatedly said those concerns aren’t justified. Banking analysts say that liquidity—the availability of ample, easy-to-sell securities and other funding to satisfy client obligations—isn’t a pressing problem: Deutsche Bank has more than €220 billion (about $246.8 billion) of liquidity reserves.
It also has a formidable backstop in the European Central Bank, which provides huge quantities of liquidity on permissive terms. (…)
Poor financial results and costly potential fines eat into the bank’s capital cushion, which is already thinner than many of its peers. Fears that the bank might be forced to raise capital, hurting existing shareholders by diluting their stakes, have weighed on shares. The decline in share price, in turn, makes it more difficult to raise fresh capital. (…)
Deutsche’s Lehman Dilemma Lehman Brothers failed in large part due to panicked hedge funds pulling their money. With some hedge funds worried enough to cut exposure to Deutsche Bank, the parallel is obvious—but misleading.
(…) “Everyone is hypersensitive,” said one hedge-fund manager caught out by the Lehman collapse. “Lehman’s taught everyone that there’s very little upside in keeping your exposure.” (…)
But Lehman was particularly vulnerable, due to its reliance on the overnight repurchase, or repo, market and on hedge funds to finance itself. Billions of dollars of cash and other assets from its so-called prime brokerage business drained away in its final few days, while repos couldn’t be renewed and banks and other counterparties demanded extra collateral to back derivatives trades.
Deutsche is different. It has a far more diversified client base, sourced from German retail banking and multiple institutional business lines. It has a lot more liquidity, amounting to €220 billion ($246.8 billion) at the end of June, equal to 12% of assets, against the $45 billion Lehman had a month before its downfall, 7.5% of assets.
Deutsche has a weak capital position made worse by weak profitability, but its problems aren’t as critical as Lehman’s, where losses amounted to more than a tenth of shareholder equity in each of the final two quarters of its life.
Most important, Deutsche has access to the European Central Bank as its house pawnbroker, meaning it can turn even fairly hard-to-sell assets into cash if it needs to. Lehman was refused extra credit by the U.S. Federal Reserve on the basis that it didn’t have enough reliable assets to post at the bank.
None of this makes Deutsche immune. No amount of liquidity could ever be enough if clients or depositors lose faith, because not all assets can be swapped for cash at the ECB. The task Deutsche Chief Executive John Cryan faces is to win back client confidence, and fast. (…)
The FT’s Lex column:
How near is Deutsche Bank to failure? By the most important measures — its senior bond prices and liquidity reserves — not even close. The former are stable, the latter ample. Elevated credit default swap prices (double the average for European banks) mean higher funding costs and lower margins, but do not signal bankruptcy. (…)
Deutsche is not dead. It is not rising from its sick bed either.
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DB: END OF THE BEGINNING OR BEGINNING OF THE END?
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This Is How Much Liquidity Deutsche Bank Has At This Moment, And What Happens Next
OIL
Economics Drove Saudi OPEC Move
(…) Saudi energy minister Khalid al-Falih’s attention was drawn to an Organization of the Petroleum Exporting Countries’ prediction that a global glut of oil would persist well into 2017, said people familiar with the matter. The data suggested that economic pain from low oil prices would last longer than the ministry first believed, as the Saudis fought an expensive war in Yemen and middle-class living standards eroded. (…)
Mr. Falih and other Saudi officials, people familiar with the matter said, appeared worried about how prices below $50 a barrel in 2017 would affect the valuation of Saudi Arabian Oil Co., known as Saudi Aramco, the state-run oil firm that the kingdom plans to publicly list in 2018. The Aramco IPO is the centerpiece of a plan to transform the Saudi economy and diversify it away from oil dependence.
Saudi Arabia offered OPEC a secret deal this month, people familiar with the matter said. The kingdom would cut production by 400,000 barrels a day. Iran was expected to hold output steady at 3.6 million barrels a day, the people said. Iran’s oil minister, Bijan Zanganeh, ultimately rejected it. Iran wanted to reach 4.2 million barrels a day.
Over this past weekend, Mr. Falih talked to OPEC Secretary General Mohammad Barkindo and backed his plan for a collective OPEC cut of almost 1 million barrels a day over a year, according to people familiar with the matter. Mr. Falih sweetened his offer to OPEC, saying Iran could increase output to 3.7 million barrels a day, the people said.
On Wednesday afternoon, the OPEC meeting was quickly consumed by the Iranian-Saudi rivalry. A few hours in, Mr. Falih made a compromise that his predecessor, Mr. Naimi, wasn’t allowed to make in Qatar: Iran, Libya and Nigeria would be treated more leniently.
It isn’t clear how much Iran will be allowed to pump, though its officials have said they want to raise production by about 10%, to about 4 million barrels a day.
These charts from The Daily Shot summarize the situation:
Saudi shares have been in freefall. Here is the overall stock market index followed by the banking index.
But there is more than economics. The Saudis have also discovered that U.S. companies can be pretty smart when push comes to shove (via The Daily Shot):
JAPAN RETAIL SALES SINK
Now on to Japan where retail sales came in materially below consensus. Note that the spikes in the charts below are related to the consumption tax increase – if you ignore those for a moment, the trend looks terrible. (The Daily Shot)
SENTIMENT WATCH (Other than DB related…)
Wall Street Says Annual Holiday Stock Rally Isn’t in the Cards This Year
It’s been low-hanging fruit for decades: buy stocks when the leaves start to turn in the Northeast, and get ready to harvest gains. This year the crop looks spoiled.
That’s going by forecasts from Wall Street strategists, whose trepidation about everything from election politics to interest rates and valuations has left them in an unusually bearish mood before this year’s holidays. Among 19 surveyed by Bloomberg, the average estimate calls for the S&P 500 Index to end 2016 at 2,171, about 1 percent below where the gauge closed on Thursday. (…)
Seldom have strategists been less bullish than they are now. They’ve called for gains in the equity market 82 percent of the time during the past decade, according to data compiled by Bloomberg. Yet even amid an 18 percent recovery in the S&P 500 since its low on Feb. 11, strategists have held their target price largely unchanged.
That doesn’t mean they’re bereft of optimism. A slew of upbeat revisions in recent weeks pushed their average estimate up from a low of 2,146 in August, and among the four that have made projections for next year, the average target calls for an 8.2 percent rally. (…)
