U.S. Light Vehicle Sales Ease from Record High
Total sales of light vehicles during 2017 totaled 17.27 million units, just slightly below the record 17.51 million averaged during 2015 and 2016, according to the Autodata Corporation. During December alone, however, sales improved 1.9% (-1.7% y/y) versus November to 17.85 million (SAAR).
Light truck sales increased 4.5% last year to a record 10.92 million. Sales of domestically-made light trucks in 2017 increased 3.0% to 9.02 million while sales of imported light trucks surged 12.3% to 1.90 million. During December alone, light truck sales improved 4.9% (6.4% y/y) to 11.76 million. That followed declines during the prior two months from an incentive-charged record high. Domestically-made light trucks increased 4.7% (5.0% y/y) to 9.61 million units following a 3.4% decline. Imported light truck sales rose 5.8% (13.3% y/y) to 2.16 million units, a record high.
Trucks’ share of the U.S. vehicle market jumped to a record 65.9% in December and was higher than 51.7% ten years earlier.
The passenger car market weakened last year as sales fell 10.6% to 6.35 million units. Domestically-produced passenger car sales were off 11.7% to 4.59 million while sales of imported cars eased 7.8% to 1.76 million. During December alone, auto sales fell 3.6% (-14.3% y/y) to 6.09 million units, about the same as during the prior two months. Domestic passenger car sales declined 4.6% (-16.2% y/y) to 4.40 million. Sales of imported passenger cars eased 0.8% (-8.8% y/y) to 1.69 million units on the heels of a 5.4% decline.
Imports share of the U.S. vehicle market rose to 21.2% in 2017, a four year high. That was higher than 19.9% during all of 2015. Imports share of the passenger car market increased to 27.7% and recently has been little changed. Imports share of the light truck market strengthened to 17.4% last year, up from 12.7% in 2014.
This long-term chart from CalculatedRisk shows that vehicle sales have yet to break their past cyclical highs:
Fed Minutes Reveal Uncertainties Over Tax Cuts
(…) “Participants discussed several risks that, if realized, could necessitate a steeper path of increases†in their benchmark federal-funds rate, according to the minutes. “These risks included the possibility that inflation pressures could build unduly…perhaps owing to fiscal stimulus or accommodative financial-market conditions,†the minutes said. (…)
Officials expected the tax changes to boost consumer spending and capital spending, but they thought the magnitude of the effects was uncertain, the minutes said. (…)
In the end, their projections suggested they didn’t think then that the economic boost would be so large that they would have to raise rates more than three times this year to guard against too much inflation. (…)
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Inside the Fed’s December Meeting: The Annotated Minutes Are concerns about low inflation approaching a tipping point?
OPEC Holds Production Steady as Compliance Exceeds Promised Cuts
Drugmakers impose inflation-busting price increases Pfizer among those risking backlash with new year rises on hundreds of medicines
(…) For the most part, drugmakers held the increases at less than 10 per cent, but they still tracked well ahead of inflation, currently 2.2 per cent in the US. (…)
EARNINGS WATCH
Taxes and the Terrible, Horrible, No Good, Very Bad Fourth-Quarter Earnings Season Hefty expenses companies will record as a result of the tax plan will hit fourth-quarter trend hard, even as the tax law gives a big long-term boost to corporate profits.
(…) But because of the tax overhaul that President Donald Trump signed into law last month, many companies will record late-breaking expenses—some required and some at their discretion—that will cut into fourth-quarter profits.
On the required side, companies will need to write down the value of deferred tax assets—past losses and other items that can be used to defray future tax bills. Because the corporate tax rate has been lowered to 21% from 35%, those assets aren’t worth as much. Several banks that racked up steep losses during the financial crisis, including Citigroup and Bank of America have said they will be taking charges against earnings.
Balancing that out, many energy and telecom companies have deferred tax liabilities—money set aside to cover taxes they expect to owe. Since tax rates will be lower, those tax bills will be smaller and companies will get a one-time boost to earnings.
Another requirement: Companies will face a one-time tax on stockpiled foreign profits. They are allowed to pay this over eight years, but for financial reporting purposes they need to recognize it in the fourth quarter, when the tax bill was signed into law. Among the companies that will see the biggest hits are Apple, Microsoft and Pfizer .
The foreign-profits tax will come to about $235 billion for companies in the S&P 500, estimates Zion Research Group—enough to nearly wipe out fourth-quarter earnings under generally accepted accounting principles.
Most companies will treat the hits as one-offs, however, and will exclude them from so-called pro forma results. Still, the tax hit is a real cost that investors shouldn’t ignore. It may distort the underlying trend in earnings, but that is no reason to pretend it isn’t there.
On the discretionary side, the tax plan also provides companies with an incentive to move some expenses they normally would incur in the current quarter into last quarter. Doing so lowers their tax bill for 2017, when taxes on profits were higher. Goldman Sachs , for example, was delivering some stock-based compensation to executives early for tax reasons. (…)
As I wrote last week, it will be chaos and everybody will be able to pick its own profit base from which to value equities…
BTW, if you missed yesterday’s post:
- Thomson Reuters/IBES published its first tally of Q4 earnings releases and it is very strong: 16 companies have already reported their Q4 results. Eight are consumer companies, 6 technology and 2 industrials. The beat rate is 81% with a +7.0% surprise factor (+2.4% on revenues). Trailing 12 months EPS have jumped from $128.22 to $131.78 as a result, a 2.3% gain. Full year 2017 EPS will surely exceed the current estimate of $131.47.
A Hedge-Fund Titan Puts Away the Punch Bowl Ray Dalio of Bridgewater sees Americans’ debt as a coming drag on growth and markets
(…) Americans have accumulated far more debt than they have assets and income to support.
Not only will this drag on growth and markets, it will leave the economy acutely vulnerable to higher interest rates. The relevant parallel, he says, is not the early 1930s, when the economy imploded, but the late 1930s when the Federal Reserve tightened monetary policy and inadvertently extended the Great Depression. Today, the central bank must balance the short-term need for higher interest rates to contain inflation against the long-term need for low rates to work off the debt overhang and sustain high asset prices.
“It becomes more and more difficult to balance those things as time goes on,†Mr. Dalio said when we met at his Westport, Conn., office in November. “It may not be a problem in the next year or two, but the risk of not getting it right increases with time.†(…)
Just as the Fed can’t cut rates much, it can’t raise them much either, or debt servicing would swamp cash flow and asset prices would sink. Thus Mr. Dalio sees years of low interest rates, and while he thinks stocks are fairly valued, returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes. (…)
In fact, his biggest worry is that lower corporate taxes and higher stock prices do nothing for the bottom 60% of households who own almost no assets and whose stagnant wages are the mirror image of expanding profit margins, feeding resentment and political polarization. Says Mr. Dalio: “If we do have an economic downturn, I worry we will be at each other’s throats.â€
(…) The cost of minting a bitcoin is as low as $3,224 in Louisiana, according to an analysis by the Crescent Electric Supply Co., one of the largest electrical suppliers in the U.S. The Pelican State had the lowest average residential power costs in the U.S. as of October, according to the Energy Information Administration. Electricity is the biggest cost for bitcoin miners once they fork out for their equipment. (…)
(…) the world’s digital-currency miners have gravitated to the regions where power is cheapest. In recent years, that’s been China. (…)
Along China’s northern border, there’s an excess of coal generation and, in Xinjiang, of wind. In the southwestern provinces of Sichuan, Yunnan and Guizhou, ambitious dam-building has left a glut of hydroelectricity. By offering cheap fuel to bitcoin’s crypto farms, generators have been able to improve the meager returns on their fixed assets.
The People’s Bank of China outlined plans to limit power use by some bitcoin miners at a closed-door meeting Wednesday, . But the business model may already be under threat regardless of bank regulation, thanks to the way China’s energy system is changing.
Sick of wasting electricity, Beijing has in recent years introduced measures to prevent the building of surplus generation and to transfer the electricity that’s available to where it’s most needed.
All but one of the 16 lines in China’s ultra-high-voltage transmission network, intended to shift electrons from the oversupplied provinces of the north and west toward the power-hungry east, are scheduled to be complete this year. In November, the country’s National Energy Administration promised to end renewable-energy wastage by 2020. (…)
After years of headlong growth, the increase in China’s installed power capacity hit its slowest annual pace since at least 2010 in the December quarter.
As those measures dry up China’s generation glut, bitcoin miners that have grown fat on some of the cheapest power prices in the world may find life getting tougher. The feast may soon be ending.
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Merrill Lynch has blocked clients and financial advisers who trade on their behalf from buying bitcoin, citing concerns over the cryptocurrency’s investment suitability.
China’s Wanda mulls sport unit IPO and sale of overseas assets – sources China’s Dalian Wanda Group is considering a Hong Kong listing for its sports assets as part of efforts to rationalize its portfolio that could also include other sales, according to five people familiar with the situation.
(…) Wanda is separately looking to sell Sunseeker International, a British yacht maker it bought in 2013 for $495 million but whose financial performance it has failed to turn around, two other people said. (…)
Last year, Chinese regulators told banks to stop providing funding for several of its overseas acquisitions as Beijing looks to curb the conglomerate’s offshore buying spree.
Shortly after, Wanda sold a portfolio of hotels and tourism assets, including 13 theme parks, for $9 billion to Guangzhou R&F Properties (2777.HK) and Sunac China (1918.HK). Five flagship overseas developments – in London, Chicago, Los Angeles, Sydney and Australia’s Gold Coast – are also available for sale, according to one source.
This is significant as it exposes China’s huge corporate debt problem. Wanda Commercial has total debt of US$36 billion and seems unable to find new funding within and without China. Also note that Wanda (and other Chinese conglomerates as per below) is getting no support from Beijing.
(…) The rating on the commercial property unit has been lowered to BB+ from BBB, and the downgrade comes after Wanda Commercial failed to issue offshore senior notes by the end of 2017, despite it gaining approval for the US$1.5 billion issuance quota from the National Development and Reform Commission. (…)
Fitch added the risk is nevertheless exacerbated by the absence of approval from the State Administration of Foreign Exchange to transfer onshore funds offshore.
The Fitch move comes a day after Wanda Network Technology Group, a unit of the property conglomerate, said it is slashing its workforce. Wanda Network will shrink its workforce to 300 jobs from 6,000, according to a December 29 report by The Paper, a Chinese news website. (…)
Wanda Commercial is a wholly-owned subsidiary of Dalian Wanda Group, the largest property holder in China.
Last week, the FT reported that Chinese tech champion LeEco was unravelling:
(…) The unravelling of LeEco, the tech group that once aimed to be the Tesla and Netflix of China, has devolved into a chaotic scramble for cash, providing a case study case into the shakiness of the country’s nascent corporate bankruptcy regime. (…)
A dysfunctional bankruptcy system has allowed China’s insolvent businesses to continue with little pressure to restructure. It has also discouraged investors and banks from properly pricing credit risk into their lending, which spells trouble for a country with $18tn in corporate debt, equal to 169 per cent of gross domestic product, according to the Bank for International Settlements. (…)
The LeEco conglomerate includes smartphones, ride-hailing applications, real estate, sports entertainment and electric cars. On Dec. 29:
On Dec. 13, the WSJ reported on the apparent funding problems at HNA Group, another Chinese conglomerate with assets of more than US$140 billion and more than $100 billion in outstanding debt, some 25% coming due in 2018. The group controls around a dozen publicly-listed companies as well as scores of private entities in China, Europe and the U.S.
(…) Investor concerns have been mounting about HNA’s high debt levels and its liquidity. The company has gone on a global-acquisition spree over the last two years, scooping up stakes in Deutsche Bank AG, the Hilton hotel chain, and other assets, in many cases borrowing from banks and other investors to help fund the deals. (…)
HNA said it has over 800 billion yuan ($120.9 billion) in credit lines from various financial institutions, of which 310 billion yuan are unused. If true, this means that were HNA to tap the remaining $47B of its credit lines, its total debt would balloon to $147B, exceeding its reported assets of $140B. The “various financial institutions†at the other end of the credit lines must be trying hard to prevent any new fund outflows…
Two days ago:
HNA Group has once again borrowed against its stake in a Hilton Hotel chain, adding half a billion dollars to a $3 billion share-backed loan.
This was the third time in December that the Chinese conglomerate raised debt using its 25 percent stake in Hilton Worldwide Holdings, the Wall Street Journal reported. HNA purchased the 25 percent stake in Hilton for $6.5 billion in 2016 from the Blackstone Group, as part of a spending spree that’s totaled about $40 billion since 2015. (…)
In December, HNA added debt to its stake in Deutsche Bank and pledged shares in one of China’s largest banks, Postal Savings Bank of China.
Yesterday:
HNA Group Co. has fallen behind in repaying loans it obtained from employees and individual investors on an internet-lending platform, another sign that the Chinese conglomerate is having difficulty meeting some of its debt obligations.
A unit of HNA told employees in an email Tuesday that payments on investment products they previously purchased would be delayed, according to a person familiar with the matter. (…)
In an email in early December, the same unit acknowledged the company was late in repaying investors who had bought short-term investment products that were originally due on Nov. 28.
At the time, it asked for their patience and support and pledged to repay them by Jan. 2 along with additional interest, according to a copy of the email reviewed by the Journal.
The email this week said the HNA unit now expects to repay the money by Jan. 30, the person said. (…)
BTW:
2018 is the year of the dog on the Chinese horoscope! Could well be the year of the dogs.