Consumers May Have Cut Back in February. Here’s Why You Shouldn’t Worry There’s at least one reason to expect a weak report on retail sales during February: Tax-refund payments were delayed for millions of U.S. households.
(…) The law, intended to prevent fraud by giving the IRS time to double-check income data, caused many refund payments to go out later than usual this year. As of Feb. 10, the IRS said it sent out 14.1 million refunds totaling $28.93 billion—down sharply from 2016, when 29.2 million refunds totaling $94 billion were sent through Feb. 12. The tax agency began to release those postponed payments around the middle of the month and by Feb. 17, the IRS said it had sent 32.9 million refunds totaling $103.24 billion. (…)
But there is also the fact that real income has stalled as this Sentier Research chart illustrates:
DATA DEPENDENT?
What most people read last week about the important Services PMIs:
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U.S. Service-Sector Activity Expanded to Highest Level in More Than a Year U.S. service providers posted their highest level of activity in more than a year in February, the latest sign the economy is gathering steam amid Americans’ rising optimism.
The Institute for Supply Management said Friday its index of nonmanufacturing activity rose to 57.6 in February, up 1.1 points from a month earlier and the highest since October 2015. (…)
Industries that provide services—including work done by doctors, accountants, barbers and miners—account for roughly 80% of the U.S. economy. Manufacturers also saw a big increase in activity last month, the ISM said earlier this week. Together the reports suggest the economy in early 2017 is expanding faster than the 2% pace it has averaged through the current economic expansion.
Based on historical trends, February’s service-sector activity corresponds with roughly 3.4% annual growth in gross domestic product, said Anthony Nieves, who heads the nonmanufacturing survey. (…)
Friday’s report showed that a measure of service-industry sales, or new orders, rose quickly in February, hitting a reading of 61.2 compared with 58.6 a month earlier. A measure of production—or how many services companies provided—grew 3.3 points to 63.6. A measure of hiring climbed half a point to 55.2.
Markit’s PMI is not as well known in the U.S. so few people read that:
February data pointed to a slowdown in U.S. service sector growth. Rates of expansion in
activity, new work and employment all eased. Meanwhile, volumes of work-in-hand were depleted
for the first time since November last year. Sentiment regarding the year ahead also
weakened, despite remaining upbeat overall. On the price front, both input costs and output charges
increased at slower rates. (…)In line with the trend seen for output, new business in the service sector rose at a slower pace in
February. Growth moderated to a five-month low, having reached its highest in one-and-a-half years
at the start of 2017. The rise was still robust overall, however, with some firms reporting a higher
customer turnout in the latest period. (…)Optimism was the weakest since September 2016. That said, the respective index was still comfortably in positive territory, with improving demand, new products, innovation, business expansions and the end of the election cycle all mentioned as factors expected to drive activity growth.
Adjusted for seasonal influences, the final Markit U.S. Composite PMI™ Output Index fell from 55.8
in January to 54.1. February’s reading was indicative of a robust expansion in private sector
activity. That said, it also pointed to a slowdown in growth – the index was down from January’s 14-
month high and below the average since the series started in October 2009 (55.3). The easing was
mainly centred on the dominant service sector.
February survey is broadly consistent with 175,000 payroll jobs being added, which represents a pace of hiring that will do little to deter the Fed from delaying its next rate hike.
Markit’s February survey is almost the exact opposite on most sub-series, painting fairly different trends. Zerohedge’s plot of both series shows that they often diverge for short periods, generally to see the ISM retreat to the PMI trends.
Many economists argue that the apparent strengthening of the U.S. economy during the last few months is really only observed in “soft data” such as the PMI surveys and that hard, real world data, are not confirming like currently on manufacturing data (charts from AAR):
- Animal Spirits (the gap between hope for the future and the current reality) has never been higher…(Zerohedge)
Variant Perception adds this:
(…) While we have seen some modest improvement in economic data like industrial production, sentiment surveys like consumer confidence and the small business NFIB surveys are positively euphoric. Whenever soft data runs so far ahead of hard data, it is a sign investors have got ahead of themselves and normally it leads to markets trading sideways to down.
On the left chart, you can see the difference between soft versus hard data is at the highest levels recorded. We have extracted a signal, as you can see from the chart on the right. The market has not always gone down, but it is worth noting that, when previous signals have activated, eg in 2003 the market declined for the next ten months, it peaked in 2007, it had the “Flash Crash” in May 2010, it traded sideways and then fell 20% in 2011. We’re not forecasting a crash, but investors should beware that given euphoric sentiment surveys, the good news is arguably priced in. The economy has a lot to deliver for stock prices to be justified.
Most survey results are diffusion indices, trend indicators which give no weight to the various sizes of the survey respondents and can thus give a false reading if trends at many small companies are in effect more than offset by opposite trends at fewer larger firms.
The Association of American Railroads provides solid, never revised, hard data on a large swat of the economy and most of their data series are showing little improvement in January-February trends on a YoY basis:
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Goldman points out that US auto inventories continue to climb. This trend is forcing US automakers to spend more on incentives in order to maintain sales. (The Daily Shot)
Source: Goldman Sachs, @joshdigga
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Heavy-Duty Truck Orders Rose for Fourth Straight Month
Fleet owners in February ordered 22,900 Class 8 trucks, the big rigs used in long-haul trucking, up 5% compared with January and a 28% increase from a year earlier, according to a preliminary report released Friday by FTR, a transportation research firm.
Many trucking companies trimmed fleets last year as truck capacity outweighed demand from shippers, driving down freight prices. In recent months the freight market has picked back up as manufacturing strengthened and businesses completed inventory adjustments, “so there is more freight to haul,” said Don Ake, FTR’s vice president of commercial vehicles.
February orders pushed the backlog of trucks ordered that haven’t yet been built past 100,000 units, Mr. Ake said (…)
February was the best month for heavy truck orders since late 2015, said Kenny Vieth, an analyst at ACT Research, which put out similar order numbers.
“2016 was just such a bad year for orders that 2017, even if it’s mediocre, is going to shine by comparison,” Mr. Vieth said.
While the February order numbers “on their own…do not excite,” Stifel analyst Michael Baudendistel said in a note, he added that the recent upswing was sufficient for the firm to increase its 2017 production estimate from 200,000 units to 215,00 units.
Here’s the production data through January, up from the deep trough but still pretty low:
Major hard data releases in recent weeks:
- U.S. Light Vehicle Sales Stabilize in February Sales have effectively been flat since late 2015.
- U.S. Construction Spending Falls in January
- U.S. Take-Home Pay & Personal Spending Decline When Adjusted for Inflation
- U.S. GDP Growth Is Unrevised at 1.9%
- U.S. Pending Home Sales Dip
- Durable Goods Orders Rise, Reflecting Aircraft Rebound Non-defense capex ex-aircrafts declined 0.4% MoM in January and are up only 0.4% YoY.
- U.S. New Home Sales Rebound in January, Though Less than Expected Housing has been weak since spring 2016.
- U.S. Industrial Production Slips in January on Warmer Weather and Weaker Autos
- U.S. Retail Sales Slow with Lower Auto Sales; Other Spending Firms
- U.S. Payroll Increase Accelerates; Wage Gains Slow Payroll employment was up 1.5% YoY in January after +1.7% in 2016 and +2.1% in 2015.
So, even though the U.S. has reached full employment (per recent Fed speak) and that inflation is near target, there is yet nothing to suggest that the economy is taking off.
Yet
(…) “We realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession,” she said.
Yellen all but declared that the Federal Open Market Committee would increase rates for the first time this year at its March 14-15 meeting, saying that such a move “would likely be appropriate” if the economy stays on its current track. She also suggested that would not be the last increase this year. (…)
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Gavyn Davies: Why the Fed means business this time.
Meanwhile, even with soft data, Citi’s U.S. economic surprise index seems to be peaking (chart from Ed Yardeni):
Bespoke offers the broader picture:
However, China is not accelerating:
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China Takes a Cautious Turn in Setting Its Growth Outlook In a sensitive political year, China is enlisting old economic growth drivers, betting it can contain mounting financial risks and postpone some painful overhauls.
Premier Li Keqiang on Sunday laid out next year’s blueprint for the Chinese economy to the National People’s Congress, acknowledging the downward slope for growth—the “new normal” that has been the leadership’s slogan for years. A small calibration of the growth target set it at “about 6.5%” rather than last year’s range of 6.5% to 7%.
Mr. Li made clear even one notch below 6.5% would be a disappointment and that the rate should be higher, if possible. (…)
The 2017 fiscal-deficit target of 3% of economic output suggested China would continue rolling out public-works projects to prop up growth.
Last year, China spent more than $400 billion on rail, highway, aviation and waterway projects. Economists say infrastructure spending is delivering increasingly less growth after years of high spending, given government inefficiency and a reduced pool of good projects.
While the target matched last year’s, the actual deficit in 2016 reached 3.8% of output and economists expect it will overshoot the target again. (…)
And yet:
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Bullish Commodity Bets Hit Record Highs
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China’s Li Walks Knife Edge on Growth as ‘Graver’ Risks Loom
(…) Challenges include a faster pace of U.S. interest rate hikes pressuring capital outflows and the yuan, and the risk of trade friction with the world’s biggest economy should President Donald Trump follow through on campaign pledges to take a tough stance. He also cited mounting downward pressures on growth and serious challenges from excess industrial capacity, an overhang of housing inventory in small cities, and environmental degradation. (…)
China lowered some economic targets and left others unchanged:
- M2 money supply growth forecast was lowered to about 12 percent from 13 percent
- Retail sales growth goal was reduced to 10 percent from 11 percent
- Fixed-asset investment growth estimate cut to about 9 percent from around 10.5 percent
- Consumer price index forecast unchanged at 3 percent increase
OIL
(…) While more than 100 have gone bankrupt since the start of 2015, the companies that survived have reshaped themselves into fitter, leaner and faster versions that can thrive with oil at $50 a barrel. Now, it’s OPEC that’s seeking solutions, desperate to drive prices up even further in a push to repair the economies of the countries it serves.
“The shale business is rejuvenated because of the difficulties it has been through,” Ben van Beurden, the chief executive officer of Royal Dutch Shell Plc., said in comments last month.
(…) Exxon is diverting about one-third of its drilling budget this year to shale fields that will deliver cash flow in as little as three years, Chief Executive Officer Darren Woods said this week. In January, Exxon agreed to pay as much as $6.6 billion in an acquisition designed to more than double the company’s footprint in the Permian basin of west Texas and New Mexico, the most fertile U.S. shale field. (…)
The growth is also the result of far more efficient ways to drill than existed only two years earlier. With oil companies benefiting from lower service costs, Shell reckons it can drill a well today for about $5.5 million, down a whopping 56 percent from 2013. And the new wells, thanks to more powerful fracking techniques, are yielding more barrels than ever.
The average Permian well now gushes 668 barrels per day, compared to just 98 barrels four years ago, according to government data.
Shale companies such as EOG Resources Inc. and RSP Permian Inc. are telling investors they will expand oil output by as much as 30 percent in the next two or three years, more than they did in the heydays of the shale boom between 2010 and 2014.
“The bottom line is we think they can produce as much oil out of the Permian as they want to,” Greg Armstrong, the boss of Plains All American Pipeline LP, told investors in February. “It’s a matter of rigs, just a manufacturing operation.”
And the revival isn’t confined to the Permian, which stretches from Texas into New Mexico. Drilling is also increasing in other shale basins, such as the Scoop and Stack in Oklahoma, and in the Gulf of Mexico’s deep-water oilfields. (…)
“Today, almost every single shale basin is economic in the $35-$50 a barrel price range,” said Regina Mayor, head of energy at KPMG LLP in Houston.
Meanwhile, Toronto has joined Vancouver in the bubbling universe:
Toronto Home Prices Jump More Than 20% for Sixth Straight Month
EARNINGS WATCH
Overall, 98% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 65% have reported actual EPS above the mean EPS estimate, 12% have reported actual EPS equal to the mean EPS estimate, and 23% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (71%) average and below the 5-year (67%) average.
In aggregate, companies are reporting earnings that are 2.8% above expectations. This surprise percentage is below the 1-year (+4.4%) average and below the 5-year (+4.2%) average.
In terms of revenues, 53% of companies have reported actual sales above estimated sales and 47% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (52%), but equal to the 5-year average (53%).
In aggregate, companies are reporting sales that are 0.3% above expectations. This surprise percentage is above the 1-year (+0.1%) average, but below the 5-year (+0.5%) average.
The blended earnings growth rate for the fourth quarter is 4.9% this week, which is equal to the earnings growth rate of 4.9% last week and higher than the estimate of 3.1% at the end of the fourth quarter (December 31).
At this point in time, 105 companies in the index have issued EPS guidance for Q1 2017. Of these 105 companies, 75 have issued negative EPS guidance and 30 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 71%, which is below the 5-year average of 74%.
Ex-IT, negative guidance is 83% (58/70), up from last week’s 80% (51/64) meaning that all but one of last week’s guidances were negative. In fact, since Feb. 22, there have been 14 negatives and no net positives. Meanwhile, EPS revisions remain down but much more so on the smidcaps.
Stocks: A Crowded Elevator Ready to Go Down?
(…) The day after his speech to a joint session of Congress on Tuesday evening, the stock market surged. The rally was paced by a boom in buying of exchange-traded funds, especially the biggest of them all, the SPDR S&P 500 (ticker: SPY). Spyders, as the ETF is called by its fans, attracted over $8 billion on Wednesday alone. That was the biggest daily influx into the world’s No. 1 ETF since December 2014, according to strategists at Bank of America Merrill Lynch, and accounted for the lion’s share of inflows into equity mutual funds of all stripes, which totaled $9.8 billion in the week ended on Wednesday. (…)
Even before Wednesday’s surge in prices and coverage, so-called retail investors had been driving the stock rally, according to Nikolaos Panigirtzoglou, who tracks fund flows with an eagle eye for JPMorgan. If anything, he says, institutions this year have kept their equity exposures unchanged or have pared them, according to the bank’s indirect tracking of their stances. Individuals, in contrast, have been buyers of ETFs and driving the rally, he says. (…)
Sentiment is ebullient, to say the least. Investors Intelligence’s polling shows bulls at 63.1% of respondents, the highest reading since 1987. That makes 14 weeks in which the number has been over 55%—what II dubs the “danger zone.” Bears were down to 16.5%, the lowest figure since July 2015. That put the bull-bear spread at 46.6 percentage points, the highest for the current market cycle. (Some 20.4% were looking for a correction, around the recent level.) Talk is cheap, but for those plunking down dough in the options market, JPMorgan also found a high “skew” of bullish calls over bearish puts in out-of-the-money contracts.
The market’s advance looks solid from a technical standpoint, with small- and mid-cap stocks, transportation shares, and overall market breadth looking positive, Ramsey adds. Even utility stocks, which were thought to be so last year with the reflation trade now in vogue, are only a few percentage points below their high. (…)
- Last Wednesday’s surge was no accident as even Peggy Noonan admitted:
(…) People watching would have had a better opinion of him by the end of the speech than when they began. And those who abhor Mr. Trump got a glimpse, for once, of what his supporters saw and see in him. (…)
Mr. Trump took a lot of steam out of the Democrats. By the time he movingly lauded the beautiful young widow of a Navy SEAL, the faces of the Democrats on the floor had turned glum and grim. They were sinking in their seats. Politicians know when a politician has scored.
Republicans, on the other hand, were buoyed. As they came to understand the speech was not a disaster but a triumph, they got more enthusiastic and happy-looking. As desperate as they are not to do anything, because to decide is to divide, they are also desperate to do something. Maybe they can with Chief Crazy Horse. All the polls will show a bump for the president. They’ll see it as a bump for the party.
It marks, if not a new chapter, a turning of the page. It suggests Mr. Trump may have a capacity to grow into the office, which is so surprising to me as a thought that I hardly want to commit it to paper. But here it is, in the paper.
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Small Investors Run to ETFs A total of $124 billion has poured into ETFs in the first two months of 2017, the most aggressive start to a year since the industry was founded 24 years ago.
Individual investors accounted for as much as 85% of the inflows at BlackRock Inc.’s iShares ETFs in the first two months of the year, far higher than the usual 50% to 60%, said Martin Small, head of U.S. iShares. (…)
It is a contrast from the bull market of the 1990s, when individual stocks captured the bulk of investor money. The trend into passive investing is accelerating, with even legendary investor Warren Buffett weighing in last weekend about the benefits of investing in index funds. (…)
Funds typically see strong inflows early in the year, as investors scramble to meet contribution deadlines for retirement savings accounts, said Rebecca Cheong, head of Americas equity derivatives strategy at UBS Group AG. Most investors have until mid-April to maximize contributions into individual retirement accounts.
Steady gains for major U.S. stock indexes and low levels of volatility could coax more money into the market in the weeks ahead, she said.
“This money needs to be deployed relatively quickly, so it could still trigger more buying,” Ms. Cheong said.
Two important consequences of this ETF craze:
- If funds move from actively managed to passive funds, additional cash is likely invested in equities since passive funds hold practically zero cash while active managers always keep 3-5% in cash.
- There is little rotation going on because money poured into ETFs is redeployed in line with individual securities weights.
So when Lowry’s Research says that it is not seeing the usual end-of-bull-market rotation out of expensive stocks into cheaper equities and out of smaller caps into larger caps, it could be because of this rush out of active into passive funds.
This gradual process of an increasingly selective market, and the resultant weakness in the Adv-Dec Lines, typically takes place over a period of at least four to six months. However, in this case, our OCO Large-Cap and Mid-Cap Adv-Dec Lines rose to new bull market highs during the past week, showing that the usual deterioration found well in advance of a major market decline has not even begun to develop in the mid-caps and large-caps. (…) Therefore, the probabilities drawn from our long history continue to strongly suggest that the primary uptrend should persist for at least another four to six months – particularly in large-caps.
Interestingly, the arrival of Joe Public is not resulting in higher volume:
