THE DAILY EDGE (9 January 2017): Earnings Watch

Did you miss this:

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  High P/Es reveal nothing about the near-term moves. Hmmm…

   

Jobs Growth Slows, Wages Post Best Gain Since 2009 The unemployment rate ticked up to 4.7% in December, with U.S. employers adding a lower-than-expected 156,000 positions, but wage growth pointed to a tightening labor market more than seven years after the expansion began.

• Nonfarm payrolls rose a seasonally adjusted 156,000 in December from the prior month, a slowdown from November’s more robust gain, the Labor Department said Friday. The unemployment rate ticked up to 4.7%, but finished 2016 at the lowest point to end a year in a decade.
• The Labor Department also produces broader measures of unemployment and underemployment that include people who gave up looking for jobs because they were discouraged, and people who are working part-time but would prefer full-time work. The broadest measure was 9.2% in December, the lowest since April 2008.
• Wages increased 2.9% in December from a year earlier, the best annual rate since 2009 and a contrast to gains closer to 2% earlier in the expansion.
• Average hourly earnings for production and nonsupervisory employees, the majority of workers who hold rank-and-file jobs, rose a more modest 2.5% in December from a year earlier and showed little sign of acceleration over the past year.

Like many mainstream media, the WSJ’s economic reporting has become more superficial in 2016. There was other salient info to be reported:

• Private service sector employment increased 132k (1.9% YoY), the weakest rise since May.
• Temporary help services jobs declined 15,500 (+1.6% YoY), the first decline since August.
• 73% of all private new jobs were in two sectors: education and health (+70k) and accommodation and food services (+35k).
• David Rosenberg notes that “in the Household survey, the number of nonfarm wage & salary workers shrank 195,000 in December. In fact, when the Household Survey is put on the same comparable footing to the Establishment (payroll) survey, it showed a whopping 529,000 plunge! We havenÂ’t seen a number that bad in over three years.”
• Average hourly earnings increased 0.4% and recouped November’s 0.1% decline. The 2.9% YoY gain in pay was broad based. Factory sector earnings grew 3.4% and construction sector pay gained 3.0%. On the weaker side, financial sector pay improved 2.4% and education & health services earnings grew 1.8%.
• The length of the average workweek held at 34.3 hours and equalled the shortest numbers of hours worked since early 2014. Private service sector hours remained depressed at 33.3, down from the 2015 high of 33.4 hours. Factory sector hours have been fairly stable at 40.7 hours, but construction sector hours were depressed at 38.7.

• Aggregate hours worked, which represents the complete gamut of labour market input to GDP growth, rose by less than 0.2% MoM in December, merely recouping the
  November dip, and on a three-month basis the trend has receded all the way down to a mere +0.8% annual rate which is towards the low-end of the range of the past three years. (DR)

So, all is not rosy on the employment front. The slowdown in hours worked is puzzling given the low unemployment rate and accelerating wages. Why would employers grant higher wages if labor demand is not that strong? It must have to do with a supply shortage. Yes Virginia, inflation can also erupt from a lack of supply. The current reality is that the unemployment rate is lower than it was at the at the peak of the last two “normal cycles”, 1979 and 1989. In 2000 and 2007 employment was boosted by economic/financial bubbles.

This is why I don’t side with economists arguing that U-6 (red line above) is still too high to signal peak employment. U-6 was not measured prior to 1994 and my guess is that it currently is not that much out of line with where it probably was in 1979 and 1989, at times of “normal” peak employment. The proof is in the pudding and this is what the pudding looks like:

Since February 2015, wage growth has accelerated from the +2.0% range to nearly +3.0% while unemployment dropped from 5.5% to its current 4.7%. Guess what will happen if unemployment gets even lower? Make sure to also consider these facts:

• The JOLT report tells us that job openings are near all-time highs and the NFIB (which regroups America’s main employers) survey says that small biz hiring intentions are as high as they were in 2007 and nearly as high as in 1999, two bubble peaks.
• The same NFIB survey reveals that a record number of employers can’t find enough qualified applicants and that a near record number say that their single most important problem is the quality of labor.

The normal employer reaction? Make sure to keep the employees you already have, pay them more and bid up when you find good employees. Even more so if you expect better times ahead courtesy of this new President.

• Why Wages Have Lagged Behind the Global Jobs Recovery In a world of sluggish economic growth, two conflicting trends puzzle policy makers: Why are companies hiring so aggressively and why haven’t wages until lately risen more rapidly?

(…) First, the types of jobs created since the crisis aren’t the same as those lost beforehand. While jobs were lost primarily in the construction and manufacturing sectors, they have been added in the services sector, says Stefano Scarpetta, an economist with the Organization for Economic Cooperation and Development, a think tank for advanced economies. In the euro area, nearly all of the 3.2 million positions created since the recovery were service-sector jobs, primarily in trade, transport and business services, according to the ECB. Many of these positions tend to be harder to substitute with machines, and don’t pay so well.

Second, workers’ bargaining power may have been eroded due to general economic uncertainty, labor-market reforms and intensifying global competition from China and elsewhere. Workers in new service-sector jobs may not be organized into unions, reducing the pressure for wage hikes, said Christopher A. Pissarides, a Nobel Prize-winning economist at the London School of Economics. Employees have also been changing jobs less frequently, which is associated with weaker wage growth.

Third, some firms may not have been able to reduce labor costs as much as they wanted after the crisis, and therefore dragged the adjustment out over time. ECB officials pointed to such “pent-up wage restraint” at their October meeting, according to the minutes. Public-sector pay has also been squeezed as governments tightened their belts, pulling down average wages and perhaps weighing on private-sector pay by proxy.

Fourth, the changing makeup of the labor force may have artificially supported wages after the recession, but subsequently held them down. Since low-wage workers were disproportionately fired, and firms slowed new hires—who typically earn less—average wages held up, according to researchers at the Federal Reserve Bank of San Francisco. As the economy has strengthened, lower-wage workers have been re-entering the workforce. Meanwhile, highly-paid baby boomers have started to retire, putting downward pressure on wages.

All that means wage growth may be a poor indicator of job-market strength. A better measure, the Fed researchers argue, is the pay of workers continuously in full-time work, ignoring those entering and leaving the labor force. That indicator, which is tracked by the Atlanta Fed, suggests wage growth has been about 1 percentage point per year higher since 2014 than is indicated by average hourly earnings. (…)

• Oil Workers Benefit From Wage Increase

(…) Some privately held oil-field-service companies that help producers drill new oil wells report that they have had to boost salaries by 10% to 12% in recent weeks to hire new workers. (…)

• Fed Officials Say More Rate Rises Coming Several Federal Reserve officials, in their first public comments since raising short-term interest rates last month, signaled Friday they still favor lifting them higher this year.

U.S. Trade Gap Widened in November The U.S. trade deficit widened again in November, creating a likely drag on overall economic growth as the year ended.

(…) The trade gap for goods and services increased 6.8% from a month earlier to a seasonally adjusted $45.24 billion in November, the Commerce Department said Friday. That took the monthly deficit to its highest level since February. (…)

Exports fell 0.2% from the prior month while imports climbed 1.1%. (…)

In November, imports of all goods rose to the highest level since August 2015. Exports of capital goods–engines, computers, bulldozers and the like–fell to the lowest level since September 2011. (…)

In the third quarter of the year, trade contributed 0.85 percentage point to gross domestic product’s 3.5% advance, the most since the end of 2013, according to Commerce Department data. That may be reversed in the final months of the year as farm sales return to more normal levels and the stronger dollar hinders American exporters.

Forecasting firm Macroeconomic Advisers on Wednesday said it expects GDP to expand at a 2.2% pace to end the year, a marked slowdown from the third quarter. (…)

More from Haver Analytics:

Exports of goods declined 0.6% (+0.9% y/y) after a 2.8% decrease. (…) Services exports rose 0.4% (1.9% y/y) after a slim 0.1% rise in October. Travel exports rose 0.4% (+3.3% y/y) and transport exports gained 0.6% (-1.5% y/y). (…) U.S. exports to China fell 4.6% m/m (14.1% y/y), while imports fell 2.7% (1.7% y/y).

Oil Prices Slip as U.S. Drilling Activity Picks Up Oil prices fell as lingering doubts over production cuts and concerns over increased drilling activities in the U.S. damped sentiment among traders and money managers.

(…) The major headwind for prices over the weekend was the report from the Houston-based oil-field services company Baker Hughes that drilling rigs in the U.S. had increased by four for the week ended Dec. 30. The uptick was the 10th straight week of rig-count growth and the U.S. now has the highest number of rigs in operation, at 529, since December 2015. (…)

To put the figures into perspective, U.S. oil production was 9.225 million barrels a day in December 2015 compared with current levels of 8.77 million barrels a day as reported last week by the Energy Information Administration. (…)

Six Tweets in 80 Minutes: Trump Gives New Congress a Taste of What’s to Come The challenges of President-elect Donald Trump’s strategy of using Twitter to connect with American voters emerged as the Republican-led Congress got underway.

(…) From 6:19 a.m. to 7:42 a.m., Mr. Trump posted six messages on Twitter in which he criticized the media, tweaked a promise to pay for a border wall and derided Arnold Schwarzenegger for a TV ratings flop—on a show that Mr. Trump himself is producing. (…)

The week appeared to start where the campaign left off, with a Trump criticism of one of the Congress’s first major acts—a Republican proposal to weaken an ethics watchdog. The party quickly abandoned the proposal after the president-elect tweeted his disapproval.

But as it wore on, the challenges of Mr. Trump’s continued strategy became more apparent. At times, his unique approach stirred confusion inside the Capitol and within his own team, according to officials in both places.

When Republicans in Congress started to plan the repeal of the Affordable Care Act, a move that Mr. Trump called for on the campaign trail, he took to Twitter to warn them to be careful of the political consequences and that the health-insurance system would fall under its own weight.

With that, more notes of caution were raised within his own party, leaving the Republican strategy for ending the Affordable Care Act looking more tenuous. (…)

There was little initial support in Congress for a request from the Trump team to find money to build a continuous wall along the nation’s southern border, which the president-elect had promised to make Mexico fund. That was a point he reiterated on Twitter on Friday morning: “The dishonest media does not report that any money spent on building the Great Wall (for sake of speed), will be paid back by Mexico later!”

That prompted former Mexican President Vicente Fox to tweet back: “neither myself nor Mexico are going to pay for his racist monument. Another promise he can’t keep.” (…)

• After weeks of tweeting, Trump and team face open questioning this week

(…) For weeks Trump has been mostly out of sight, heard from mostly in random, 140-character bursts that have rattled cages from Capitol Hill to corporate boardrooms to world capitals. But for all the running commentary, Trump’s transition has been particularly opaque. Over the next week, he and many of his Cabinet nominees will all be out in public, providing answers that could start to bring his administration into sharper focus.

The focal point will be Trump’s news conference Wednesday in New York, with two issues uppermost: how he answers questions about the Russian hacking of the Democratic National Committee and Hillary Clinton’s campaign chairman John Podesta’s emails; and how he explains the steps he plans to take with his business enterprises to avoid conflicts of interest as president.

Confirmation hearings are scheduled for a slew of his Cabinet picks, so many there won’t be enough television screens to accommodate them all. They include two of the most controversial nominees: Exxon’s Rex Tillerson, Trump’s choice for secretary of state; and Sen. Jeff Sessions (R-Ala.), the early Trump supporter named to be attorney general. The many confirmation hearings are likely to be overshadowed by Trump’s event, but they deserve as much attention as can be given.

The coincidence in timing for Trump’s news conference couldn’t have been written better by a Hollywood scriptwriter. The president-elect hasn’t met with the press corps for a full-fledged question-and-answer session since last July (days after the first DNC emails were leaked by WikiLeaks), when he approvingly called on the Russians to find and reveal emails from Clinton’s private server. (…)

Lawrence Summers: US tax reform is vital but Donald Trump’s plan is flawed

Bearish bets against US Treasuries climb to new record Big short positions accompany a steep sell-off in US government debt

Prices Are Rising Across the Globe. That’s a Good Thing, Right?

(…) Evidence of a decisive shift away from the deflation danger zone presented itself loud and clear in Germany on Tuesday, when data showed December price growth jumped a full percentage point to 1.7 percent, the biggest increase on record. That helped push the euro-area number beyond economist expectations to its fastest pace since 2013.

Data on Thursday showed producer-price inflation returned to the euro area after more than three years, at 0.1 percent in November. In China, factory-gate inflation accelerated to the highest since 2011, and in the U.S., the world’s largest economy, the Federal Reserve’s preferred gauge of inflation was up 1.4 percent year-on-year for October and November, making for the fastest gains since 2014. (…)

Skeptics say the recovery merely reflects a rebound from low commodity prices — a so-called base effect — rather than a robust recovery in underlying fundamentals. That’s a disconnect that will last, said David Mann, chief Asia economist at Standard Chartered Plc in Singapore. (…)

China warns US of retaliation if Trump imposes tariffs Commerce secretary Penny Pritzker says risk of trade war between two largest economies

(…) “The Chinese leadership said to me ‘If you guys put an import duty on us we are going to do it on you’,” Ms Pritzker said. “And then they said ‘That will be bad for both of us’.” (…)

“But I think that the Chinese posture . . . towards foreign-developed products is changing towards favouring indigenous developed products . . . That’s the issue I think that faces the next administration.” (…)

Japanese officials and top executives also pushed back against Mr Trump, warning on Friday of fallout for US-Japanese trade and investment if the president-elect followed through on his call to impose a border tax on Toyota to stop the carmaker from building a new plant in Mexico. (…)

Retailers Face Multibillion-Dollar Earnings Hit Under GOP Tax Plan

A Republican proposal aimed at cutting tax rates and keeping jobs in the U.S. risks whacking the earnings of big U.S. retailers by driving up the cost of imported clothes, furniture and other goods.

(…) the “border-adjusted” portion of the proposal would impose taxes on imported goods by making imports a nondeductible expense, and exempt exports.

Authors of the Republican tax plan crafted it to spark economic growth and reduce the incentives for U.S. companies to shift jobs, profits and headquarters out of the country. (…)

The earnings hit to six big retailers could total nearly $13 billion, according to RBC Capital Markets analyst Scot Ciccarelli, with Best Buy Co.’s annual earnings wiped out. To offset their higher tax bills, retailers would need to increase revenue by raising prices for consumers, he said. (…)

More broadly, the proposed tax adjustments could spell an end to an era of cheap apparel for consumers, according to Brian McGough, an analyst at Hedgeye Risk Management LLC.

In a report released Wednesday, Mr. McGough said consumer apparel prices could rise as much as 15% from the tax plan, “with specialty apparel being the category most at risk given the mix of imported merchandise.” (…)

Gauging the plan’s impact on retailers is difficult because most don’t break out what percentage of their inventory is imported, and even goods produced in the U.S. can rely on imported material. Also, it isn’t clear how any final change in policy will be shaped by a Republican-controlled Congress or a Donald Trump presidency.

Still, many investors expect the U.S. retail industry could be hit particularly hard because of the number of companies selling apparel and household goods made almost exclusively overseas. (…)

Some economists and advocates of the plan say currency-rate adjustments will offset the tax changes and mute retailers’ objections. They see the U.S. dollar strengthening, making imports cheaper. (…)

At the same time, the Republican plan would cut corporate tax rates to 20% from a top federal rate of 35%. The ability to immediately write off capital expenditures under the Republican proposal would also be positive for some retailers.

Those changes would help Home Depot Inc. offset the negative impact of the border-adjusted tax, analysts said. Although its tax bill would rise slightly, to $4.8 billion under the plan, its annual net income would rise to $8.5 billion from $7.8 billion after deducting capital expenditures immediately, according to Mr. Ciccarelli. (…)

EARNINGS WATCH

Factset:

In terms of estimate revisions for companies in the S&P 500, analysts made smaller cuts than average to earnings estimates for Q4 2016 during the quarter. On a per-share basis, estimated earnings for the index for the fourth quarter fell by 2.2% from September 30 through December 31. This percentage decline was smaller than the trailing 5-year average (-4.3%) and the trailing 10-year average (-5.6%) for a quarter.

In addition, a smaller percentage of S&P 500 companies have lowered the bar for earnings for Q4 2016 relative to recent averages. Of the 111 companies that have issued EPS guidance for the fourth quarter, 77 have issued negative EPS guidance and 34 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 69%, which is below the 5-year average of 74%.

As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings growth rate for Q4 2016 is 3.0% today. On September 30, the expected earnings growth rate was 5.2%. Seven sectors are predicted to report year-over-year earnings growth, led by the Utilities and Financials sectors. Four sectors are projected to report a year-over-year decline in earnings, led by the Telecom Services and Industrials sectors.

As a result of downward revisions to sales estimates, the estimated sales growth rate for Q4 2016 is 4.8%. On September 30, the expected revenue growth rate was 5.3%. Ten sectors are projected to report year-over-year growth in revenues, led by the Utilities sector. The only sector predicted to report a year-over-year decline in revenues is the Telecom Services sector.

The Consumer Discretionary sector has recorded the fourth largest decrease in expected earnings growth since the start of the fourth quarter (to 0.3% from 6.1%). Overall, 64 of the 82 companies (78%) in this sector have witnessed a decline in their mean EPS estimate during this time. Of these 64 companies, 16 have recorded a decrease in their mean EPS estimate of more than 10%, led by Chipotle Mexican Grill (to $0.96 from $2.08), Amazon.com (to $1.39 from $2.13), and Viacom (to $0.83 from $1.19). Amazon.com is also the largest contributor to the decrease in the expected earnings growth rate for this sector since September 30. Other significant contributors to the drop in earnings growth are Ford Motor (to $0.36 from $0.40), Walt Disney (to $1.50 from $1.60), and General Motors (to $1.18 from $1.27).

The Information Technology sector is the only sector that has recorded an increase in expected earnings growth since the start of the fourth quarter (to 5.9% from 4.3%). Overall, 37 of the 66 companies (56%) in this sector have seen an increase in their mean EPS estimate during this time.

Thomson Reuters I/B/E/S is even more optimistic:

• Fourth quarter earnings are expected to increase 6.1% from Q4 2015. Excluding the Energy sector, the
  earnings growth estimate improves to 6.2%.
• Of the 21 companies in the S&P 500 that have reported earnings to date for Q4 2016, 71% have
  reported earnings above analyst expectations. This is above the long-term average of 64% and in-line
  with the average over the past four quarters of 71%.
• In aggregate, companies are reporting earnings that are 4.5% above estimates, which is above the 3% longterm
  (since 1994) average surprise factor, and below the 5% surprise factor recorded over the past four
  quarters.
• 33% of companies have reported Q4 2016 revenue above analyst expectations. This is below the long term
  average of 59% and below the average over the past four quarters of 51%.
• In aggregate, companies are reporting revenues that are 0.5% below estimates.
• For Q4 2016, there have been 82 negative EPS preannouncements issued by S&P 500 corporations
  compared to 40 positive EPS preannouncements. By dividing 82 by 40, one arrives at an N/P ratio of
  2.0 for the S&P 500 Index. This 2.0 ratio is below the N/P ratio at the same point in time in Q4 2015 (2.9), and below
  the long-term aggregate (since 1995) N/P ratio for the S&P 500 (2.7).

For all of 2016, TR sees EPS totalling $118.07, up 0.5% from $117.46 in 2015. Factset is at $118.72, up 0.6% from $117.97. For 2017, TR sees $132.61 vs $132.92 at Factset. Using TR’s 2016 year-end number, the Rule of 20 P/E is 21.4, 7.5% above fair value (2100).

 One of Wall Street’s Legendary Bulls Has Turned Bearish

Thomas Lee, managing partner and co-founder of Fundstrat Global Advisors in New York, published a note today saying the S&P 500 Index will finish the year at 2,275, about 3 percent lower than the median of 18 strategists surveyed by Bloomberg. His caution stems from policy risk and a yield curve adjustment he sees translating into an S&P 500 decline to 2,150 by mid-year before the index rebounds. (…)

Bears are not what they were. But there are now so few of them…

…even the correction camp is deserted. (Charts from Ed Yardeni)

Even the Chicago crowd is scared to take negative positions:

Are these bears? (via The Daily Shot)

This app will send you alerts when Donald Trump tweets about stocks you own.”