DRIVING BLIND (Continued)
When I was managing money, after our group had discussed and explored all economic scenarios based on available data, we often concluded with the wishful expression “next month things will be clearer”. We kept repeating it month after month…
What we got last week:
- Q2 GDP
The U.S. economy entered the second half of the year on firmer footing than previously estimated, with stronger growth, an uptick in corporate profits and consumers feeling better amid a rebound in housing. (WSJ)
The good news is, the U.S. economy grew more than initially expected a month ago. The first stab at the Q2 real GDP on July 31st was 1.7% a.r. Then the trade numbers came out and wow, the view changed and it looked like GDP grew in the neighborhood of 2½% a.r. Then, as the
days went by, more data on inventories and consumer spending caused estimates to be trimmed, leaving consensus and us at around 2.2%-to-2.3% for the second quarter. Now, gentle reader, it looks like we should’ve stuck with the trade data as real GDP did rise 2.5% a.r. in Q2, the largest increase in nearly one year. That and the fact that consumer spending wasn’t revised at all (still 1.8% a.r.) is encouraging. Exports were revised up nicely, and inventories added more to the bottom line. (BMO Capital)
A 2.5% growth is not particularly impressive, but when one takes into account (a) the fiscal drag of lower government spending and higher payroll taxes and (b) the financial drag of retaining revenues to rebuild private balance sheets, the results are beating expectations. Moreover, it is interesting to note that the current recovery has come about despite a declining trend in the velocity of money. (Palos Management)
Curb your enthusiasm:
The latest GDP update shows the current data point is lower than the onset of all recessions except the one that started in January 1980. (Doug Short)
But domestic final sales, which strip away swings in the trade deficit and inventories, actually were revised slightly lower, to a 1.9% annual pace from 2%. Over the past 12 months, domestic final sales are up 1.5%, which is more in line with GDP year-on-year growth of 1.6% per annum. (WSJ)
We get a similarly weak picture in the YoY Real Final Sales (which excludes changes in private inventories). (Doug Short):
Notice how current levels are indicative of recessionary conditions. (Note to Ian M.: thanks for the heads up on the ZH post. Doug’s chart is just so much better)
JULY CONSUMER DATA
July Consumer Spending Up 0.1% Americans spent more cautiously in July as income growth slowed, signaling a potential risk for the economic recovery in the second half of the year.
Overall incomes improved slightly, but wages and salaries fell 0.3%, pushed down by federal spending cuts that spurred furloughs across the government. Government wages were reduced by $7.7 billion in July and $700 million in June due to the furloughs, the report said.
The weak growth of overall spending was partly due to falling demand for durable goods. The category fell 0.2% in July after rising 0.9% in June, marking the first decline since March.
Real disposable income was up 0.8% YoY and is really not growing enough to sustain the recent spending trends…
…unless the consumer keeps dissaving. Bold call!
Doug Short continues:
As the chart above illustrates, the US savings rate had generally declined since the early 1980s, a trend no doubt supported by the psychology of the secular bull market from 1982 to 2000. After stabilizing for a couple of years following the Tech Crash, a new surge in asset-growth confidence from residential real estate was probably a factor in that trough in 2005. But in 2008 the Financial Crisis reversed the trend … for a while.
Doug is absolutely right. Savings are the residual of income minus spending. When people borrowed against their house to pay for their third car and new boat, the savings rate collapsed, a phenomenon unlikely to be repeated for quite a while.
Several economists lowered their growth estimates for the third quarter after Friday’s weak report, which offered the first major gauge of consumer spending in the third quarter. The forecasting firm Macroeconomic Advisers now expects a 1.6% annualized growth rate, down two-tenths of a percentage point from its earlier estimate. Barclays economists lowered their estimate 0.3 percentage point, also to 1.6%. (WSJ)
What about August? Weekly chain store sales have been on the weak side so far (to Aug.24). Slow back-to-school sales generally herald sluggish Christmas sales.
Note: The automakers will report August vehicle sales on Wednesday, Sept 4th.
From Kelley Blue Book: Crossovers, Pickup Trucks Lift August Sales Nearly 14 Percent, According To Kelley Blue Book
In August, new light-vehicle sales, including fleet, are expected to hit 1,460,000 units, up 13.6 percent from August 2012 and up 11.0 percent from July 2013.
The seasonally adjusted annual rate (SAAR) for August 2013 is estimated to be 15.6 million, up from 14.5 million in August 2012 and down from 15.8 million in July 2013.
With consistency in the fleet environment, total light-vehicle sales in August 2013 are also expected to increase by 12 percent from August 2012 to 1,495,400. Fleet sales are expected to account for 15 percent of total sales, with volume of 225,000 units.
PIN and LMC data show total sales reaching a 16 million unit SAAR in August, which is the highest since November 2007, with actual unit sales the highest since May 2007.
For August 2013, new light vehicle sales in the U.S. (including fleet) is expected to be 1,464,214 units, up 14.4 percent from August 2012 and up 11.8% percent from July 2013 (on an unadjusted basis).
The August 2013 forecast translates into a Seasonally Adjusted Annualized Rate (“SAAR”) of 15.75 million new car sales
The analyst consensus is for sales of 15.8 million SAAR in August.
July sales were 15.7M annualized.
After a six-month stretch where the headline index saw some extremely volatile month to month swings, the Chicago PMI has settled down over the last two months with back to back increases of 0.7 points. To top things off, the headline reading also came in right in line with forecasts.
New orders at 57.2 from July’s 53.9. Impressive!
Overall prices rose just 0.1% in July from June, according to the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditures, released Friday. Core prices, which exclude volatile food and energy costs, also nudged up 0.1%. Both rose at a slower pace than in June. Compared with a year earlier, overall prices were up 1.4% while core prices rose 1.2%. (WSJ)
In effect, the U.S. economy looks like a building seemingly pretty solid from the outside but actually resting on weak foundations.
And while the charts above showing that current readings on YoY growth in GDP and final sales generally reflect recessionary conditions, the Conference Board’s LEI charts keep hopes alive (more great Doug Short charts):
It may well be that the YoY change in key GDP numbers were unusually distorted by the “temporary” sequester. In fact, quarterly trends are not indicative of a coming recession . Last 3 quarters:
- GDP: 0.1%, 1.1%, 2.5%;
- Final sales of domestic product: 2.2%, 0.2%, 1.0%;
- Final sales to domestic purchasers: 1.4%, 0.5%, 1.9%.
- These while federal government spending was: –13.9%, –8.4%, –1.6%.
Palos’ Hubert Marleau:
We have noticed that the private sector has started to slightly lower its preference for cash and equivalents. Should the trend in the velocity of money turn upwards as theory would suggest, the US economy would certainly gather steam. It would either bring about an increase in growth or inflation or both. Given the existing slack in the economy, it is more likely to first have an increase in growth than inflation. This leads us to believe that the Fed is about to reduce its bond-buying program this Fall.
Confused? Pity the FOMC in a couple of weeks. But don’t worry, it will be clearer next month…
GLOBAL GROWTH THE NEW NARRATIVE?
Manufacturers drive eurozone recovery New orders rise but companies continue to shed employees
WHAT TO DO NOW?
(…)Yet investors aren’t exactly dumping their riskiest, priciest bets, notes Justin Walters of Bespoke Investment Group, who divided the 500-stock benchmark into 10 groups of 50 stocks based on various criteria. He found, for instance, that the 50 stocks with the richest price/earnings valuations had declined just 3.4%, the least among the 10 deciles. The 50 stocks paying no dividend lost just 3.9%, versus 4.9% for the 50 proffering the most generous yields. Heavily shorted stocks outperformed. Says Walters: “This is the type of relative performance you would see during a market rally, and not a market decline.”
Individuals also seem to be doing more of the selling, and the 50 stocks most heavily held by institutions fell just 3.5%, versus 4.9% for the 50 with the least institutional ownership. Bulls are rethinking their infatuation with U.S. exposure: The 50 stocks with the most foreign revenues fell just 3.2%, versus 5.2% for those with the most U.S. sales. Meanwhile, economically sensitive sectors continue to hold up. More than half of all industrials, materials and technology stocks hovered above their 50-day averages—a feat managed by less than 15% in the utilities and consumer-staples camps. (Barron’s)
Fall Market Forecast Looks Sunny With the economy growing and earnings on the rise, stocks could head higher in coming months. Market strategists like technology and industrials, but not utilities. Who’s afraid of the Fed?
The market, as represented by the Standard & Poor’s 500, has risen 14.5% year-to-date, and Wall Street’s investment strategists see more gains ahead both this year and next.
Barron’s recently checked in with 10 Street seers, whose consensus view is that the S&P will reach 1700 by year-end, 4% above Friday’s close. If these prognosticators are right, the market will log a 19% gain for the full year, compared with last year’s 13.4% advance. Unperturbed by rumblings of rising interest rates or another budget brawl in Washington, some strategists see the S&P hitting 2000 or more in 18 to 24 months. (…)
The S&P currently trades for 14 times the next 12 months’ estimated earnings, up from 13 times earnings at the end of last year. That’s not dirt-cheap, but nor is it rich; the market historically has averaged a P/E of 15 times future earnings, and much more in the past 20 years.
For the record, the average and median P/E on trailing earnings have been 13.3 since 1927, 1945 and 1983 (13.5 actually). Referring to the past 20 years is, shall I say, irrational exuberance. But let the sunshine in:
Corporate-earnings growth, stalled around 5% in the year’s first half, hasn’t been a big driver of stock-market gains this year. But that could change, the strategists say, as profit growth accelerates sharply in the fourth quarter. Our forecasters look for stronger growth in U.S. gross domestic product to boost company-earnings growth to 8% toward year end. The strategists expect full-year S&P earnings to total $107.85, rising to $116.50 next year. (As usual, the consensus view of industry analysts is higher, with estimates of $110 for this year and $123 for 2014.)
Obviously, the strategists are not confused about the economy.
The bull case
(…) Knight says consumers have “hung in,” with annual spending growth of almost 2%, despite paltry wage gains and the expiration of the 2% Bush payroll tax cut early this year. Businesses continue to hire new workers at a steady but not stellar rate of 150,000 to 200,000 per month. The fiscal head winds caused by sequestration and government contraction could ease as the government’s automatic spending reductions are lapped early in 2014, he says.
Auth looks for investment and capital expenditures to pick up, and notes the U.S. housing market has worked through excess inventory. Rising home prices will add to the wealth effect, and nonresidential construction—which hasn’t moved yet—will increase, he says. Commercial rents are stabilizing, and in prime markets such as New York City, they are rising. That is a prelude to greater construction activity, he says.
In the past, construction accounted for 9% of GDP, but it has contributed only 5.5% in the past few years. Construction is “where all the missing middle-class jobs are,” Auth says.
And the “Earnings Math”
With many companies in the S&P 500 reporting near-peak profit margins, “you need sales to come through” to propel earnings growth, Goldman’s Kostin adds.
Barclay’s Knapp is looking for S&P revenue to grow at a rate of up to 5% in the second half, possibly more than doubling the year-to-date growth rate. The drivers, he says, will be higher capital expenditures, steady consumer spending, and continued strength in the U.S. housing industry. Steady growth globally also will help.
For more, and better earnings math, read the “EARNINGS WATCH” segment of my Aug. 5 New$ & View$.
For good measure, Barron’s cites a few negatives for its thorough readers:
(…) the litany of negatives, including the widespread expectation of the Federal Reserve’s taper of its $85 billion-a-month bond-buying program, which threatens to stall the housing recovery; weaker-than-expected data, especially on the part of consumers’ income and buying; the potential for renewed upheavals in Europe once the Sept. 22 German elections are safely out of the way, including the recognition that Greece will likely need a third bailout; and the resumption of U.S. fiscal follies, including the need to pass a continuing resolution to keep the federal government from shutting down when the new fiscal year starts on Oct. 1; and yet another debt-ceiling fight when the Treasury reaches its borrowing limit in mid-October.
And add to that we’re heading into historically the worst month for stocks, one frequently marked by currency and other financial crises (which seem to be brewing in the emerging markets), and there’s the potential for a September to remember. Or maybe one the bulls might want to forget, especially if things heat up in the Middle East.
SPEAKING OF EARNINGS
99% of S&P 500 companies have reported Q2:
- Q2 EPS are $26.36, up 3.7% YoY.
- Trailing 12 months EPS are $99.28, up 0.9% from 3 months ago and +0.6% YoY.
- Estimates are now $27.04 (+12.7% YoY) for Q3 and $29.04 (+25.4%) for Q4. These estimates have essentially stopped declining in recent weeks (again, see the “EARNINGS WATCH” segment of my Aug. 5 New$ & View$ before buying these estimates).
Thomson/Reuters says that there have been 105 pre-announcements for Q3: 88 negative and 17 positive. During the past month, we have had 28 pre-announcements for Q3, 27 of which were negative. By comparison, at the same time after the Q1 earnings season, there had also been 28 pre-announcements, 24 of which were negative. Post the Q4’12 season, again comparing similar periods, we had 54 pre-announcements, 41 of which were negative.
Another way to look at pre-announcements, one month prior the end of the quarter, 78.2% of pre-announcements were negative for Q1’13, 80.6% for Q2 and 83.8% for Q3.
Summer has come and passed
The innocent can never last
wake me up when September ends (Green Day)
The objective Rule of 20 barometer, based on trailing earnings and inflation, closed August 9% undervalued from its 1787 fair value. Downside from the current level of 1633 to the Rule of 20 P/E of 16 (trailing P/E of 14 + 2% inflation) -15% (1390). We hit these levels during the mid-2010 and mid-2012 retreats.
Technically, the S&P 500 Index is now at its 100 day m.a. (1640), a level that held in June, and downside to its 200 day m.a., last touched in December 2012, is 4.5% (1563). At that level, the upside potential would be roughly in line with the downside risk, providing a more attractive investment proposition. Importantly, both moving averages are still positively sloped, as is the 50 day m.a. for that matter.
- Patience is bitter, but its fruit is sweet. (Aristotle)
- Patience is power.
Patience is not an absence of action;
rather it is “timing”
it waits on the right time to act,
for the right principles
and in the right way. (Fulton J. Sheen)
The Seven Deadly Sins of Investing Financial crisis be damned—investors are still making the same mistakes the always have. Here are their biggest blunders and how to avoid them.
Lust: Chasing Recent Performance The belief investors feel that recent performance will dictate future performance—known as “recency bias” in psychology—is one of the biggest investor pitfalls, experts say. (…)
Pride: Being Overconfident (…) Investors, especially ones new to the game, frequently believe they know far more than they actually do about a particular investment, say psychologists and financial advisers. (…)
Sloth: Overlooking Costs Investors often just don’t pay attention to details. (…) “The expenses are much more predictive of future performance because there’s so much randomness in past performance,” he says.
Envy: Wanting to Join the Club (…) The desire to be part of an exclusive offering often drives people to throw money into an investment that doesn’t fit into the overall goals of their portfolio, against their better judgment.
Wrath: Failing to Admit Failure People hate to lose money. (…) Loss aversion, as it is called by psychologists, isn’t hard to spot. (…)
Gluttony: Living for Today Let’s face it: (…) Fifty-seven percent of U.S. workers surveyed by the Employee Benefit Research Institute earlier this year reported less than $25,000 in total household savings and investments, not counting their house or defined-benefit retirement plans. The lack of preparedness has led experts to deem it a crisis. (…)
Greed: Following the Herd (…) To battle the fear that inevitably comes with a market decline or other adverse events, financial advisers say it is crucial that investors have a detailed portfolio plan that they stick with regardless of short-term events. The plan should outline investors’ targeted holdings in bonds, stocks and other investments, and be based on their retirement goals. (…)
Don’t think investment pros are immune from the above. BTW:
According to JPMorgan’s strategists, nearly three out of five fund managers are trailing their benchmarks this year, including 32% who lag behind by 2.5 percentage points or more.
THIS PART IS EVEN BETTER:
Filings with the SEC in March and again this month show the extraordinary gumption of Charlie Munger, Warren Buffett’s business partner and vice chairman of Berkshire Hathaway.
Mr. Munger, who will turn 90 years old next Jan. 1, is a model for individual investors who wonder how they can possibly beat the professionals at their own game. The pros have more information than you, and their trading machines are faster. But you still have an edge over them—so long as you play a different game by your own, more sensible rules.
You can be patient; the pros can’t. You don’t have to be part of the herd; they do. Above all, you can be brave; they almost never are.
What makes Mr. Munger a model for individual investors?
In the first quarter of 2009, during the most desperate days of the financial crisis, Mr. Munger took 71% of the cash at Daily Journal, a small publishing company he chairs, and poured it into the bank stocks that so many other investors were fleeing. By March 31, 2009, his bet already had gained 60%. With other purchases he made later, Mr. Munger invested $49.7 million into stocks and bonds that today are worth $128.4 million, according to financial statements Daily Journal filed on Aug. 20.
At Daily Journal’s annual meeting in February, Mr. Munger discussed the move briefly. According to an online transcript and an attendee, Alexander Rubalcava of Los Angeles-based Rubalcava Capital Management, Mr. Munger said “we behaved pretty sensibly” by moving boldly out of cash when stock prices got “ridiculously low.”
The Daily Journal investment wasn’t the only bold move Mr. Munger made during the crisis. (…)
Where does Mr. Munger get his gumption?
In the late 1980s, he recalled in a magazine interview, a guest at a dinner party asked him, “Tell me, what one quality accounts for your enormous success?”
Mr. Munger’s reply: “I’m rational. That’s the answer. I’m rational.”
Trained as a meteorologist at the California Institute of Technology, Mr. Munger thinks in terms of probabilities rather than certainties, say those who know him well. (…) Decades of voracious reading in history, science, biography and psychology have made him an acute diagnostician of human folly.
“Charlie has such a deep sense of stoicism,” says a long time friend, Christopher Davis, chairman of New York-based fund manager Davis Advisors. “He seems to be able to invert emotions, becoming uninterested when other people are euphoric and then deeply engaged when others are uncertain or fearful.”
Mr. Munger favors what he calls “sitting on your a—,” regardless of what the investing crowd is doing, until a good investment finally materializes.
In the panic that typically produces such an opportunity, Mr. Munger ruminates. If he likes what he sees, he pounces.
“Charlie knows exactly what he thinks, and the fact that other people don’t agree has no impact on him,” says his friend John Frank, managing principal at Oaktree Capital Management in Los Angeles. “He doesn’t get confused about the difference between an emotional feeling and an intellectual understanding.”
Many money managers spend their days in meetings, riffling through emails, staring at stock-quote machines with financial television flickering in the background, while they obsess about beating the market. Mr. Munger and Mr. Buffett, on the other hand, “sit in a quiet room and read and think and talk to people on the phone,” says Shane Parrish, a money manager who edits Farnam Street, a compelling blog about decision making.
“By organizing their lives to tune out distractions and make fewer decisions,” he adds, Mr. Munger and Mr. Buffett “have tilted their odds toward making better decisions.” (…)
Mr. Buffett declined to comment other than to say, “Charlie is indeed rational.”
This unsolicited and unpaid advertising was presented to you by New$-to-Use .
This is what NTU attempts to help us do. Be well informed with relevant, unbiased info, think rationally and independently, and act rationally based on sound probabilities.
PICK YOUR CORRELATION!
John Mauldin “hates” this market. His latest weekly note, always a good read, shares his “reasons to head for the sidelines”. One of these is this chart with these comments:
One of the first market aphorisms I learned was that copper is the metal with a PhD in economics. While you can get into a great deal of trouble regarding that as a short-term trading axiom, it is definitely a longer-term truth. Copper is a metal that is closely associated with construction, industrial development and production, and consumer spending. One can argue that the price of copper is falling today because of a fundamental increase in supply, but for those of us of a certain age, the following chart is nervous-making. Unless the long-term correlation has disappeared, the data would indicate that either the price of copper needs to rise or the market is likely to fall.
Something inside me screeched when I read “Unless the long-term correlation has disappeared”. John is younger than me so his “long term” must differ. Here’s my “long term” which does not correlate copper with equity prices very well (sorry, I do not have John’s means to quickly combine both series on the same chart but the time frames are the same).
John’s long term seems to begin with China and QEs. It likely includes a lot of hype in copper which is now deflating thanks to China’s slowdown and the coming tapering. My sense is that copper prices, and those of most other commodities, are on their way back to their real long term trend which is dismal and little (!) correlated with other asset classes (chart from SoGen).
One day, I will explain why I essentially never invest in commodity-related stuff but the chart above provides a good starting point.
(…) One leading indicator of waning appetite is that stocks at metal at warehouses in Shanghai have stabilized around 400,000 tons after falling from as high as a million tons earlier this year. Manufacturers are easing up on using stocks after robust buying over the past few months depleted inventories, according to the manager of a warehouse who declined to be named as he isn’t authorized to speak to the media. (…)
Another sign is that the premium for copper in China is falling, which analysts say also bodes badly for futures. (…)
“We’re not very bullish on copper prices going forward,” said Liu Jiang, a purchasing manager at a Zhejiang-based power-cable maker that supplies China State Grid Corp., the world’s biggest utility. He sees demand from power cable producers, which account for half of copper consumption in China, remaining flat until the end of the year after a flurry of activity in the first half.
Mr. Liu said his company’s order books have been thin since July, as some urban infrastructure projects have ended, with most of the orders placed and filled in the first half.
Investment in power grids rose 19% in the first six months from the same period a year earlier to 165.9 billion yuan ($27.1 billion), far exceeding the 4% growth target set by China State Grid. That means there is little room for growth from the power sector for the rest of the year, according to Yang Changhua, chief copper analyst at state-owned metals consultancy Beijing Antaike.
“We’re unlikely to see any surprise in copper demand from China this year,” Mr. Yang said. (…)
Plus, a potential glut from rising copper supply may also add to the metal’s woes, says Barclays, who forecasts prices will fall in the fourth quarter. The U.K.-based investment bank estimates there will be a 418,000-ton global copper surplus in the second half of this year compared with a 307,000-ton market deficit in the first half. (…)
Chinese home prices climbed 8.6% in August from last year and soared in major cities, but didn’t lift construction, or the wider economy.
Prices nationwide climbed 8.6% year-over-year in August and soared in major cities, according to data provider China Real Estate Index System on Monday. Housing prices are up 22.5% year-over-year in Beijing, CREIS said. In Guangzhou, the rate is 24.2%. Other cities are seeing more modest increases, with prices in Shanghai up 7.7%
(…) developers are sitting on a large amount of unsold inventory. With builders preferring to pare down their existing supply rather than take on new projects, housing starts are returning to life only sluggishly—up 7.1% in the first seven months of the year, according to the government. Sales rose 27.1% to 547.3 million square meters over the same period. (…)
The backlog in unsold housing is formidable. At the end of 2012, China had more than 4 billion square meters of residential property under construction, enough to satisfy demand for more than four years without a single new project started. The bloated inventory is the result of China’s last go-round with slowing growth, in 2009. To recharge the economy, Beijing unleashed bank lending and loosened its controls on the property sector. Sales and construction soared. (…)
ONLY IN CHINA!
Cooper Tire factory hit by tri-national $2.5bn M&A dispute
Chinese factory workers in eastern Shandong province have turned a traditional management weapon – the lockout – back on their American bosses, by denying them access to a tyre plant at the centre of a controversial $2.5bn cross-border deal.
The sustained Chinese industrial action that erupted in June after the deal was announced is the first to target a major offshore acquisition involving two foreign companies, and exposes a new risk for multinationals operating in China with local partners.
Ohio-based Cooper Tire, which has accepted a buyout offer from India’s Apollo Tyres, admitted for the first time on Friday that workers at its joint venture with the Chengshan Group had taken “disruptive actions”. These included “denying access to certain representatives of the company and withholding certain business and financial information”. (…)
Unlike most other high-profile disputes between foreign manufacturers and Chinese workers, Cooper’s Shandong employees are not demanding higher wages.
The workers have instead complained they were not adequately consulted over Apollo’s offer for Cooper. They also fear the deal will burden their prospective Indian owner with too much debt and result in a clash of corporate cultures.
Kerry praised the support of France—”our oldest ally,” which supported the new United States in the Revolutionary War against Britain—in a pointed barb following the vote by the House of Commons. That, of course, also was the reverse of those nations’ stances regarding the U.S. invasion in Iraq, for which former Prime Minister Tony Blair was a vociferous supporter and France was opposed.
Oh, I get by with a little help from my friends
Mmm, I get high with a little help from my friends
Mmm, gonna try with a little help from my friends