Industrial production. NY Fed manufacturing. Retail sales weakening. Secular trends. Sentiment watch. Earnings watch. Broker poetry. Eroding equities undervaluation. China retail sales. Spain vs France. Currency wars. Oil. Mining. Bill Miller.
Monitoring for any signs of a growth problem like in 2010 (starting in May), 2011 (January)and 2012 (April):
- Industrial Sector Slowed in January U.S. industrial production edged lower in January as auto and other manufacturers trimmed output.
But Markit reassures us:
Industrial production fell 0.1% in January, confounding analysts’ expectations of a 0.2% increase. The downturn was led by a 0.4% drop in manufacturing output. However, December’s industrial production numbers were revised up, from 0.3% to 0.4%, and November had seen a 1.4% increase.
The January data therefore need to be looked at in part as an
adjustment of production levels from the strong upturn seen late last year, and importantly the three-month growth rate accelerated from 0.6% in December to 1.5% in January, pointing to the strongest underlying growth trend since last February.
Manufacturing output is meanwhile still up 1.9% in the latest three-month period, despite the wobble in January, enjoying the strongest pace of expansion since last April.
Same thing with retail sales: 3-ms growth through January is accelerating. And the NY Fed manufacturing survey jumped 18 points to 10.0 with the new orders index climbing 20 points to 13.3
Alexander Ineichen’s high frequency indicators table is stable:
- Readings Bolster Hope on Economy U.S. consumers are showing surprising resilience, providing some hope for the economy as a new round of Washington budget battles approaches.
Consumer confidence jumped more than expected in the first half of this month despite higher payroll taxes since the beginning of the year, according to a gauge released Friday by the University of Michigan. Its index of consumer sentiment rose to 76.3, up 2.5 points. (…)
The U.S. economy lost $16 trillion in total wealth from the end of 2007, when the U.S. recession started, until early 2009, he said. That amounted to about a quarter of total U.S. wealth. It has since regained $13.5 trillion of that wealth, mostly owing to a rebound in the stock market and recent improvement in housing prices.
I don’t post often on consumer confidence surveys. Here’s why: CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL! And here’s the better readings on consumers:
- Consumer is O.K.
Food company J.M. Smucker Co. on Friday said sales rose 6% in the three months ended Jan. 31 from the same period a year earlier. CEO Richard Smucker said he was “cautiously optimistic” about the economy going forward, and noted that the industry as a whole has seen stronger demand in recent weeks. “We are actually seeing the consumer be a little more confident and therefore spending a little more,” Mr. Smucker told investors.
- Consumer is dead: Wal-Mart Executives Sweat Slow February Start in E-Mails
Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.
“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.” (…)
Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.
“(…) Where are all the customers? And where’s their money?” (…)
“As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions,” David Tovar, a Wal-Mart spokesman, said in an interview, adding that the company will report fourth-quarter earnings on Feb. 21. Wal- Mart’s fourth quarter ends in January. (…)
About $19.7 billion more in tax refunds had been delivered to shoppers by this time last year, according to an analysis prepared by Wal-Mart’s Global Customer Insights & Analytics division that was attached to Murray’s e-mail on Feb. 12. The retailer expected returns to be delayed by three to four weeks because of the late release of tax forms and additional, federally mandated tax-fraud scrutiny. (…)
Even with a slow January, Wal-Mart is gaining market share steadily, Simon said.
“That points to our competitive landscape, which means everyone is suffering and probably worse than we are,” Simon said, according to the minutes.
What to think? I side with Wal-Mart, the largest and most sophisticated retailer in the world. These e-mails have not been denied by WMT. Their sales problems seem to be industry-wide since they see they market share growing. And it jibes with weekly chain store sales reports:
- On the other hand, ISI surveys, which have done a good job warning of previous slowdowns, are, so far, not declining. Their diffusion index is going sideways, however, as “some of the consumer surveys with smaller ticket size have decelerated recently”.
Yet, when I scrutinize ISI’s surveys up to Feb. 15, I find that:
- Auto dealers surveys are slowing and, at 51.1, are flirting with the 50 level;
- Broadline retailers surveys have clearly weakened;
- Specialty retailers surveys are stable at a weak level;
- Restaurant surveys have slipped below 50;
- Credit card companies surveys have slipped below 50;
Only Consumer staples companies surveys have improved in recent weeks and not by much.
STRONG SECULAR TRENDS
In spite of its own “short term” hurdles and of significant problems abroad, the U.S. economy keeps surprising. Its resilience comes from new positive secular trends:
- HOUSING, now a front page phenomenon. Note that ISI homebuilders surveys remain very, very strong!
- THE ENERGY GAME CHANGER, also front page now, and
- THE U.S. MANUFACTURING RENAISSANCE, no longer page 16 but not quite front page material yet:
According to just-released data from the Federal Reserve, oil & gas extraction remains a key driver of industrial output. As today’s Hot
Chart shows, volume extraction has increased by more than 30% in the past three years. The last time the U.S. produced so much oil & gas was in 1974.
This unexpected energy surge is playing an important role in helping revive the U.S. manufacturing base. The new abundance of oil & gas is altering the outlook for U.S.-based production of chemicals and plastics. As shown, both industries are now adding capacity for the first time in five years. We would expect this situation to endure for the foreseeable
future since capacity utilization is running near the pre-recession high of 80%. Increased production will have to be met with increased capacity. (NBF Financial)
Reliable and sustainable energy sources are vital to a growing economy, boding well for the future, but perhaps more importantly, this again illustrates what creative minds in America can achieve when market forces are left to work. (Schwab Market Perspective: Seeing the Forest)
That also helps:
11.1 years: The average age of light vehicles in the U.S. last year, according to automotive-research firm Polk.
The index has risen 8.37% over that period. The Russell 2000 also made it seven straight weeks of gains. It is up 10.94% in the past seven weeks.
S&P 500 Getting Close to Consensus Price Target At the start of the year, the consensus Wall Street year-end price target for the S&P 500 was 1,531, which translates into a gain of 8.76%. With the index up 6.65% year to date, the market is already close to the consensus price target after just a month and a half.
That may be what is keeping the S&P 500 Index stuck at 1520. You can bet that, unless the economy turns bad in coming weeks, these “targets” will get a lift up accompanied with silly rhetoric such as this one from Citigroup’s European strategy group (my emphasis):
(…) However, policy makers and the healing process of time are reducing the fear. The risks of falling are still there but confidence in the safety net is increasing. This is being played out in risk assets rallying. We believe
there is more to go as investors time horizons lengthen. While we do not expect plain sailing from here we see equity markets at least 10% higher by the year end.
First the bad news that we all already know. The weak economic conditions especially in Europe in 2013 as more austerity bites will make the bottom up forecasts of 10% earnings growth very difficult to achieve. We view 5% as a more likely outcome.
But this is not a secret and the market should have discounted this already. What is more important is the outlook for 2014 earnings. As we have detailed above we expect economic growth to inflect in 2013 and be accelerating into 2014. This in itself makes double digit earnings growth more likely in our view.
While the EBITDA margin is at relatively high levels because leverage is low () the RoE is less stretched. We believe that margins should be sustainable around current levels given stable economic conditions, steady commodity prices and little delta in corporate capex.
Taking the 12m forward PE the market is trading at around a 10% discount to its 25 year average. Normalisation points to upside. Price to book is trading at a similar discount while ex Financials the markets are back to average. Of course by their very nature markets have to spend time above and below average to make up that average. Using the trailing PE, as it is a longer source of data, the market trades at above average multiples 48% of the time. It is not unusual to be re-rated.
So, 2013 is already well understood and discounted so we have to buy on 2014 prospects which call for 10% EPS growth because the economy is currently inflecting. Margins should remain high thanks to stable everything. And valuation is attractive because it is 10% below its last 25-year average (which includes 7 years of bubbly P/Es but never mind that since stocks trade above average 48% of the time).
Beautiful broker poetry!
The only worthy thing in this report is this chart which, I assume because it is not explicit, correlates the U.S. ISM with U.S. earnings momentum. Contrary to Citigroup, I fail to feel positive, just yet, on earnings based on this chart.
- In Europe:
Some 54 percent of companies in the Stoxx 600 reported earnings that topped analysts’ estimates this week, according to data compiled by Bloomberg. Fifty-six percent beat revenue projections, the data show. (Bloomberg)
- In the U.S.
Below is an updated look at the earnings and revenue beat rates for the fourth quarter reporting period (which comes to an end next Thursday). As shown below, 63.6% of US stocks that have reported this season have beaten earnings estimates, while 64% have beaten revenue estimates.
I essentially rely on S&P data for my earnings and valuation analysis. This is important now since S&P includes “actuarial gains or losses” on pension expense in operating income, unlike some other aggregators.
S&P reports that as of Feb. 14, 79% of S&P companies had reported Q4 results. The beat rate is 64.9% while the miss rate was 24.5%. Ex-IT (beat rate of 82%), the beat rate drops to 61.7% and the miss rate rises to 27%.
Total Q4 EPS keep declining and are now seen at $23.32, down $0.21 from Feb. 6 and $0.51 from Jan. 31. As a result, trailing 12-month earnings dipped to $96.99, down 0.4% from their Q3’12 level, their first decline since 2009.
Q1’13 estimates stabilized lately: they are estimated at $25.62, up 5.6% Y/Y. If achieved , trailing 12-month EPS would rise to $98.37. Keep in mind that Q4’12 results will likely come in nearly 8% below what analysts were estimating less than 2 months ago.
The creeping market and easing trailing earnings are slowly eroding the market undervaluation which is now 14%, down from 21% in December.
U.S. companies that do significant chunks of their business in Japanese yen are starting to see some serious costs associated with the currency’s recent decline.
“It’s having a significant top line and bottom line impact,” Wolfgang Koester, chief executive of foreign exchange risk-management company FiREapps told CFO Journal. While companies have spent much of the past year focused on protecting themselves from fluctuations in European currencies, the impact of the dollar-yen exchange rate over the past quarter has taken some companies by surprise, and could worsen if companies fail to put in hedges to absorb some of the impact, Mr. Koester said.
The Japanese yen has rapidly lost ground against the dollar, falling about 20% since November. (…)
Handbag maker Coach , Inc., for example, said last month that its fiscal second quarter Japanese sales fell 7% from the same period a year earlier in dollar terms due to the weaker yen. The sales were only off 2% in constant currency terms.
Automotive companies and airlines are also reporting negative impacts. (…)
“It isn’t just the dollar-yen” that has become a drag on results, Mr. Koester said. “The euro-yen is an even bigger exposure for some companies because of the European financial crisis. It is totally catching them off-guard.”
China New Year Retail Sales Growth Slows on Austerity Shop and restaurant sales in China during the week-long Lunar New Year festival rose at the slowest pace in four years as a government campaign to discourage extravagant spending limited outlays on food and drink.
SPAIN VS FRANCE
The improved competitiveness is illustrated by Spain’s recent success in attracting automotive manufacturing expansions by Ford, Renault, Nissan, and Volkswagen, despite a weak overall market in Europe. (Schwab Market Perspective: Seeing the Forest)
There’s a Feeling of Instability Bubbling Up Even so, there are good reasons to believe that talk of currency wars is, for the moment, just talk.
The U.S. was the first country to be accused of waging currency war, when Brazil objected to the Federal Reserve’s second round of quantitative easing in 2011, which was widely seen as a naked attempt to drive down the dollar.
The new Japanese government may now claim that its promise of a massive monetary and fiscal stimulus is solely designed to boost the domestic economy but it has made little secret of its desire to see a weaker yen. Similarly, Bank of England Governor Mervyn King has been open in his view that a further devaluation of sterling, on top of the 20% depreciation since the start of the global financial crisis is needed to further rebalance the economy—even while warning that other countries risk triggering competitive depreciations. (…)
At the same time, the global prohibition on competitive devaluations appears asymmetric; countries that have intervened to prevent their currencies rising, such as Switzerland, have so far escaped censure. Goldman Sachs argues this de-facto global stand-off over currencies represents an unofficial Global Exchange Rate Mechanism. (…)
After all, central banks have so far largely welcomed rising asset prices as a sign of restored confidence and view low yields as creating an incentive for investment.
In the absence of domestic political support, it would take a brave policy maker to argue that soaring asset prices risk creating a new debt-fueled misallocation of capital and threaten to pull away the punch bowl. But perhaps they’re made of sterner stuff these days.
There we go!
Yen resumes slide after G20 Comments on currency devaluation fail to single out Japan
Investors turn their backs on sterling Bets against pound second in volume only to yen
Norway Ready to Use Rate Cuts to Cool Krone, Olsen Says “A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.”
Abe Pressures BOJ Japanese Prime Minister Shinzo Abe said Monday that if the central bank is unable to achieve the 2% inflation target that it has set, that would be a condition for changing the Bank of Japan’s law.
Japan PM says BOJ easing a key factor driving FX Japanese Prime Minister Shinzo Abe said on Monday the central bank’s monetary policy is not directly aimed at weakening the yen, but is among key factors driving exchange-rate moves.
Risk appetite is an important factor – but wars of any kind are bad for trade
(…) Certainly a strong yen is bad for Japan’s exporters. Popular thinking goes that a weaker one will thus lift profits and stocks. Since November 14, when Yoshihiko Noda called a general election, the yen has fallen 14 per cent against the dollar and the Topix has rallied by 30 per cent. Carmakers, as some of the biggest exporters, are among the biggest beneficiaries of a weaker currency. Toyota gains about Y38bn ($407m) in operating income – or 3 per cent of its full-year target – for every Y1 weakening, Nomura estimates. Add in the yen’s 15 per cent slide against the Korean won since November, which should hamper Japan’s biggest rivals, and exporters are in clover.
That does not make the stocks the biggest gainers from yen weakness – those are in fact banks and other financial groups. For every 5 per cent the yen weakens versus the dollar or won, the Topix banks index tends to gain 25 and 12 per cent respectively, according to CLSA. Transport stocks and the big electronics exporters add half that. That suggests the real driver is not the currency move and its profit effects so much as risk appetite. It was a flight to safety that drove the yen to its painful peaks. Now stock market volumes are up amid bets of even looser monetary policy.
Wars of any kind are bad for trade. Avoiding currency moves becoming a pitched battle should be good for the animal spirits that really move the yen – and the stock market.
Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.
“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.” (…)
“Another possible fallout is getting rid of some of the countries that are being ruined by being in the euro, notably the southern European economies,” Christensen said. “People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.”
Saudi Arabia’s crude oil output fell in December to a 19-month low as shipments from OPEC’s biggest producer dropped for a third month and domestic consumption decreased, the Joint Organisations Data Initiative said.
The kingdom exported 7.06 million barrels of crude a day in December, the least since September 2011, JODI reported, citing statistics the government submitted to the Organization of Petroleum Exporting Countries. Exports were 1.3 percent lower than the previous month. Production dropped 4.8 percent in the month to 9.03 million barrels a day.
Saudi Arabia, which burns oil to produce electricity and desalinate water, is seeking to increase use of natural gas as a substitute fuel. By doing so, the government plans to free up more crude for sale overseas, where the commodity can sell at higher prices than it does at home.
The kingdom burned 303,000 barrels a day at power plants in December, the lowest level in 10 months, according to the data. That is 29 percent less than what it burned a year ago.
Saudi Arabia, the world’s biggest oil exporter, stored 276.6 million barrels of crude within its borders in December compared with 278.9 million a month earlier, the data show. Refineries processed 1.73 million barrels a day during the month, down by 44,000 barrels a day from November.
Anecdotally, the economy in South Florida is clearly softening. There are vacancies all along A1A on the sea coast, right in prime season, and most business people I talk to say biz is slow.
Some things will never change:
Rash acquisitions leave miners in a hole Companies report multibillion-dollar writedowns
BILL MILLER INTERVIEW