Wednesday, July 1, 2015

Happy Fourth of July! (excerpt)


In addition to barbeques and fireworks, the Fourth of July weekend is also a big one for big discount sales. Consumers are certainly in a happy mood. The Consumer Confidence Index rose from 94.6 during May to 101.4 during June, remaining near recent cyclical highs. The labor market continues to improve, with the percentage of consumers saying that jobs are plentiful at 21.4% last month, a new cyclical high and the best reading since February 2008.

An index of pending existing home sales rose in May to the highest since April 2006. That’s yet another sign of improving consumer confidence. The puzzle, though, is that Census data on household formation show that they continue to be all renters. This suggests that most of the housing transactions are between younger current owners who are trading up and older current owners who are trading down. First-time homebuyers seem to be missing in action. That may be because the Millennials are saddled with student debt, postponing getting married, and renting apartments in cities, as we discussed last week.

Finally, I should note that the five available regional business surveys for June are showing an upturn from their winter/spring soft patch. The average of the composite business indexes for the Fed Districts of New York, Philadelphia, Richmond, Kansas, and Dallas rose to 0.7 last month, the first reading above zero since February. That’s still relatively weak, suggesting that there may still be some soft spots in the economy. The Dallas survey is especially weak because the oil industry in Texas has been hard hit by lower oil prices.

Today's Morning Briefing: Land of the Free, Home of the Brave. (1) Fireworks on July 4 in US, July 5 in Greece, and July 6 in the markets. (2) Another panic attack followed by another relief rally? (3) Greece will either be kicked out or kicked down the road. (4) US fundamentals improving relative to rest of world, but valuation is a problem. (5) S&P 1500 forward earnings bottoming and turning up. (6) Consumers are in a spending mood as labor market continues to improve. (7) Housing sales looking up, although all new households are renting. (8) Trading up and down. (9) Regional business surveys still show a few soft spots. (10) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

Tuesday, June 30, 2015

Braking and Accelerating in China (excerpt)

The Chinese have a very high savings rate, widely estimated to be 40%-50% of their income. A rough proxy for the amount of saving is M2, which rose to a record $21 trillion during May. It is up $2 trillion y/y and $12 trillion over the past five years.

The PBOC’s monetary policies have channeled most of those deposits into loans that expanded industrial capacity and funded property development. Now there is a glut of these, which is weighing on economic growth. Yet as I discussed yesterday, China’s banking regulators are set to scrap the country's longstanding loan-to-deposit ratio requirement, which is currently 75%. That move could inject another $1.1 trillion into the economy.

Over the past seven months, Chinese investors have poured money into the stock market seeking better returns, thus inflating a speculative bubble, which may be starting to burst already. Helping to burst the bubble are regulators intent on keeping a lid on margin lending by shadow banks. The 6/25 FT reported that official margin lending totaled $354 billion as of Wednesday’s close, up nearly 5.5-fold from a year earlier. However, this officially sanctioned margin lending, which is tightly regulated and relatively transparent, is only the tip of the iceberg for Chinese leveraged stock investing.

Unregulated margin leverage can reach 5:1 or higher, with no limits on which shares investors can buy. The funds come mainly from wealth management products (WMPs) sold by banks and trust companies. These are structured deposits that banks market to customers as a higher-yielding alternative to traditional savings deposits. Regulators moved to limit the availability of shadow margin debt on Saturday, June 13, triggering panic selling on Monday, June 15.

This past Saturday, China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders. In the fourth reduction since November, the one-year lending rate was reduced by 25 basis points to 4.85%. The one-year deposit rate will fall by 25 basis points to 2%, while reserve ratios for some lenders, including city commercial and rural commercial banks, will be cut by 50 basis points. The PBOC was clearly worried about a meltdown in the stock market.

Today's Morning Briefing: Central Bank Credit & Credibility. (1) Are central banks losing control? (2) Given global turmoil, US stocks may be more attractive again. (3) BOJ pumps up liquidity, but fails to ramp up production. (4) Japan’s forward earnings still rising to record highs. (5) Chinese savings glut. (6) As China’s margin debt regulators step on brakes, PBOC steps on monetary accelerator. (7) Wealth management products may be China’s weapons of mass financial destruction. (8) ECB stimulates bank lending a little bit. (9) How much does Greece owe ECB? (10) Not cool: Dudley compares Greece to Lehman. (11) Liftoff or back off? (12) Fist fight between IMF and BIS. (More for subscribers.)

Monday, June 29, 2015

US Consumers Still Consuming (excerpt)

I have often said that betting against the US consumer is usually a bad bet. When we are happy, we spend money. When we are depressed, we spend even more to release the dopamine in our brains’ pleasure center. That helps us feel better. We were born to shop!

I have to admit that I was starting to doubt American shoppers earlier this year. Forgive me, please. Retail sales were anemic during the first four months of the year despite the windfall from lower gasoline prices. I reckoned that perhaps the savings from lower fuel costs was offset by higher out-of-pocket medical expenses attributable to Obamacare. In addition, rent inflation has been rising faster than overall CPI prices, reducing consumers’ spendable dollars for other goods and services.

Well, never mind: Retail sales jumped 1.2% during May, and the previous two months were revised higher. On Friday, we learned that personal consumption expenditures (PCE) jumped 0.9% during May, with upward revisions during April (0.1% from 0.0%) and March (0.6% from 0.5%). Real PCE rose 2.1% (saar) during Q1, and probably rose by about 3.0% during Q2.

On a year-over-year basis, real PCE rose 3.4% through May. Real disposable personal income rose 3.5%, with real wages and salaries rising 4.8%. Over the past three months through May, real consumer spending rose 2.8% (saar), led by solid gains in durable goods (9.8) and nondurable goods (2.9) but a middling increase in services (1.7).

Today's Morning Briefing: Standard of Living at Record High! (1) The last act of the Greek drama? (2) Dopamine and consumer spending. (3) Winter’s cabin fever set stage for spring spending splurge. (4) Real pay per worker at record high. (5) Real consumption per household is at record high. (6) Corporations prefer to buy back shares, pay dividends, acquire competitors, and cut expenses. (7) The logic of deals. (8) Not much inflation. (9) Why is PCED inflation lower than CPI version? (10) Yet another Chinese fire drill. (More for subscribers.)

Thursday, June 25, 2015

The Productivity Puzzle (excerpt)

There is something very odd about the productivity numbers. They don’t make much sense. Productivity growth seems awfully weak given all the news articles about robots, automation, drones, the Internet of Things, and all the apps that are enabling everyone to work more efficiently.

The real output of the nonfinancial business (NFB) sector recovered from the last recession during Q4-2011, when it first exceeded the previous cyclical peak. Since then through Q1-2015, it is up 10.3%. Over this same period, NFB productivity is up only 2.3%. In other words, an 8.0% increase in hours worked accounted for most of the increase in output. On a y/y basis, real NFB output has been hovering around 3% since mid-2010. Over the same period, hours worked has been growing around 2%, while productivity has been rising around just 1%.

My hunch is that the output of the services-producing industries may be undercounted. Alternatively, productivity may be particularly weak in these industries. The easiest and best productivity gains in services-producing industries may have been gotten, and extracting more out of them is getting harder to do. Here are the relevant data points:

(1) The ratio of real GDP for goods to goods-producing payroll employment was at a near-record high of $267,810 per worker during Q1 (saar), up 1.7% y/y. The similar ratio for services rose to $81,372 per worker, down 0.1% y/y.

(2) Since the start of the data in 1947, the goods-producing “productivity” ratio is up a whopping 908%, while the comparable rate for services is up only 77%.

Today's Morning Briefing: Everyday Low Price. (1) EDLP. (2) Walmart stuffing labor costs down supply chain. (3) Is the Phillips Curve right about wage inflation, but wrong about price inflation? (4) S&P 500 Hypermarkets & Super Centers are getting squeezed. (5) Other retailers still showing upbeat metrics. (6) Is there something wrong with the productivity stats? (7) Productivity ratio falling recently in services. (8) Global economy muddling along in the mud. (9) US economy still has some soft spots. (10) Eurozone’s M-PMIs more upbeat than actual production. (11) Submerging economies. (More for subscribers.)

Wednesday, June 24, 2015

US Housing: Good Foundation? (excerpt)

Sales of both new and existing homes rose last month. That always happens during the spring. However, the data are seasonally adjusted, and were relatively weak earlier this year. There is an encouraging development for the housing industry in recent household formation, suggesting a higher trend in sales.

The total number of new households increased by 1.4 million y/y through March. This growth rate has exceeded the 1.0 million mark since October 2014. That’s the good news. The bad news is that all the new households are renting rather than buying their homes. The total number of homeowners peaked at 76.5 million during Q4-2006. It was down to 74.0 million during Q1-2015. The number of households who are renters rose 9.3 million since Q2-2004 from 32.9 million to 42.2 million.

That trend has clearly benefitted landlords of multi-family units and given them an incentive to build more of them. However, housing starts of such units have been back to their previous cyclical high for over a year. There was a big jump in May’s building permits for multi-family units, which reflected a surge of applications to beat the expiration of a lucrative tax break in New York City.

Single-family housing starts has been hovering around 700,000 (saar) for over a year, well below previous cyclical highs that typically well exceeded 1.0 million units. New single-family home sales rose to a cyclical high of 546,000 units (saar) during May, but that’s closer to previous cyclical troughs than peaks.

Today's Morning Briefing: Household Formation. (1) Narrowing bull market. (2) Three outperforming sectors. (3) Health Care way ahead of the pack. (4) Seeking earnings growth. (5) No bargains. (6) Dollar and oil weighing less on earnings revisions. (7) More households, but they are all renting. (8) Housing starts and new home sales still well below previous cyclical peaks. (9) Existing home sales rising, but who is buying? (10) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)