Friday, November 22, 2013
Germany: Q3 GDP
In the wake of recent criticism by the IMF (and even the U.S. Treasury) that it is too reliant on its exports, Germany released its detailed Q3 GDP report today. And, while trade contributed quite a bit to the country's output in Q2, the balance on goods and services actually detracted from GDP in the most recent quarter. The largest contributions were made, rather, by the consumption and investment components:
It's a No Taper Day Today on Wall Street
Despite Fed minutes that left the door open to a December taper contingent on better economic stats, the markets are taking the relatively upbeat data over the last two days in stride. The S&P500 is now up about 25 points from Wednesday's "Taper On" low, while 10 year bond yields have fallen back 9bps and the dollar has its sights fixed on Wednesday's "Pre Taper On" trough. We do note, however, gold's lack of enthusiasm either way.
US Residential REITS Locked in Persistent Downtrend
Over the last year, as taper concerns have flared, US residential REITS have struggled. As a group they have underperformed the MSCI World index by 24% on average. The chart below shows the relative performance.
All four stocks look like they are locked in persistent downtrends. Ignat's rule states that a portfolio full of underperforming stocks is likely to underperform. The best way to confront this truth is to avoid stocks that are underperforming...especially those locked in persistent downtrends.
Disconnect Between JOLTS and Payroll Data Widens
US JOLTS (Job Openings and Labor Turnover Stats) is a useful employment indicator that doesn't get as much attention as it's nonfarm payroll cousin. According to Bureau of Labor Statistics, JOLTS data was designed to "serve as a demand-side indicator of labor shortages". It is an important measure of how "tight" the job market is in the United States. One disadvantage to the data is it isn't very timely (the latest release is for September).
Since the recession, the Job Openings Rate has been unable to move above 2.8%. The latest data point is again at 2.8%. The number of job openings has basically been unchanged since February.
A divergent relationship has been developing since earlier this year between the JOLTS and the nonfarm payroll data. The spread between these two data points has widened out and persisted like never before since the JOLTS data was introduced (which was in late 2000). It would seem that either the payroll data has been overstated or the JOLTS data has been understated. The chart below shows this new trend.
Finally, yesterday we commented that the first two regional fed surveys had underwhelmed. We had our third release for November today with the release of the Kansas City Fed Manufacturing Survey. This survey came in one point HIGHER than consensus and indicates manufacturing in this region is expanding in November.
Thursday, November 21, 2013
Europe: Consumer Confidence
The European Commission released its flash estimate of consumer confidence for the month of November this morning:
The fall to -15.4 for the Euro Area contrasts with an expected improvement to -14.0 and follows less than stellar data releases for retail sales and prices earlier this month:
The fall to -15.4 for the Euro Area contrasts with an expected improvement to -14.0 and follows less than stellar data releases for retail sales and prices earlier this month:
Falling Yen Bad News For US Profit Margins
With the Yen having fallen below 100, it is important to understand some of the consequences. Over the last 25 years, a structurally rising Yen has been good for US profit margins. In the chart below, one can see the 73% correlation over the last 25 years and how the sequence of higher highs on the Yen have been coincident to higher highs in profit margins.
If the structural Yen strength is giving way to structural Yen weakness, one area to be concerned about is US corporate profit margins. Per the scatterplot below, there is not a single observation over the last 25 years where the Yen was below 100 and profit margins were above 9%.
While there are many variables that impact profit margins, if we isolate on the Yen and run a regression against US profit margins, the model suggests a worrying outcome. It predicts profit margins of 7.8% in a year, down from 10% today. Importantly, that modeled drop in margins implies a 20% drop in earnings. We aren't necessarily forecasting a 20% drop in earnings....but it is important to understand that, in general, a falling Yen is bad news for US profit margins.
If the structural Yen strength is giving way to structural Yen weakness, one area to be concerned about is US corporate profit margins. Per the scatterplot below, there is not a single observation over the last 25 years where the Yen was below 100 and profit margins were above 9%.
While there are many variables that impact profit margins, if we isolate on the Yen and run a regression against US profit margins, the model suggests a worrying outcome. It predicts profit margins of 7.8% in a year, down from 10% today. Importantly, that modeled drop in margins implies a 20% drop in earnings. We aren't necessarily forecasting a 20% drop in earnings....but it is important to understand that, in general, a falling Yen is bad news for US profit margins.
Nikkei Hits 6 Year High as BOJ and Abe Work Overtime, but is Japan Out of the Woods? Part 2
In Part 1 of this piece we explored at a high level some of the impacts of Japanese monetary policy on on the real economy. We concluded that currency devaluation has been successful in raising import prices, but has so far been ineffectual in creating private demand or rising real wages. In this part we'll compare the composition of growth over the last year with the composition of growth over the last ten years, and then examine whether this composition of growth is 1) sustainable and 2) likely to continue in 2014.
Over the last ten years Japan has had three basic drivers of growth: private consumption (accounting for 65% of growth on average), public consumption (accounting for 22% of growth on average) and trade (accounting for 16% of growth on average).
Over the last year the composition of growth has changed dramatically and has been led primarily by: private consumption (accounting for 44% of growth on average), public investment (accounting for 31% of growth on average) and public consumption (accounting for 13% of growth on average). Government spending of one form or another has produced 43.3% of the growth over the last year vs the ten year average of 27.8%. This is clearly the result of the Abe-led expansionary fiscal policy, but we get the feeling this relatively large policy initiative is being confused for underlying demand.
The just released Indices of Building and Civil Engineering clearly paint the picture of weakening private investment and soaring public investment.
The question then is whether this type of government led growth is sustainable and the answer to that question is a resounding NO! At 9.2% of GDP, the country is running one of its largest budget deficits ever with a debt to GDP ratio of 209%.
Abe has a plan for this though. He has pushed through a consumption tax hike of 3% that will take effect in April of 2014. While fiscal retrenchment is obviously necessary, the tax increase combined with the tailwind from fiscal stimulus in 2013 turning into a headwind in 2014 will likely produce a drag on GDP of 2-4%, depending on how much fiscal tightening is actually allowed to occur. So unless the private sector ramps up investment and/or consumption or trade starts to pull some serious weight, there is a good chance Japan will wind up back in recession by the end of 2014. The problem with these rosy scenarios is that lack of capacity hasn't been a problem for years, consumption is likely to be brought forward ahead of the April tax hike (and thus be weak in the second half of 2014), and world trade has flat-lined with global growth estimates for 2014 coming down by the day.
With that said, count us skeptical in the Great Japanese Revival or the Abe Put. A more likely scenario seems to be the Great Japanese Fiscal Cliff that will unlikely be accompanied by a soaring Nikkei. Of course, that is a longer-term view that says little about the trading opportunities in Japanese assets, but we would caution against interpreting rising Japanese stocks to mean Abenomics has been a success.
Over the last ten years Japan has had three basic drivers of growth: private consumption (accounting for 65% of growth on average), public consumption (accounting for 22% of growth on average) and trade (accounting for 16% of growth on average).
Over the last year the composition of growth has changed dramatically and has been led primarily by: private consumption (accounting for 44% of growth on average), public investment (accounting for 31% of growth on average) and public consumption (accounting for 13% of growth on average). Government spending of one form or another has produced 43.3% of the growth over the last year vs the ten year average of 27.8%. This is clearly the result of the Abe-led expansionary fiscal policy, but we get the feeling this relatively large policy initiative is being confused for underlying demand.
The just released Indices of Building and Civil Engineering clearly paint the picture of weakening private investment and soaring public investment.
The question then is whether this type of government led growth is sustainable and the answer to that question is a resounding NO! At 9.2% of GDP, the country is running one of its largest budget deficits ever with a debt to GDP ratio of 209%.
Abe has a plan for this though. He has pushed through a consumption tax hike of 3% that will take effect in April of 2014. While fiscal retrenchment is obviously necessary, the tax increase combined with the tailwind from fiscal stimulus in 2013 turning into a headwind in 2014 will likely produce a drag on GDP of 2-4%, depending on how much fiscal tightening is actually allowed to occur. So unless the private sector ramps up investment and/or consumption or trade starts to pull some serious weight, there is a good chance Japan will wind up back in recession by the end of 2014. The problem with these rosy scenarios is that lack of capacity hasn't been a problem for years, consumption is likely to be brought forward ahead of the April tax hike (and thus be weak in the second half of 2014), and world trade has flat-lined with global growth estimates for 2014 coming down by the day.
With that said, count us skeptical in the Great Japanese Revival or the Abe Put. A more likely scenario seems to be the Great Japanese Fiscal Cliff that will unlikely be accompanied by a soaring Nikkei. Of course, that is a longer-term view that says little about the trading opportunities in Japanese assets, but we would caution against interpreting rising Japanese stocks to mean Abenomics has been a success.
Chinese Flash PMI Comes in Lower, Confirming Weakness in Industrial Metals
The Markit Flash PMI was released today for China, showing that manufacturing expanded at a slower in November than in October. Every component except one was down compared to the previous month. This data point is in line with the weakness we've seen in the industrial metals space that we highlighted here. It's also in line with fiscal stimulus tapering off and thus a slightly slower pace of growth in the last quarter of 2013.
U.K. Industrials
Today's release of the CBI Industrial Trends survey showed the strongest increase in total orders since 2007:
This would suggest that positive trends in U.K. Industrial Production continue:
The Industrial sector in MSCI United Kingdom is the third best performer (behind the Telecom and Consumer Discretionary sectors) on an absolute and relative basis over the last year:
Digging deeper, the best performing sub-industry over the last year has been the Airlines (comprised of just one stock, EasyJet), followed by Industrial Machinery:
A quick look at the constituents of the U.K. Industrial Machinery sub-industry reveals one especially outstanding performer in the group:
Finally, when we look at our point-and-figure charts, along with the underlying data on price movements, we see that, once again, the highest average daily percent change generates the best relative performance:
This would suggest that positive trends in U.K. Industrial Production continue:
The Industrial sector in MSCI United Kingdom is the third best performer (behind the Telecom and Consumer Discretionary sectors) on an absolute and relative basis over the last year:
Digging deeper, the best performing sub-industry over the last year has been the Airlines (comprised of just one stock, EasyJet), followed by Industrial Machinery:
A quick look at the constituents of the U.K. Industrial Machinery sub-industry reveals one especially outstanding performer in the group:
Finally, when we look at our point-and-figure charts, along with the underlying data on price movements, we see that, once again, the highest average daily percent change generates the best relative performance:
US Economic Roundup - Better Employment, Better Manufacturing, Still No Signs Of Inflation
In today's US economic releases, we saw signs of a rebound in employment (with a caveat), a pick up in manufacturing activity, and another data point signalling low inflation.
Initial jobless claims dropped by 21k to 323k. The caveat here is last week was a shortened week due to Veteran's Day, which increases the effects of adjustments to this series. The good news is the 4-week moving average also fell.
Two data points relating to manufacturing were released. The more positive of the two was Markit's Flash Manufacturing PMI data series which jumped to an 8-month high. Since this summer, the Markit PMI has been well below the ISM Manufacturing PMI so this may be a sign that these series are converging.
The other manufacturing data point was the Philly Fed Survey. The Philly Fed Survey fell but remained positive indicating expansion in the Philadelphia Fed manufacturing region. While it remained positive, it should be noted that the first two regional fed surveys for November (Empire Fed survey was released last week) have come in below expectations.
And finally, the year-over-year change in the Producer Price Index remained at 0.3%. Similar to the CPI release yesterday, the energy component remains a depressant on prices. The year-over-year change in Core PPI ticked up slightly to 1.36%.
Initial jobless claims dropped by 21k to 323k. The caveat here is last week was a shortened week due to Veteran's Day, which increases the effects of adjustments to this series. The good news is the 4-week moving average also fell.
Two data points relating to manufacturing were released. The more positive of the two was Markit's Flash Manufacturing PMI data series which jumped to an 8-month high. Since this summer, the Markit PMI has been well below the ISM Manufacturing PMI so this may be a sign that these series are converging.
The other manufacturing data point was the Philly Fed Survey. The Philly Fed Survey fell but remained positive indicating expansion in the Philadelphia Fed manufacturing region. While it remained positive, it should be noted that the first two regional fed surveys for November (Empire Fed survey was released last week) have come in below expectations.
And finally, the year-over-year change in the Producer Price Index remained at 0.3%. Similar to the CPI release yesterday, the energy component remains a depressant on prices. The year-over-year change in Core PPI ticked up slightly to 1.36%.