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361 Weekly Research Briefing: One Foot on the Brake and One on the Gas

July 16, 2018

Right now would be a very good time to have Sammy Hagar as your co-pilot. While there have been several areas of the markets to have grabbed big gains this year, there is still plenty to worry about. I love the Nasdaq stock gains, but I also squirm when I see how many sectors of the market aren’t participating. If Banks, Consumer Staples and Emerging Markets were participating in this equity market, I would consider removing my portfolio’s brake for a second gas pedal. But with economic uncertainty building, credit worsening and interest rates rising, I want to make sure that every turn I make is near perfect.

For a month in July this is a busy week in the markets: Trump/Putin summit, Fed Chairman Powell testifies before Congress, plenty of China data to look at, 18% of the S&P 500 will release earnings, and of course Amazon Prime day to worry all retailers. Oil markets also must look for follow-through comments regarding the White House tapping the strategic petroleum reserve to try and lower oil prices. (I’d suggest saving the tap for a recession, depression, or if prices spike > $200 a barrel during a global shock.)

Lots of talk about the market breadth this week. Yes, the total market breadth is wide given how strong small caps have done with the stronger U.S. economy and the fear of trade wars. But also no, the major cap-weighted indexes are narrow as the technology-weighted mega caps have put up all the performance for the year. It helps that these mega caps are more service oriented (so less affected by global trade wars) and they also earn sizable profits in the the better performing global economy (the U.S.). So everyone is both right and wrong. Now go look back in time to the last time that both Mega Caps and Small Caps outperformed. Unfortunately, Sammy Hagar did not have a chart topping album during the last three times that this happened. Instead the chart-toppers were Santana’s Supernatural, Nelly’s Nellyville and Rhianna’s Good Girl Gone Bad. And if you don’t want to look up the dates, just call The Leuthold Group in Minneapolis. In the meantime, I am double checking my 5-point seatbelt and cinching my helmet.

A strong theme among the all-time new highs last week…

(@charliebilello)

But even as the Nasdaq makes all-time new highs, it has little bench support…

(@hmeisler)

And if you remove the FANG stocks from the S&P 500, you are seeing red…

(Bank of America/Merrill Lynch)

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361 Weekly Research Briefing: Melting...

July 9, 2018

Ice cream wasn’t the only thing melting last week. It was a good, short trading week for U.S. equities, helped by the strong set of Goldilocks-looking jobs data. But was there also a melting of increased trade worries as the initial tariffs were implemented? Not only was there the direct economic impact caused by the tariffs on agriculture and other end-use products, but there was the uncertainty of tariffs on all intermediate goods which is causing Oracle and SAP software to run overtime on every accounting IT server. Some think the new Trade Wars will be around for a bit, while others moved into the ‘this is absurdity camp’ late last week and were betting long in the market that the Trade Wars would end soon. While I agree that the broad tariffs are absurd and not well thought through, I do not know if they will be turned off like a light switch. Volumes in the market are currently low with the summer holiday, so stocks could be giving us a false read.

What we do know for certain is that there is plenty of uncertainty. So not a bad idea to be flexible in your portfolios and have your investment bets spread out, with cash available to jump as opportunities arise. Earnings will begin in full later this week with big bank stocks launching first. From these reports, we will see data points of credit health and economic growth activity. So welcome back to the heat of the market. Time to get busy.

Perfectly put…

“Investors have this unusual set of dual realities,” said Rebecca Patterson, chief investment officer at Bessemer Trust. “You have a risk of an escalating, truly global trade war which creates a huge amount of uncertainty. But if you look at the economic data coming out each day most of it is still suggesting robust growth — it still looks really good and that is supportive for earnings.”

The likelihood of an all-out trade war is still batted away by many investors as a remote possibility. Nonetheless, there has over the past month been a rotation in US equities, out of globally exposed, growth-oriented “cyclical” stocks such as industrials, into more defensive sectors like utilities. The Russell 2000 index of smaller company stocks, which are better shielded from any tit-for-tat on tariffs, has easily beaten the S&P 500 in performance terms of late.

“It is fairly clear from an equity market standpoint that the more cyclical, globally exposed sectors have come under pressure and defensive parts of the market have done well,” said David Lebovitz, global market strategist at JPMorgan Asset Management.

(Financial Times)

Smoking Hot #1: Unemployed divided by job openings now at a 50-year low…

(@PlanMaestro)

Smoking Hot #2: Take this job and shove it…

Workers are choosing to leave their jobs at the fastest rate since the internet boom 17 years ago and getting rewarded for it with bigger paychecks and/or more satisfying work.

Labor Department data show that 3.4 million Americans quit their jobs in April, near a 2001 peak and twice the 1.7 million who were laid off from jobs in April.

Job-hopping is happening across industries including retail, food service and construction, a sign of broad-based labor-market dynamism.

Workers have been made more confident by a strong economy and historically low unemployment, at 3.8% in May, the lowest since 2000.

(WSJ)

Smoking Hot #3: Rising tide is lifting all boats…

A record-low 11.4 percent of U.S. workers earned poverty-level wages last year, according to the Economic Policy Institute, and that share is likely to fall further, said Torsten Slok, chief international economist at Deutsche Bank. With the unemployment rate for those with a college degree at 2.1 percent, “any incremental increase in jobs going forward will go to people with lower skills and wages,” he said. The labor market is at an inflection point, with wages “moving higher simply because there are today economy-wide more job openings than unemployed people.”

(Bloomberg)

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361 Weekly Research Briefing: Summer Breaking...

June 25, 2018

I’ve been on break studying history, culture and food with the family this weekend. But quickly, here are a few interesting things that I noticed this week in the markets:

While most stocks were lower, the international trade-related stocks (Industrials, Semis and Materials) were down much more. Also, Emerging Markets and Developed International equities underperformed even with the U.S. dollar lower. Tells me that risk was for sale as the trade wars increase.

Energy stocks bounced as OPEC production increases were less than expected (600k bbl/day versus 1m bbl/day expected). Now will anyone cheat (or do they have the capacity to do so)? And so the price of Crude Oil bounces back above the 200-day moving average.

Utilities, Retail and REITs outperform. So again, risk off and investors want more U.S. consumer exposure rather than multi-national trade exposure.

Small Caps again outperform Large Caps even with the U.S. dollar lower, so investors are working extra hard to avoid trade war exposure and get more U.S. consumer exposure.

The Financial Sector ETF (XLF) has now fallen 10 days in a row. This is a new record. Yield curve going flat is weighing big time.

Philly Fed Index for June came in short at 19.9 versus 29.0 estimated (and 34.4 in May). And new orders looked even worse falling from 40.6 to 17.9.

Daimler sends out a profit warning as they expect U.S. tariffs on U.S. manufacturing to affect future sales overseas (especially in China where their SUVs dominate). So Mercedes and BMW have gone into full freak out mode.

Airbus also warned that Brexit could affect its 15,000 employees in the U.K. Yea, Brexit…the gift that keeps on stinging.

The Dow Jones Industrial average dumped GE for Walgreens/Boots.

CNBC has a funeral for Bitcoin. So, they are no longer going to talk about it anymore? Bitcoin gets crushed to new lows below $6000.

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361 Weekly Research Briefing: Global Trade Gets Muddy

June 18, 2018

Much to think about this week, but the acceleration in the global trade wars has once again moved to the top of the list. Going tit for tat with China has upset the financial markets. Will this set a precedent for how the U.S. ‘negotiates’ with Europe, NAFTA and the rest of the world? If so, U.S. economic growth will certainly slow. For now, the Fed continues to think that the U.S. will avoid the trade wars and that growth will continue. As a result, the Fed increased rates 25 basis points last week. As rates moved higher, so did the U.S. dollar putting a further hurt on Emerging Market currencies, equities and debt. Will EM be the tipping point for the global markets? It has happened before. But for now, the financial markets have competition for attention as the World Cup started off with an incredible weekend of games. Hats off to Mexico, Iceland and Ronaldo.

Trade tariffs with China have expanded to include the building blocks of technology…

Will semiconductor investors stay put in their stocks?

The U.S. semiconductor industry bristled at President Donald Trump’s plan to impose tariffs on about $50 billion of Chinese goods, arguing they will hurt American business and make the country less competitive.

The rules, which take effect July 6, will place 25% tariffs on a variety of goods including semiconductors and related product imports, products brought into the U.S. that amounted to $2.5 billion in 2017, according to the Semiconductor Industry Association, a U.S. trade group.

A second set of tariffs, which would take effect at a later date, includes additional semiconductors and related products—and that impact is more extensive, including a wider collection of components in chips than the original list, the group said. The trade group said it was still determining the financial impact.

China, in a retaliatory move, said it would impose tariffs of 25% on U.S. products including autos, agriculture and seafood.

(WSJ)

How to delete a 100-year old American company with tariffs…

Lyon Group Holding owns Lyon and Republic, century-old companies that dominate the market for American-made lockers. The companies’ combined annual sales are around $100 million, and they employ some 400 full-time workers at three manufacturing plants in Indiana and Illinois.

Steel has long accounted for 45% of the cost of making lockers at Lyon and Republic, the single biggest expense. Mr. Trump’s 25% tariff has driven up the price of foreign steel and given domestic steel the chance to raise prices. American hot-rolled steel coil recently sold for $900 per short ton—the highest price in a decade. That’s up 38%, or $248 per ton, since the beginning of January. Lyon and Republic now spend $40.68 on steel for their $100 individual locker units, up from $33.90 before the tariffs. In this low-margin business, that’s the difference between a $5 profit and $1.78 loss on each unit.

“This is do or die for businesses,” Mr. Altstadt says. “Either you fix this problem, or if you can’t fix it somehow, the business will have to close completely because you can’t have a negative profit on the product you sell.”

Raising locker prices isn’t an option. Even before the tariffs, Lyon and Republic’s clients were paying a 10% premium for the convenience of buying American instead of Chinese, and they can’t afford to go any higher, Mr. Altstadt says.

(WSJ)

(WSJ/Daily Shot)

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361 Weekly Research Briefing: Risk in Traveling

June 11, 2018

The international financial markets remain full of fear and doubt causing those who look abroad to remain cautious. This hesitancy to commit new monies overseas continues to benefit U.S. risk assets. While most global risk assets pulled back from the edge last week, it was U.S. equities and credit which outperformed. Until emerging market currencies find a floor value and European economic data begins to stabilize, it will take much work to get investors to send their capital abroad.

There is good news for investors with the U.S. economic datapoints showing further strength. And over the weekend, Italy’s new finance minister has also decided to remain in the Euro, which gives Germany and France time to find a creative solution for the Boot. This week will be a big one with central bank decisions from the FOMC, ECB and BoJ. Expect the strong U.S. dollar and trade war uncertainty to appear in the decisions and surrounding conversations. And then on Thursday, the biggest sporting event in the world begins for the next four weeks. Expect trading volumes and financial decision making to be impacted. Good luck with your portfolio and your teams.

Great news out of Milan this weekend…

The newly formed government has decided to remain in the Euro. This was a major source of concern a week ago. We have no idea how long the decision will last but it is a start and will help Italy negotiate with the EU.

Italy’s government has no intention of leaving the euro and plans to focus on cutting debt levels, looking to boost growth through investment and structural reforms rather than deficit spending, the new economy minister said.

In his first interview since taking office a week ago, Giovanni Tria told Corriere della Sera newspaper that he aimed to meet existing debt targets for 2018 and 2019, adding that Italy’s debt commitments were fully sustainable.

“Our goal is (to lift) growth and employment. But we do not plan on reviving growth through deficit spending,” Tria said, adding that he would present new economic forecasts and government goals in September.

“These will be fully coherent with the objective of continuing on the path of lowering the debt/GDP ratio,” he said.

(CNBC)

But while Italy looks better, the Emerging Markets look worse even with all the IMF and Central Bank assistance…

So far, few believe the weakness in riskier markets threatens the nine-year-long U.S. stock advance, but the recent market moves have bolstered the case for caution. More turbulence could be in store next week, when the European Central Bank and the Federal Reserve hold their monetary policy meetings. Many expect the Fed to raise interest rates, which would increase pressure on emerging markets and test the ability of some countries to repay dollar-denominated debt.

“Rising global real interest rates are the number one predictor of financial problems in vulnerable economies,” said Kenneth Rogoff, a professor at Harvard University and the former chief economist of the International Monetary Fund. “The risks are greater than people realize.”

Dollar strength is a danger for some countries because it weakens their currencies and makes it more difficult to pay back dollar-denominated debt. Higher U.S. rates dim the allure of foreign assets, especially in emerging markets, where investors often take on greater risk in exchange for higher yields and returns.

(WSJ)

At the same time, Europe economic data continues to slow…

German factory orders just turned negative YoY.

(@jsblokland)

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Weekly Research Briefing: To the Moon

June 4, 2018

When the world becomes uncertain, we retreat towards certainty. Right now there is plenty of significant uncertainty for Global Macro investors in the world: trade wars, Italy’s new populist government, Brazil’s social and economic upheaval, just to name a few major items. As investors have become increasingly uncertain of the outcomes of these events, they will concentrate their bets towards those with more certainty. As a result, the global equity markets saw a shift toward U.S. growth stocks last week. Just look at the list below of very large cap stocks which hit all-time highs on Friday. These are high-multiple companies that dominate their industries and are less likely to get caught up in a trade war or suffer from Emerging Market unrest. While investors backed away from European and U.S. names tied to export trade, several Emerging Markets caught in strong U.S. dollar cross-hairs, and Financial stocks that might have international exposures, they quickly reallocated into U.S. Technology, Biotechnology, as well as domestic Consumer stocks. So the fuse has been lit for growth names once again. As long as the U.S. economy remains solid and uncertainty continues around the globe, I believe this trend will remain. Have a great week.

From Friday’s ‘all-time high’ list ranked by market cap…

You have to go down to the 15th name to find a stock with a trailing P/E less than 20x.

Mega Caps Amazon and Microsoft leading the way last week for higher growth and high-multiple stocks…

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Weekly Research Briefing: Who Blinked? Who Cares?

May 21, 2018

Just end all this tariff nonsense and let’s get back to business. Farmers have soybeans to plant and Campbell’s urgently needs cheaper can prices. The steel workers will be upset, but from the looks of their stock prices they were about to lose volumes to imported finished goods anyway, as end customers shifted to cheaper solutions. We can only hope that the pause of this trade rift with China will lead to calmer heads in other trade negotiations (NAFTA and the EU).

While global trade wrinkles meet an iron this weekend, a few other articles need to find a steam press. First there is Venezuela which is unraveling further after the world turns against their sham Presidential election on Sunday. As planet Earth turns away from buying Venezuelan oil, prices will go higher. Global energy stores are exhausted and even a small supply disruption will elevate prices. But Venezuela is more than a small producer. U.S. and Iran angst only adds to oil price uncertainty. Hope that you locked in your summer airfare prices, or are soon taking delivery of your Tesla.

The continued rise in U.S. interest rates and the U.S. dollar is putting significant pressure on Emerging Market currencies. And forex pressure is causing investment outflows which of course is negatively impacting EM stocks and bonds. Capital outflows is the last thing that Argentina, Turkey and others need right now. Investors will need extra thick stomach lining to hang onto their EM investments this year if the U.S. dollar continues to strengthen.

While the markets will wrestle with higher oil prices and increasing troubles in Emerging Markets, I’d expect any return to normal on global trade to help U.S. stock prices for the time being. The direct beneficiaries of multi-national industrial and material companies, as well as anything touching grains, fruits and vegetables will see the most benefit. Those names that were hurt the most during the trade war will now see the most relief. This shift will throw a small wrench in the summer portfolio plans of several active funds. The environment also gets a bit better for credit which remains under the microscope for many of us. So, maybe it will end up being a good summer after all for investors…just like it will be for soccer fans because the World Cup begins in less than five weeks!

Think you know the global markets and soccer? Enter the 361 Capital World Cup Challenge today.

The good trade news update on Sunday…

The U.S. and China declared a truce in their trade dispute over the weekend, but that will prove temporary if the world’s two largest economies fail to deliver on their vague commitments to re-balance trade.

“We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday after the two sides released a joint statement a day earlier. “Right now, we have agreed to put the tariffs on hold while we execute the framework.”

For now, Mnuchin’s cease-fire declaration will soothe the nerves of investors worried that the world’s two biggest economies were on the verge of an all-out trade conflict. President Donald Trump had threatened to slap tariffs on up to $150 billion in Chinese imports, and Beijing vowed to respond in kind.

(Bloomberg)

No company more excited to see the metal tariffs stop than Campbell’s Soup which fell -12% after their earnings report last week…

Looking for maximum business uncertainty? Try being a grain farmer in 2018…

Tom Giessel is cutting back on plantings this year on his farm in central Kansas as he reckons with a drought, a glut in global grains supply and trade tensions between the United States and China.

About 200 miles away in the northwestern part of the state, farmer Janet Bear swapped the sorghum seed she ordered for corn, after top importer China slapped steep anti-dumping investigation into U.S. sorghum. The action pushed down U.S. prices and made the crop less profitable.

China dropped its probe on Friday, retreating from a dispute that had upended global grains markets.

Beijing separately threatened last month to slap an aggressive 25 percent tariff on U.S. soybeans, the single most valuable U.S. agricultural export to China, worth about $12 billon annually….

The conflict between the world’s two largest economies has sown uncertainty in the U.S. heartland about what crops will be profitable come harvest. Some farmers have changed from one crop to another. Others have decided to leave some land fallow rather than risk growing a money-losing crop.

Nationally, U.S. farmers are set to plant the fewest acres with crops in seven years, according to the most recent farmer survey from the U.S. Department of Agriculture. The agency’s forecast for 318 million crop acres is down just 0.4 percent from 2017, but it signals curbs in plantings of everything from corn and soybeans to sugar beets and sunflowers.

The trade dispute adds another layer of complexity to U.S. farmers’ decisions as they wonder whether one of the biggest buyers in global agricultural markets, China, will want to import U.S. produce and in what volumes.

(Reuters)

A good review of which commodities could win as trade with China resumes…

Commodities were a big casualty of the escalating trade war between the U.S. and China, but are now set to be a major beneficiary of Beijing’s pledge to import more American goods.

(Bloomberg)

One commodity winner according to the White House will be energy… And as new IEA data shows, crude inventories are now below their five-year average.

(WSJ)

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Weekly Research Briefing: So many roads ahead...

December 11, 2017

Dallas/Fort Worth International Airport, TX, USA (Benjamin Grant/DigitalGlobe) |WIRED

Which road will Alabama take on Tuesday? Which road will the FOMC take on Wednesday? Which road will Congress go down as they have many decisions to make on the Tax Bill?

As the stock market looks to wind up for its often ‘Santa Clause’ rally in the second half of December, there are some big items that are about to be decided on. Easily the biggest decision of the week will be Tuesday’s special election for the U.S. Senate in Alabama. While the RNC may have already made a decision to thin their ranks and coffers by deciding to back Roy Moore, the state voters could surprise the U.S. by electing Doug Jones. Crazier things have happened in politics in the last 13 months. For the FOMC meeting on Wednesday, a 25bp hike would seem to be a lock in terms of where we are headed. But with a new Chairman at the center of the table, communication will be key to the markets. Let’s see if any language changes about the overall strength of the economy, and what the future plans are to deal with inflation. And in Washington D.C., the Tax Bill wrangling continues. Some very big items surrounding State and Local income tax deductions for individuals, AMT for corporations, FIFO to become mandatory for capital gains, Electric vehicle tax credits, and many others. Expect fits and starts from affected stock prices as leaks make their way to the market. There is much to be done and not a lot of time before the holidays begin.

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In looking at last week’s returns, it really makes you wonder if the Gold bugs are transmutating into Bitcoin bugs…

(12/8/17)

Among sectors, Financials and Industrials owned the week. Not so for Commodity stocks…

(12/8/17)

Some are worried that all the repatriated cash will be spent on buybacks. The market says no way…

Yes, some companies have no internal cash needs because their core business is very mature and has no input for additional cash. These companies should buy back stock and pay greater dividends. But any business that is growing into new industries, markets or just participating in the synchronized global GDP expansion will look to invest in Capex, R&D and acquisitions that will allow them to grow faster. This chart clearly illustrates that the market wants to reward investment in growth right now and not capital shrinkage. If a CEO and Board of Directors listens to the stock market and cares about their stock price, then they will spend time looking to deploy repatriated capital with the 2018 Tax Bill.

(Bloomberg)

Also, just look at this ramping chart of factory manufacturing…

Companies will need to spend as production moves up and to the right.

Even small businesses are looking to ramp up their hiring…

(@DriehausCapital)

Of course with a U.S. economy on fire, Goldman Sachs asks the obvious question…

…the key economic question is the impact of more stimulative fiscal policy at a time when the economy is moving beyond full employment. If most of the added growth takes the form of stronger aggregate demand without an offsetting increase in aggregate supply, as we expect, then it is only a matter of when, not if, financial conditions and monetary policy need to turn more restrictive to reverse the demand expansion. In a full employment economy, what Congress giveth, the Fed ultimately taketh away. The prospect of fiscal stimulus thus reinforces our forecast that the funds rate will rise well beyond current market pricing, with four hikes in 2018 and a terminal rate of 3¼%-3½%.

(Goldman Sachs)

Your follow up question should be, “When do we pay down the National Debt balance?”

And yes, at first glance, this does look like a price chart of Bitcoin… which begs the question even louder.

(@moved_average)

If the Fed is a go, will our Emerging Market stocks and currencies remain calm? My fingers are also crossed for the Goldilocks scenario…

The Federal Reserve is set to raise interest rates for the third time this year Wednesday, just as other central banks in the developed world have recently started to tighten monetary policy. But investors in developing countries aren’t flinching, reflecting confidence in the growing global economy and a changing investment landscape in those countries, fund managers say.

“Everybody used to think if the Fed tightens, all emerging markets die,” said Helen Qiao, managing director at Bank of America Merrill Lynch in Hong Kong. “I don’t think that is the picture anymore.”

The reversal in fortunes comes as emerging markets are enjoying what some analysts call a “Goldilocks” moment—a combination of strong global growth, stabilizing commodity prices and improving domestic fundamentals. This has fueled a rally dwarfing gains made by U.S. stocks.

(WSJ)

Still easier to bet on International stocks over U.S. stocks as this price and valuation chart shows…

Time for international stocks to make up some ground and close this 20% multiple gap.

(JP Morgan)

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Weekly Research Briefing: More earnings? No problem.

November 6, 2017

Corporate America continues to exceed expectations as the bulk of the earnings season winds down. Both sales and earnings beats are above their historical averages as the global economy continues to pick up helping top-line beats, while also creating incremental margins to assist the in bottom-line beats. Before the earnings season started, Q3 expectations were reduced rather significantly on worries over U.S. growth and falling energy prices. But since then, the realized U.S. data points in October have rebounded and the hurricane storm impact was evident but absorbed. Looking forward, the Technology and Materials sectors look well positioned to benefit from GDP growth, while the Energy sector could be the giant upside surprise for Q4 should commodity prices continue to bounce. (And don’t forget to factor in this weekend’s episode of the Saudi Game of Thrones which could push energy even further.)

While equity investors focused on corporate earnings, many others fretted over the House’s tax reform package. I still see major tax reform as highly unlikely so didn’t spend too many hours reading up on the details. There is no bigger fan of tax simplification than I, but if Congress is going to tackle one of the biggest items in politics, it will need a very organized, well thought out plan with significant leadership backing. What I saw looked more like a 2nd grader’s science fair project that was assembled by sleep deprived-parents at 2 am. And cutting taxes on pass-through entities and eliminating AMT? I can only guess whose idea that was. But even with dynamic scoring, the current House plan will add $1 trillion to our U.S. debt levels. So, I can’t believe that this is anything that fiscal conservative members of Congress will vote for.

The good news is that the markets absolutely do not care. The jobs report was good. Three percent GDP looks to be on track. Short-term interest rates are agreeing and moving higher. There is a new head at the Fed and the Bond market is calm about the change. And corporate merger and acquisition departments are busy looking past Washington and moving forward with strategic deals. (Broadcom/Qualcomm, Marvell/Cavium, CVS/Aetna and now Disney/21st Century Fox.) So, ignore the clouds and fog and keep your eye on that landing ramp and all will be fine.

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October ended strong and November has grabbed the baton…

@JBoorman: $SPX starts November the same as the previous six months, with a higher high and higher low.

When ‘Sell in May and Go Away’ doesn’t work, get long…

Throughout the year, we have been highlighting a now considerable list of positive studies suggesting that US equities will likely finish the year higher. The longer-term outlook for US equities remains positive. SPX rose more than 8% during May-October. This period is often considered the “weakest 6 months of the year”; when SPX has done well during this period, the next 6 months have also been strong, with SPX gaining a median of 12% and closing the period with a gain 91% of the time (next two charts from Stock Almanac).

(The Fat Pitch)

And year-end seasonality is not just a U.S. thing…

(Daily Mail)

Focusing on earnings, look at the recovery in Q3 earnings as companies have crushed their quarters the last three weeks…

(JP Morgan)

Very interesting to see the surprises in the Energy sector…

To date, 81% of the companies in the S&P 500 have reported actual results for Q3 2017. In terms of earnings, more companies (74%) are reporting actual EPS above estimates compared to the five-year average. In aggregate, companies are reporting earnings that are 4.8% above the estimates, which is also above the five-year average. In terms of sales, more companies (66%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.2% above estimates, which is also above the five-year average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the third quarter is 5.9% today, which is higher than the earnings growth rate of 4.4% last week. Upside earnings surprises reported by companies in multiple sectors (led by the Information Technology sector) were responsible for the increase in the earnings growth rate for the index during the past week. Overall, six sectors are reporting earnings growth, led by the Energy, Information Technology, and Materials sectors. Five sectors are reporting a year-over-year decline in earnings, led by the Financials sector.

(Factset)

And some great conference call data points that give great insight…

“From an end market perspective, virtually all improved during the quarter. Aerospace, fabricated metals and oil and gas continued to show strength while other end markets like heavy truck and agriculture which had bottomed out several quarters earlier are improving. In general, as customer sentiment remains positive and the industries hold the current levels, we should continue to see solid sales trends.” — MSC Industrial (Distributor)

“While competitive intensity remains high, several suppliers began taking prices up or signaling that price increases are likely in the coming months…what we are telegraphing here is a big bit firmer and more defined activity than what we have seen in past years at this point in time.” — MSC Industrial (Distributor)

“This is a broad-based growth…We’re really growing across the globe…better than we’ve seen in over five years. Really, really coming out of the recession was the only other time we saw this kind of growth number.” — UPS (Logistics)

“The data that we see has the ocean utilization at over 97%. So you have a high, high, demand environment now with capacity really becoming tight…then you get up in the air, this is the fourth consecutive quarter where you really had demand outpacing capacity.” — UPS (Logistics)

“In fact, Brent is already over $60. So as I like to say, I’m going to declare victory and retreat. In terms of what has to happen now for there to be increased investment, I think it’s going to happen…I think what’s going to happen – what’s happened is that there has been an enormous, enormous underinvestment in productive capacity worldwide. It’s breathtaking how big that underinvestment has been.” — Loews (Conglomerate)

(AvondaleAM)

Texas Roadhouse is seeing much more labor inflation than it predicted…

The Louisville-based casual-dining chain said that its same-store sales increased 4.5 percent at company locations in the period ended Sept. 26. They increased 4.7 percent at franchise locations…

But margins as a percent of sales fell 31 basis points to 17.8 percent, the company said, as higher wages offset lower food costs.

Revenue at the company increased 12.2 percent to $540.5 million, from $481.6 million a year ago. Net income increased 20.8 percent to $31 million or 43 cents per share, from $25.7 million, or 36 cents…

The company increased its outlook for labor inflation, to between 7 percent and 8 percent, after previously saying labor would rise in the mid-single digits.

(National Restaurant News)

After a hurricane affected jobs number last month, the economy hopped back on track on Friday…

(Daily Shot/WSJ)

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[blainerollins]

Weekly Research Briefing: Halo Time?

October 30, 2017

Did last week’s blowout earnings just throw a halo on the equity market? It sure as heck felt like it. Those that have worked with me, or have read my market missives over the last several years, know that I like to listen to (and not fight) the market. And I am pretty sure that on Friday, the market was using a bullhorn to scream in my ears. Just look at that volume spike (see below) in the Nasdaq 100. This tells me that there were many investors caught flat footed and under-invested in the big cap tech names that blew out their sales and earnings on Thursday night. Alphabet beat revenues by $400m, as did Intel. Microsoft beat by $1b and Amazon by $1.8b. Looks to me that the U.S. economy is doing just fine and these four companies have the right products and services to take advantage of it.

Treasury Bond yields look like they want to break higher, and more so in the event any progress can be made on tax reform. But with all the lobbying and discontent in Congress combined with the lack of specific tax item leadership from the White House, I remain skeptical that anything of importance will make it to a bill. So, bring on the new Fed announcement which will give the TVs something to talk about and the bond markets something about which to speculate. I’m going back to look at corporate earnings because the Equity markets are much more fun right now.

A Thursday afternoon and Friday that won’t be soon forgotten…

For one day at least, it felt like 2000 again in the U.S. stock market.

A swell of enthusiasm for shares of America’s best-known technology and internet companies carried the Nasdaq Composite Index to another record, up 2.2% in its biggest one-day point gain since August 2015.

The headiest gains were in Amazon.com Inc., Google parent Alphabet Inc., Microsoft Corp, and Intel Corp. The surge in those shares added a collective $146 billion in market value to the companies. That one-day rise eclipsed the entire value of International Business Machines, at $143 billion.

(WSJ)

Several of last week’s earnings comments were quite encouraging for the overall economy…

“We’re seeing broad-based sales increases across a number of industries in all regions. We continue to see strength in China construction. Onshore oil and gas in North America is also strong. Construction activity in North America was up compared to last year, and we’re seeing increased order activity by mining customers.” — Caterpillar (Construction Equipment)

“Industrial demand remains strong…I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan.” — Texas Instruments (Semiconductors)

“Clearly we’re seeing clients starting more new projects. They’re spending more money. They have more sense of urgency. Their existing staff has a lean because they’ve held a line so far during this recovery. So, there’s some pent up demand that results from that.” — Robert Half (Temp Staffing)

“The labor market in the U.S. is extremely tight, hard to find people.” — Manpower (Temp Staffing)

“The core underlying market we’re facing for raw materials is certainly toughening.” — 3M (Industrial)

“We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently” – Procter and Gamble (Consumer Products)

“Given the level of destruction of capital give or take $100 billion vaporizing in a relatively short period of time…it is hard for us to imagine that given the loss activity it is not going to be a definitive wake-up call for market participants and capital providers to focus more deeply or to revisit what is an appropriate risk-adjusted return.” — WR Berkley (Insurance)

(Avondale AM)

Nice to see that earnings beats are being rewarded…

(@bespokeinvest)

Let’s take a look at last week’s equity dispersion…

There were 46 large cap stocks in Russell 1000 Index that gained 5%+ last week…

(10/27/17)

…but there were 67 large cap stocks in Russell 1000 Index that fell 5%+ last week!

How is this market not one of the best stock picking environments that we have ever witnessed?

(10/27/2017)

For the week, it was all about the Nasdaq 100 and the U.S. Dollar…

(10/27/17)

Keeping the Nasdaq100’s performance in perspective…

@jfahmy: People who say this market has gone on too far forget that the Nasdaq went nowhere for 17 years.

How can you not be overweight Japan after reading this article?

Even a recent surge in the Nikkei Stock Average, which stands at a 21-year high after a record 16 straight days of gains, has generated little enthusiasm. For most Japanese, the trauma of the early 1990s bubble collapse, when the leading stock average fell more than 60% in less than three years, was enough to drive them out of the market.

Japan’s situation is a reminder of how hard it can be, even in a rising market, to build the kind of investing culture Americans are accustomed to. Only 10% of households in Japan own equity, compared with 36% in the U.S., according to the Bank of Japan…

More than half of Japan’s household wealth sits in bank deposits or cash under the mattress, according to the Bank of Japan, compared with 14% in the U.S.

“We have to increase our assets. Otherwise we cannot survive in a super-aged society,” said Satoshi Nojiri, director of the Fidelity Retirement Institute in Japan.

In a survey of 10,000 salaried people in their 20s through 50s last year by the Fidelity institute, more than 60% used words like “risky,” “scary” and “gambling” to describe investing. Among those in their 30s, fewer than one in eight said they were actively investing for retirement.

(WSJ)

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[blainerollins]

Weekly Research Briefing: The Early Catch...

October 23, 2017

Early corporate earnings have arrived and the reception is positive. Some big moves to the upside in IBM, Grainger, United Healthcare, Danaher and PayPal more than offset the disappointments in United Airlines, Genuine Parts and Procter & Gamble. The big surprise was at IBM where the company finally posted an upside revenue beat and forecast for acceleration, which was broad-based across divisions. This sent the perennial shorts scrambling to cover their positions and likely caused some long only tech money to finally shift into the name. No more kicking sand in Watson’s face.

This week will give us even more earnings data points to look through and evaluate. As we raise the bar for earnings expectations given last week’s results, there are a few other important items to keep an eye on. Over the weekend, Abe showed Theresa May how to win a super-majority as his party solidified their power within the Japanese government. Their stock market rewarded 14 straight days of gains with a 15th day. In the U.S., Congress will be legislating over tax reform while the POTUS makes his final decision on the next Fed Chair. It looks like a Powell/Taylor/Yellen decision but with the situation so fluid, maybe another name will emerge this week. Expect the bond market to be on edge for a final decision. Bond investors seem to be frightened of Taylor and like Powell. If it were up to me, I’d stand pat with Yellen. She has done a good job and the markets have rewarded. There is no way that I could fire any woman with the tidal wave of ‘girl power’ that has just washed over the globe. I would be very, very long the Wonder Woman ETF right now.

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Why earnings are important to the market…

@HayekAndKeynes: Some perspective on the magnitude of the earnings collapse during the financial crisis & why this bull market has had such a strong recovery

Corporate Earnings and Revenues beat rates are mixed with last quarter, but the post earnings stock movement has been much better than three months ago…

@bespokeinvest: From this week’s Bespoke Report, note how much better companies have been performing on earnings so far this season compared to last:

This will be another big week of earnings releases…

Bespoke has this good cheat sheet for you.

(@bespokeinvest)

It was a risk-on week for the markets last week…

Bonds and Gold were lower, while Equities and JunkBonds were higher. The U.S. Dollar strength held back International assets.

(10/20/2017)

Within the International Markets, check out this run in Japan…

15 straight days of gains ties their record. Economic data points and politics seem to be all headed in the right direction. No question about whether or not to own the market. Your main decision is do you go long the currency or hedge it out.

(@bespokeinvest)

Just recovering back to levels from 21 years ago…

The Nikkei is up 13% this year, nearly all of it since early September after having vastly underperformed most global equity markets in 2017.

The market’s recent move higher has come in spite of the yen’s overall strength against the U.S. dollar: In the past, Japanese stocks have tended to perform well when the yen is weak, as that helps the profits of the country’s big exporting companies.

Analysts and investors cite strengthening domestic corporate earnings and signs of a strengthening economy as catalysts for the Japanese market’s recent surge to its highest level since 1996. It isn’t overly expensive, either. The Nikkei trades at about 17 times projected earnings over the next 12 months, roughly around its five-year average, according to FactSet. By comparison, many other markets, including the U.S., sport valuations that are much higher than average.

(WSJ)

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[blainerollins]

Weekly Research Briefing: More of the same...

October 16, 2017

It was another week of new highs across the major indexes as the markets ignored Washington and geopolitics, focused on the global economic picture and waited for the surge of corporate earnings reports. Drug and Health Care stocks were sent to the doghouse as the White House ramped up its war against pricing and made executive order changes to Obamacare which will remove dollars from the total system. HMOs, Hospitals, Drugs/Biotech and Distributors were all hit. The industry was a leader in the market for the year but Washington may have just given the group the flu.

Correlations among stocks remain near two decade lows which continues to provide opportunities for active managers to outperform.

If you can own the right geographies, sectors and individual names, you can outperform. We even saw evidence of this last week in the early reports from the banking group where Bank of America gained +1.5% on its earnings report while Citigroup and Wells Fargo fell -3% on theirs. Expect much more dispersion among earnings stocks in the next few weeks as portfolio managers fight for names to own and not own as they look to finish up 2017 on a strong note. Active managers who can beat their indexes by 300+ basis points going into year-end will no doubt catch the attention of investors looking to find some outperformance. If they are lucky, they might even be able to win some assets from the passive ETFs!

(WSJ)

Not only are correlations low and breadth is running high…

But Walter reminded us last week that this market is no longer being led by the FANG stocks. This is again great news for active managers who don’t concentrate in the top market cap stocks like the indexes and ETFs do.

Another good place for alpha generation has been in Emerging Market stocks…

Which just posted their highest levels in 10 years.

Ryan reminds us that even Europe is about to break out of a long-term trend…

@RyanDetrick: The Euro STOXX 50 is nearing a major breakout nearly 17 years in the making. We take a closer look here…

(LPL Research)

No surprise that Portfolio Managers are highlighting the equity opportunities Overseas…

WASHINGTON DYSFUNCTION, plus high valuations, are pushing more managers to look abroad. Among our Big Money managers, 45% said they expected emerging markets to perform best in the next 12 months. Of the rest, 29% chose European markets to outperform. Just 13% named the U.S. Expectations are lowest for China and Japan.

“If you believe the bull case, the best place to put money is into emerging markets that will likely outperform developed markets,” says Scott Minerd, global chief investment officer for New York–based Guggenheim Partners, which has $260 billion in assets. “They are strengthening in their own right.”

He cites valuations as another argument for emerging markets: The MSCI Emerging Markets Index trades at 12 times 2018 earnings forecasts, versus 18 for the S&P 500 and 15 for the MSCI Europe Index.

(Barron’s)

Tough to not be excited about Japan given their positive economic surprises…

If there is one area of the world which could use some inflation, it would be Japan.

(WSJ/Daily Shot)

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[blainerollins]

Weekly Research Briefing: Feel the lift?

October 9, 2017

It is difficult not to see it, hear it, or feel it. The global expansion continues to gather steam and slowly, but surely, it is making its way through to supply and prices. For anyone in the business less than 10 years, this is how it feels. In Denver, you might raise an eyebrow at another skyscraper going up downtown…until you find out that all of the existing new builds are leased up before the building is completed. Or, you might hear that air freight capacity for upcoming months across the Pacific Ocean is being closely allocated. Or, you might see that one of the largest racetracks in North America being used as a parking lot for a quarter of a million flood-damaged cars and trucks. If you are a Netflix customer you just got a notice that they are raising prices 10%. Once again, Fixed Income managers are going to earn their paychecks over the next 12 months.

Every quarterly earnings period is important, but for the next three weeks the market will be hunting closely for companies who have pricing power and for those who don’t. The market has risen into the earnings period even as earnings estimates have fallen. While some of that is due to the hurricane impacts, the rest is due to some increased uncertainty over pricing power and margins. We know that volumes will be good along with the rest of the global economy, but what we want to see if the ability to absorb and pass along price increases. With that said, good luck with your hand of companies. Let’s deal the cards.

The U.S. economic backdrop going into earnings…

American manufacturing expanded last month at the fastest pace in 13 years, powered by robust order growth and healthy production, figures from the Institute for Supply Management showed Monday.

(RenMac)

The jobs data on Friday was a mess, but still some tea leaves to sift through, especially for rising wage inflation…

In the end, the hurricane distorted September Employment Situation Report did prove to be interesting. Headline Non-farm Payrolls registered a loss of 33,000 jobs, the first loss since 2010. The hurricane effects were obvious in that the Leisure industry lost 111,000 payrolls for the month and nearly 1.5 million people could not work due to bad weather. That 1.5 million compares to the two decade average of 109,000 people. The loss of lower paying Leisure industry jobs likely boosted Average Hourly Earnings where month over month growth matched July’s strong 0.5% reading. The readings are tied for the highest in a decade. The Bureau of Labor Statistics reported the hurricane had no discernable effect on the Unemployment Rate which was 4.2%. That is the lowest reading since 2000. That was accompanied by an increase in both the Labor Force to new all-time highs and the Labor Force Participation Rate to its highest level since March 2014. With the exception of the headline Nonfarm Payrolls print and a likely lower revision for wages this was an extremely impressive Employment Situation Report.

(Jones Trading)

The 2-year Treasury yield continues to take note of the rising economic strength…

The equity markets are also playing for continued economic strength…

Emerging Markets, Nasdaq and Small Caps led on the week while Bonds and Gold lagged.

Same at the sector level…

As defensive stocks continue to be a source of funding by managers to buy more economically sensitive and growth sectors of the market.

Biotech is in a full sprint as it breaks out to all-time new highs…

Here is that picture of Texas World Speedway…

Hope there is not a race until next summer.

General Motors is getting help from more than just the Hurricanes…

A 30% move is worth much more than just selling an extra 250-500k cars and trucks. Portfolio Managers want to buy GM because they think the company will be selling a lot more autos at higher prices in busier factories. GM just might be the markets single best thermometer right now.

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[blainerollins]

Weekly Research Briefing: Good Old Days...

October 2, 2017

It was a great September and 3rd Quarter for the markets, but it has been a challenging one for the human spirit. Last night’s news out of Las Vegas, combined with the devastation from the hurricanes have weighed upon all of our hearts. Our thoughts and prayers are with everyone affected by the many tragedies in the last month. As a strong believer in reversion to the mean, I expect there to be much good news in the months ahead.

For the eighth straight quarter, the S&P 500 finished in the green. You might even say that the market finished in the dark green, as virtually every major index closed at all-time highs. Bond investors even joined in the positive column as early quarter gains were barely held onto by the end of the month. While equity investors appear to have the wind at their backs, bond investors are going to be earning their entire coupons as they navigate the global strengthening in GDP, rising inflation pressures and central bank tightening. As bond volatility continues to increase relative to stock volatility, it will be interesting to watch how investors react if bonds yields continue to chart a course for higher highs. This will be unexplored territory for many conservative investment portfolios.

I can’t sum the markets up any better this week…

Markets Sanguine Amid Prospects of Tax Reform and Monetary Policy Normalization US stocks finished the week at fresh all-time highs, though volumes remained uninspiring and volatility stayed at historically low levels. Breadth expanded with the Transports, Russell 2000 and the NASDAQ joining the S&P at new highs. The Dow held back some, which may have been partially due to quarter-end profit taking and rotation out of large caps. Small caps and banks, in particular, benefited by an aggressive push by President Trump and congressional republicans to get a tax reform package approved by the end of this year. The growing hopes for fiscal stimulus reignited support for the reflation trade resulting in a move higher in rates and notable bounce in the Greenback. Treasury yields backed up and curves steepened. Central bank speak was pervasive with officials on both sides of the Atlantic indicating a continued willingness to push ahead with the admittedly gradual pace of normalization.

(Trade The News)

Wall Street week…

S&P: All-Time High Nasdaq: All-Time High NYSE: All-Time High S&P Mid-Cap 400: All-Time High Russell 2000: All-Time High

(@charliebiello)

Just the month of September had some incredible sprints in Small Caps, Semis, Regional Banks and even Energy…

Not only is breadth expanding in the S&P 500, but it is even accelerating throughout the Russell 2000…

(RenMac)

A glance across the multiple time frames at week’s end…

Small Caps have surged to gather much ground for the Q3 and even make for a more respectable 2017. The most recent bounce in the U.S. Dollar has helped here. Emerging Markets were hurt by the U.S. Dollar recently but still led for the Q3 and 2017. Safety is running into headwinds as Bonds and Gold begin to post negative returns in the short term. I have to think that the longer term returns will also begin to be challenged unless the synchronized global growth begins to slow.

(9/29/17)

If you prefer a visual of Q3 asset returns, JPMorgan has one for you…

(JP Morgan)

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[blainerollins]

Weekly Research Briefing: Green Light...

September 25, 2017

The Fed finally gave the signal to begin shrinking its balance sheet. As the Fed conveyed in its text release, and Janet emphasized in her Q&A, the economy is good and the time is right. And so it begins, although at a very slow pace. I was actually surprised that Janet didn’t put up a presentation poster showing the surge in the 2-year treasury yield. Had she done so to begin the Q&A, she could have dropped the mic, put on her Ray Bans and walked out of the meeting room. This new high in short-term Treasury yields is telling us all that the economy is strengthening and higher inflation lies ahead. Bits and pieces of inflation have been trickling through, but add the impact from three devastating hurricanes and you can bet that it will accelerate. The stock market began to take further notice this week as it again shifted from defensive, yield-oriented equities into economically cyclical and price dependent business models. Look at the moves in Energy, Industrials and Materials over the last month. Now compare that to the performances of Consumer Staples, REITs and Utilities. Stocks seem to be trying to tell us something. While the news flow seems to be focused on North Korea, Healthcare, Tax Reform and the NFL, maybe the year-end surprise will be in inflation and interest rates. Very few portfolio managers seem to be worried about it from what I can see in the surveys.

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Fed gives the green light to start shrinking the balance sheet…

“For October through December, the decline in our securities holdings will be capped at $6 billion per month for Treasuries and $4 billion per month for agencies. These caps will gradually rise over the course of the following year to maximums of $30 billion per month for Treasuries and $20 billion per month for agency securities and will remain in place through the process of normalizing the size of our balance sheet.” (Fed Reserve Chair Janet Yellen)

“The basic message here is U.S. economic performance has been good,” Fed Chairwoman Janet Yellen said at a press conference after a two-day policy meeting that ended Wednesday. “The American people should feel the steps we have taken to normalize monetary policy…are well justified given the very substantial progress we’ve seen in the economy.”

(WSJ)

The Fed did not raise interest rates this meeting, but they told you that it will happen soon enough…

Investors are still pretty sanguine about the direction of interest rates through year end…

Follow 361 Capital on Twitter to see more polls like this.

If you are looking for a large potential source of inflation, start with housing…

There is just no inventory to be had in the U.S. market—and this data is before the three hurricanes.

Goldman Sachs thought shelter inflation could remain low. But then the indexes began to shift upward…

Shelter cost is 17% of the core PCE index and over 40% of the core CPI index. The surprise in the recent data was that multifamily builds have been absorbed more quickly by the market. Again, this data doesn’t yet reflect the displacement of so many in Houston, Florida and Puerto Rico.

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[blainerollins]

Weekly Research Briefing: Fear of Heights...

September 18, 2017

It was all-time equity highs across the board last week, as the global markets disregarded the North Korean fireworks in favor of buying 100-year Austrian bonds at a 2% yield. U.S. economic data began to feel the effects of the recent hurricanes (a pop in jobless claims to 284k) while U.S. consumer prices jumped to a surprising +0.4% (outlier or new trend?). As we wait for more bumps in the data and keep an eye on Washington D.C., there can be no denying that the stock markets feel good. Interest rates are low and credit quality remains well above average. And while the indexes are at highs, there are many experts on the sidelines who remain cautious on risk. Very important to highlight the big upward move in low quality names the last two weeks (pointing fingers at Energy and Retail). It is difficult to be short and negative when bottom of the barrel stocks make double digit percentage weekly moves. Likely some of these recent sprints in some sectors are overdone and in need of a rest. But if you are a long-time bear expecting a sharp correction, I would suggest turning off the screens and hibernating off the grid for the next several months.

Succinctly said by the Urban Camel…

The major US indices all recorded new all-time highs (ATH) this week. The very broad NYSE, covering 2800 stocks, also made a new ATH, suggesting the rally is supported by adequate breadth. Longer-term studies and the fundamental macro data continue to indicate that further upside into year-end is odds-on. Remarkably, a new survey shows that fund managers are the most underweight US equities in 10 years, despite the SPX rising 9 of the last 10 months by an impressive 17%.

(The Fat Pitch)

Perfectly put by Ben Carlson…

Notice the recent surge…

…in new highs and equally important plunge in new lows…

(Stock Charts)

Another good indicator of market strength: the most shorted stocks are ripping higher…

For the week, it was the weakest performing assets that performed the best…

So, Small Cap stocks in equities, and Junk in bonds.

(9/15/2017)

Ditto for the sector performance on the week…

(9/15/2017)

Several pointed the pop in consumer inflation last week…

This might continue to surprise as the Hurricane price disruptions ripple through the markets.

Inflation may be creeping higher. Inflation has been virtually nonexistent for months, but that may be starting to change. The Consumer Price Index rose a more-than-expected 0.4% in August, the strongest gain in five years. Price advances were due to a number of factors, including higher lodging costs and surging automobile prices.

(Bob Doll/Nuveen)

Europe has been having its share of inflation surprises. Maybe our turn next?

As long as growth remains robust and unemployment continues falling, it will be hard for central bankers to relinquish the idea that shortfalls in inflation are temporary. Moreover, concerns about the consequences of keeping monetary policy so accommodative—in particular, dangerously overheated markets—will persist.

(WSJ)

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[blainerollins]

Weekly Research Briefing: Wrenches Thrown...

September 11, 2017

As if U.S. economic growth wasn’t difficult to predict, an economist’s job just became more difficult. Hurricanes Harvey and Irma will throw a wrench into the smooth patterns of forecasting for not only 2017, but well into 2018. If anyone in the market is looking for volatility, just take a look at your future GDP forecasts. The hits will be weighted in Q3 by Energy and Industrial shutdowns in Texas, and then in both Q3 and Q4 by more consumer-related activity in Texas and specifically, Houston. The next question is how quickly can the Florida tourism machine get back up to speed for the winter season. The current data is still very fluid and so guesstimates are just that. And are you keeping an eye on Hurricane Jose for this weekend?

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The economic data for 2017-18 is about to get very messy as you can see how quickly the Texas economy slowed after Harvey, and how damage estimates continue to rise…

@SoberLook: Harvey Damage Estimates Rose Sharply and Have Settled in the $60-100bn Range

(Goldman Sachs)

If the severity of storms is going to worsen in the future, maybe the auto manufacturers should bring back the Duck Boat…

Few American cities depend on cars as much as Houston. More than 94 percent of the city’s households have cars, second only to Dallas, the Cox Automotive consultancy says. Houston is even less amenable to walking, bicycle-riding and mass transit than freeway-mad Los Angeles, according to Walk Score, which promotes walkable communities.

Fourteen-lane highways link downtown Houston to its sprawling suburbs. Off-ramps are stacked five-high at some interchanges, inducing vertigo for motorists unschooled in driving Houston-style. Outside the city center, isolated islands of office towers are connected only by concrete and asphalt.

Cars are “everything here,” Hartmann says. “Cars are part of a person’s lifestyle. Most people in our area work 25, 30 miles from home.”

Houston is used to flooding. But it had never seen anything like Harvey, which dropped a year’s worth of rain onto the metro area. Flooded roads and neighborhoods left cars submerged and, in most cases, impossible to salvage.

“Almost every square inch of your vehicle has wires in it,” says Rebecca Lindland, executive analyst at Cox Automotive. “The materials are often flame-retardant, but they are not waterproof.”

(AP News)

Harvey has put the U.S. construction industry in a tight spot. Here are some numbers…

Before Harvey, construction workers across the U.S. were already in tight supply and material costs were rising. Houston is likely to face such a severe crunch that it could affect the national economy by pushing up material costs and driving down the U.S. unemployment rate for construction workers further, according to Robert Dietz, chief economist at the National Association of Home Builders. There were 225,000 unfilled construction jobs in June, near the recent high of 238,000 recorded in July 2016, according to a National Association of Home Builders analysis of Labor Department data.

In all, 10,000 to 20,000 workers could be needed to rebuild the homes damaged by Harvey alone, or 10% to 20% of the total number of residential construction workers in the Houston metropolitan area, according to the National Association of Home Builders.

(WSJ)

The Fed’s beige book noted certain tightness in the labor market last week. This will add to the challenge of rebuilding Houston and Florida…

Employment growth slowed some on balance, ranging from a slight to a modest rate in most Districts. Labor markets were widely characterized as tight. There were reports of worker shortages in numerous industries, most notably in manufacturing and construction. Firms in the Atlanta, St. Louis, and Minneapolis Districts said that they had turned down business because they could not find the necessary workers. Many Districts indicated that businesses were having difficulty filling openings at all skill levels. In spite of the tight labor market, the majority of Districts reported limited wage pressures and modest to moderate wage growth. That said, there were reports from firms in the Dallas and San Francisco Districts that labor shortages were pushing up wages.

(Federal Reserve Beige Book)

Meanwhile in Washington D.C., this about sums it up for the White House economic team…

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