NEW$ & VIEW$ (24 APR. 2015): Housing; Commodity investing; Earnings; Aging; Churning.


Sales of New Homes Fell 11.4% in March

Sales of newly built homes declined by 11.4% in March from their red-hot pace in February, which itself registered as the strongest month for sales in seven years, to a seasonally adjusted annual rate of 481,000, according to Commerce Department figures released Thursday.

However, the March tally represents a 19.4% increase from the sales pace of March 2014. Even more broadly, the 129,000 newly built homes sold in this year’s first quarter represent a 21.7% gain from the same period of 2014. (…)

A sustained recovery in the new-home market could influence the broader economy, given that home construction typically accounts for 5% of U.S. gross domestic product but has languished at roughly 3.1% in recent quarters as the industry struggled through a slow, fitful recovery. (…)

The median price of a newly built home declined in March for the fourth consecutive month to $277,400, according to the Commerce Department. (…)

CalculatedRisk has this table from housing economist Tom Lawler who notes that combined net orders were up 0.4% YoY in Q1’14.


Here’s the long-term chart courtesy of Doug Short:

Click to View

Will that gap eventually close?

Global Glut Challenges Policy Makers The global economy is awash in commodities, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand.

(…) The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. (…)

Examples of oversupply abound. (…) Not all commodities are in excess. China’s strong appetite for materials such as copper, gasoline and coffee will keep supplies tight in these markets. (…)

Funny how things change:

Here’s a longer term relationship also broken:

Punch The reality is that commodities (and commodity-sensitive equities) do not correlate well with equities and are the worst long term investment one can make: high risk, no reward.


Higher Prices Fail to Salvage Profits American companies are struggling to offset the damage from a strong dollar without hurting their sales.

(…) Consumer-goods giant Procter & Gamble Co. said Thursday that price increases to offset currency issues in developing countries had contributed to a 2% drop in sales volume in the quarter ended in March.

Mead Johnson Nutrition Co., maker of Enfamil formula, said declines in Latin American currencies outpaced the company’s price increases, contributing to a 2% drop in overall sales from a year ago.

For McDonald’s Corp., a 2% price increase in both the U.S. and in Europe outside Russia wasn’t enough to keep the dollar’s rise from cutting revenue by $700 million and earnings by 9 cents a share in the first quarter. Executives forecast more pain from the currency fluctuations for the rest of the year.

The stronger dollar reduces the value of sales earned in foreign currencies such as the euro or the Brazilian real when those revenues are converted back into dollars. (…)

P&G said sales in the first three months were down 8% from a year earlier. If it hadn’t been for currency issues, they would have been flat. At Coca-Cola Co., a 7% rise in sales shrank to a 1% gain after the impact of the stronger dollar was accounted for. 3M Co. lowered its earnings forecast for the year after a stronger dollar reduced first-quarter sales by 6.5%, leaving them down 3.2% overall.

The dollar’s impact comes amid improving earnings and sales for big companies that aren’t in the oil-and-gas business. With about a third of the S&P 500 reporting results, earnings are forecast to rise 6.9% excluding energy companies, according to Thomson Reuters. Revenues, meanwhile, are forecast to rise 2.5% on that basis.

For some companies, currency effects meant the difference between sales growing and shrinking: 5% growth became a 4% decline at Kimberly-Clark Corp., thanks to currency. At United Technologies, 3% sales growth became a 1% decline. And Mead Johnson saw a 3% sales increase become a 2% drop once currency fluctuation was taken into account.

Google Inc. said the dollar’s strength reduced the quarter’s revenue growth to 12% year-over-year from 17% without currency effects. Facebook, which generates more than half its revenues overseas, said the stronger dollar reduced revenue by nearly $200 million, and Microsoft Corp. predicted the strong dollar would continue to slow its revenue growth.

And other companies also expect currency to remain a significant drag through the year. Pharmaceutical maker Baxter International Inc. said second-quarter sales are likely to grow 1% excluding currency effects—but decline 9% to 10% including them, even without further strengthening of the dollar. United Technologies expects foreign-exchange pressure to weigh on its sales and profit from regions such as Europe for the rest of the year.

Companies have other levers to pull as the dollar value of their overseas earnings falls. P&G is planning more cost cuts, including slashing its spending on marketing agencies. (…) PepsiCo, meantime, said it is seeking to cut costs as well as to move more production costs to overseas markets as currency effects are poised to reduce profit in Europe. The company says it generally tries to recover 75% of currency effects through price increases and make up the rest with cost cuts.

“The challenge is to balance volume and revenue,” said Pepsi CEO Indra Nooyi. So far, executives say, demand is largely withstanding the price changes Pepsi has imposed in some markets, including Russia. Pepsi warned currency weakness could hit its profit by 11 percentage points this year. Revenue fell 3.2% in the first quarter, while profit was flat.

The decision to raise prices can be complicated, requiring an assessment of what customers can bear and what rivals will do.

Laboratory equipment maker Thermo Fisher Scientific Inc. said it sought to offset currency losses by increasing prices in targeted markets, including Japan, where it has few domestic competitors that are insulated from currency effects.

DuPont Co. said price increases for its agricultural products increased the segment’s revenue by 3%, in part to offset weakening currencies in Europe and Asia. But currency fluctuations overwhelmed those price increases, contributing to a 10% overall decline in revenue for the segment.

In a Tuesday earnings call with analysts, CEO Ellen Kullman said DuPont employees are reanalyzing pricing strategy based on currency movements, recognizing that it is typically harder to raise prices when facing off against a local competitor as opposed to other foreign producers that also deal with currency challenges. (…)


Midway into earnings season, the EPS numbers look better and better while revenues are coming in weak.

  • 189 companies (48.4% of the S&P 500’s market cap) have reported. Earnings are beating by 5.5% (5.3% yesterday) while revenues have missed by -0.7% (-0.6%).
  • Expectations are for a decline in revenue, earnings, and EPS of -3.4%, -2.1%, and -0.5%. Excluding Energy, growth would be 2.4%, 6.0%, and 7.9% (7.1% yesterday), respectively. This excludes the likelihood of beats.

The bigger surprises are coming from Financials (+5.8%) and Consumer Staples (+13.0%). Best YoY EPS growth: Financials (+12.2%), Health Care (+8.8%). Every other sector is below 5%.

Is the Nasdaq in Another Bubble? The Nasdaq Composite Index cruised to a record closing high Thursday, surpassing a 15-year milestone last reached at the height of the dot-com era.

(…) In 2000, the Nasdaq traded at 175 times its companies’ profits for the previous 12 months, according to Birinyi Associates. Today, it is 30 times, which is high but not astronomical. (…)


The average annual increase in the number of Americans aged 16 to 64 years is expected to plunge from the 2.0 million of 1965 through 2007 to just 570,000 during the next 10 years. Reinforcing a dramatic shift toward a grayer America, the average annual increase in the number aged 65 years and older is projected to soar from the 450,000 of 1965- 2007 to 1.74 million during the next 10 years.


As inferred from the expected 0.5% average annual rise in the number of 16- to 64-year old Americans, and assuming average annual productivity growth of 1.5% to 2%, real GDP’s average annual growth rate should be in a range of 2% to 2.5% for the 10-years-ended 2025. In stark contrast, real GDP expanded by 3.4% annualized, on average, during the 25-years-ended 2000.

Productivity growth can compensate for a deceleration by labor force growth. However, the 10-year average annualized rate of labor productivity growth has sagged considerably from the 2.8% of the span-ended 2004 to the 1.5% of the span-ended 2014. The reasons for this deceleration probably extend well beyond tax and regulatory issues.

But, gloom need not predominate. Though impossible to pinpoint, history shows that productivity growth has invariably received an unexpected boost from the introduction of new products that effectively utilize labor more efficiently. (Moody’s)

Money Entire Treasury Department Competing For Same Goldman Sachs Job Opening

Goldman Sachs human resources manager David Browning reported Thursday that a high-level position with the investment bank had attracted applications from every official in the United States Treasury Department. “Within just minutes of listing the open position on our jobs page, the flood of applications from email addresses started rolling in, and it hasn’t slowed down since,” said Browning, adding that most of the Treasury regulators who applied for the job highlighted their previous experience working closely with Wall Street financial firms and included a letter of recommendation from former Treasury Secretary Henry Paulson. (…) Browning added that the new hire was needed to take over the responsibilities of a former Goldman Sachs executive who had recently left for a high-ranking position in the Securities and Exchange Commission. Confused smile


April data indicated slower growth momentum for the U.S. manufacturing sector, with production volumes and incoming new work both expanding at weaker rates than in the previous month. This contributed to a fall in the headline seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) to 54.2 in April, from 55.7 in March. Although still comfortably above the 50.0 no-change value, the latest index reading signalled the least marked improvement in overall business conditions since January.


Production volumes picked up at a solid pace in April, but the rate of expansion was the slowest so far in 2015. Survey respondents generally cited softer new business gains, especially from international markets. Measured overall, new work increased at the weakest pace for three months, while export sales dropped for the first time since November 2014. A number of manufacturers noted subdued demand from clients across Europe, in part reflecting the stronger US dollar exchange rate.

Despite a slowdown in output and new business growth, the latest survey indicated that job creation remained solid and was little-changed since March. Anecdotal evidence attributed sustained rises in payroll numbers to strong pipelines of outstanding work, positive sentiment towards the business outlook and the launch of new products.

Manufacturers indicated a slower expansion of input buying during the latest survey period, which in turn contributed to a softer increase in pre-production inventories. Meanwhile, supplier lead times lengthened for the twenty-second month running, with a number of firms noting ongoing transportation delays in the wake of the west coast port strikes earlier in the year.

April data indicated that manufacturing companies experienced another decline in overall input prices, which extended the current run of falling costs to four months (the longest sustained period since 2008/09). As a result, factory gate price inflation across the manufacturing sector eased to its lowest for 11 months.

NEW$ & VIEW$ (23 APR. 2015): Housing; Chinese debt; Earnings watch.

Existing-Home Sales Up 6.1% in March

Existing-home sales increased 6.1% last month from February to a seasonally adjusted annual rate of 5.19 million, the National Association of Realtors said Wednesday. That was the highest level since September 2013. The jump in March sales follows two lackluster months amid bad winter weather. The February sales pace was 4.89 million and January was only 4.82 million.

March sales were up 10.4% from a year earlier. The inventory of unsold homes increased 2.0% y/y.

The median sale price for a previously owned home was up 7.8% from a year earlier to $212,100 in March, NAR said. (Chart from Doug Short)

Click to View

A rough estimate: Sales in March 2014 were reported at 4.70 million SAAR with 14% distressed.  That gives 658 thousand distressed (annual rate), and 4.04 million equity / non-distressed.  In March 2015, sales were 5.19 million SAAR, with 10% distressed.  That gives 519 thousand distressed – a decline of about 21% from March 2014 – and 4.67 million equity.  Although this survey isn’t perfect, this suggests distressed sales were down sharply – and normal sales up around 15%. (CalculatedRisk)

New-Home Prices Are on Fire

(…) New homes generally command a 10% to 20% premium over existing houses because new construction tends to be of higher quality and have more up-to-date amenities, the TD economists said. But by 2014, the price gap between new and existing houses had widened to 40%.

What’s behind the bigger spread? The housing bust and consumer preferences, says Gennadiy Goldberg, a U.S. strategist at TD Securities. After the financial crisis, “many existing homes were in foreclosure or in poor maintenance,” said Mr. Goldberg. “Buyers wanted a discount.”

That bargain-seeking plus the flood of existing homes into the market caused the median resale price to plummet by about one third during the bust. In fact, even at $212,000 in March, the median resale price is below the $230,000 record set during the boom.

Meanwhile, the median price for a new home fell only about 25% during the bust and surpassed its boom peak way back in early 2013. That’s because home builders cut back drastically on single-family housing starts during the recession. Plus, as household finances stabilized, “consumer preferences changed,” said Mr. Goldberg. “Consumers wanted a new home.” More demand plus tight inventories allowed builders to lift prices.

If new house prices are 40% higher than existing ones, that must mean that new house affordability is substantially worse than that of existing houses:

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Our son just bought a house in South Florida. Initially attracted by the idea of a brand new house, he quickly realized they were much too expensive compared with existing ones. He bough a nice row house built in 2008 at less than $140/sq.f.

Millennials Looking for a Home Might Try the Rust Belt

Young homebuyers in some of the biggest U.S. cities may be out of luck, regardless of their solid credit and the cash they’ve socked away, according to new research conducted for Bloomberg by Zillow. In three of the 10 largest U.S. metro areas, fewer than half of the homes for sale on Zillow during the fourth quarter of 2014 were affordable to typical 23- to 34-year-olds. So where can the typical local millennial afford the largest share of for-sale homes? Consider the Rust Belt. To define affordability, Zillow used the median income of young adults in a given metro and assumed buyers would put 5 percent down and spend 30 percent of their monthly income on mortgage payments. The data don’t factor in the cost of living, which may tilt the affordability equation in some cities. Read the full story here.

BTW: D.R. Horton: Net Home Orders Up, Prices “Flattish;” Says If Prices are Low Enough, There is “Demand” from First-Time Buyers

Italy’s Retail Sales Begin to Show Signs of Life

Italian retail sales continue to make some progress but are still falling year-over-year. The chart makes it clear that advances in confidence have preceded improvements in retail sales. And Italian consumer confidence is on a roll again in early 2015.

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Yet, retail sales are still lagging. The chart shows that sales gains do tend to follow after increases in confidence and that confidence tends to move up in waves with retail sales gains lagging and following in a much smoother pattern of improvement. The relationship that used to exist between levels of confidence and the growth rate for retail sales has shifted with retail sales still piggybacking on confidence gains but with less vigor than before. (…)

But what is more encouraging is that in the quarter to date sales are actually showing gains. Retail sales less auto sales are up at a 0.3% annual rate. Food, beverage and tobacco sales are up in the quarter at a 1.3% annual rate. Clothing and furniture sales are up at a whopping 7.4% annual rate. In inflation-adjusted terms, retail sales ex-autos are rising at a 1.2% annual rate in the current quarter.

(…) having sales rising in the current quarter is a big change from the past because retail sales have been slipping since 2011.

Spain adds 500,000 jobs as recovery spreads

According to data released on Thursday, Spain’s recession-scarred labour market continues to show signs of improvement. Employment in the first quarter rose 3 per cent compared with the year before, while the number of jobless fell more than 8 per cent.

The unemployment rate also came down compared with the previous year, but rose slightly from the last quarter of 2014, to 23.8 per cent today. More than 5.4m Spaniards are currently out of work.

Spain is now in its second year of post-crisis economic expansion, with most forecasters expecting national output to grow at least 2.5 per cent this year. (…)

According to Wednesday’s quarterly labour market survey, employers created 289,700 open-ended jobs over the past year, compared with 174,800 temporary positions. (…)

We’re Just Learning the True Cost of China’s Debt

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

FT Alphaville:

Do read the full Bloomberg piece but here’s one more bit we’d like to pull out:

Chong said international investors should understand their rights as creditors in the event of default. “In almost all cases, onshore creditors will get their claims to assets first before offshore creditors, so the position of offshore creditors is deeply subordinated,” he said.

What’s the worry with this chart from Ed Yardeni?

Debt Builds in China Stock Rally

Margin lending has more than tripled in the past year to a record 1.7 trillion yuan ($274.6 billion), according to database WIND Info, echoing past investment crazes among Chinese speculators. Such investors have long shown a penchant for rushing into whatever is yielding the highest returns, from real-estate and wealth-management products, to bitcoin and online money-market funds.

The practice isn’t unique to China, where margin debt equals 3.2% of total market capitalization, compared with 2.3% in the U.S. But when looked at compared with the number of shares that are freely traded, the percentage for China rises because the country’s state entities own more than half of the market.

Research by Macquarie Securities Group shows China’s margin-debt ratio at 8.2% of the free float, a measure the securities house prefers, and a level that easily tops the peak levels in Taiwan during the late 1990s, and far exceeds levels in the U.S. during the dot-com frenzy when the market rose and then quickly fell. (…)

The turnover from margin financing accounts for 25% of daily trading volumes on the ChiNext, the market in Shenzhen where small Chinese startups trade, according to estimates from UBS AG. There, local investors have rushed to buy firms purported to have huge growth potential, pushing the ChiNext benchmark up nearly 80% this year to record-high valuations.

By comparison, the turnover from margin-financing accounts makes up 15% of daily trading volume in the total mainland market. (…)

China: North Korean Nuclear Threat Is Rising China increased its estimate of North Korea’s nuclear-weapons production well beyond most previous U.S. figures, suggesting Pyongyang can make enough warheads to threaten regional security.
  • 135 companies (34.6% of the S&P 500’s market cap) have reported. Earnings are beating by 5.3% (5.6% yesterday) while revenues have missed by -0.6% (-0.5%).
  • Expectations are for a decline in revenue, earnings, and EPS of -3.2%, -2.8%, and -1.2%. Excluding Energy, growth would be 2.5%, 5.3%, and 7.1% (6.8% yesterday), respectively. This excludes the likelihood of beats, which have come in above 4% historically.


Eurozone business activity growth pulled back from March’s 11-month high, according to flash PMI survey data for April. The slowdown reflected weaker rates of expansion in France and Germany, which offset an acceleration of growth in the rest of the region to the fastest since August 2007.

The Markit Eurozone PMI® fell from 54.0 in March to 53.5 in April, according to the flash estimate based on an expected 85% of usual monthly replies. Although signalling an easing in the pace of expansion, the latest reading was still the second-highest seen over the past nine months. The manufacturing and service sectors continued to expand, but both saw rates of expansion cool compared to their ten- and eight-month respective highs seen in March.


Incoming new business at service providers continued to rise solidly, but growth of manufacturing new orders slowed. Overall growth of new orders moderated slightly from March’s near four-year high as a result, but remained sufficiently strong to encourage firms to take on staff at a marginally increased rate. April saw the strongest monthly gain in employment since August 2011. Job creation in manufacturing inched up to the highest since August 2011 and revived in services to a rate not exceeded since May 2011.

Despite the increase in workforce numbers, backlogs of work edged higher for a third consecutive month, raising the likelihood of further job gains in May.

Average selling prices for goods and services meanwhile continued to fall, but the rate of decline was the weakest since June of last year, in part reflecting the pass-through of higher input costs. Average input costs rose at a rate just shy of March’s eight-month high.

Manufacturers’ selling prices rose marginally for the first time since last August, as their input prices rose at the fastest rate since last July. Rates charged for services meanwhile fell at the slowest rate since June 2014, despite input cost inflation easing slightly during the month.

Growth slowed in Germany, reflecting weaker expansions in both manufacturing and services, but remained slightly above the pace of expansion seen across the region as a whole. France saw a steeper slowdown, with growth almost stalling. A near-stagnation of service sector growth in France was accompanied by a faster rate of decline of factory output.

In contrast to the slower rates of expansion seen in Germany and France, the rest of the region enjoyed the strongest growth since August 2007, with growth of new orders and employment also picking up to the highest since mid-2007.