NEW$ & VIEW$ (24 NOVEMBER 2015): Buybacks.

U.S. Existing Home Sales Retreat; Prices Down for Fourth Straight Month

The National Association of Realtors reported that sales of existing homes declined 3.4% (+0.9% y/y) during October to 5.360 million (AR) after an unrevised 4.7% increase to 5.550 million in September. The latest figure disappointed expectations for 5.40 million sales in the Action Economics Forecast Survey. Single-family home sales were off 3.7% last month to 4.750 million (+1.5% y/y). Condo and co-op sales eased 1.6% (-3.7% y/y) and were 6.2% below their June high.

The median sales price of an existing home fell 0.9% to $219,600 (+5.8% y/y) and was down 7.1% from June’s record $236,300. The average sales price fell 0.9% to $262,800 (+3.4% y/y).

By region, sales in the Northeast remained unchanged m/m at .760 million units (5.0% y/y) but were near the eight-year high. Sales in the West retreated 8.7% to 1.160 million (0.0% y/y) following September’s 6.7% increase. In the South, sales declined 3.2% to 2.140 million (-2.7% y/y) and reversed the prior month’s gain. In the Midwest, sales eased 0.8% to 1.300 million (+6.0% y/y) after September’s 2.3% rise.

During September, the composite index of home affordability rose 3.5% to 163.5 (-2.9% y/y). Payments as a percent of income eased m/m to 15.3% but were up from the low of 11.7% in January 2013.

The inventory of unsold homes declined 4.5% y/y to 2.140 million. The 4.8 months’ supply of homes on the market remained down from the 11.9 month high in July 2010.

large image

Domestic Demand Led German Economic Growth in Third Quarter

German domestic demand increased 0.7 percent in the three months through September, according to data released Tuesday from the Federal Statistics Office in Wiesbaden. Imports jumped 1.1 percent, while exports rose just 0.2 percent and capital investment shrank by 0.3 percent. The economy expanded 0.3 percent, matching a Nov. 13 estimate.

Government expenditure expanded 1.3 percent last quarter, the fastest rate since the start of 2009, and private spending increased 0.6 percent. The figure for exports was the weakest in almost three years.

Domestic demand added 0.7 percentage point to growth, while net trade stripped out 0.4 percentage point. Inventories added 0.2 percentage point. (…)

Japan to raise minimum wage by 3% to boost consumption

Japan will raise the minimum wage by 3 per cent each year from next fiscal year as part of a package of policies aimed at strengthening consumer spending and stoking economic growth.

The government will also strengthen policies to get more women into the work force and ease regulations to encourage corporate investment and breathe new life into an economy that has struggled with patchy domestic demand. (…)

The national average of Japan’s minimum wage was 780 yen ($6.36 U.S.) per hour last fiscal year, so a 3 per cent increase would still not buy more than a bowl of ramen noodles – an illustration of the difficulty policy makers face in boosting consumption.

Abe told cabinet ministers he eventually wants to raise the weighted national average minimum wage to 1,000 yen per hour. (…)

Energy Downturn Spreads Beyond the Oil Patch The prolonged slump in crude prices is rippling beyond the oil industry into areas of the North American economy that, until recently, had managed to avoid the worst of the downturn.

(…) Signs of that distress are spreading throughout once-booming oil-producing regions across North America. Sales of single-family homes in Houston fell 10% on the year in October, the first double-digit decline this year, according to the local association of real-estate agents. Restaurants in Texas and the Southwest have experienced a drop in revenue and customer traffic, industry tracker Black Box Intelligence said in a recent report. (…)

The gloom is deepest in and around pockets of the industry where costs are highest: shale oil, oil sands and the offshore Arctic. Tapping those fields made sense when oil was $100 a barrel, but less so below $50. From plunging car sales in Calgary, Alberta, to higher hotel-room vacancies in Williston, N.D., and weakening restaurant traffic in Texas, the ripple effects of the downturn are spreading.

North Dakota earlier this month said output from the Bakken Shale, once one of the hottest growth areas in the industry, marked the first year-over-year decline since 2004 in September. That came as some producers gave up on the Bakken, where profit margins are thin due to higher production and transportation costs than many other oil-producing areas. (…)

October home sales in Calgary, the headquarters of many Canadian oil and gas companies, fell by a third on the year, according to the Calgary Real Estate Board. September sales of new vehicles in Alberta fell 13% on the year to 23,142 units, according to Canada’s statistics agency.

Hedge funds’ oil shorts reach 2015 peak Bets on further pressure on crude build ahead of Opec meeting
Pace of Stock Buybacks Stirs a Debate

Corporate stock buybacks are climbing toward a post-financial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports.

Stock repurchases boost earnings per share, even if total earnings don’t change, by reducing the number of shares. Analysts and investors typically track per-share earnings, not overall earnings. (…)

This WSJ piece is timely as James wrote me yesterday “curious to hear how all these share buybacks have distorted the EPS growth numbers.”

This is a more significant matter at specific company levels than at the overall Index level. S&P calculates that 68% of the S&P 500 companies have lower share counts in Q3’15 than in Q3’14 and 22.5% have 4% fewer shares. On the other hand, 9% have 4% more shares YoY.

Keep in mind that many buybacks seek to offset dilution from options exercise. Also, share buybacks have the effect of increasing losses per share when companies are losing money (e.g. energy companies currently).

Nerd smile The facts are that, in total, there are currently 0.8% fewer shares in the S&P divisor than there were last year. This is up from –0.5% in Q2. On a trailing 12-month basis, the share count has not declined by more than 1.5% YoY during this bull market. The TTM share count peaked in September 2011 and has declined a grand total of 2.9% since then. Interestingly, the TTM share count troughed in March 2009 and is now 1.5% higher than at the start of this bull market.

In reality, share buybacks do not have a meaningful impact on aggregate EPS.


Insiders sending an ominous market signal

Corporate insiders have been dumping shares at the highest pace in 4½ years, according to market data firm TrimTabs. The selling averaged $450 million a day in November, the highest since May 2011. (…)


November data indicated a setback for U.S. manufacturing sector growth, following the modest rebound recorded during the previous month. At 52.6, down from 54.1 in October, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) pointed to the slowest improvement in overall business conditions since October 2013. The decline in the headline index in November reflected weaker contributions from all five PMI components.


Although still robust, manufacturing production growth moderated since the previous month and was slightly weaker than its average for 2015 so far. At the same time, latest data highlighted the softest expansion of incoming new work for just over two years. Reports from survey respondents generally cited a cyclical slowdown in demand patterns and ongoing weakness in export sales. Reflecting this, the index measuring new orders from abroad dipped back inside negative territory in November. Lower levels of new work from abroad were linked to a combination of the strong dollar and weaker global economic conditions.

In response to slower output and new business growth, manufacturers signalled greater caution in terms of their purchasing activity and inventories during November. The latest rise in input buying was the weakest since January 2014, while stocks of finished goods dropped for the fourth month running. Meanwhile, latest data showed that pre-production inventories were broadly unchanged, which contrasted with the pattern of modest growth seen throughout most of the past year-and-a-half.

Manufacturing payroll numbers were reported to have increased again in November, continuing the trend seen for much of the past six years. However, the latest expansion of employment levels was only modest and weaker than seen on average over the recovery period. Softer rates of job hiring reflected greater caution in terms of the business outlook and reduced pressure on operating capacity. This was highlighted by a drop in backlogs of work for the first time in 12 months.

November data pointed to a further lengthening of suppliers’ lead-times, but the latest deterioration was slightly less marked than that recorded in October. Meanwhile, average cost burdens fell for the third month running, which was overwhelmingly linked to lower transportation and commodity prices. Factory gate charges increased only fractionally in November, and the rate of output charge inflation remained well below the long-run survey average.

NEW$ & VIEW$ (23 NOVEMBER 2015): Oil Up? Earnings Watch. Commodities.

Oil Reverses Loss as Saudi Arabia Signals OPEC Cooperation

Oil rose in New York, reversing earlier losses, as Saudi Arabia repeated that it’s prepared to work with OPEC and other producers to stabilize global oil markets.

The country strives to “cooperate with all oil producers and exporters, from inside and outside of OPEC, to preserve the stability of the market and prices,” Saudi Arabia’s cabinet said in a statement on Monday following its weekly meeting, carried by the Saudi Press Agency.

Bearnobull was among the very few media to highlight what al-Naimi said last Wednesday week at a conference in Bahrain (NEW$ & VIEW$ (19 NOVEMBER 2015), noting the importance of the statement. Here’s what al-Naimi said last week (via Bloomberg):

Saudi Arabia is working with other OPEC members and producers from outside the group to stabilize the market, Saudi Oil Minister Ali al-Naimi said.

Saudi Arabia is a very reliable supplier. We cooperate with OPEC and non-OPEC countries to stabilize the market,” al-Naimi said at a conference in Manama, Bahrain. “We need billions of dollars to continue exploration and producing oil and to invest in spare capacity to stabilize the market.”

Now, the Saudi cabinet is making it official:

The Cabinet stressed the Kingdom’s role in the stability of the oil market, its constant readiness and continuing pursuit to cooperate with all oil producing and exporting countries. (Saudi Press Agency)

…stressing the “kingdom’s role in the stability of the oil market”, one year after the kingdom’s role in the collapse of the oil market.

Will other countries respond? (Call me Russia).

Masters of the Finance Universe Are Worried About China

David Tepper says a yuan devaluation may be coming in China. John Burbank warns that a hard landing there could spark a global recession.

Tepper, the billionaire owner of Appaloosa Management, said last week at the Robin Hood Investor’s Conference that the Chinese yuan is massively overvalued and needs to fall further. His comments follow similar forecasts from some of the biggest hedge fund managers, including Crispin Odey, founder of the $12 billion Odey Asset Management, who predicts China will devalue the yuan by at least 30 percent.

The money managers are losing faith in China’s ability to revive its economy, which suffers from rising nonperforming loans and falling exports, after the surprise 1.9 percent currency devaluation in August and global market rout that followed. (…)

“The downside scenario for China seems more intimidating than ever before,” billionaire Dan Loeb wrote on Oct. 30 to investors at Third Point, which manages $18 billion. “The new question is not whether but how severe the slowdown of the world’s foremost growth machine will be.”

Goldman Sachs Group Inc. on Thursday echoed the managers’ concerns, saying the biggest risk to a rebound in emerging-market assets next year is a “significant depreciation” of the yuan. Policy makers, facing a stronger dollar and slower growth, may let the currency decline, which would ripple through emerging markets, strategists led by Kamakshya Trivedi wrote.

“In our view, the fallout from such a shift is the primary risk,” the analysts said.

Hedge fund holdings of some of the largest U.S.-listed Chinese companies have dropped in the past six months. The funds owned about 8 percent of reported U.S.-traded shares of Baidu Inc. at the end of the third quarter, according to regulatory filings. That’s down from about 13 percent in the first quarter. Fund ownership of International Ltd. sunk to roughly 16 percent from 25 percent in the period, and it declined to approximately 22 percent from 44 percent at Inc. (…)

Burbank, the founder of $4.4 billion Passport, told investors in an Oct. 30 letter to beware of a China-led shakeout. The world may be heading into “a global downturn that leaves no region safe, including the United States,” he wrote. If economic conditions worsen in China, particularly with nonperforming loans, it could mean the end of the dollar peg for the yuan, lower interest rates and the liquidation of risk assets around the world, he said. (…)

Elliott Management’s Paul Singer also warned about global contagion from China’s decline. Singer told investors in an October letter that emerging market countries are “choking” on U.S. dollar-denominated debt that was extended due to low interest rates and monetary stimulus. He said many emerging economies, which are in recession, are “scared to death” about even a 25 basis-point increase in U.S. interest rates.

While “muddling along” is still an option, Singer wrote that the world could face a more severe scenario like a “global central bank panic.” He said that policy makers will probably “double down on monetary extremism” in response to deteriorating economies in emerging markets and China. (…)

Watch Next: Are Investors Too Gloomy When It Comes to China?

BTW: China Rail Freight, a key industrial gauge, fell 1.0% in October, the third consecutive weak month.

Global debt defaults near milestone US accounts for 62 of 99 defaults by global companies in 2015

(…) Since 2007, the proportion of corporate bonds S&P has rated speculative-grade, or junk, has climbed to about 50 per cent from 40 per cent. (…)

In the US, about three-fifths of defaults in 2015 have been among energy and natural resources businesses (…)

The jump in defaults has been reflected in the average yield on US corporate junk bonds, rising from 5.6 per cent at the start of 2014 to 8 per cent at present, according to Barclays.

The sell-off has been concentrated in the energy and materials industries and the average yield for junk bonds in the two sectors shot above 12 per cent last week; no other sector has a yield above the overall average.

Chart: Corporate defaults

Emerging market borrowers have accounted for 19 of the defaults — the second largest source of failures, Europe has counted 13 and the remainder are in other developed countries, such as Japan and Canada.

The number of weaker companies rated by the credit agencies has also risen from 167 in the previous quarter to 178. S&P defines these “weakest links” as borrowers with junk bonds rated B minus or lower and at risk of further downgrade.

Diane Vazza, head of global fixed income research at S&P, said: “By most measures, the rising number of defaults in the near future likely will be muted by historical standards, but the current crop of US speculative-grade issuers appears fragile and particularly susceptible to any sudden or unanticipated shocks.”

Northern Trust adds this:

Even though the Barclays 2% High Yield Index return is -0.5% through November 9, there’s been a wide dispersion in returns. There’s a 26% return differential between the best-performing sector (refining) and the worst-performing sector (independent energy). Of the 45 sectors in the Barclays index, 34 have positive returns and 16 have returns greater than 5%. In contrast, losses have been concentrated to just six sectors, with returns ranging from -5.5% to -15.9%. These sector returns show that high yield is no longer a beta-driven market fueled by accommodative Fed policy.


S&P 500 Profits Fall $25 billion in First Three Quarters of 2015

Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters. (…)

On a share-weighted basis, S&P 500 profits were down 3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth. (…)

The negative trend in U.S. earnings is set to persist in the fourth quarter, with analysts expecting a 5 percent drop in S&P 500 profits in 4Q, according to data compiled by Bloomberg. (…)

Here are the facts:

The Q3 earnings season is essentially over with 95% of the S&P 500 companies having reported. Thomson Reuters’ tally shows that the season ended on a strong note with Q3 EPS reaching $30.09, 1.1% above the Nov. 2nd estimates ($29.76), up 5 cents YoY and equal to Q2. Trailing 12-month EPS are now $119.32, up 4.2% from 12 months ago.

So far, there have been 23 positive pre-announcements for Q4, up from 18 at the same time last year and 76 negative (77 last year).

From Factset:

With 95% of the companies in the S&P 500 reporting actual results for Q3 to date, more companies are reporting actual EPS above estimates (75%) compared to the 5-year average, while fewer companies are reporting sales above estimates (45%) relative to the 5-year average.

In aggregate, companies are reporting earnings that 5.3% above the estimates. This surprise percentage is above both the 1-year (+4.8%) average and the 5-year (+4.8%) average.

The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q3 2015 is now  -1.6%. If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 5.2% from -1.6%.

The blended revenue decline for Q3 2015 is now -3.9%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.2% from

Every sector but Financials and Materials have exceeded estimates in Q3:


We know the impact energy had in 2015. Northern Trust illustrates the effect of an 18% YoY appreciation of the dollar. The resilience of corporate margins is remarkable:


Smaller caps from Zacks Research (as of November 18, 2015):

For the Russell 2000 index, we currently have Q3 results from 1776 members that combined account for 90% of its total market cap (the index currently has 1979 members at present). Total earnings for these 1776 index members are down -15.1% from the same period last year on +1.5% higher revenues, with 50.1% beating EPS estimates and only 36.5% beating revenue estimates.

This is a weaker performance than we have seen from same group of 1776 index members in other recent periods, as the charts below show.

As you can see in the right-hand side chart above, the revenue beat ratio (36.5%) for the Russell 2000 index is notably below what we have been seeing from this same group of index members in other recent periods. In other words, the revenue weakness isn’t solely a problem restricted to the multi-nationals as a result of the dollar strength, but is very much present in the small-cap space as well.

The Rule of 20 P/E is now 19.4, 3.2% from fair value of 2160.


Deepening Metals Rout Sends Copper Below $4,500 as Nickel Slumps
Prices for Base Metals Plummet Copper and nickel hit six- and 12½-year lows as China demand slows and dollar strengthens

(…) The declines heap more pressure on some of the world’s largest miners, from Glencore PLC to Russia’s MMC Norilsk Nickel, and put further strains on the budgets of many emerging-market nations whose economies depend on commodity mining. (…)

The losses come amid a broad pullback in commodity prices that has gained steam over the past year, enveloping disparate markets from crude oil to coffee and iron ore to soybeans. Most commodities are reeling from a trifecta of weaker demand, growing supply and a rocketing dollar, although factors specific to each individual market also come into play. (…)

Analysts estimate that half of all nickel production is now unprofitable. For copper, around 15% to 20% of global production capacity is loss-making at current copper prices, according to Macquarie. (…)

Bottom fishing time? Heck! How much more can they drop? After all, copper is down 27% and nickel 42% YtD.

Even more compelling, copper is down 55% since 2011!. It can’t decline much more, can it?


Think again after looking at this chart:image

Hmmm…not so sure this is “buy low time”, are you?

Don’t worry, Goldman Sachs has all the answers for you in this just released 22-pager titled Strategic case for commodities delayed, but not derailed. Here’s the strategy (my emphasis of course):

  • the extent of this weakness has far exceeded our initial expectations
  • However, we continue to believe that the underperformance of commodity returns to date still fits within our historical framework of returns: With the business cycle the key driver of the level of returns and the commodity supply cycle the key driver of the source of returns (spot vs. roll returns). Importantly, these cycles have been in the historically weakest phase of their returns, both outright and relative to other asset classes. Yet, this same framework leads us to foresee much better commodity returns once we shift into the next phase of the business cycle, Recovery.
  • Our economist’s new forecasts put global GDP growth at 3.5% in 2016 (vs. 3.2% in 2015) and point to the global business cycle shifting back into Recovery by early 2016.
  • We caution however that further growth disappointments could delay this timing again (…)
  • we continue to believe that the downside risks to our forecasts are non-negligible
  • we don’t believe that current prices present an appealing entry point to position for higher commodity returns, despite the perceived asymmetric risk-reward at low spot prices and post such weak returns.
  • Importantly though, this has not derailed the long-term strategic case for including commodities in an asset allocation. In addition to higher returns in the future, we continue to see clear benefits from commodities’ structural low correlations to other assets and strong inflation hedging ability.

What is, really, the “long-term strategic case” for commodities? What are the “clear benefits”?

With this chart, I rest my case:


GS is quite right about the “structural low correlation”, however!


Eurozone businesses reported the fastest rates of growth in business activity and employment for four-and-a-half years in November. The Markit Eurozone PMI® rose from 53.9 in October to 54.4, according to the preliminary ‘flash’ reading, indicating the fastest rate of expansion of output since May 2011. Moreover, the survey’s employment, new orders and backlogs of work indicators all signalled the strongest monthly expansions in four-and-a-half years.


The survey data also highlighted the broad-based nature of the upturn. The recovery continued to be led by the service sector, where business activity and new business rose at the fastest rates since May 2011 and employment showed the biggest monthly gain for five years. Manufacturing output growth meanwhile also gathered pace, reaching a three-month high amid the largest monthly improvement in order books since April of last year. Factory headcounts also rose at a faster rate as firms raised capacity in line with the improved demand environment.


One area of weakness was France, where business activity rose at the slowest rate for three months, largely reflecting weaker service sector growth. Manufacturing output growth also slowed despite a slightly faster rise in new orders. Growth meanwhile accelerated to a three-month high in Germany, fuelled by the biggest monthly improvement in new business for two years.

Stronger gains in business activity and new orders in the service sector were partly offset, however, by a slowdown in manufacturing. An upturn in job creation was reported across both sectors, nevertheless, resulting in the largest jump in overall employment for nearly four years.

The strongest rate of expansion was seen outside of the eurozone’s two largest economies, where the survey recorded the second-steepest rise in output since the global financial crisis. Employment in the rest of the currency bloc meanwhile showed the joint-largest gain since July 2007.

Despite the upturn in the pace of growth and hiring, the survey showed ongoing deflationary pressures. Average prices charged for goods and services fell marginally, at a rate unchanged on October, while average input costs once again barely rose, linked primarily to falling global commodity prices.