Hype is Hurting
by Sinclair Noe
DOW – 9 = 16,560
SPX – 3 = 1933
NAS – 12 = 4389
10 YR YLD + .02 = 2.44%
OIL - .15 = 97.22
GOLD + .60 = 1309.50
SILV - .10 = 20.02
SPX – 3 = 1933
NAS – 12 = 4389
10 YR YLD + .02 = 2.44%
OIL - .15 = 97.22
GOLD + .60 = 1309.50
SILV - .10 = 20.02
The Dow Industrial Average has now gone negative
year-to-date. Seven of the 10 main groups in the S&P 500 declined, with
energy companies dropping 0.7 percent to lead the slide as Brent crude settled
at the lowest level since July 2013. The International Energy Agency said a
supply glut was shielding the market against threats in the Middle East.
As we wrap up earnings season, 73% of companies have
beaten earnings estimates, slightly above the 1-year average of 72%, but
“beating estimates” this time doesn’t mean what it did in recent quarters. For
the past few years, analysts have ratcheted down their estimates in the run-up
to earnings season, setting the bar lower and lower—and setting up an easy
beat. Companies are beating by an average of 4.2%, above the 1-year average of
3.2%. Q2 earnings growth is 8.4%, up from an expected 4.9% on June 30. This is
the second-highest earnings growth rate since Q4 2011. Revenues are now up for
5 consecutive quarters and at all-time highs, and it now looks like revenues might
be driving earnings. The strongest sectors for upside earnings surprises have
been telecom services, health care (especially biotech), and information
technology; while consumer staples is the weakest. US banks and thrifts had their
second best quarter in 2 decades, with more than $40 billion in net income.
Profit margins have soared. Net profit margins more than
doubled from 4.6% in March 2009 to 9.8% at the end of the first quarter. Margins
could come in just shy of 10% when all the second-quarter results are in. The
problem is that high margins tend to mark a peak rather than a normal level of
profitability. In other words, it’s tough to keep the margins high, and there
are several reasons: most of the fat has been cut and it is difficult to further
improve labor efficiencies and that’s confirmed by last week’s productivity
report showing that the real output of nonfarm business has been hovering
around 3% year to year since Q2-2010, consistently higher than real GDP growth;
capital spending has been low, but is likely to rebound; and with interest
rates near all-time lows, companies will find it difficult to find better
financing to boost margins. As margins stagnate or slip, the best defense is to
look for companies that are growing revenues.
Actually, the best defense might be to discount analysts’
expectations; something that Wall Street is doing with greater frequency. The
problem is that analysts issue glowing earnings growth expectations for the
next few quarters, based on pro forma estimates, minus the bad stuff, and
heavily adjusted; which in turn drives up share prices. Traders buy in. As the
distant quarters get closer and closer, the analysts ratchet down expectations,
making for a bar that is easy to hurdle, and again the traders buy in.
In its latest report on earnings expectations and
reported earnings, FactSet
found a startling change in how the market reacts to these fabricated earnings
beats. Over the past five years, companies with upside earnings surprises saw
their stock prices rise on average 1% from two days before the announcement to
two days afterwards; and downside earnings surprises were punished with a 2.3%
decline in stock price over the four-day window. So far in the second quarter
earnings season, companies have been crushing earnings, and the market is
languishing. FactSet found that this time around the market didn’t reward these
juicy earnings surprises at all. Stocks of these companies actually dropped
0.1% over the four-day window. And downside earnings surprises got hit with a
3% decline. The hype is hurting.
The share of unemployed Americans competing for each open
job hit a six-year low in June. The Labor Department's monthly Job Openings and
Labor Turnover Survey, or JOLTS report, showed the number of unemployed job
seekers per open job fell to 2.02 in June, the lowest level since April 2008. Job
openings, a measure of labor demand, increased to a seasonally adjusted 4.67
million in June, the highest level since February 2001. At the same time,
hiring reached its highest point since February 2008. Much of the increase in
employment growth since the 2007-2009 recession ended had been driven by a
sharp decline in the pace of layoffs, as opposed to a higher rate of hiring.
Job growth has topped 200,000 in each of the past six
months, a stretch last seen in 1997. The unemployment rate has declined to 6.2
percent from 6.7 percent at the end of 2013. The JOLTS report shows some of the
slack is coming out of the labor market, and the next sign of a tightening
labor market is if we start to see wage growth. Meanwhile, a gauge of small
businesses’ intentions to hire has also surged to a fresh post-crisis high,
with 13% of respondents to a survey by the National Federation of Independent
Business indicating their intentions to hire. That’s the largest percentage
since September 2007. The problem is they aren’t actually hiring. The JOLTs
hiring rate is nowhere near as buoyant as the job opening rates. The US hiring
rate, hires as a share of total employment, hit 3.5% in June. You might expect
businesses to intend to hire before they actually hire, but there is also a
disconnect; and it might be in a skills mismatch or it might be in a wages
mismatch.
During the Great Recession and its aftermath, the federal
government acted to help victims of the severe downturn by funding programs
that extended unemployment benefits—to up to 99 weeks in some cases, up from
the standard 26 weeks. As the economic recovery continued, weak as it was for
many in the working class, many lawmakers on the right began to believe that
these extended benefits were a drag on employment—the theory being that
government checks reduced the incentive for recipients to find a job, and that cutting
off this lifeline would compel unemployed workers to look harder for work and
perhaps take jobs they may not have accepted if the benefits had continued.
Relying on this premise, Congress allowed the federally-funded Emergency
Unemployment Compensation program to lapse last December.
Now, more than seven months later, data are available to
test this idea. Coming from perspectives that diverge greatly along the
ideological spectrum, scholars at both AEI and EPI, the Economic Policy
Institute and the American Enterprise Institute, a couple of think tanks at
opposite ends of the spectrum, have come to the conclusion that this
“bootstraps” theory is incorrect—curtailing jobless benefits did not boost
employment. Because unemployment benefits are contingent upon the people who
receive them proving that they are looking for a job, receiving jobless
benefits appears to make recipients at least just as likely, and certainly not
less likely, to rejoin the ranks of the employed.
The US budget deficit was $95 billion at the end of July,
down 3 percent from the same period last year. The fiscal year-to-date deficit
at the end of July was $460 billion, the lowest level since the same period in
fiscal year 2008, compared with a deficit of $607 billion for the same period
in fiscal year 2013.
The National
Association of Realtors released metro area home-price data for the second
quarter, and it looks like growth in home prices is slowing, especially in the
East. Nationwide, the median existing single-family home price in the second
quarter was $212,400, up 4.4% from the second quarter of 2013. The median existing
home price for the Phoenix area is $198,600, up 8.6% from one year ago.
The inventory of all existing homes for sale rose 6.5
percent in June from a year earlier to 2.3 million, an increase from a 13-year
low of 1.8 million in January 2013. That’s a 5.5-month supply at the current
sales pace, less than the six months that is considered equilibrium between
buyers and sellers. Breaking it down further, inventory tightened at the market’s
low end and grew at the top. The number of U.S. homes for sale in the bottom
third of the market -- below $198,000 -- fell 17 percent in June compared with
a year earlier, according to a Redfin analysis of 31 large U.S. metropolitan
areas. The supply was up 3 percent in the middle market and jumped 15 percent
at the top. The rising inventory of more expensive properties is giving a boost
to sales. At the bottom of the market, first-time buyers, even those with the
credit, savings and income to overcome tougher underwriting requirements, must
face off against other bidders. First-time purchasers accounted for 28 percent
of all sales of previously owned homes in June, down from about 40 percent
historically.
A funny thing happened in New York yesterday; Manhattan prosecutors
filed criminal charges against a dozen payday lending companies and their
owner, accusing them of making payday loans that defied New York's limits on
interest rates, or usury laws. The defendants in the case tried to cover their
tracks with a maze of offshore corporations, to make it look like they weren’t
doing business in New York. Under New York state law, the maximum interest rate
that can be charged is 9 percent annually and the general usury limit is 16%,
with a bunch of exemptions. The defendants in this case are accused of charging
between 300% and 700% interest. Remarkably, most states still have usury laws
on their books, but not all. In Arizona the legal rate of interest is 10%.
You may very well have a credit card that charges more
than 10%, and the reason that is not considered usury is federal court
decisions and statutes have virtually exempted credit card companies by
allowing them to charge customers, regardless of their state of residence, the
interest rates allowed by the state in which they are incorporated. This means
that there are no limits on credit card interest rates in practice, even if
certain limits remain on the books, the only exception being the 18 percent
interest limit for federally chartered credit unions. And so it is a very rare
event when anyone faces a criminal charge of usury.
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