FMX | Connect – www.fmxconnect.com - (Reported 8/18/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
ANOTHER DAY OF DISMAL DATA
In terms of economic data out of the U.S., yesterday was definitely one for the growth bears, as Claudia (filling in admirably for the data writeups during my jaunt to Whistler) explains below. U.S. single-family housing starts were down three months in a row to their lowest level since May 2009 and permits got clobbered for the fourth straight month, indicating more weakness in starts ahead (as if the National Association of Home Builders’ housing market index hadn’t already signalled that). And, the 33% bulge in multiple starts plays right into our deflation view as the supply response to apartment demand helps keep rents under wraps. The median core PPI (which excludes food and energy) was barely up in July and the core intermediate and crude measures deflated, portending industrial price weakness ahead. Yes, industrial production bounced 1% MoM but netting out the downward revisions and the seasonal factor effects as they pertain to the automotive sector (no idling this summer), the underlying increase was closer to 0.2% and we expect a significant pullback for August.
The weakness in the incoming economic data in the U.S. will soon show through in reduced corporate guidance and more downward earnings revisions (think of Bernanke as CEO for USA Inc. and consider that he just cut the forecast for the second time in six weeks). These pose near-term cyclical risks to the equity market outlook.
Based on our GDP views and taking into account cycle-high margins, it seems to us that S&P 500 operating EPS will fall short of consensus forecasts for Q3 — $17 as opposed to $20. As for Q4, our projections for costs, volumes and pricing leave us at $18 compared with the $22 the market is de facto pricing in.
So, earnings, which recently trended up towards $80, are settling into a $70-75 range for the coming year. Slap a 12x multiple on that earnings profile and do the math of what a really an attractively priced market would look like.
NO REAL EVIDENCE OF HOUSING BOTTOM
Yesterday’s U.S. housing starts report was disappointing, especially in the wake of the soft NAHB report on Monday. Total starts rose 1.7% MoM in July, slightly missing the 2.0% increase expected by the consensus. That was probably the best news of the report.
Downward revisions to the June data were harsh with the -5.0% initial estimate being taken down to -8.7%. Another way of putting it, if it weren’t for the downward revisions, the headline would have been negative.
The increase in total starts was driven by a huge jump in the very volatile multi-family component — up 33% after a 33% decline in June. A better gauge for underlying demand is single-family housing starts, which dropped 4.2%, the third monthly decline in a row, falling to the lowest since May 2009. The YoY rate fell to -14%, the second month in negative territory and the weakest print since August 2009 — it really doesn’t seem like things are getting any better. To put it into perspective, single-family starts has been essentially range-bound since the end of 2008, languishing near record lows— even after all the government stimulus.
Forward-looking components of the report were weak as well, with building permits falling 3.1%, the third decline in four months. Note that total permits go into the index of leading economic indicators and our tally so far suggests a flat July monthly print for LEI, at best.
Again, single-family permits were soft, down 1.2%, the fourth consecutive monthly decline — pointing to more weakness in starts in the coming months. Multi-family permits fell 8% suggesting that the 33% increase in multi-starts will be partially reversed in coming months.
INDUSTRIAL PRODUCTION: DEAD CAT BOUNCE?
A seemingly positive economic report was the July industrial production report, which blew away consensus expectations, coming in at 1.0% MoM versus 0.5% expected. Production in the manufacturing sector rose 1.1% on a spectacular 9.9% jump in motor vehicle production.
Here’s why we called it a “seemingly” positive report. Remember that July has been a strange month for seasonal factors, especially related to the auto shutdowns (GM kept most of its plants open this year and the government’s seasonal-adjustment models don’t account for this). We saw wild swings in the weekly initial jobless claims partly due to seasonal-factor adjustments (claims dropped by 10% in the first two weeks only to increase by 10% in the third week of July, to give you a sense of the volatility).
We think something similar was going on with the seasonally-adjusted motor vehicle production numbers — in other words, the seasonal factors may have artificially boosted the data. In fact, when we adjust the seasonal factors, total IP would have been 0.4%, according to our calculations, not the 1.0% reported. We could see a significant pullback in August as part of the July increase is reversed. On top of this, the back revisions to the actual data were negative — the +0.1% gain in June was turned into a -0.1%. So the underlying increase over June and July would be in the 0.2% range, hardly inspiring.
U.S. PRODUCER PRICE INDEX: DETAILS STILL DEFLATIONARY
July PPI rose 0.2% MoM after three straight months of declines. The closely-watched core measure (which strips out food and energy) rose by a higher than expected 0.3%, after very subdued read in the prior five months. A jump in prices of light trucks (up 1.5% MoM) was partly to blame for this. In fact, most categories showed subdued increases or outright declines — by our calculations, the median increase was only 0.1%.
Pipeline inflation measures were quite deflationary, pointing to more weakness in industrial prices in the months ahead. Core intermediate prices fell by 0.4%, mirroring the decline in June. And further down the pipeline, core crude prices fell by 1.4%, the third monthly decline and is running at -27% annualized on a three month basis, the weakest since January 2009.
HOT SUMMER FOR CANADIAN MANUFACTURING SHIPMENTS
Some good news out of the Canadian manufacturing sector, with June manufacturing shipments surprising economists, including ourselves. Shipments rose 0.1% versus -0.5% expected — very weak export data had (falsely) pointed to a decline.
It’s the inflation-adjusted data that matters for GDP and on this measure, real shipments were even stronger, up 0.7%. June GDP could see a decent print of 0.2-0.3% MoM by our estimation, especially since we also know that auto sales were up by more than 2% on the month. However, the quarter started off on soft footing, so while it looks like second-quarter GDP could come in better than our 2.5% estimate, we doubt it will meet the Bank of Canada’s 3.0% forecast.
Other details of the report were also positive, in particular new orders, which rose by 2.2% (real basis) suggesting another increase in shipments in July. Inventories also rose by 0.6%, which left the inventory-shipments ratio near two-year lows.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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