Friday, December 14, 2012

Ind. Production & Capacity Utilization Beat Estimates

Both industrial production and capacity utilization for Nov. came in above consensus and certainly above our projections. This could be due to a dead-cat bounce in production after a slight downturn in Oct. caused by Sandy. We note that the Oct. m/m production change was revised down by 30bps. Higher capacity util. along with some improvement in initial jobless claims could be indicating a slightly better Dec. jobs report. However, we do not anticipate an upturn significant enough to satisfy the Fed's 6.5% unemployment rate anytime soon.

Thursday, December 13, 2012

Mixed Economic News ...

Some mixed economic news this morning:
  • The good news was that initial jobless claims came in at 343K, significantly below the 370K consensus.  Of course, the previous week's figure was revised higher by 2K.  Overall, news of initial claims below 350K is a bit encouraging.  The last time that the seasonally adjusted initial claims were below 350K was in early Oct.  We note that such good news could ease the excitement over another Fed QE.
  • The less encouraging news consisted of Nov. PPI falling 0.8%, more than the economists' 0.5% decline estimate.  Core PPI, which excludes food & energy, increased 0.1%, but still below the 0.2% consensus.  But do not be fooled.  While energy costs declined 4.6%, food costs increased 1.3% in Nov.  We do not consider this good news.  Although volatility is expected in food & energy PPI, we note that Nov.'s 1.3% increase in food inflation followed a 0.4% increase in Oct.  By the way, food is a necessity.
  • Nov. retail sales numbers were mixed.  Overall, they increased by 0.3%, below the 0.6% consensus.  However, excluding auto and gas, retail sales went up 0.7%, beating the 0.5% estimates.  This was driven mainly by a 2.5% increase in sales at electronics & appliance stores, which we think is partially due to the upcoming Christmas Holidays and to the rebuilding going on post-Sandy.  By the way, speaking of electronic stores, BBY (Best Buy Co.) is up nearly 18% in pre-market.  It appears that auto sales did not recover as quickly as economists thought.  Excluding only autos, Nov. retail sales were flat, meeting expectations.  Total motor vehicles & parts dealers' sales went up 1.4% in Nov., not nearly as healthy of a gain as Oct.'s 5.4%. 
CPI and industrial production & capacity utilization will be reported tomorrow morning.  We posted our projections of the last two earlier this week.  S&P 500 futures are pretty much flat, while gold has dipped below $1700 and front month oil futures are down slightly, trading at $86.6. 

Director Purchases 20K AVID Shares

According to two SEC Form 4 filings yesterday, Robert M. Bakish (President & CEO of Viacom's Viacom International Media Networks, and currently sitting on AVID's board) purchased 10K shares of AVID on 11/28 at an average price of $6.28/sh.  He purchased another 10K this week, Monday (12/10), at an average price of $6.82/sh.  With these latest transactions, Mr. Bakish more than doubled the number of AVID common stock that he owns.  He now owns 36K AVID shares according to the last filing.  As a reminder, we posted our thoughts on AVID on 12/10. 

Wednesday, December 12, 2012

Biggest Issue: Wage & Income Growth Stagnation for Most Americans

We've pointed out many times that stagnation of growth in wages for most Americans is one of the biggest issues facing this consumer driven economy. This morning, Wednesday 12/12/12, at 10:10AM (ET), The Atlantic posted a much simpler way of saying the same thing on its site. Enjoy ...

A Giant Statistical Round-up of the Income Inequality Crisis in 16 Charts.

Monday, December 10, 2012

Avid Technology, Inc. (AVID)

We believe we have come across a value play.  Although the stock has moved up 10%+ during the last 2-3 weeks, we believe there is still some attractive upside to this turnaround.

Avid Technology (AVID) makes software and hardware that ad agencies, news organizations, music producers, and other marketing and entertainment companies use to create, edit, and add effects to film, video, and audio.  After a Q3 earnings warning in October, the stock tanked from nearly $9/sh to $5.87/sh.  Since then the stock has formed a base or support at around $6/sh and has slowly climbed back up to $6.83/sh.We note that trading volume of this stock has tapered off since the downturn in Oct.  Based on this, we do not anticipate too much further selling during the short to medium-term.

AVID is a very well-known and respected technology company in the media sector.  It has a very large installed base along with many loyal users.  Businesses utilize AVID's technology to create, edit and distribute content to audiences of all sizes on a variety of platforms.  The Company conducts business globally.  Its revenues are 40%/60% US/international.

Again, we think this is a turnaround story.  One of the mistakes that AVID made a few years back was that it tapped into the consumer side of this business by making a few acquisitions.  Although the results were impressive initially, they led to a consistent decline in the Company's margins given the increasing pricing pressure the Company faced in its consumer business segment.  Given declining margins and increasing operating losses, AVID took steps to make itself a more efficient and profitable company.

AVID divested its consumer business earlier this year, which we believe will help expand gross margins, although it will have a negative impact on the Company's top-line.

In addition, AVID is making its products more open and less dependent on its hardware.  This will also help expand margins by making the Company more of a software company.  By focusing on maximizing the sales of its differentiating software products, AVID will be taking another step towards making higher margin recurring software and maintenance revenues a bigger chunk of its total revenues.

The Company has also taken steps to lower operating expenses going forward.  For example, its manufacturing and R&D teams are now much more closely aligned.  AVID has also reduced its headcount by 15% - 20% during the last 12 months.  Management has said it expects to save around $80MM in opex.

From a revenue standpoint, we do not expect impressive growth.  In fact, we have assumed a below 4% 5-year CAGR.  However, again, a higher percentage of AVID's revenues will be recurring.  From a high-level standpoint, AVID's revenue drivers include trends within the media and entertainment industries such as centralized media asset management systems, increase in creation and distribution of 3D content, prioritization of not only distributing but also creating and editing content on mobile platforms in real-time, and, of course, the continuing transition towards HD content. Although the HD content transition can be considered as nearly complete in the US, we believe there are opportunities for AVID within the emerging markets.

Large events also drive some top-line growth for AVID.  In fact, the Company has long been successful in selling new products or upgrading products before very widely covered US and/or international events.  The Presidential election and the Olympics this year are a couple of good examples.  Sales generated by such events usually close 2 - 3 quarters before the actual events take place.  Looking ahead, we believe US midterm elections and the World Cup in 2014 will drive more top-line growth in the second half of FY '13.  What makes the 2014 midterm elections 'special' is that they include 36 gubernatorial races.  CA, NY, and TX are just a few examples of the states having gubernatorial elections.  Those races will certainly be widely covered.  Of course, the worldwide coverage of the 2014 World Cup doesn't need any further explanation.

AVID faces many competitors such as Apple (AAPL) and Adobe (ADBE).  However, given its sizable installed base, we do not expect the Company to lose big opportunities or current clients to competitors.  In fact, AVID's divestment of its consumer business, we believe, will help it differentiate more effectively from its competitors.


From a valuation standpoint, we did a DCF on AVID and came up with a $10/sh valuation.  In our opinion, a valuation based on comps is much more realistic.  For this reason, we value AVID at $9/sh based on 7x FY '13 EBITDA plus the Company's $1.83/sh in net cash (no debt).  Other companies in the space are trading at an average EV/EBITDA multiple of 8.  At $6.83/sh, AVID is trading at only 5x forward EBITDA.  It appears the Street is not expecting any return from AVID's restructuring at least during the next 12 months.  We note the Company is also trading at only 0.75x book value.

The 32% upside that our $9/sh valuation represents is only based on valuation.  The stock could go above $10/sh during 2H of 2013 as the Street begins to recognize the benefits of the restructuring.  We believe its institutional fan base may increase further, which then will likely push up the stock a bit more.  The near-term catalyst is AVID's Q4 results, which will be announced in Feb.  We think the Company will generate positive non-GAAP EPS and may breakeven on a GAAP basis.

Nov. Industrial Production & Capacity Utilization Expectations

Industrial production and capacity utilization for November will be released this Friday (12/14) morning.  As demonstrated by the ISM and employment stats, it is very difficult to estimate the impact of Sandy on these economic figures.  We continue to believe that, at least in the short-term, the economy was impacted negatively by Sandy and we may see a sign of that in Friday's economic numbers.  We estimate the industrial production index to come in at 96.0%, a 0.6% decline from the previous month.  The consensus stands at 96.9%, an increase of 0.3%.  Given the work week figures of most regional surveys and the ISM employment sub-indexes, along with other production indicators, we also expect to see a decline in capacity utilization.  Our projection stands at 76.6%, a 1.2% sequential decline.  The Street is expecting 78.0% or a 0.2% increase.

Friday, December 7, 2012

November Employment Report Surprised to the Upside

Well, it appears that the Sandy effect was absent from the November jobs number as BLS reported a 146K gain in NFPs, significantly above the 80K consensus and certainly higher than our 70K.  However, we note that the September and October numbers were revised down by a total of 49K (16K for Sept. and 33K for Oct.)!  In addition, while the 7.7% unemployment rate might sound good, it is likely the result of the participation rate declining to 63.6% (from 63.8% in Oct.) and number of people not in the labor force increasing by 542K.  Let's put it this way, since Nov. 2011 more than 2MM people have left the labor force.
  • The private NFP count increased by 147K, indicating that there were only 1,000 jobs cut in the government sector. 
  • Retail led the way by adding more than 52K jobs as we are approaching Christmas season.  This was also evident in the 13.1K additional wholesale trade jobs and 23K in leisure and hospitality. 
  • Given Obama's victory in the prior month and the increased likelihood of Obamacare being implemented, number of jobs within the health care and social assistance industry rose by 22K. 
  • The 12K increase in jobs within the information industry may be indicating additional IT investments being made by companies to either prepare for growth or become more efficient given the likelihood of the G. W. Bush-era tax cuts coming to an end.
  • There was weakness in construction as jobs in that industry slipped by 20K.  We might see a gradual increase in this one during the Dec. - March period as some rebuilding post-Sandy will likely begin.  It will be a slow process as we are in the winter season.
  • Manufacturing was also weak with a decline of 7K jobs in Nov.  The 11K increase in durable goods jobs was more than offset by the 18K decline in non-durables, such as jobs in the foods sector.
  • Average weekly hours were unchanged, while average hourly earnings increased by 4c. 
  • On the household survey front, again, the unemployment rate dipped 20bps to 7.7%.  The U-6 unemployment rate also declined by 20bps, going to 14.4%. 
  • It appears that a lot of the decline in participation rate and the increase in people no longer being in the labor force came from part-time employees.  Part-time for economic reasons dipped 168K.  114K less people were part-time workers due to bad jobs or business conditions, but the ones that could only find part-time jobs went up by 44K.  Part-time workers because of non-economic reasons declined by 335K.  We think a big chunk of that number was due to people leaving the labor force completely. 

Overall, while the change in NFP was much higher than expected.  It appears impact of Sandy remains to be seen.  We also believe that the 50K+ change in retail was driven by Christmas season and we will likely see that figure come back down for Dec. and Jan.  The S&P futures are up 4.5 points or 0.3%.  Gold and oil futures are pretty much flat. 

Thursday, December 6, 2012

Nov. NFP Projection ...

Unfortunately, due to some unexpected events, we were not able to provide our projections for Nov. ISM.  Manufacturing ISM missed expectations, while services ISM beat the consensus. 
However, we found some time to run our employment models.  The results are as follows: for Nov. we expect BLS to report an increase of 70K in the NFP count.  Our forecast is slightly below the 80K consensus. 
Obviously, the Sandy storm impacted the NFP numbers.  The storm was also an excuse used by Moody's on Wednesday morning to describe why ADP came in below expectations, even though most economists had already included an estimated impact of Sandy in their projections.  We note that weekly released initial claims had already climbed above the critical 350K level (seasonally adjusted) approx. 3 weeks before the storm hit the east coast.  In addition, those claims have remained near the 400K level even 4 weeks after Sandy.  Simply put, while Sandy impacted employment numbers negatively, we do not think it was as significant as it has been presented to us by the main uber-bullish, very popular and colorful US financial media outlet.  For this reason, we do not expect a significant bounce in the Dec. NFP count. 
Nov. employment report will be released on Friday (12/7) at 8:30AM (ET). 

Thursday, November 15, 2012

Update and Ind. Production & Capacity Utilization Projections

Well, the equity market (S&P 500) has certainly taken a step back since hitting its intra-day YTD high of 1474 on 9/14.  It has declined more than 8% during the two months since.  Of course it remains significantly above our 12-month target of 1247 (published on 10/8).  Economic and political concerns, both domestic and global, have come out of the hiding.  The 'sugar high' provided by the QE3 announcement didn't last long.  In addition, unfortunately, the Sandy storm has likely created huge long-term economic costs.  In short, the macro story has not changed much from the beginning of the year.
In terms of economic indicators, given that it has been a while since the last time we posted, we will just briefly review some of the numbers that came out this week, followed by our projection of Oct. industrial production and capacity utilization, both of which are due out tomorrow morning.
Oct. headline and core PPI came in significantly below expectations.  However, both increased more than 2% Y/Y.  Oct. retail sales were slightly disappointing, although the miss was due partially to the Sandy.  Excluding auto and gasoline sales, the retail sales monthly growth was negative.  Sept. business inventories (yes, this is data from a while back!) came in above expectations.  Although this data usually lags sales growth, we think the November figure (which we won't see for a while) will not be very strong given the Sandy impact. 
Today's data included the Oct. headline and core CPI, both of which were in-line with estimates.  But similar to the PPI figures, the Y/Y changes were greater than 2%.  Initial jobless claims came in much higher than expected, 439K versus estimates of 376K.  Of course initial claims released last week were much lower than estimates due to Sandy which made it difficult for many to file jobless claims.  Today's jobless claims print was not surprising to us.  As usual, the prior initial claims figure was revised higher. 
Empire manufacturing survey for Nov. was slightly below expectations, -5.2 versus -5.0.  This was surprising as many had expected the worst given impact of Sandy.  Although new orders, backlog, and shipments showed improvement, the employment sub-index took a dump, down to -14.61 in Nov. from -1.08 in Oct.  The average workweek sub-index also dipped further; down to -7.87 from -4.30.  The Philly Fed manufacturing survey, also released this morning, wasn't better.  In fact, it was much worse.  That index came in at -10.7 compared to the 2.5 estimate.  New orders and shipments declined significantly.  There was some improvement in the employment and workweek sub-indices, but both remained in negative territory, and optimism about the next six months has declined a bit. 
As mentioned earlier, Oct. industrial production and capacity utilization will be released tomorrow.  We do not expect to see the full impact of Sandy in those numbers yet.  We estimate slight improvement in both, with 97.3 in industrial production and a capacity utilization of 78.4%, compared with 97.0 and 78.3% in the prior month, respectively.
Lastly, with tensions between Israel and its neighbors increasing, expect commodities, mainly crude oil, to increase a bit.  Normally that might be taken as a positive by the market, but given the weak underlying economy here and elsewhere, higher commodities are not necessarily beneficial, especially in consumer driven economies such as the US'.  If this issue escalates further, China and India can benefit from a competitive standpoint as the US economic sanctions imposed on Iran has allowed the two countries to offer much lower prices for the oil they receive from Iran.  And as we have said before, although it might take a while, the two economies, especially China, are slowly but surely moving towards more consumption. 

Friday, November 2, 2012

Someone Agrees with Us ...

9:55 EDT - Consumer discretionary sector is the strongest in early trading following better-than-expected October jobs report, but headline 171,000 job gain doesn't necessarily suggest consumers are on the verge of a spending spree. They need more cash to spend, but average hourly earnings were down last month, and have only grown 1.6% during the past 12 months, not keeping pace with a 2% y/y rise in consumer prices in September. (        

  (END) Dow Jones Newswires


October NFP Beat Everyone's Expectations

The BLS and its widely followed employment report certainly surprised everyone this morning, especially us.  October NFP print was 171K versus our 110K and the Street's 125K.  It appears we'll need to adjust our NFP model or add a dummy variable to indicate month before the Presidential election.  By the way, the Aug. and Sept. numbers were revised up by a total of 84K.  In fact, the Aug. NFP has been revised up by 96K the last two months!  In Sept. while we had estimated a 145K change in NFP (versus the Street's 113K), maybe we should have included a dummy variable for upcoming QE discussions.  The BLS has found it convenient to revise the Sept. figure to 148K.  The S&P 500 futures is up only 6.0 points, or 0.42%; but gold is taking a beating, down 1.1%.  It appears that part of this upbeat jobs report was priced in yesterday when the market jumped 1%+, or that the market believes this report will up Obama's chances of getting re-elected.  We note that impact of hurricane Sandy will be evident in the November jobs report.
  • The 171K change in NFP included a decline of 13K of jobs in the government sector, resulting in total private NFP change of 184K.  The decline in government jobs was expected as it had suddenly and unusually gained significantly and revised up for three straight months.
  • Big turnarounds compared to the previous month took place in the goods producing sector, led by manufacturing.  Given the regional Fed reports and the ISM, this was very surprising to us.  After losing 14K jobs in Sept., manufacturing added 13K in Oct. 
  • Apparently, the Holiday driven hiring has begun as jobs in retail trade jumped by 36.4K.  This included more than 4K in auto dealers, and  health and personal care stores.  Clothing stores added 3.1K.  However, number of employees in department stores is estimated to have declined by 2K. 
  • The unemployment rate inched up to 7.9% from 7.8% in Sept.  The more important U-6 unemployment rate declined slightly to 14.6% from 14.7%.
  • One of the few negatives in the household survey results included a sizable increase in people being unemployed for more than 27 weeks, +158K. 
  • In addition, the number of people working part-time due to only finding part-time work went up by 42K.  
  • Lastly, while the NFP number came in much better than expected, average weekly hours worked remained unchanged and average hourly wages actually declined by a penny.  This could result in further stagnation of growth in disposable income and possibly have a negative impact on consumption in the future.  We will see if all of the hiring in retail trade will pay off for the employers!

Thursday, November 1, 2012

Oct. ISM Mfg & ADP Beat Expectations; Adjustment to Our NFP Estimate

ISM Mfg (October)
October ISM for manufacturing of 51.7 was above our expectation of 50.0 and slightly higher than the Street's 51.5.  While this figure came in above expectations, it certainly does not indicate much of an uptick in manufacturing activity. 
New orders and production sub-indexes improved.  However, the employment index fell. 
In addition, inventories continued to decline, but some replenishment could follow in November, given increase in new orders.  Increase in inventories in Nov. will likely be subdued given the decline in Oct. backlog of orders sub-index.  We note that both exports and imports fell in Oct.
State of Employment Data & Estimate Revision
Two employment indicators, of which the results were mixed, were also released earlier this morning.  The Challenger job-cut report for Oct. increased to more than 47K, which is the highest level since May and is not necessarily good news.  The ADP employment report came in slightly better than the Street's estimate; 158K vs. the Street's 155K. 
In addition, ADP changed its methodology and is now working with Moody's to provide its estimate of monthly changes in non-farm private payrolls nationwide.  With this new information and the ADP Oct. report, we revised our model which generated a new and higher estimate of change in Oct. NFP.  We now expect that figure to be 110K (significantly higher than our initial projection of 75K), still below the Street's 125K expectations and slightly below last month's 114K.  That number will be announced tomorrow morning by the BLS. 
Market Update
After declining more than 3%, or 45 points, in two weeks, the S&P 500 is welcoming the latest slightly better than expected economic news.  Those numbers are having more of an impact than usual, given the damage and destruction that the hurricane and storm Sandy delivered to the Northeast the last few days.  S&P 500 is up 14.5, or more than 1.0%.  VIX is down 7.1%. 
Given that there must be some rebuilding after destruction, the XHB ETF is up 2.7% this morning and has increased approx. 5.0% since last Friday.  XLY, the consumer discretionary ETF, is also up more than 1.0% today.  We note that while preparation for the storm Sandy drove many to purchase more consumer staples products than usual, those purchases, along with rebuilding costs (in dollar and psychological terms), will likely reduce purchases of consumer cyclical or discretionary products and luxury items during the Holidays.  The XLY ETF could be getting ahead of itself as the Y/Y consumer cyclical purchases during Holiday season may not look that impressive.

Wednesday, October 31, 2012

Chicago PMI Remained Below 50

According to this morning's release of October Chicago PMI, the index edged up 0.2, but remained below 50.0 and missed the Street's expectation of 51.0.  This appears to support the possible disappointment in tomorrow's ISM manufacturing report that we are expecting (discussed on 10/29).  In terms of other important economic data coming out this week, the BLS recently confirmed that it will release the Oct. employment report as scheduled, on Friday 11/2.

Monday, October 29, 2012

Our October ISM & NFP Projections

With the markets closed today and possibly tomorrow (Tuesday, 10/30), we thought to provide our estimates for some of the very important economic indicators to be released later this week - ISM manufacturing (Oct.), ISM services (Oct.), and state of employment (Oct.).
With some relevant data on regional manufacturing activities released earlier this month, we expect overall ISM manufacturing index (to be released on Thursday, 11/1) to come in at 50.0, a decline from 51.5 in Sept.  The consensus currently stands at 51.5.  In addition, we have projected ISM services index of 51.0, lower than last month's 55.1.
Based on our research and some estimates such as the ADP employment report (which is due out on Thursday, 11/1), we have projected a 75K increase in NFP for Oct. indicating a slowdown in hiring as change in NFP during Sept. was 114K.  The consensus for Oct. stands at 125K. 
We note that although the state of employment report is scheduled to be released this Friday, according to the Wall Street Journal, the Labor Dept. may delay it due to the current "weather emergency", the storm and hurricane Sandy, in the East Coast.  We certainly hope and wish for everyone's well-being and safety.

Saturday, October 27, 2012

QE Policies Are Not Helping the Economy

It is good to see that some of our views is in-line with the very well-respected financial professionals out there.  Below is the link to an article related to what the hedge-fund manager, David Einhorn, said about the Fed's monetary easing policies at the Buttonwood Gathering last week.

Friday, October 26, 2012

Q3 GDP Surprised on the Upside, but ...

Q3 annualized real GDP growth came in at 2.02%, above the 1.9% consensus, and certainly above our 1.5% estimate.
At first, we thought that the upcoming Presidential election may have 'impacted' the number.  Then we asked ourselves to stop throwing those conspiracy theories around.  Finally, after looking at the report, we concluded that conspiracy theory or not, the federal government consumption expenditures saved the Q3 GDP figure from disappointing Wall Street.
Let's put it this way, of the 2.02% GDP growth rate, more than 72bps were contributed by federal government consumption; the first positive contribution since Q2 of last year.  Those 72bps represent a 9.6% annualized growth rate!  Of those 72bps, 65bps, or 90.2%, were on national defense; and that represented a 13.0% growth rate!  In addition, although government consumption on the state and local level continued to decline, it did so at a lower rate; from -1.0% in Q2 and -2.0% last year, to only -0.1%.
PCE represented 142bps of that 2.02% growth rate, which is positive but not very bullish, in our opinion.  Last year, PCE in Q3 represented over 90% of the GDP growth rate.  That figure is merely 70% for this year's Q3.  We must note that both goods and services contributed positively to the Q3 GDP growth.
In terms of net exports, the decline of 1.6% in exports was the first decline since Q1 2009.  This was driven by a significant 3.5% decline in exports of goods, the first decline since Q2 2009.  The 3.1% increase in exports of services partially offset the very disappointing goods exports.  Imports also declined; however, as usual, that decline contributed positively to the overall GDP growth rate.
In summary, while the headline GDP number was slightly better than the Street expected, we recommend not getting too excited about it as too much of it was driven by government consumption.  By the way, this is BEA's initial GDP growth rate estimate.  We expect this figure to be revised down the next time it is released, which will be approximately one month from now.

Update ...

It is currently 12:16 AM (PT) on Friday morning and we thought to provide an update.  Overall, the equity market has dropped approx. 3.3% since the last time we posted (10/17/12).  Economic data has been very mixed as it appears that some of the latest housing data hasn't been indicating a robust recovery, as many were hoping. 
In addition, some widely followed companies have reported disappointing September quarter earnings.  Facebook (FB) was not one of them as it beat both on the top and bottom line.  It shot up 18%+ the day after earnings, closing at $23.23.  On Thursday, it gave some of it back and ended the day at $22.56.  We still value FB at $23/sh, as we have all along since the Company's much hyped IPO.
Although some big names such as AAPL and AMZN reported disappointing earnings on Thursday, it appears that much of the disappointments had been priced in.  Whether those companies will keep declining as they have since late Sept. and early Oct., remains to be seen.  We actually think that some of Friday's macro data would either put those stocks' downward trend into a higher gear, or they would help ease it a bit.  The Q3 annualized real GDP growth is one such economic data.  The Street is expecting 1.9%, while we're projecting only 1.5%, as mentioned on 10/9/12.  If the GDP print is better than expected, we'd probably see some short covering in those names and others. 
Lastly, the University of Michigan's consumer sentiment survey for October is also due out on Friday.  Economists have estimated no change in that index.  We note that we will also be cheering on the University of Michigan's football team on Saturday as they play Nebraska.

Wednesday, October 17, 2012

Better-than-expected Building Permits & Housing Starts

Housing data keeps improving, but then again, it is all in the eye of the beholder.  Both building permits and starts in September blew away the Street's estimates.
Permits came in at an annualized rate of 894K, up from the downwardly revised 801K in August, and significantly above the 810K consensus.
  • From the previous month, total permits went up 11.6%, driven mostly by MDUs of 5+, which went up nearly 23%.  Permits for single-family homes inched up 6.7% m/m.  Regionally, the Midwest led the way with a 19.5% increase.
  • Permits increased 45.1% from last year; again, driven by the 5+ MDUs, which nearly doubled.  Single-family homes permits were up 27.3%.  In terms of Y/Y change, the West was the leader with a 56.8% increase from Sept. '11. 
Housing starts came in at an annualized rate of 872K, up from August's upwardly revised 758K, and above the 765K consensus. 
  • From August, housing starts were up 15.0%, driven by a 25% increase in 5+ MDUs.  Regionally, the West led the way with a 20.1% m/m increase, while the Northeast experienced a 5.1% decline.
  • On a Y/Y basis, housing starts were up nearly 35%.  Surprisingly, this was driven by the 42.9% increase in single-family home starts.  All regions experienced growth from the prior year, with the Midwest leading the way with a 47.4% increase.
While these numbers are much better than expected, we continue to believe that if these starts are completed, they will boost inventory too much which then will put pressure on overall prices.  In addition, such great numbers do not necessarily mean that the builders are seeing so much of an increase in demand.  They could just be taking advantage of continuing lower construction costs.  We note that the latest MBA data does indicate an increase in purchase applications, but at a declining rate. 

Tuesday, October 16, 2012

Economic News Update ...

Industrial production and capacity utilization for September were in-line with the Street's expectations, but slightly below ours. 
  • Industrial production index edged up 40bps to 97.0 in September.  Although the consensus was an increase of only 20bps, the end result was in-line with expectations as the August number was revised down by 20bps.  We note the index remained below 2007 level.
  • Production of consumer goods was unchanged from August as the continuing decline in durables (led by automotive products) was offset by slight turnaround in non-energy nondurables (led by clothing, foods & tobacco). 
  • There were also turnarounds in production of business, and defense & space equipment. 
  • The increase in capacity utilization to 78.3% from August's downwardly revised 78.0% did support the slight improvement we saw in the September NFP.  However, as indicated in this morning's industrial production & capacity utilization report, capacity utilization remains 2% below its long-run average, which is good news and bad news.  The good news is that there may not yet be time for fears of too much inflation.  However, the bad news is that during stable economic growth periods capacity utilization has been between 80.0% and 85.0%, and we are currently far from those levels. 
Headline CPI came in slightly above the Street's expectations.  September CPI increased 0.6% from August, higher than the 0.5% consensus.  Most of the increase was driven by higher gasoline prices.  Core CPI m/m change was only 0.1%, less than the Street's 0.2% estimate.  However, we note that the Y/Y changes for both headline and core CPI were 2.0% in September. 
Surprisingly, there was no upside surprise in the NAHB housing market index.  It came in at 41.0, in-line with expectations.  However, this was the highest level since Jun '06!  In addition, the index increased for the seventh straight month.  While the traffic component of this index continued to increase, its current and future sales measures remained unchanged.  As usual, the homebuilders are blaming "overly tight credit conditions".  The homebuilders' ETF, XHB, is up only 0.3%, trailing the overall equity market.   
S&P 500, which we continue to view as overvalued, is loving the better than expected economic news.  It is up 0.75% at 1451.  And VIX continues to give back last week's gain; down 3.3%.

Monday, October 15, 2012

September Retail Sales, NY Fed Mfr. Survey, & more ...

Details regarding September's retail sales report and October's NY Fed manufacturing survey results are provided below.  We have also included our forecast for the September industrial production and capacity utilization numbers, which are due out tomorrow morning.
Retail Sales (September) 
  • The initial retail sales report for September came in better than most analysts expected; a 1.1% sequential increase versus the analysts' 0.7% estimate. 
  • Excluding auto and gasoline sales, retail sales grew 0.9%, significantly better than the 0.5% consensus.
  • Based on the data provided by the Dept. of Commerce, the 4.5% growth in sales of electronics and appliances appear to have been the driver behind the better than expected retail numbers.  We could assume that at least the initial sales of Apple's (AAPL) iPhone5 could be partially responsible for this growth. 
  • Such good numbers could be too good and too early.  They could negatively impact sales during Christmas season, given that overall wage growth remains stagnant. 
  • Auto and parts sales went up 1.3%, while sales at gasoline stations increased 2.5%
  • We note that the August figures were revised higher.  Overall retail sales were bumped up 40bps to 1.3%.  Excluding autos and gasoline, that figure was revised higher by 20bps to 0.3%. 

Empire State Mfr. Survey (October)
While the September retail sales surprised on the upside, NY Fed's manufacturing survey for October was disappointing.  The overall index came in at -6.16, an improvement from September, but below the -3.0 consensus.
  • New orders sub-index remained negative at -8.97, but yet better than the prior month's -14.03.  This figure has been below zero for four consecutive months, after being in positive territory for seven months in a row. 
  • Not surprisingly, without much improvement in new orders, the shipment sub-index also dipped into negative territory; -6.40 in Oct., from 2.75 in Sept.
  • Downward trend in the employees sub-index continued for the third straight month as that figure came in at -1.08, certainly a worsening from September's 4.26.  Given that the workweek number also deteriorated, we do not expect much improvement in next month's Empire State Mfr. employees sub-index. 
  • The inventories sub-index was -2.15, down from prior month's 0.00.  Initially, we thought we might see some inventory replenishment next month; however, the forward-looking inventory sub-index proved us wrong.  That figure remained pretty much unchanged at -4.30. 
  • Most of the survey's forward-looking indicators show that optimism is slowly declining.  The general business conditions fwd index declined to 19.42, from 27.22 in September.  Fwd new orders sub-index dipped to 15.05, from 17.02. 
  • It appears that more manufacturers are expecting an increase in prices that they pay and in prices that they receive during the next six months. 
  • No change is expected in the number of employees during the next six months.  However, average workweek will likely decline further as that fwd sub-index came in at -11.83, a significant decline from prior month's 2.13.
  • Many more manufacturers are also expecting less CapEx during the next six months.  Lastly, the fwd technology spending sub-index was pretty much unchanged at 7.53.

Other possible market moving economic indicators are due out tomorrow, including the September CPI for which the consensus is 0.5% (core CPI consensus is 0.2%) and NAHB's housing market index (consensus is 41.0).  September industrial production and capacity utilization, for which we have our own models, will also be released tomorrow.  We expect the industrial production index to come in at 97.5, approx. 70bps higher than the prior month's 96.8.  The consensus is 97.0.  In addition, we have projected a capacity utilization rate of 78.8%, up from August's 78.2%, and above the 78.3% consensus. 
Housing starts and permits stats are due out on Wednesday morning.  The market expects 765K and 810K for starts and permits, respectively.  Initial jobless claims from last week will be released on Thursday.  The consensus is 365K, a significant increase from the prior week's surprisingly low 339K.  Although we do not usually project the initial jobless claims, we do expect Thursday's number to be higher than the consensus as not only will the upward revision trend of this economic indicator continue, but we also note that the applicable seasonal factor is less than the prior week's.  In other words, the 26K increase in initial claims that economists are looking for require only an increase of 10K in the non-seasonally adjusted initial claims number.  Philly Fed's manufacturing survey will also be released on Thursday.  The Street expects that index to move slightly into positive territory, 0.5.  Lastly, September existing home sales numbers are due out on Friday morning.  The consensus is 4.75mil.

Thursday, October 11, 2012

Some Thoughts on Latest Initial Jobless Claims

First, we'd like to apologize for this late post as we were having technical difficulties uploading charts, thanks to Google (GOOG).  Of course, the stock is up 1% and is one of our favorite companies.  We'll let this one issue pass.

Now, let's discuss initial jobless claims, which came in significantly below expectations; 339K versus 370K.  In fact, the initial claims number was much lower than the lowest estimate of 362K out there.  The range of estimates was 362K - 375K.  The weekly report from BLS did not indicate anything abnormal in terms of certain states not reporting initial claims, etc.  However, in our opinion, the number itself was an outlier.
Initially, we thought that the pre-determined seasonal factor (SF) may have contributed to such a result.  Below is a chart showing the SF used by BLS for the first week of Oct. since 1980.  It is clear that BLS ups the SF every 5 - 6 years to 90 and above, then it slowly brings it back down to the low 80's or high 70's; and then that 'cycle' starts all over again.  Based on the data, the Presidential election appears not to be one of the drivers behind the 5-to-6-year increase in SF. 

 Source: BLS
We note that the higher the SF, the more favorable it is for the SA (seasonally adjusted) or headline initial claims.  Last week's SF of 96.4 was the second highest SF during the last 32 years.  The highest was 97.3, applied in 2006.  The average SF since 1980 is 86.3.  If that was applied to last week's NSA (non-seasonally adjusted) claims, the SA result would have been nearly 380K!  The median and average SF for the 'spike' years (as shown on the graph above) are 93.7 and 94.3, respectively.  With those SFs, last week's SA initial jobless claims would have come in at nearly 350K, below the consensus, but much higher than the official 339K. 
We also looked at the one week change in NSA versus SA for the first week of Oct. since 1980.  As displayed in the graph below, NSA and SA have moved pretty much in the same direction most of the time, except in 2001 and the current year.  The graph shows that while last week's NSA figure increased by nearly 26K, its corresponding SA number declined by 30K!  This supports the notion that last week's initial claims result is an anomaly. 

 Source: BLS
We are not saying that BLS employees responsible for gathering and massaging such data were on vacation.  Nor do we have any conspiracy theories to explain this.  We are simply saying that last week's initial claims number is an outlier.  We will see if we are correct or not during the next few weeks, where it is very likely that the numbers will be revised.  By the way, yes, the previous week's figure (last week of Sept.) was revised higher.  Now, that upward revision certainly wasn't 'abnormal'. 
The market's reaction to this news also hasn't been as much as many thought, especially after the recent downward trend that we have seen.  S&P 500 is up 0.4% at 1438.  This morning's news certainly prevented S&P 500 to go lower than its 1430 support level.  It remains below its linear regression level of 1440.  We note the index is still trading below 1447 10-day EMA.  VIX is losing some steam today, down nearly 4%. And the energy and financial sectors are doing well this morning, up 1.3% and 0.9%, respectively. Lastly, congrats to the Yankees and Rauuuuuuul!  Last night's victory was one for the ages ... in our opinion. 

Tuesday, October 9, 2012

GDP Estimate Update & AA's Q3 Earnings ...

Alcoa (AA) reported Q3 results and beat expectations both on the top and bottom-line.  Revenues of $5.83bil were much higher than the Street's $5.57bil estimate.  Better revenues from AA also positively impacted our Q3 GDP estimate.  We now expect real GDP annualized growth rate of 1.5% for Q3, up slightly from our initial estimate of 1.4%.  We note that this number remains below the 1.6% consensus but is slightly higher than Q2's 1.3%.
Below is an update on what AA expects from its end markets in 2012.
  • Slightly upped growth estimate in the automotive space in North America to 11% - 15%, from 10% - 14%.
  • North American heavy trucks & trailers lowered significantly to 2% - 4%, from 4% - 8%.  We note the Company lowered its assessment on this market in Q2 also.
  • Beverage can packaging market in North America was unchanged.  Sales growth projection remained between -1% and 0%.
  • 5% sales decline projection for the commercial building and construction market in North America was maintained.
  • For Europe, heavy trucks & trailers were lowered to decline of 8% - 11%, from decline of 3% - 8%.  In addition, beverage can packaging sales growth was lowered to 4% - 5%, from 5% - 7%.
  • AA's assessments certainly provided more evidence of the continuing slowdown of China's economy.  While there was a bright spot in China's automotive market, as AA increased it projection to 4% - 7% growth, from its previous wider range of 2% - 7%, the Company slashed its outlook on heavy trucks & trailers in China.  It now expects a decline between 18% and 21% in 2012, compared with its previous assessment of a 3% - 8% decline.  AA also lowered its outlook on beverage can packaging sales growth in China to 5% - 8%, from 15% - 20%. 

Monday, October 8, 2012

Q3 GDP Estimate & Our 12-Month Target for S&P 500

We thought to provide our initial estimate of annualized real GDP growth for Q3.  We currently project a GDP growth rate of 1.4%, below the 1.6% consensus, but slightly higher than Q2's 1.3%.  We note that the annualized and seasonally adjusted growth rate of Alcoa's (AA) revenues is one of the factors used in our model.  Our Q3 AA revenue assumption is based on the Street's $5.57bil estimate.  AA's results, which will be released tomorrow after the close, may force us to adjust our estimate.  While AA is no longer a bellwether for the equity market (as the market is no longer based on fundamentals), we believe its top-line does provide some color on current and future domestic and global economic growth. 
From a slightly more fundamental standpoint, we looked at the latest S&P 500 EPS estimate for CY '13.  Given the modest economic growth (without much acceleration expected during the next couple of years) we thought that trading at approx. 12.5x 2013 EPS, S&P 500 may be slightly overvalued.  To get a better idea, we got our hands on the experts' average annual growth rate of earnings for the next five years.  According to S&P, that figure currently stands at 10.83%.  We thought that given the current macro environment, a PEG of 1.0 might be appropriate for valuing the S&P 500.  Applying a P/E of 10.83 to the CY '13 EPS estimates gets us an S&P 500 target or valuation of 1247, approx. 14% less than where it closed at today. 
Although fundamentals are no longer driving the market as much as they used to or as much as they should, in our opinion, they do provide a better, or more realistic perspective on valuation, which will come in handy in the future.

Friday, October 5, 2012

September Employment Report & Its Revisions Made Everything Appear Better

The September employment report was certainly a surprising one, even though the NFP count came in only 1K higher than the Street's estimate.  The August number was revised up by 46K! Again, August's NFP, the figure that many believed pushed the Fed to implement QE3, was revised up by 46K, thanks to nice bump up in government jobs!  The number of government jobs added in August was revised up by 52K, which pushed it from -7K to +45K!  Conspiracy theorists please come out and make a statement; the time is now.  So, let's put it this way - change in NFP for the past two months was 256K, compared with our 241K estimate, and the Street's ever-conservative 210K.  With respect to various government economic data, which continue to be revised up or down significantly, our models' 'revision factors' need significant adjustments continuously.  One thing is certain; today's numbers will give President Obama a lift which he certainly needed after that embarrassing performance in the first election-2012 debate earlier this week.
  • September NFP came in at 114K, below our 145K estimate and slightly above the Street's 113K.  As a reminder, the August NFP was revised up by 46K.  By the way, the July number, which was revised down by 41K in the August employment report, was revised up by 41K in the September report!  We are trying to give conspiracy theorists more ammo. 
  • The official unemployment rate fell to 7.8%. 
  • Private NFP went up by 104K, which means that 10K of jobs added were in the government sector.  Unlike the rest of the Street, we had assumed an increase in government jobs.  However, what caught our eye was that a big chunk of the overall NFP upward revisions for July and August was in the government sector!  For July and August, the number of government jobs were revised up by 39K and 52K, respectively!
  • Although manufacturing declined by 16K (we had assumed a slight increase), construction and education & health services went up by 5K and 49K, respectively.
  • By the way, while the official unemployment rate dipped 30bps to 7.8%, the U-6 figure remained unchanged at 14.7%.
  • Given the endless number of revisions in this report, looking at the net changes is basically useless, in our opinion.  We are confident that this report will make the next Presidential debate even more interesting.  Some new words or phrases will likely be added to the Presidential debate drinking game.

S&P 500 is up 0.5% while VIX is down more than 5%.  Gold futures is down around $10.  By the way, congrats to the Yankees for winning the AL East, and we are hoping the Jets will at least show up for the Monday night game against those Texans.

Wednesday, October 3, 2012

September Services ISM Beats Expectations

September services ISM of 55.1 was above the Street's 53.5.  The employment sub-index actually declined 2.7 to 51.1 from the prior month, indicating we may have over-estimated growth of employment in services in our September NFP projection.  However, we will stick with our 145K NFP estimate.
  • While ISM services' new orders sub-index increased to 57.7 (from 53.7) and inventory declined, backlog of orders went below 50.0, indicating contraction. 
  • Prices increasing for the third consecutive month, combined with decline in backlog of orders, indicate inventory replenishment and/or increase in headcount may take a bit longer.  This also goes along with the ISM report's lower inventory sentiment sub-index.
Overall, while we still think Friday's employment report will beat expectations, the rally may be short-lived.  Then again, that is based on the assumption that markets are based on fundamental, which may no longer be true for a very very long time.

ADP September Employment Report

September ADP came in at 162K, significantly higher than the 140K consensus.  We will stick with our NFP net change estimate of 145K for September even after the ADP surprise to the upside.  The Street consensus for NFP is 113K.
  • While the number was better than expected, we note that it was accommodated by downward revisions to the July and August figures.  July was lowered by 17K and August by 12K.
  • Increases in manufacturing and construction jobs (4K and 10K, respectively) are pretty much in-line with our assumption for Friday's NFP count. 
  • The same can be said of the 144K jobs added in services, a nice chunk of which we believe will be categorized as temp services in Friday's NFP report.

Monday, October 1, 2012

Market Update & Our September NFP Estimate

The market remains uber-excited about the better than expected September Mfr. ISM which came out earlier this morning.  S&P500 is up 0.9%.  And VIX just got back in the red, down only .1%.  With respect to S&P's sector ETFs, while the more cyclical sectors, such as materials, energy, financials, and industrials, are up 1%+, we note that the less cyclical consumer staples is also up nearly 1% while consumer discretionary is actually trailing staples, up only 0.5%.
Assuming a September ADP change of 140K, which is the Street's estimate, we expect to see a net change of 145K non-farm jobs in Friday's September employment report.  Our estimate is at the high-end of the Street's 75K - 162K range and certainly above the 113K consensus.  Our higher projection is based on the assumption of NFP growth in construction, manufacturing, education & health services, and temporary help services, partially offset by some weakness in retail trade and leisure & hospitality.  Given the upcoming elections in November, we also expect a slightly higher NFP count on the government side of its so-called services.  The Street expects a decline of 17K in the government NFP count. 

Sell-Siders' Usual Underestimation Made Mfr. ISM a Positive 'Surprise'

We find it very interesting that the sell-side experts continue to under-estimate the disappointing modest economic growth in order to make anything look good.  The perfect example of that is the September manufacturing ISM report which was released at 10AM (ET) this morning.  The ISM index came in at 51.5, much higher than the 49.7 consensus.  Of course, as we had mentioned last week, we were a bit more realistic than the sell-siders whose main objectives are to bring back more retail investors and increase transaction volume on their end.  Our ISM estimate was 51.0.  By the way, the Street's estimate range was 48.0 - 50.6.  With such a surprise, the basis of which was again created by the phony sell-siders' estimates, S&P 500 is now up approx. 1%. 
Mfr. ISM (September)
  • September ISM index of 51.5 shows expansion after three consecutive months of contraction (below 50.0).  Again, our estimate and the Street's were 51.0 and 49.7, respectively.
  • Basically every sub-index, except for the producer's inventories, increased from the prior month.
  • While new orders inched up above 50.0, production remained at sub-50.0.  However, given the decline in inventories, combined with improvement in new orders, we will probably see production get over 50.0 this month.
  • We note that the increase in customers' inventories could limit the upside for October's ISM index.
  • In addition, while the imports sub-index did improve, it remained below 50.0 for the second consecutive month.  This could indicate that the increase in production and new orders could be driven more by inventory replenishment on the producers' end, rather than an increase in overall demand.  In other words, again, the upside for the next few months may be limited, making this positive 'surprise' short-lived. 
  • Lastly, the employment sub-index moved up nicely to 54.7 from 51.6.  This should push up the Street's estimate for NFP (due out this Friday), but again, those sell-siders do their best to create that positive 'surprise'.  We will post our NFP estimate later this morning.

Friday, September 28, 2012

More Disappointing Economic Data ...

It appears that this week can be considered as a week of bad economic data.  Today, the personal income & spending report was disappointing, and consumer sentiment and the Chicago PMI came in below expectations.
Personal Income & Outlays (August)
August personal income & spending report showed less than expected growth in income, moderate growth in spending, and growth in overall prices outpacing growth in income.  We view such report as disappointing as the higher spending and higher inflation gauge (PCE price index) were mainly driven by higher gasoline prices and not necessarily by an increase in demand.
  • Personal income increased by only 0.1% from July.  In addition, the July monthly change figure was actually revised down from 0.3% to 0.1%.
  • Consumer spending was in-line with expectations; up 0.5% from July.
  • Y/Y growths in personal income and spending were revised down by 20bps and 10bps, respectively.
  • Headline PCE price index increased by 0.4% from July, lower than the 0.5% consensus.  However, it was higher than growth seen in income.  Core PCE price index m/m change of 0.1% was in-line with expectations.  We note that the Y/Y changes in both the headline and core inflation measures were less than the Y/Y changes in personal income and spending.
Chicago PMI (September)
The Chicago PMI not only came in below expectations, but also showed contraction during September.  This will likely lower overall estimates for the ISM report which will be released on Monday.  We still expect a slight improvement (51.0 compared with 49.6 in the prior month) in the national ISM report. 
  • The 49.7 reading was significantly below the 53.0 consensus.
  • Most sub-indexes, including new orders, order backlog, inventories, employment and capital equipment, declined from the prior month.  New orders were very disappointing as they declined significantly to 47.4 in September from 54.8 in August.
  • According to the report, the employment sub-index came in at a 2.5-year low, while new orders and order backlogs were at their lowest since mid-2009. 
  • Purchases of capital equipment came in at a 17-month low.
Consumer Sentiment (September)
University of Michigan's consumer survey results also came in below expectations; 78.3 versus 79.0.  However, the results were better than the prior month's and significantly above last year's.  Respondents were less enthusiastic about current conditions, but expect improvement going forward driven by optimism about the economy and jobs during next year.

Thursday, September 27, 2012

Our Final September Mfr. ISM Estimate

Our final estimate for the upcoming manufacturing ISM index is 51.0.  Unlike August's 49.6, it appears the September number will indicate some expansion within manufacturing.  We note that as the regional surveys released by several federal reserve banks showed, overall manufacturing remains a mixed bag of improvements and continuing decline.  We are still unaware of what the consensus for manufacturing ISM is.  The official ISM report will be released on Monday (10/1) at 10AM (ET).

Not Too Many Bright Spots in Today's Economic News ...

Initial Jobless Claims
Let's start with the good news - initial jobless claims came in significantly below expectations.  Annualized initial claims of 359K were much lower than the 376K consensus.  Of course, the prior week's number was revised higher by 3K to 385K.  We note that even with such a positive surprise, the average initial claims for September remain above what we saw in August.  This week's initial claims could be the difference maker in terms of whether September NFP will come in higher than August's.
KC Fed Manufacturing Survey (September)
Now the bad news, and we will start with September manufacturing survey conducted by the Federal Reserve Bank of Kansas City.  The composite index for that survey was 2.0, lower than the 5.0 consensus and a significant decline from 8.0 in August.  Not much looked encouraging in this report.  Production, shipment, new orders, and backlog sub-indexes all moved into negative territory from the prior month.  While the number of employees sub-index remained positive, it dipped to a mere 1.0 in September from 2.0 in August.  Continuing decline in the average workweek sub-index indicates even less hiring or some layoffs coming up in October.  Workweek declined to -13.0 from -5.0!  The forward-looking part of the survey was also not very encouraging.  In fact, new orders are expected to increase only slightly, while capex is expected to decline.  Also, those surveyed do not expect much of an increase in hiring during the next six months.
Durable Goods (August)
Durable goods orders for August, although disappointing, did have a few bright spots. 
Let's start with the bad durable goods numbers.  Change in new orders from July came in at -13.2% compared with the -5.0% consensus.  Excluding transportation, new orders were even more disappointing, coming in at -1.6%, lower than the Street's expectation of a 0.2% growth.  Orders for transportation equipment took a dump with a 34.9% decline. 
Excluding defense goods, new orders dipped 12.4% from July.  Orders for defense capital goods declined 40.1%.  We note that given the upcoming UN speech by Netanyahu, this figure could get bumped back up for the rest of the year, and maybe many more years, as politicians continue to market their pitch of attacking Iran and starting a potentially very costly war. 
Now, let's move to a couple of bright spots within the durable goods report.  New orders for non-defense capital goods went up 1.1% from the prior month.  We believe this represents mostly construction related capital goods such as machinery as we did see a better than expected uptick in homes being built in late Summer.  The other good news was the little growth, 0.6%, in total inventories.  Although we do not see that figure improve significantly for September, we do expect it to increase more as we get closer to the elections followed by a significant growth or a significant drop post elections, depending on who gets elected.
Pending Home Sales (August)
While homes continue to be built as we believe some data in durable goods orders showed, recovery in the housing market may not be as great as the market expected.  August pending home sales index was very disappointing as it declined 2.6% from the prior month level, significantly below the +0.3% consensus.  In fact, it was even worse than the lowest estimate out there (-1.5%).  Although this index is for existing homes, it is viewed as a leading indicator for the housing industry.  Some may use a supply shortage to justify such a miss.  However, such supply shortage is due to increased hesitancy in going after homes in foreclosure.  This also pushes up prices artificially.  Basically, once more foreclosed homes hit the market, combined with the uber-bullishness of homebuilders, supply shortage will end followed by too much supply, which we believe will create pressure on prices, which wil not be good news.
Given our pessimism the last six months, not many expected economic data to come in even below our estimates, but this was the case this morning with respect to the Q2 annualized real GDP growth.  We have stuck with our initial estimate of 1.6%, while the Street was expecting 1.7%.  The official figure came in at a mere 1.3%.  Personal consumption, residential and nonresidential investments were all disappointing.  Although this data is for Q2, we note that we have not seen much improvement in the Q3 economic indicators. 
As a reminder, August personal income & spending, along with University of Michigan's consumer sentiment survey results for September, will be released tomorrow.  After declining nearly 2% from last week's close, S&P 500 is up 0.4%.

Wednesday, September 26, 2012

August New Home Sales Missed Expectations

Although a bit delayed, we decided to provide a summary on and our thoughts about today's slightly disappointing new home sales data. 
  • August new home sales annual rate of 373K was below the Street's 380K estimate.  July sales were revised up 2K to 374K.
  • Y/Y sales were up in all regions with the West and Northeast leading the way with 64.6% and 56.5% increases, respectively.
  • On a monthly basis sales were down 0.3% from July.  This slight decline was driven mainly by nearly a 5% dip in new home sales within the Southern region.  Northeast led the way with 20% sequential increase. 
  • Months' supply was unchanged at 4.5, and remained at the lowest level for the year.
  • Based on non-seasonally adjusted data, median and average new home prices jumped in August when compared with July.  
  • However, the data also showed an increase in months' supply to the highest level since Feb. of this year.
  • The percent distribution of new homes sold based on price categories explained not only the increase in prices but also in inventory.  Sales of homes within the second highest price category ($500,000 - $749,999) jumped to represent 8% of total homes sold in August.  This figure is not only double that of what we saw in July, but also higher than last year's 5%.  In addition, it is above the 6% overall average for 2010. 
  • On the other side, sales within the second lowest price category ($150,000 - $199,999) represented only 16% of total sales in August, significantly below July's 25%, and 2010 and 2011 averages of 24% and 22%.
In our opinion, the widening gap demonstrated here between sales of more expensive and of cheaper homes, could result in further increase in overall prices but also possibly in increase in supply or inventory, which may create pressure on prices and limit this housing bottoming out and/or recovery.  While quantitative easing may have brought mortgage rates lower, the beneficiaries are mostly the wealthy potential home buyers and/or institutional investors that initially had enough capital to make big purchases even if rates were 200bps higher.  We remain doubtful about the trickle-down effect that the Fed and everyone else is hoping for, especially given the not very impressive growth in jobs and average wages or income.  Tomorrow's release of last week's initial jobless claims, along with Friday's release of personal income & spending in August, may provide a clearer picture.