Earnings for the third quarter disappointed and retail sales slid. The bright spots in auto and home sales have the most to lose if the Fed hikes rates. Bond traders are pricing a rate hike in December and stocks look ripe for a potential reset.
Stock prices may not have fallen far enough to price in a possible rate hike. When the music finally stops, many unprepared investors will probably be left standing. That's why we are always on the lookout for opportunities and provide a variety of strategies to prepare for the good, the bad, and the unforeseen.
Thanks to Dent Research, here is our weekly information roundup ending the week on November 13, 2015. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
U.S. Producer Prices Down 0.4% in October, Down 1.6% for the Year... Missing expectations of 0.2% growth last month and a 1.1% drop for the year, the producer price report shows the U.S. economy slowed significantly as the fourth quarter got under way.
What it means – Well, that throws a wrench into the Fed’s plans. Falling prices have a name — deflation. The interesting part of this report is that the drop wasn’t all about energy, so the Fed must contend with a soft economy just as it tries to put a happy face on everything to make the case for higher rates in December. As with most economic reports this year, PPI throws the Fed’s next move into doubt.
Large U.S. Banks Reported Negative Corporate Bond Inventories... For the first time ever, big banks are more committed to sell corporate bonds than purchase, leading to a negative inventory reading.
What it means – This is getting a lot of press, but we’re not sure it means very much. The lack of liquidity in the bond market was already well known. New rules after the financial crisis required banks to beef up their reserves and curtail their trading operations. The logical place to do this was in the capital-intensive bond market. So bond inventories were already low.
Now the Fed looks likely to raise interest rates. Any bond trader worth his salt is selling everything that’s not nailed down so that if rates do go up, he’s not watching his inventory fall in value.
Macy’s Third-Quarter Revenue of $5.87 billion Missed Estimates of $6.1 billion... Same store sales dropped 3.9% over the same period last year, much more than the expected 0.4% drop.
What it means – Macy’s is a bellwether of the retail trade, so the big falloff in revenue could signal weakness in holiday sales. At the same time Macy’s reported, a research firm noted inventory growing faster than sales at several well-known companies such as Lululemon Athletica, Under Armour, and Nike. The news sent shares of both retailers and consumer product manufacturers lower.
Whether or not hope for a great holiday season can overcome the reality of modest sales remains to be seen, and will determine if we get a significant pullback before or after year-end.
October Retail Sales up 0.1%, Below the consensus of 0.4%... Total sales rose 1.7%, but that includes the 20.1% drop in gasoline. Excluding fuel, sales increased 4.1% for the year.
What it means – In light of the news from Macy’s and Nordstrom’s (which also released disappointing results), the headline miss in retail sales seems important. But with gasoline excluded, the number isn’t terrible... yet.
We think the fourth quarter could miss expectations by a wide margin, which could lead to falling equity markets by the start of 2016. Watch out for volatility!
European Central Bank President Hints at More QE... Mario Draghi stated that the ECB stands ready to adjust its current QE program at its December meeting if economic conditions warrant a change.
What it means – Remember, this is Mario “Whatever it takes” Draghi. Now he’s Mario “Whatever MORE it takes” Draghi. Apparently buying $65 billion worth of bonds each month isn’t driving the euro zone to new economic heights. Imagine that. The central bank will press the monetary accelerator even closer to the floorboard. We don’t think it will change the economic conditions on the continent, but it will drive the euro lower compared to the U.S. dollar. Parity, here we come!
Chinese Exports Fell 6.9% in October, While Imports Dropped 18.8%... The Chinese economy continues to slow down, even after six rate cuts in the last year and a surprise currency devaluation in August.
What it means – So far, the Chinese government doesn’t have a shovel big enough to dig itself out of this hole. Export buyers have their own troubles, domestic debt weighs on construction, and consumers aren’t picking up the slack. We don’t see any light at the end of this tunnel. Expect more of the same in the months to come.
Chinese Inflation Eased 0.3% in October, Producer Prices Fell 0.4%... For the year, consumer inflation is up 1.3%, while wholesale inflation is down 5.9%.
What it means – Weak consumer price growth might be worrisome, but the real problem is on the wholesale side of the fence. The Chinese government targets inflation at 3%, so 1.3% is a disappointment, but at least it’s positive. Wholesale inflation fell for 44 straight months, showing no relief in the months ahead.
Industrial Metal Prices in Free Fall... Aluminum, copper, and steel prices are getting hammered as China slows imports while pumping out more inventory for the global markets.
What it means – Falling metal prices and the slowing Chinese economy are obviously related. The Chinese have industrial metals and capacity coming out of their ears, and nowhere to dump all of their production. So they put it on the global market, where there’s already too much supply, leading to falling prices. Copper and aluminum both sit at multiyear lows.
U.S. steel makers call it illegal dumping (when a country floods the market with a product at prices below production costs). Until China turns the economic corner, metal prices should remain depressed, weighing on emerging economies that supply China.
Oil Prices Dropped Below $44 as OPEC Signaled No Production Limits... With no limits on production, oil prices aren’t expected to rise anytime soon.
What it means – The Saudis are winning the battle, even though they might lose the war. Their plan to drive U.S. shale oil producers out of business appears to be working. The U.S. rig count fell from 1,925 this time last year to 771 last week, a drop of 60%. We expect more closures.
As U.S. rigs shut down, the Saudis gain market share. But it comes at a price. The kingdom runs a 20% budget deficit. This puts a dent in their ability to hand out financial favors in exchange for political stability. To make it worse, there’s no guarantee that the market share gains will stick.
American producers are creating a growing number of “DUCs,” which are wells that have been drilled, but are uncompleted. When prices move higher, these wells can be brought online very quickly, stealing market share from foreign producers. Overall, we expect oil prices to remain lower for longer.
Rolls-Royce Recalls One Car... The high-end manufacturer did not recall a model; it actually issued a recall for one specific vehicle. The Ghost II had incorrectly labeled airbags for the front seats, which was noted before it left the factory. The “defect” was picked up again at the dealer, before delivery to the client.
What it means – I guess when you only make 4,000 vehicles per year, and the cheapest one runs about $290,000, you can be this picky.
Next Week – Economic reports kick into high gear the week of November 16, with numbers released on consumer prices, industrial production, and housing starts. The Fed will release the minutes from its last meeting.
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