Tag Archives: Recession

Yields Acting Like Economy Is Heading Into Recession

Treasury Yields and Rate Hike Odds Sink: Investigating the Yield Curve

The futures market is starting to question the June rate hike thesis. For its part, the bond market is behaving as if the Fed is hiking the economy into a recession. Here are some pictures.

June Rate Hike Odds

https://mishgea.files.wordpress.com/2017/05/fedwatch-2017-05-17.png?w=768&h=693

No Hike in June Odds

  • Month ago – 51%
  • Week Ago – 12.3%
  • Yesterday – 21.5%
  • Today – 35.4%

10-Year Treasury Note Yield

https://mishgea.files.wordpress.com/2017/05/10-year-2017-05-171.png?w=625

The yield on the 10-year treasury note doubled from the low of 1.32% during the week of July 2, 2016, to the high 2.64% during the week of December 10, 2016.

Since March 11, 2017, the yield on the 10-year treasury note declined 40 basis points to 2.24%.

30-Year Long Bond

https://mishgea.files.wordpress.com/2017/05/30-year-2017-05-17.png?w=625

The yield on the 30-year treasury bond rose from the low of 2.09% during the week of July 2, 2016, to the high of 3.21% during the week of March 11, 2017.

Since March 11, 2017, the yield on the 30-year treasury bond declined 29 basis points to 2.92%

1-Year Treasury Note Yield

https://mishgea.files.wordpress.com/2017/05/1-year-2017-05-17.png?w=625

The yield on the 1-year treasury more than doubled from the low of 0.43% during the week of July 2, 2016, to the high 1.14% during the week of May 6, 2017.

Since March 11, 2017, the yield curve has flattened considerably.

Action in the treasury yields is just what one would expect if the economy was headed into recession.

By Mike “Mish” Shedlock | MishTalk

A Near Certainty On The Next President’s Watch ● — ● Recession!

Talk about a poisoned chalice. No matter who is elected to the White House in November, the next president will probably face a recession.

The 83-month-old expansion is already the fourth-longest in more than 150 years and starting to show some signs of aging as corporate profits peak and wage pressures build. It also remains vulnerable to a shock because growth has been so feeble, averaging just about 2 percent since the last downturn ended in June 2009.

“If the next president is not going to have a recession, it will be a U.S. record,” said Gad Levanon, chief economist for North America at the Conference Board in New York. “The longest expansion we ever had was 10 years,” beginning in 1991.

-1x-1The history of cyclical fluctuations suggests that the “odds are significantly better than 50-50 that we will have a recession within the next three years,” according to former Treasury Secretary Lawrence Summers.

Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, puts the probability of a downturn during that time frame at about two in three.

The U.S. doesn’t look all that well-equipped to handle a contraction should one occur during the next president’s term, former Federal Reserve Vice Chairman Alan Blinder said. Monetary policy is stretched near its limit while fiscal policy is hamstrung by ideological battles.

Previous Decade

This wouldn’t be the first time that a new president was forced to tackle a contraction in gross domestic product. The nation was in the midst of its deepest slump since the Great Depression when Barack Obama took office on January 20, 2009. His predecessor, George W. Bush, started his tenure as president in 2001 with the economy about to be mired in a downturn as well, albeit a much milder one than greeted Obama.

The biggest near-term threat comes from abroad. Former International Monetary Fund official Desmond Lachman said a June 23 vote by the U.K. to leave the European Union, a steeper-than-anticipated Chinese slowdown and a renewed recession in Japan are among potential developments that could upend financial markets and the global economy in the coming months.

“There’s a non-negligible risk that by the time the next president takes office in January you would have the world in a pretty bad place,” said Lachman, who put the odds of that happening at 30 percent to 40 percent.

Investors also might get spooked if billionaire Donald Trump looks likely to win the presidency, considering his staunchly protectionist stance on trade and a seemingly cavalier attitude toward the nation’s debt, added Lachman, now a resident fellow at the American Enterprise Institute in Washington.

Election-Year Jitters

Uncertainty about the election’s outcome may already be infecting the economy at the margin, with companies and consumers in surveys increasingly citing it as a source of concern.

“The views expressed by the various candidates have weighed down” consumer confidence, said Richard Curtin, director of the University of Michigan’s household survey, which saw sentiment slip for a fourth straight month in April.

-1x-1 (1)With growth so slow — it clocked in at a mere 0.5 percent on an annual basis in the first quarter — it wouldn’t take that much to tip the economy into a recession.

“It’s like a bicycle that’s going too slowly. All it takes is a little puff of wind to knock it over,” said Nariman Behravesh, chief economist for consultants IHS Inc. in Lexington, Massachusetts.

The economy still has some things going for it, leading Behravesh to conclude that the odds of a downturn over the next couple of years are at most 25 percent.

“Recoveries don’t die of old age,” he said. “They get killed off. And the three killers that we’ve had in the past don’t seem terribly frightening right now.”

The murderers’ row consists of a steep rise in interest rates engineered by the central bank, a sudden spike in oil prices and the bursting of an asset-price bubble. This time around, Fed policy makers have signaled they’re going to raise rates slowly, the oil market is still awash in excess supply and house prices by some measures remain below their 2007 highs.

“The expansion can continue for several more years,” Robert Gordon, a professor at Northwestern University in Evanston, Illinois, and a member of the committee of economists that determines the timing of recessions, said in an e-mail.

Balance Sheets

Consumers’ balance sheets are in much better shape than they were prior to the last economic contraction. Household debt as a share of disposable income stood at 105 percent in the fourth quarter, well below the 133 percent reached in the final three months of 2007.

Businesses seem more vulnerable. Corporate profits plunged 11.5 percent in the fourth quarter from the year-ago period, the biggest drop since a 31 percent collapse at the end of 2008 during the height of the financial crisis, according to data compiled by the Commerce Department.

History shows that when earnings decline, the economy often follows into a recession as profit-starved companies cut back on hiring and investment.

-1x-1 (2)“More and more employers are struggling with profits,” Levanon said. “That is resulting in some belt tightening.”

While he doesn’t see that pushing the U.S. into a recession, Levanon expects monthly payroll growth to slow to 150,000 to 180,000 over the balance of this year, compared to an average of 229,000 in 2015.

Though much of the weakness in earnings has been concentrated in the energy industry, companies in general have been struggling with rising labor costs as the tightening jobs market puts upward pressure on wages and worker productivity has lagged.

Peter Hooper, chief economist for Deutsche Bank Securities in New York, sees that leading to a possible recession a couple of years out as companies raise prices, inflation starts to accelerate and Fed policy makers have to jack up interest rates more aggressively in response.

“The slower they go in the near-term, the bigger the risk down the road,” he said of the Fed. “Looking out over the next four years, the chances of a two-quarter contraction are probably above 50 percent.”

Source: David Stockman’s Contra Corner | Rich Miller, Bloomberg

Welcome To The Revenue Recession

 

The “Revenue Recession” is alive and well, at least when it comes to the 30 companies of the Dow Jones Industrial Average. 

Every month we look at what brokerage analysts have in their financial models in terms of expected sales growth for the Dow constituents.  This year hasn’t been pretty, with Q1 down an average of 0.8% from last year and Q2 to be down 3.5% (WMT and HD still need to report to finish out the quarter).  The hits keep coming in Q3, down an expected 4.0% (1.4% less energy) and Q4 down 1.8% (flat less energy). 

The good news is that if markets discount 2 quarters ahead, we should be through the rough patch because Q1 2015 analyst numbers call for 1.9% sales growth, with or without the energy names of the Dow. The bad news is that analysts tend to be too optimistic: back in Q3 last year they thought Q2 2015 would be +2%, and that didn’t work out too well. 

Overall, the lack of revenue growth combined with full equity valuations (unless you think +17x is cheap) is all you need to know about the current market churn. And why it will likely continue.

The most successful guy I’ve ever worked for – and he has the billions to prove it – had the simplest mantra: “Don’t make things harder than they have to be”.  In the spirit of that sentiment, consider a simple question: which Dow stocks have done the best and worst this year, and why?  Here’s the answer:

The three best performing names are UnitedHealth (+19.3%), Visa (+18.2%) and Disney (14.2%).

The worst three names are Dupont (-28.3%), Chevron (-23.5%) and Wal-Mart (-16.0%).

Now, consider the old market aphorism that “Markets discount two quarters ahead” (remember, we’re keeping this simple).   What are analysts expecting for revenue growth in Q3 and Q4 that might have encouraged investors to reprice these stocks higher in the first 7 months of the year?


For the three best performing stocks, analysts expect second half revenues to climb an average of 14.1% versus last year. 

And for the worst three?  How about -22.1%. Don’t make things harder than they have to be.

That, in a nutshell, is why we look at the expected revenue growth for the 30 companies of the Dow every month.  Even though earnings and interest rates ultimately drive asset prices, revenues are the headwaters of the cash flow stream.  They also have the benefit of being easier for an analyst to quality control than earnings.  Not easy, mind you – just easier.  Units, price and mix are the only three drivers of revenues you have to worry about.  When those increase profitably the rest of the income statement – including the bottom line – tends to take care of itself.  

By both performance and revenue growth measures, 2015 has been tough on the Dow. It is the only one of the three major U.S. “Indexes” to be down on the year, with a 2.3% decline versus  +1.2% for the S&P 500 and +6.3% for the NASDAQ.  Ten names out of the 30 are lower by 10% or more, or a full 33%.  By comparison, we count 107 stocks in the S&P 500 that are lower by 10% or greater, or only 21% of that index.  

Looking at the average revenue growth for the Dow names tells a large part of the story, for the last time the Average enjoyed positive top line momentum was Q3 2014 and the next time brokerage analysts expect actual growth isn’t until Q1 2016. The two largest problems are well understood: declining oil and other commodity prices along with an increase in the value of the dollar. For a brief period there was some hope that declining energy company revenues would migrate to other companies’ top lines as consumers spent their energy savings elsewhere.  That, of course, didn’t quite work out.  

Still, we are at the crosswords of what could be a turn back to positive growth in 2016. Here’s how Street analysts currently expect that to play out:

At the moment, Wall Street analysts that cover the companies of the Dow expect Q3 2015 to be the trough quarter for revenue growth for the year.  On average, they expect the typical Dow name to print a 4.0% decline in revenues versus last year.  Exclude financials, and the comp gets a little worse: 4.4%.  Take out the 2 energy names, and the expected comp is still negative to the tune of 1.5%.

Things get a little better in Q4, presumably because we start to anniversary the declines in oil prices as well as the strength of the dollar.  These both began to kick in during Q4 2014, and as the old Wall Street adage goes “Don’t sweat a bad quarter – it just makes next year’s comp that much easier”.  That’s why analysts are looking for an average of -1.8% revenue comps for Q4, and essentially flat (-0.01%) when you take out the Dow’s energy names.

Go all the way out to Q1 2016, and analysts expect revenue growth to finally turn positive: 1.9% versus Q1 2015, whether you’re talking about the whole Average or excluding the energy names Better still, analysts are showing expected revenue growth for all of 2016 at 4.1%.  OK, that’s probably overly optimistic unless the dollar weakens next year.  But after 2015, even 1-3% growth would be welcome.

We’re still keeping it simple, so let’s wrap up.  What ails the Dow names also hamstrings the U.S. equity market as whole.  We need better revenue growth than the negative comps we’ve talked about here or the flattish top line progressions of the S&P 500 to get stocks moving again. The third quarter seems unlikely to provide much relief.  On a more optimistic note, our chances improve in Q4 and even more so in Q1 2016. Until we see the U.S. economy accelerate and/or the dollar weaken and/or oil prices stabilize, the chance that investors will pay even higher multiples for stagnant earnings appears remote.  That’s a recipe for more volatility – potentially a lot more.

Via Zero Hedge … Via ConvergEx’s Nick Colas

Chart Of The Day: Recession Dead Ahead?

By Tyler Durden

The chart below showing the annual increase, or rather, decrease in US factory orders which have now declined for 6 months in a row (so no one can’t blame either the west coast port strike or the weather) pretty much speaks for itself, and also which way the US “recovery” (whose GDP is about to crash to the 1.2% where the Atlanta Fed is modeling it, or even lower is headed.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/Factory%20Orders%20YY.jpg

As the St Louis Fed so kindly reminds us, the two previous times US manufacturing orders declined at this rate on an unadjusted (or adjusted) basis, the US economy was already in a recession.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/fed%20recession%20NSA.jpg

And now, time for consensus to be shocked once again when the Fed yanks the rug from under the feet of the rite-hike-istas.

Texas: Recession In 2015?

https://i0.wp.com/i.imwx.com/web/news/2012/january/snow-txdrillrig-iwit-mlallison-440x297-010911.jpgby Josh Young

Summary

  • Texas is by far the largest producer of oil in the US.
  • Oil production represents a disproportionate portion of Texas’s economy.
  • With oil prices down 45%, oil’s share of Texas GDP may fall 50% or more.
  • Unlike Russia and other countries, Texas cannot depreciate its own currency, magnifying the economic effect.

Texas is the largest oil producer in the US. And oil prices are down almost 50% in the past 4 months. Yet nowhere in the news do we hear about the risk of Texas entering a recession. The facts and figures below should concern investors in securities with economic exposure to the Texas economy. The risk is real.

As seen in the below chart by the EIA, Texas is the largest oil producing state in the US, producing 3x as much oil as the next largest producing state.

In September, Texas produced 3.23 million barrels of oil per day. This compares to 1.1 million barrels of oil per day produced in the second largest oil producing state, North Dakota, and much smaller quantities by other traditional oil producing states such as Alaska, California, and Oklahoma. And by comparison, Russia produces 10.9 million barrels per day.

Quantifying the value of this production, at $100 oil, that would be $323 million worth of oil produced per day, or $118 billion of oil produced per year. With the current price of oil hovering around $55 per barrel, that same oil production is only worth $178 million per day, or $65 billion. This is a loss of $53 billion of oil sales revenue just in the state of Texas.

This $53 billion in lost revenues compares to Texas’s GDP of $1.4 trillion in 2013 – it would be 3.8% of the State’s GDP, which is now “missing” due to oil prices having fallen. This is only the direct loss to the state – the indirect loss is likely several times as much. Direct oilfield activity is slowing down dramatically, as oil producing companies cut their capital expenditure budgets for 2015. Oilfield services stocks (NYSEARCA:OIH) are already down 37% from their peak earlier this year in anticipation of an activity slowdown. And for every job lost on a rig or in an oil company’s office, there are several additional jobs that may be lost, from the gas station manager to the sales clerk at a store to the front desk worker at a hotel.

The oil industry is unusual in that both the upstream independent producers and the service companies tend to outspend their cash flow, typically on local (to Texas) goods and services, on everything from drill pipe to rig manufacturing to catering. This means that for every dollar of lost oil sales from the lower oil price, there may be several dollars less spent across the Texas economy. This could be devastating for the Texas economy, and has not yet been widely discussed in the financial media.

To see an extreme example of the impact of lower oil prices on an economy tied to oil production, we can look at Russia (NYSEARCA:RSX). The Russian economy is more oil dependent than Texas’s. Russia’s GDP was $2.1 trillion in 2013. This compares to Texas’s GDP of $1.4 trillion. So Russia produces 3.3x as much oil as Texas, but only has 1.5x the GDP. So on a direct basis, assuming “ceteris paribus” conditions, a $1 decline in the price of oil would have 2.2x the impact to the economy of Russia as to the economy of Texas.

So what is happening in Russia? Already, the ruble has dropped in value by 50% in the past year. And numerous sources are calling for a severe recession in 2015. This would be expected, considering the high portion of the GDP that is attributable to oil production.

However, Russia has an advantage that Texas does not have. It has its own currency. While a 50% drop in a currency may not sound great if you’re looking to spend that currency elsewhere, it is crucial if you are an exporter and your primary export just dropped in price by 45%. The ruble denominated impact of the drop in the price of oil is a mere 10%. Unfortunately, for Texas, the dollar denominated drop in oil is 45%. So despite the lower economic exposure to oil, Texas does not have the benefit of a falling currency to buffer the blow of lower oil prices.

It may get even worse. With less drilling activity, oil production growth in Texas may slow, and eventually may decline. Depending on the speed of this slowdown, Texas could even see production decline by the end of 2015. This is because most of the new production has been coming from fracking unconventional wells, which can decline in production by as much as 80% in the first year. Production growth has required an increasing number of wells drilled, and has been funded with 100% of oil company cash flow along with hundreds of billions of dollars of equity and debt over the past few years. With the recent crash in oil stock prices (NYSEARCA: XOP) and in oil company bonds (NYSEARCA: JNK), oil drillers may be forced to spend within cash flow, and that cash flow will be down at least 45% in 2015 if the oil price stays on the path projected in the futures market.

All of this means that in 2015, Texas oil wells could be producing less than the 3.23 million barrels of oil per day it was producing in September 2014, and their owners could be receiving 45% less revenue per barrel produced. Again applying an economic multiplier, the results could be devastating. And without the cushion of a weak currency that benefits countries like Russia, it is hard to see how Texas could avoid a recession in 2015 if the price of oil stays near its current low levels.