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Monday, February 01, 2016

Here's Something To Worry About

I'm trying to compile a list of negative/positives.

I prefer Ward's automotive data, because I find it the most accurate by far. Today I ran into this article, which is probably not available to the public. But you might be able to access it by registering.

The article predicts that first-quarter light vehicle North American production will be about level year over year and down from both the previous quarters. If this is true, we can take it that industrial production is going to be bad through this quarter.

Ward's then predicts that Q2 production will rise sharply, exceeding the prior three quarters and increasing over Q2 2015. Should the economy be in recession, one would suspect that this is too optimistic.

Since housing seems to be lagging a bit, with construction value increases YoY dropping sharply the last few months (at a time when weather was very favorable), that would leave us in pretty rough territory this year. Also, the unfavorable second-half retail spend is going to be cutting into state and some local budgets:

This is SA level Total Construction Spending. That impetus tailed out.


We had already lost this one - this is Industrial Production YoY, and it is not a pretty sight. End 2015.


This is retail YoY ex motor vehicles. One would assume that car dealers are working hard on the incentives, so maybe they'll move out the inventory and Q2 production will be okay. But on the other hand, when one looks at the rest of the economy one is skeptical.

Car sales have been the remaining push, although really light truck sales was what carried the end of the year.

Shortly we will get NMI Composite. This morning's manufacturing was the same as last month - crap. I have never seen services not follow manufacturing with a fall of this magnitude before.

The peak for existing home sales, most categories of retail, and NMI Composite seems to have centered on July of 2015, with only a slow drift down since.

But FUT!!! As of January 28th MTD:
January 2016: 512
January 2015: 524

I would say that services is following now.

Federal Unemployment Tax seems to be a very sensitive recession indicator, probably because it is charged quarterly on a very low level of wages, and thus it captures new hirings and opportunities to change employment for better wages/opportunity.

Positives:
There was some sort of calculation change which increased SS awards for recent retirees. I don't know the details, but BEA calculated it at +8.8 billion annually. That will help.

Walmart's March increase may be pushing some other retailers to increase wages slightly.

Comments:
Interesting how some of the current levels are equal to 'well into a recession' levels. I wonder if Walmart's positive adjustment in March will lead to a bigger negative adjustment later...
 
If dealers are working the incentives hard in Q1, that likely means their orders in Q2 will be down. Maybe the factory will work its incentives harder to the dealers, although I don't see why the factory would forecast order increases for Q3, even for new models.

I guess I'm just not buying the Q2 increase at all.
 

The Chauvet-Piger Recession Probability went from 0.4 in August to 3.84 in November (the latest available data):

https://research.stlouisfed.org/fred2/series/RECPROUSM156N


 
The one major positive I can see is that a lot of the negative could potentially be explained by transitory low oil prices. At this point, it seems more probable than not that we enter a recession without oil rebounding to >$50 within the next 6-9 months. Low oil can explain industrial production, capex, profits, and HY energy spreads. Seems like a good time to get defensive and hedge the upside with oil.

Thanks for you input MoM. Always insightful.
 
Low oil is a symptom of China's crash. China's bubble is over and it ain't coming back. Oil will adjust and in a couple years get back to the 50-60 range, but that won't be enough to save junk energy bonds. Barring a mideast supply disaster, the North American energy crash will go down as another casualty of China's debtberg.
 
Going back to the 1980’s in Texas, when oil went from $35 to $10 per barrel, a dark cloud moved over the Southwest (particularly Texas, Oklahoma, Louisiana). Let me help you remember, Resolution Trust Corporation, Savings and Loan, “see-through” buildings. Should we expect anything less this go round? I don’t know the exact numbers but Silverleaf Energy filed bankruptcy and just auctioned their properties off at $245 mil. Only problem is they were on the books for $2,500 mil., so someone is sitting with a big loss on their books, unless they were leveraged up 10:1 (that would never happen here!) in which case it would be a giant loss.
Well the see through buildings are back in Houston and many other small towns in the oil patches, Alberta, North Dakota, Oklahoma and Texas. And all the roughnecks making $100k+ are starting to miss payments on their $50,000 pickups. It just takes time to work through the system.
For 25 years, I have watched my suppliers push their prices to me up and up as they are very directly tied to the price of steel. This past January, they LOWERED prices.
The FED is creating a disaster, which no one can see coming of course. State and local governments are beginning to feel the public employee pensions really bite their budgets, and they still are NOT dealing with the truth. These pension plans are still assuming people are going to die at 67, that their portfolio will return 7.75% per annum, which when adjusted to reality spike their shortfalls. Some of the worst are Chicago, Philadelphia, Houston, but it would be easier to list those less affected. Pretty much all the states with both coasts being hit really hard.
While auto makers may do ok, look at the stock price of SC (Santander Consumer), one of the largest subprime auto loan lenders. Their stock price went from $24 to $10. If they stop lending, kiss the auto sales bye-bye. But their delinquencies are increasing. Peterbilt (the large class 8 18wheeler tractor mfg) recently laid off their entire 3rd shift, and January orders are still very bad.
In Dallas, it is getting hard to find a Texas license plate due to all the progressives running around. Five miles from my house, Toyota is building their new headquarter, next to Fedex, next to the new Dallas Cowboys practice facility (indoor stadium seating 25k, hotel, entertainment facilities), next to a new campus for Chase bank. In short, companies are getting the heck out of the high tax states while they still can. The wife's company is paying $5k bonuses for filling open IT positions.
I would gladly settle for a recession as I see it getting much worse. How much more debt can consumers, state & local govts, corporations continue to add as their incomes stay flat or decline? Debt is defined as increased current consumption in exchange for decreased future consumption. It is not like we took the debt and built a new nationwide freeway system.
Best regards,
Learner2

 
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