Financial Review

Stormy Weather

…..Manufacturing growing slower. Construction spending increased. Yield curve flattens. SCOTUS nomination may go nuclear. Car sales drop last month, except for Tesla – now bigger than Ford. Household debt climbs back near 2008 peak. Student loans don’t buy what they used to.

Financial Review  by Sinclair Noe for 04-03-2017

 

DOW – 13 = 10,650
SPX – 3 = 2358
NAS – 17 = 5894
RUT – 16 = 1369
10 Y – .05 = 2.34%
OIL – .33 = 50.27
GOLD + 3.80 = 1254.00

 

The Institute for Supply Management (ISM) said its index of national factory activity slipped to a reading of 57.2 last month from 57.7 in February, which was the highest since August 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

 

The U.S. Markit manufacturing purchasing manager’s index fell to 53.3 in March from 54.2 the previous month.

 

In a separate report, the Commerce Department said construction spending increased 0.8 percent to $1.19 trillion in February. That was the highest level since April 2006 and followed an upwardly revised 0.4 percent drop in January. Construction spending increased 3.0 percent from a year ago. In February, private construction spending rose 0.8 percent to its highest level since May 2006 after being unchanged in January. Spending on residential construction surged 1.8 percent to its highest level since July 2007. Investment in homebuilding has now increased for five straight months. Spending on private nonresidential structures fell 0.3 percent in February, declining for a second consecutive month.

 

The yield on the 10-year Treasury note fell 5 basis points to 2.34%. Over the first quarter, the yield curve became flatter, meaning the difference of rates between short-term bonds and long-term bonds narrowed, signaling concern over the economic outlook. Among Federal Reserve speakers, Philadelphia Fed President Patrick Harker reiterated that he still backs two more rate hikes this year. Richmond Fed President Jeffrey Lacker is scheduled later this evening. The big event on the economic calendar this week is the Jobs Report on Friday. After 238,000 people were hired in January and 235,000 in February, some analysts are looking for a pullback in hiring, possibly a number below 200,000, simply because the economy can’t keep up that kind of hiring pace nearly eight years into a recovery in which employment has grown by nearly 15 million jobs.

 

Senate Democrats appear to have enough votes to block Neil Gorsuch’s confirmation to the U.S. Supreme Court under current rules, a move that may lead to a unilateral rule change by Republicans known as the “nuclear option”. While the GOP controls the Senate 52-48, current rules require 60 votes to move a high court nomination toward a final vote. Democrats say they have 41 votes to oppose advancing the nomination. Senate Majority Leader Mitch McConnell has guaranteed that the Senate will confirm the judge, a hint that the GOP is prepared to force a rule change this week. The rule change could happen Wednesday with a full vote on Friday. Gorsuch’s confirmation would give the court five Republican-appointed justices, restoring a majority that had been in place for almost half a century before the February 2016 death of Justice Antonin Scalia.

 

Brexit could disrupt millions of expats’ lives. The more than 3 million EU nationals who live in Britain and the almost 1 million British citizens who live in other EU countries face uncertainty. With the free movement of citizens—a basic tenet of EU law—curtailed or restricted, theoretically they could see bank accounts closed, employment terminated or rental agreements revoked—not to mention deportation.

 

Passenger car sales dropped last month even as automakers offered some very juicy discounts. Ford suffered the biggest loss with a 7.5 percent drop in sales, followed by Fiat Chrysler at 5 percent, Toyota at 2 percent and Honda at just under 1 percent. Nissan sales were up over 3 percent, Volkswagen’s rose just under 3 percent and GM posted an increase of just under 2 percent. The LMC Automotive consulting firm said incentives hit a March record, averaging $3,768 per vehicle and the highest amount since March of 2009. In addition, cars and trucks are sitting on dealer lots for an average of 70 days, the highest level for any month since July of 2009 during the sharp economic downturn.  Even some truck and SUV inventories are starting to climb. Ford, which saw a 24 percent decline in car sales, executives were happy with monthly numbers largely because of a 10 percent increase in sales of the F-Series pickup.

 

Tesla said it delivered a record 25,418 vehicles in the quarter ended March, a 69-percent increase from last year. Tesla shares climbed about 6%, giving Tesla a market capitalization of $48 billion – surpassing Ford Motor’s $45 billion value and just below General Motor’s value of $51 billion. Tesla sold about 40,697 vehicles in the U.S. last year. Ford delivers that many F-Series trucks about every three weeks. The Tesla story is not about past year performance but growth potential. Ten years from now it will be difficult to buy a new gas powered vehicle. The future is electric; something Ford and GM have failed to fully embrace. Still, there are doubters. Short interest in Tesla has risen to 29 percent of its free float from a 52-week low of 20 percent in mid-October, even as Tesla shares have jumped nearly 40% since the start of the year – meaning short sellers have lost more than $2.2 billion in the first quarter, at least on paper. Today Elon Musk tweeted: “Stormy weather in Shortville …”

 

Looking ahead, Tesla will introduce the Model 3, with a more realistic price of around $35,000; they expect to produce 500,000 a year by 2018. But Tesla is more than a car company. It’s a vertically integrated energy company that also makes vehicles. Tesla plans to transform from its original state as a small, financially precarious manufacturer of luxury electric cars to the world’s dominant supplier of clean, autonomous transport, and an electricity source for millions of businesses and homes. Tesla can start to deliver on that promise by combining the solar energy firm SolarCity, its massive lithium-ion battery plants, a growing number of retail stores, and expanding commercial and residential energy storage business. Tesla’s theory goes that it can innovate faster, engineer a seamless user experience and reduce costs through economies of scale. As a one-stop shop for clean energy and mobility at work, home and on the road, Musk has mused before that Tesla could be the world’s first $1 trillion company one day. If Tesla succeeds, it will find itself as a major global player in two of the world’s largest markets: energy and transportation.  Of course, a lot needs to happen first, and Tesla will likely weather a few storms along the way.

 

Companies that provide oil and gas drilling services had to lower prices for their clients during the most recent oil crash. Some oil-field services providers lowered prices for offshore drilling by as much as 50%, toward levels that would have made their businesses unprofitable, according to Reuters. Oil-field services giants like Baker Hughes and Halliburton lost pricing power because the oil crash hurt their clients’ revenue. That fiscal pain led clients to be more willing to find the cheapest driller. Separate from the oil crash, there has been a structural decline in the average cost of drilling for oil for the past few years. According to a report from the Energy Information Administration last March, costs per well increased from 2006 through 2012 — a time of rapid growth in US drilling activity. But average costs have fallen since 2012 partly because of more efficient technology. That does not mean oil will trade much lower, but it likely helps define a trading range of about $40 to $60 a barrel.

 

The New York Federal Reserve announced that in 2017 total household debt will reach its previous peak of $12.68 trillion, which it reached in the third quarter of 2008. It’s already close: Total household debt in the fourth quarter of 2016 was nearly as high, at $12.58 trillion. Compared with 2008, fewer borrowers have housing-related debt — including their first mortgages, or home equity lines of credit — and instead more have taken on auto and student loans. Although housing debt has decreased since 2008, mortgages still make up the bulk of the debt total, at 67%.

 

In 2016, borrowers with $100,000 in student loans or more make up just 5% of borrowers, but account for about 30% of total outstanding student debt. What’s more, these borrowers appear to be struggling more than they have in recent years. But the default rates have spiked over the decade. Just 6% of borrowers with $100,000 or more in loans who left school between 2005 and 2006 defaulted on their debts five years later, according to the NY Fed. More than 20% of borrowers who left school between 2010 and 2011 owing that amount defaulted within five years. Over the past several years, higher education leaders have become most concerned about the fate of student loan borrowers with relatively low balances of about $10,000 or less. That’s because these borrowers are typically at the highest risk of defaulting on their debt, likely because their low balance is a signal that they didn’t complete much education. Borrowers with six-figure debts, on the other hand, are less at risk of default because their high balances are often a sign that they’ve completed more schooling that’s made them valuable in the labor market.

 

Now it appears these borrowers are facing more challenges. While borrowers with high balances are still less likely to default than their counterparts with less debt, their default rates are catching up with the share of borrowers defaulting overall. The increased struggles of borrowers with six figure debts may reflect that it’s becoming more common to borrow $100,000 or more without getting a professional degree, like a medical degree, that typically assures good outcomes in the labor market. In other words, $100,000 in student debt just doesn’t buy what it used to.

 

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