foxex: Soft Data

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. U.S. Markets Slump as Investors Await Trade Talks

2. Hard Data vs. Soft Data

3. 3Q Earnings Preview

4. GM Strike Enters 4th Week Amid Little Progress

Markets Closed

Dow
26,478.02 -0.36%

S&P
2,938.79 -0.45%

Nasdaq
7,956.29 -0.33%

VIX
17.86 +4.81%

Bitcoin
$8,261.12 +3.19%

US 10-Yr Yield
1.553 +2.51%

Markets Today

U.S. markets lose early gains ahead of trade talks
Cargo alert—Shipments from China to U.S. fall ahead of holidays
Mortgages are cheap, but buyers remain sidelined

U.S. markets seesawed for the better part of the day Monday, but slumped near the close as investors wait for the U.S.-China trade talks to resume on Oct. 10. Press reports have already started dropping indications that China will offer less concessions than the U.S. seeks, and that an overarching agreement is not likely to take place anytime soon. Most people have accepted that notion, and the general hope may just be that this round of talks doesn't worsen the relationship, which could lead to more tariffs. That, in turn, would likely lead to a broader slowdown for the U.S. and Chinese economies, as well as those of our respective trading partners.

Trade tensions and tariffs are already eating into the GDP of both economies, and taking a toll on corporate profits. Nearly 70% of companies in the S&P 500 cited trade uncertainty as the main source of concern and the reason for reining in their earnings forecasts at the end of last quarter. Expect to be hearing a lot more of that in the coming weeks.

Meanwhile cargo loads from Shanghai bound for the Port of Los Angeles have flatlined this month, right about the time they are supposed to spike ahead of Black Friday in November. In order for shipments to arrive from the Port of Shanghai to Los Angeles, they needed to have been booked by last Friday. Data from the Port of LA indicates that cargo may have missed the deadline or has yet to be ordered.

The Trump Administration had agreed to postpone a recent round of tariffs so as not to hurt holiday sales. While that may have had a headline impact, it is not showing up in cargo load reports, which everyone knows I am obsessed with.

U.S. Housing Market Conundrum

The U.S. housing market finds itself in a tricky spot. Mortgage rates have come way down as the Fed has cut interest rates, but buyers remain on the sidelines.

According to the Home Purchase Sentiment Index from Fannie Mae, the largest owner of U.S. mortgages, fewer Americans are confident in the U.S. housing market, despite lower mortgage rates that are making homes more affordable in the United States.

The two biggest reasons for the lack of confidence, according to the survey:

Fear of losing a job
Fear that home prices won't go up from here

This is a great example of how consumers can start to assume the worst, even when things seem OK on the surface. Unemployment is at a multi-decade low, personal income continues to rise, and interest rates are low.

But, as we mentioned last week, consumer confidence and sentiment are starting to crack as fears of a recession begin creeping in.

Here's Fannie Mae's chart of survey respondents who think U.S. home prices will be higher 12 months from now:

Hard Data vs. Soft Data

The above is a good example of what we call "soft data." It's a survey, which is less scientific than hard data like earnings, producer prices, and employment numbers.

In the U.S. right now, the soft data is decidedly weaker than the hard data. Consumer sentiment (soft data) is weaker than consumer spending (hard data).

But soft data, according to economists, is often seen as a leading indicator for the economy, which makes sense. Most of the hard data reports are for the prior month, while soft data, like surveys, captures people's sentiments at a particular point in time. But when sentiment shifts, money usually follows.

Here's consumer sentiment over the past year, courtesy of YCHARTS.

(source: YCHARTS)

And here's retail sales over the past year:

Earnings Expectations

3Q'19 earnings season kicks into high gear next week
Companies have taken down their forecasts as global economy slows
Current forecast is for a 2% decline in S&P 500 earnings

As I mentioned, earnings season will be upon us in the next week or two. The general consensus is that corporate profits will be weaker than last quarter as the effects of the trade war and a slowing global economy catch up to company balance sheets.

It should be noted that second quarter earnings were supposed to be lower than the first, but corporate buybacks ended up making those profits look stronger. When companies buy back their shares, they reduce the amount of shares outstanding, which makes their P/E ratio (Price to Earnings) look better than it might otherwise be. Nothing illegal about it, but it does make earnings seem stronger.

Analysts did not expect stock buybacks to have been as robust as they were in prior quarters, and sales have been weaker for some big companies like Boeing and the automakers.

That could cause that 2% overall decline analysts are forecasting. But companies love to set the bar low, and then show "upside surprise" when they report, by delivering better than their forecasts. It's what companies say about the next quarter and year that gets investors' attention, so tune your ears for that—especially when you see charts like this from Bank of America.

The sectors that are expected to show the biggest declines in earnings: materials and industrials. That shouldn't come as a surprise either, since those sectors, along with technology, are the ones most impacted by the trade war.

More News:

Why the 2019 IPOs May Slow the Market for New Offerings

6 Sectors Seen Leading 3Q Earnings Declines in Warning to Market

NVIDIA Stock Tests Reaction Highs After Bullish Analyst Comments

(chart courtesy YCHARTS)

Shares of ConocoPhilips rose by over 3% after the company announced a 38% increase in its dividend payouts to investors, in spite of the weak oil price environment. Kohl's stock price rose by more than 3% as well today, after releasing an exclusive new home furnishings line from its partnership with the Scott Brothers—the stars of HGTV's Property Brothers show.

Noble Energy was hit the hardest today, closing with its stock price down by over 4%. Shares of Harley-Davidson fell by just over 3.5% after a Reuters report revealed that its new LiveWire isn't receiving the positive reception from younger consumers that the company was counting on.

Word of the Day

Furlough

Given the news that General Motors has furloughed 415 workers at a Mexico plant, in addition to the 10,000 other non-union workers it has put on involuntary leave due to the UAW strike, this is the word of the day.

The UAW strike on GM has entered its fourth week, and based on GM's rejection of UAW terms over the weekend, this could go on for awhile.

A furlough is a temporary layoff, an involuntary leave or another modification of normal working hours without pay for a specified duration. Businesses use furloughs for a variety of reasons, such as plant shutdowns, or when a broad reorganization makes it unclear which employees will be retained.

(credits: Ford.com)

Today in Automotive History

On Oct. 7, 1913, Ford's team rigged a rudimentary final assembly line at the Highland Park Assembly plant. Engineers constructed a crude system along an open space at the plant, complete with a winch and a rope stretched across the floor. On this day, 140 assemblers were stationed along a 150-foot line and they installed parts on the chassis as it was dragged across the floor by the winch. Man hours of final assembly dropped from more than 12 hours under the stationary assembly system to fewer than three. In Jan. 1914, the rope was replaced by an endless chain.

By bringing the work to the men, Ford engineers managed to smooth out differences in work pace. They slowed down the faster employees and forced slower ones to quicken their pace. The results of mass production were immediate and significant. In 1912, Ford Motor Company produced 82,388 Model Ts, and the touring car sold for $600. By 1916, Model T production had risen to 585,388, and the price had dropped to $360.

"Fordism"—large-scale production combined with high wages—was born and spread to other industries around the world.

Correction: A couple weeks ago I wrote that the Model T was only produced in Black. One of our smart readers wrote in to correct me that it was produced in Red, Blue, and Gray from 1908–1913. Good catch.

(https://corporate.ford.com/articles/history/100-years-moving-assembly-line.html)