Auto sales, Lumber, Rail loadings, Global survey, Profits comments, Las Vegas Real Estate, Central Banks buying gold

This has been know to be associated with the housing cycle:

Framing Lumber Prices Down 30% Year-over-year

This has taken a dive recently:

Global economy enters ‘synchronised slowdown’

(F) The global economy has entered a “synchronised slowdown” which may be difficult to reverse in 2019, according to the latest update of a tracking index compiled by the Brookings Institution and the Financial Times. The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries. The headline readings slipped back significantly at the end of last year and are at their lowest levels for both advanced and emerging economies since 2016.

Corporate Profit Squeeze Looms, Threatening Stocks’ Climb

(WSJ) Analysts project S&P 500 profits in the first quarter will contract 4.2% from a year earlier, according to FactSet, followed by flat growth in the second quarter. That puts the broad index at risk of entering its first earnings recession—marked by at least two or more consecutive quarters of negative earnings growth—since 2016. S&P 500 companies grew profits 20% in 2018, one of the best growth rates since the financial crisis, according to FactSet. Analysts see profits growing just 3.7% this year. S&P 500 companies are trading at 16.7 times their future earnings, the same level the broad index traded at in early October.

Las Vegas Real Estate in March: Sales Down 16% YoY, Inventory up 92% YoY

Gold buying like this functions as ‘off balance sheet deficit spending’. It’s off balance sheet as the payments by the CB don’t count as fiscal expenditures as they are accounted for as CB asset. And it’s functionally state deficit spending as the purchases add income in the form of net financial assets to the non government sectors:

China’s on a bullion-buying spree. The world’s second-largest economy expanded its gold reserves for the fourth straight month, adding to optimism that central banks globally will continue to build holdings.

The People’s Bank of China raised reserves to 60.62 million ounces in March from 60.26 million a month earlier, according to data on its website. In tonnage terms, last month’s inflow was 11.2 tons, following the addition of 9.95 tons in February, 11.8 tons in January and 9.95 tons in December.

China, the world’s top gold producer and consumer, is facing signs of a slowing economy, even as some progress is being made in trade negotiations with the U.S. The latest data from the PBOC indicate that the country has resumed adding gold to its reserves at a steady pace, much like the period from mid-2015 to October 2016, when the country boosted holdings almost every month. Should China continue to accumulate bullion at that pace over 2019, it may end the year as the top buyer after Russia, which added 274 tons in 2018.

Governments worldwide added 651.5 tons of bullion in 2018, the second-highest total on record, according to the World Gold Council. Russia quadrupled its reserves within the span of a decade amid President Vladimir Putin’s quest to break the country’s reliance on the U.S. dollar, and data from the central bank show that holdings rose by 1 million ounces in February, the most since November.

ADP, Light vehicle sales, Wolf quote

This is ADP’s forecast of tomorrow’s employment number. We’ll see tomorrow how well accurate they were:


A bit higher than expected but down for 2017 vs 2016 (negative growth):

Highlights

Unit vehicle sales proved solid in December, at a 17.9 million annualized rate vs 17.5 million in November. Outside of October and September, which were driven by hurricane-replacement demand, December’s results are among the very best of the last two years. The results, which easily top Econoday’s high estimate, point to strength for the motor vehicle component of the retail sales report and are a plus for fourth-quarter consumer spending. Domestic-made sales also topped the high estimate, coming in at a 14.0 million rate vs November’s revised 13.8 million.

Based on a preliminary estimate from WardsAuto, light vehicle sales were at a 17.79 million SAAR in December.

That is down 1.5% from December 2016, and up 2.2% from last month.

This puts annual sales 17.14 million, down from 17.46 million in 2016.
Read more at http://www.calculatedriskblog.com/#VDdCh1WIl0m8GDhd.99


This is not population adjusted:


And in any case it’s turning into an all light truck story:

Annual U.S. Car Sales Drop for First Time Since Financial Crisis

Jan 3 (WSJ) — Though sales fell 1.8% last year as pent-up demand declined and interest faded in sedans and compact cars, auto makers still sold 17.2 million vehicles in 2017, the first time the industry has cleared the 17-million mark three consecutive years, according to IHS Markit. Vehicles now routinely sell for above $32,000, even with average incentives of $4,000 factored in, according to J.D. Power. That is 10% higher than what car buyers were dishing out when the industry’s rally began in 2010. The domestic car business is far healthier than the last time volumes slipped.

From Wolf’s book:

10. Wolff also writes at length about former Goldman Sachs executive Gary Cohn, who leads the president’s National Economic Council. Cohn has privately disagreed with Trump a number of times in the past year. But an April email that, Wolff writes, circulated around the White House “purporting to represent the views of Gary Cohn” takes this to a new level:

“It’s worse than you can imagine. An idiot surrounded by clowns. Trump won’t read anything – not one-page memos, not the brief policy papers; nothing. He gets up halfway through meetings with world leaders because he is bored. And his staff is no better. Kushner is an entitled baby who knows nothing. Bannon is an arrogant prick who thinks he’s smarter than he is. Trump is less a person than a collection of terrible traits. No one will survive the first year but his family. I hate the work, but feel I need to stay because I’m the only person there with a clue what he’s doing. The reason so few jobs have been filled is that they only accept people who pass ridiculous purity tests, even for midlevel policy-making jobs where the people will never see the light of day. I am in a constant state of shock and horror.”

JOLTS, IBD survey, Trump comments

I read this as weakening demand and employers unwilling to pay up to hire, and maybe even posting openings to replace existing workers at lower wages:

Highlights

Job openings held steady at a very abundant 6.082 million in August while hirings remained far behind, at 5.430 million. In an early indication of full employment, the gap between openings and hiring first opened up about 2-1/2 years ago signaling that employers are either not willing to offer high enough pay to fill empty positions and/or are having a hard time finding people with the right skills. At 652,000, the current spread between openings and hirings is one of the very widest on record.

For comparison, the number of job seekers who are out actively pounding the pavement is 6.911 million which is very near the total number of available openings. Today’s results offer further evidence that the economy is at full employment and will likely add urgency for further Federal Reserve rate hikes.

Hires have gone flat and on a per capita basis are far lower than the prior cycle:

More evidence Trumped up expectations are fading:

United States IBD/TIPP Economic Optimism Index

The IBD/TIPP Economic Optimism Index in the United States fell 5.8 percent from the previous month to 50.3 in October 2017, below market expectations of 54.2. The gauge of the six-month economic outlook declined 4.7 percent to 48.7; and the personal financial outlook index dropped 4 percent to 59.5. Also, the measure of confidence in federal economic policies decreased 9.1 percent to 42.8.

President Donald Trump suggested he’s smarter than Secretary of State Rex Tillerson, saying in an interview published Tuesday that if Tillerson did call him a moron, as reported, the two should ‘‘compare IQ tests.’’

“And I can tell you who is going to win,” Trump said to Forbes magazine.

Trump reportedly wanted nearly 10 times more nuclear weapons

  • President Donald Trump discussed increasing the number of U.S. nuclear weapons by nearly 10 times at a July meeting with top national security officials, according to NBC News.
  • After the meeting, Secretary of State Rex Tillerson was heard calling Trump a “moron,” NBC reported.
  • Factory orders, ISM services, China investments, ISM NY

    Up nicely but not so good excluding aircraft orders, which are highly volatile:

    Highlights

    Factory orders surged 3.0 percent in June but were skewed higher by a more than doubling in monthly aircraft orders. Excluding transportation equipment, a reading that excludes aircraft, orders actually fell 0.2 percent in the month following a 0.1 decline in May and no change in April. June orders for capital goods (nondefense ex-aircraft) were also weak, unchanged in the month.

    Shipments fell 0.2 percent while inventories rose 0.2 percent, lifting the inventory-to-shipment ratio to a less lean 1.38. A major positive in today’s report is a 1.3 percent surge in unfilled orders which had been flat but are now getting a lift from transportation equipment as well as capital goods industries including machinery and fabrications.

    Turning to nondurable goods, orders slipped 0.3 percent on declines for petroleum and coal. Aircraft are an important part of the factory sector and have been a big plus so far this year, yet outside aircraft the sector is still struggling to get in the air this year.

    This is not inflation adjusted and still well below the highs of the last cycle and below the 2014 highs:


    Less than expected as trumped up expectations fade further:

    Highlights

    Slowing is the call from ISM’s non-manufacturing sample where July results show their least strength since August last year. The composite index slowed by an abrupt 3.5 points in July to 53.9 with new orders down 5.4 points to 55.1 and business activity down 4.9 points to 55.9. Employment is also down, to 53.6 from 55.8 in a reading that does not point to acceleration for tomorrow’s employment report. But strength is still the clear message of this report with inventories rising, delivery times slowing and, very importantly, backlog orders still rising.

    Yet the July edition is a surprise for this report which is usually very consistent with the headline composite in the high to mid 50s and new orders and business activity in the low 60s. The contrast with this morning’s PMI services report is noticeable, one slowing and one accelerating, but the story of the two samples together is positive: moderate growth for the bulk of the economy.


    This could slow things down:

    China issues rules to curb state firms’ overseas investment risks

    Aug 3 (Reuters) — China’s giant SOEs have been leading the country’s “go out” drive with growing overseas investments, but they have encountered low returns on investment and weak profitability, the ministry said. The guidelines will help “strengthen financial management of overseas investment of state-owned enterprises, prevent financial risks and improve investment efficiency,” the ministry said. “The lack of accountability of senior executives for poor or failed investment is one of the reasons that lead to radical decision-making and loss-making deals,” Xu Baoli, director of the research centre at China’s state-owned assets regulator said.

    ISM NY:

    NY state mfg survey, Housing index, Lending, White House headline

    Trumped up expectations reversing?

    Highlights

    Activity in the New York manufacturing region is flattening out this month following a run of unusually strong growth. May’s Empire State index came in at a lower-than-expected minus 1.0 with new orders also moving into the negative column to minus 4.4. Unfilled orders, which were very strong in April and March, also moved below zero to minus 3.7.

    But the strength in prior orders is keeping production up, at a very solid plus 10.6 this month, and is also keeping hiring up, at 11.9 and only 2 points slower than April’s 2-year high. Delivery times continue to slow though to much a lesser degree than prior months which points to easing congestion in the supply chain. Inventories are flat and price pressures still increasing though, once again, less than before.

    The slowing in this report is actually welcome news, giving time for supply constraints to ease and reducing risks of over heating. This report points to easing for Thursday’s Philly Fed where another month of enormous strength is currently the expectation. Yet despite the strength of anecdotal reports like Empire State and Philly, definitive factory data out of Washington have yet to show outsized acceleration. Watch for the manufacturing component of tomorrow’s industrial production, definitive data where only a moderate rise is expected.

    To me buyer traffic is most relevant:

    The NAHB Housing Market Index in the United States rose to 70 in May of 2017 from 68 in April, beating market expectations of 68. The index is 1 point shy of 71 reached in March, which was the strongest reading since June 2005. The index of current single-family home sales went up 2 points to 76; sales expectations over the next six months increased 4 points to 79 while buyer traffic edged down 1 point to 51.

    Not good:

    The worst news for the economy might be coming from banks, not retail

  • Loan issuance declined in the first quarter from the previous three-month period, the first time that has happened in four years, according to a SNL Financial.
  • Commercial and industrial lending, which usually pops this time of year, posted just a small increase.
  • The business climate, at least measured by the willingness to take on debt, remains cautious.
  • White House still refuses to say whether Trump taped conversations

    Housing starts, Philidelphia Fed survey, NY Fed on household debt

    Still depressed by historical standards, and still seem to me to be going sideways, as per the charts:

    Highlights

    Housing starts did fall 2.6 percent in January but the 1.246 million annualized rate is well above Econoday’s consensus for 1.232 million. Details show a 1.9 percent rise for single-family starts to a 823,000 rate, offset by a 10.2 percent decline in multi-family units to 423,000. Year-on-year, however, both components are very positive, up 6.2 percent for single-family homes and at a very strong 19.8 percent for multi-units.

    Permits rose 4.6 percent in January to a 1.285 million rate that also easily beat the consensus, for 1.233 million. But here single-family permits, which are very closely watched, fell 2.7 percent to a 808,000 rate that is still, however, 11.1 percent higher than a year ago. Multi-family permits jumped to 477,000 from a 398,000 rate but are up a relatively modest 3.5 percent from a year ago.

    This report is always volatile and bumpy from component to component but in sum, housing starts and permits are pointing to continuing strength for new homes where lack of supply held down what nevertheless was a solidly positive 2016 for the sector.


    More trumped up expectations?

    Highlights

    The strength of the Philadelphia Fed’s general business conditions index is impossible to exaggerate. February’s 43.3 is not a misprint. It’s the strongest since very far back, since January 1984. Yes, this index is a response to a single question on monthly sentiment but its enormous strength is confirmed by a very tangible reading, and that is the new orders index which jumped 12 points in the month to 38 which itself is a record or should be one if it is not.

    Other readings in this report are less spectacular but very strong including a big build for backlogs, a healthy draw for inventories, understandable slowing in delivery times, and noticeable pressures in costs and positive traction for selling prices.

    As an advance indicator, this report rivals the ISM manufacturing survey in importance. These readings point squarely at 2017 acceleration for a factory sector that limped through 2016.

    Not uncommon for a sudden surge of debt to come before a drop in spending, as consumers get caught short on the income side and borrow for a while as they transition to reduced spending:

    From the NY Fed: Household Debt Increases Substantially, Approaching Previous Peak

    The Federal Reserve Bank of New York today issued its Quarterly Report on Household Debt and Credit, which reported that total household debt increased substantially by $226 billion (a 1.8% increase) to $12.58 trillion during the fourth quarter of 2016. This marked the largest quarterly increase in total household debt since the fourth quarter of 2013, and debt today is now just 0.8% below its peak of $12.68 trillion reached in the third quarter of 2008. Every type of debt increased since the previous quarter, with a 1.6% increase in mortgage debt, 1.9% increase in auto loan balances, a 4.3% increase in credit card balances, and a 2.4% percent increase in student loan balances. This boost in balances was in part driven by new extensions of credit, with a large increase in the volume of mortgage originations and a continuation in the strong recent trend in auto loan originations. This report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample of individual- and household-level debt and credit records drawn from anonymized Equifax credit data.

    Mortgage balances increased and mortgage originations reached the highest level seen since the beginning of the Great Recession.

    Mortgage delinquencies remained mostly unchanged and the delinquency transition rates for current mortgage accounts improved slightly.

    New foreclosure notations reached another new low for the 18-year history of this series.

    Overall delinquency rates were roughly stable this quarter.

    This quarter saw the lowest number of bankruptcy notations in the 18-year history of this series, continuing an overall downward trend since the financial crisis.
    emphasis added

    Read more at http://www.calculatedriskblog.com/#x5tyrtmlKLRi2SWM.99

    You can see how it moved up into the crash of 08:

    Trumped up expectations, Chicago PMI, Consumer sentiment, Redbook retail sales, Executive orders, GDP comment, Trump comments, Income and spending chart

    Trumped up expectations vs ‘hard data’:

    13101

    13102

    Highlights

    January was a flat month for the Chicago PMI which could manage only 50.3, virtually at the breakeven 50.0 level that indications no change from the prior month. New orders have now joined backlog orders in contraction in what is a negative combination for future production and employment. Current production eased but is still solid though employment is clearly weakening, in contraction for a 3rd straight month. One special note is pressure on input costs which are at a 2-1/2 year high. Business spirits and consumer expectations may be high, but they have yet to give the Chicago economy much of a boost. Watch for the consumer confidence report later this morning at 10:00 a.m. ET.

    13103
    Trumped up expectations starting to cool:

    13104

    Highlights

    Consumer confidence held strong and steady in January, at 111.8 for only a slight decrease from December’s 15-year high of 113.3 (revised). Details are positive including a noticeable decline in those saying jobs are hard to get right now, at 21.5 percent vs December’s 22.7 percent, combined with a solid rise in those who say jobs are plentiful, at 27.4 vs 26.0 percent.

    But the outlook is less upbeat with more saying there will be fewer jobs 6 months from now and fewer saying there will be more. Confidence in income prospects is also down.

    And there’s red flags in the details, including a nearly 2 percentage point drop in buying plans for autos. This suggests that auto demand, after several months of very strong sales, may have understandably flattened. Home sales have been less strong than auto sales, but here too buying plans are down sharply.

    Back to the lows:

    13105

    Inventories and Low Deflator Boost Low GDP Estimate

    By Rick Davis

    Jan 29 (Econintersect) — The BEA’s “bottom line” (their “Real Final Sales of Domestic Product”, which excludes the growing inventories) recorded a sub 1% growth rate (+0.87%), down over 2% (-2.17%) from 3Q-2016.

    Real annualized household disposable income was reported to have grown by $177 quarter-to-quarter, to an annualized $39,405 (in 2009 dollars). The household savings rate decreased by -0.2% to 5.6%.

    For the fourth quarter the BEA assumed an effective annualized deflator of 2.12%. During the same quarter (October 2016 through December 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.41%. Under estimating inflation results in correspondingly over optimistic growth rates, and if the BEA’s “nominal” data was deflated using CPI-U inflation information the headline growth number would have been much lower, at a +0.62% annualized growth rate.

    Trump gives an inaccurate explanation of how pipelines are built and shipped

    By Tom DiChristopher

    Jan 30 (CNBC) — President Donald Trump on Monday gave an inaccurate explanation of how foreign-made pipes are made and shipped to the United States.
    The president made the comments as part of his case to convince oil and gas pipeline makers to use U.S. materials and equipment rather than imported parts.

    Speaking to a group of small business leaders, Trump described a process that “hurts the pipe” — suggesting that many miles of America’s pipelines contain substandard parts which presumably would have to be replaced. But he simultaneously indicated that he is not actually familiar with how pipelines are made, using a variation of “I imagine” three times and saying “I assume” as he explained the process.

    “These are big pipes. Now, the only way I can imagine they [ship them] is they must have to cut them. Because they’re so big, I can’t imagine — they take up so much room — I can’t imagine you could put that much pipe on ships. It’s not enough. It’s not long enough,” he said.

    So I assume they have to fabricate and cut, which hurts the pipe, by the way,” he said.

    A spokesperson for the Association of Oil Pipe Lines said he had never heard of foreign pipe makers cutting segments into portions to send them overseas. Manufacturers create pipes in lengths that can be shipped rather than chopping up vast lengths of pipe.

    TransCanada, the company behind the controversial Keystone XL pipeline, also told CNBC that pipes it buys from overseas are not cut into smaller segments before being shipped.

    So it’s rule by executive orders and tweets supported by alternative facts:

    How Islamophobes and “Alternative Facts” Shaped Trump’s Muslim Ban

    And as previously discussed, looks like a weak dollar policy is in the works:

    Obama

    >Euro spikes after Trump’s trade adviser says Germany is using ‘grossly undervalued’ currency

    Germany is using a “grossly undervalued” euro to gain advantage over the United States and its own European Union partners, Donald Trump’s top trade adviser told the Financial Times, echoing a sentiment he gave last week on CNBC.

    Peter Navarro, the head of Trump’s new National Trade Council, told the newspaper that the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany a competitive advantage over its main partners.

    Navarro said that Germany was one of the main hurdles to a U.S.-EU trade deal and that talks over a Transatlantic Trade and Investment Partnership (TTIP) were dead, the newspaper reported.

    As previously discussed, weak income tends to drag down spending:

    As previously discussed, weak income tends to drag down spending:

    13106

    GDP, Rents, Saudis

    This line shows total GDP growth over the prior 10 years. It makes the point as to just how sudden the latest drop off was and how severe it continues to be. It’s just screaming ‘lack of aggregate demand’ begging a fiscal relaxation of maybe 5% of GDP annually for a while.

    120401
    Bottom line: It’s always an unspent income story.

    The 2008 financial crisis led to a sharp fall off in private sector deficit spending (credit expansion) that had been offsetting desires to not spend income, which I call ‘savings desires’. And it was in mid 2008, for example, that I proposed a full FICA suspension that would have allowed spending to continue, but from income rather than from debt. However, what happened instead was an attempt to restore private sector credit growth with a zero rate policy that was soon supplemented with quantitative easing, and to date has failed to restore output growth and employment.

    The Fed, however, believes the spark has been ignited and will likely move to ‘remove accommodation’ with a another small rate hike, even as all the indicators I can see continue to decelerate as previously posted and discussed.

    120402

    http://www.cnbc.com/2016/12/03/rent-prices-show-signs-of-calming-down-with-nyc-san-francisco-and-dc-sliding.html

    Frothy rental prices across the nation are showing signs of cooling, recent real estate data show, with the white hot markets of New York City and Washington D.C. offering modest relief to sticker-shocked renters.
    In its recent survey of nationwide rent conditions, data from apartment rental site Zumper said that the most expensive markets in the nation saw either flat prices or outright declines—demonstrating evidence of a potential top.

    “Among the top ten most expensive rental markets, only one city, Seattle, saw median rent prices for one bedrooms rise this past month, up just a modest 0.5 percent,” Zumper wrote. “Several of these rental markets saw falling prices, including in New York and Boston, while both D.C. and Chicago saw even sharper declines of over three percent.”

    Zumper’s National Rent Index showed that prices for a one bedroom apartment rose marginally, by 0.3 percent, across the nation. Yet the cost for a two bedroom unit fell slightly, but is still up more than 2 percent on average since 2015.

    However, the data showed more worrisome declines at the micro level of certain cities. The Big Apple’s average rent remained relatively flat around $3000 per month for a one bedroom apartment, but showed the sharpest drop of any top 10 U.S. rental market, Zumper added. One bedroom prices are down by more than 7 percent since last year, while two bedrooms have swooned by nearly 8 percent.

    Top five cities such as Boston, San Jose and Oakland—the latter two closely linked to Silicon Valley’s fortunes—also saw flat to falling prices, according to Zumper.

    In the perpetually hot San Francisco area, rents have now fallen for five consecutive months, Zumper data showed. A one bedroom now costs about $3,330 on average, and $4,500 for a two bedroom. “Overall, one bedroom rents in San Francisco end the year down nearly 5 percent from where they were twelve months ago, as Bay Area renters are beginning to see a bit of relief after years of accelerating rent prices,” Zumper’s study said.

    They set price and ‘insider trading’ is not illegal:

    Saudi Arabia discussed oil output cut with traders ahead of Opec

    Dec 4 (Financial Times) — Saudi Arabia convened private talks with the world’s largest oil traders in Vienna before Opec’s crunch meeting on whether to cut oil output, seeking views about the likely market reaction should they fail to clinch a deal, it has emerged.

    Corporate profits, Q4 GDP 3rd revision, Credit contraction and commercial property articles

    Corporate Profits
    er-3-25-1
    Highlights
    Held down by declines in the petroleum and chemical industries, corporate profits in the fourth quarter came in at $1.640 trillion, down a year-on-year 3.6 percent. Profits are after tax without inventory valuation or capital consumption adjustments.

    er-3-25-2
    Revised up, but seems the odd looking spike in ‘recreational services’ that alone added most of the upward revision is likely to reverse in Q1, subtracting that much more from current forecasts, with real disposable personal income was revised lower as well. That said, you might want to see the table of changes, and note how many relatively large changes there were, up and down, all subject to reversion and revision:

    GDP
    er-3-25-3
    Highlights
    Real GDP came in stronger than expected in the fourth quarter, at an annualized plus 1.4 percent for the third estimate vs expectations for 1.0 percent. The second estimate was also 1.0 percent with the first estimate at plus 0.7 percent.

    The third estimate got a boost from an upward revision for personal consumption expenditures which came in at a respectable 2.4 percent annualized rate for a 4 tenths increase from the prior estimate (a similar rate for the first quarter would be welcome). Residential fixed investment gave a 10.1 percent boost to the quarter, offset in part by a 2.1 percent decline on the non-residential side. Net exports cut 0.14 percent off the quarter, an improvement from minus 0.25 and 0.47 in the prior two estimates. Inventory cut 0.22 percent. Final sales came in at 1.6 percent, up 4 tenths from the initial estimate. Inflation was muted with the price index up 0.9 percent and the core up 1.3 percent.

    In any case, the overall deceleration is clear, likely to have continued into Q1, and all subject to be revised lower over the next few years:
    er-3-25-4

    er-3-25-5
    With limited govt deficit spending, and net imports rising, GDP is that much more dependent on private sector credit expansion. So this type of thing doesn’t help.

    The article is a bit long, but the take away is the ongoing energy related credit contraction that spills over to the rest of the economy. And note how regulators tightening up is part of the pro cyclical nature of banking and the private sector, as previously discussed:

    Bad Loans Hit the Oil Patch

    By Bradley Olson, Emily Glazer and Matt Jarzemsky

    March 25 (WSJ) — Bad loans in the U.S. oil patch are on pace to soon outnumber good ones, an indication of the pressure on energy companies and their lenders from the crash in prices.

    The number of energy loans labeled as “classified,” or in danger of default, is on course to extend above 50% this year at several major banks, including Wells Fargo & Co. and Comerica Inc., according to bankers and others in the industry.

    In response, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash, according to more than a dozen bankers, lawyers and others familiar with the plans.

    The pullback is curtailing the flow of money to companies struggling to survive a prolonged stretch of low prices, likely quickening the path to bankruptcy for some firms. About 175 companies are at high risk of not being able to meet financial stipulations in their loan agreements, according to Deloitte LLP.

    Since the start of last year, 51 North American oil-and-gas producers have filed for bankruptcy, cases totaling $17.4 billion in cumulative debt, according to law firm Haynes and Boone LLP. That trails the number from September 2008 to December 2009 during the global financial crisis, when there were 62 filings of oil and gas producers, but it is expected to grow.

    “This has the makings of a gigantic funding crisis” for energy companies, said William Snyder, head of Deloitte’s U.S. restructuring unit. If oil prices, which closed at $39.46 a barrel Thursday, remain at around $40 a barrel this year, “that’s fairly catastrophic.”

    While U.S. oil prices have rebounded from their February low of $26.21, they remain down about 36% from last year’s highs amid a global glut of supply.

    Since late last year, regulators have been leaning on banks to be tougher in their labeling of bad loans. That has also been a factor in driving up the rate of troubled debt, bankers said.

    Earlier this month, the Office of the Comptroller of the Currency published an updated manual for energy lending that establishes stricter guidelines for loans tied to future oil-and-gas production. One guideline banks use to classify loans as “substandard and worse” is if the creditor has debt generally more than four times greater than operating income, before depreciation and amortization expense.

    That high a ratio was rare when crude prices began to plunge in 2014 but will be the average across the sector by the end of the year, estimates energy investment bank Tudor, Pickering, Holt & Co.

    The updated manual follows a series of calls in recent weeks between the OCC and banks around energy lending guidelines, people familiar with the calls said.

    Many of the souring energy loans are revolving-credit facilities, backed by future barrels of oil and gas, which are typically used by companies for short-term needs. Usually, around a half dozen banks share the risk on the “revolvers,” reducing exposure. But as oil prices remain low there is less profitable work the energy firms can do, which makes their loans riskier for the banks who must hold more capital against them.

    Although some bank loans may be replaced by debt from hedge funds or private equity, many of those who step in to fill the void left by banks will do so seeking more control over the companies with an eye toward taking over if the companies aren’t able to turn things around. That’s different from banks, which were key enablers of drillers in recent years, and have worked to keep companies afloat and avoid foreclosure. The prices being discussed include a discount to the loan value in the range of 65 to 90 cents on the dollar, potential buyers said.

    Global oil-and-gas sector debt totaled $3 trillion in 2014, three times what it was at the end of 2006, according to the most recent figures from the Bank for International Settlements, a central-banking group based in Switzerland. The oil-price plunge has worsened the financial picture for energy borrowers and lenders around the world because it directly affects the value of oil reserves and other assets backing some of the debt.

    The situation is particularly acute in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom and are now weighed down with debt as low oil and gas prices have made their assets unprofitable to produce.

    Regional banks that lent to energy companies have the most concentrated exposure. While the biggest U.S. banks have already set aside hundreds of millions of dollars for potential losses, their lending to the sector is a smaller part of their overall business. About 1.5% to 3% of the loan portfolios of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo were outstanding to the oil-and-gas sector in January, according to Goldman Sachs Group Inc. and Evercore ISI.

    “I’m not worried about it bringing the industry down,” said Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., in an interview. “We may have a bank failure but it should be one-off.”

    However, the lending shakeout could be significant for U.S. oil-and-gas producers, which face a biannual review by banks of their reserves that is widely expected to curtail their revolving credit lines. That credit, which has been critical for capital flexibility in the downturn, may be cut 20% to 30%, analysts said.

    James J. Volker, chief executive of Whiting Petroleum Corp., one of the biggest producers in North Dakota’s Bakken formation, said at a Denver conference this month that he expected the company’s credit line to be reduced by $1 billion, or more than a third.

    Still, he said he was optimistic Whiting would weather the storm, adding that the company was “well within” the rules established by its lenders.

    “We have over 6,000 drilling locations in the Williston basin . . . so basically a large treasure trove, if you will, of locations to drill,” Mr. Volker said.

    Turning Point? U.S. Commercial-Property Sales Plunge in February

    By Peter Grant

    March 22 (WSJ) — Sales of U.S. commercial real estate plummeted in February, sending the clearest signal yet that a six-year bull market might be coming to an end.

    Just $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands last month, compared with $47.3 billion in the same month a year earlier, according to deal tracker Real Capital Analytics Inc. In January, sales were $46.2 billion.


    Prices, which had been on a steady march higher since 2009, are beginning to plateau, and have started falling in certain sectors and geographies, according to analysts and market participants. An index of hotel values compiled by real-estate tracker Green Street Advisors, for example, was 10% lower in February than it was a year earlier, due in part to reduced business and international travel.

    Overall, commercial-property values are leveling off. Green Street’s broad valuation index in February was 8.7% higher from one year earlier, but in the previous year the index rose 11%.

    “Clearly there has been a plateauing,” said Jonathan Gray, global head of real estate for Blackstone Group, the world’s largest private property owner.

    The question is whether February was a temporary blip or the beginning of a more lasting pullback. The Green Street index, which tracks higher-quality property owned by real-estate investment trusts, is 24% above its 2007 peak and 102% higher than the trough it hit in 2009.

    Mr. Gray and others emphasize that the commercial-property market is much healthier than before the 2008 crash. Rents, occupancies and other fundamental factors are improving for most property types, analysts say. New supply growth has been limited, they point out.

    “It’s too early to call the end of the cycle,” Mr. Gray said.

    Still, some are heading for the exit. For example, Radnor, Pa.-based Brandywine Realty Trust has sold $765 million worth of property this year, including Cira Square, the former U.S. Post Office Building in Philadelphia.

    Gerard Sweeney, Brandywine’s chief executive, said the real-estate investment trust is “accelerating” its property sales. “We’ve made the call that given where we are in the real-estate cycle, now is a good time for us to be harvesting value by selling,” he said.

    The market has slowed primarily because of forces at work in the global capital markets rather than problems stemming from real estate itself. These forces, which also caused global stock markets to plummet in the first two months of this year, have made debt–the lifeblood of real estate–more expensive and more difficult to obtain.

    The most dramatic sign has been the sharp decline in bonds backed by commercial mortgages. In 2015, about $100 billion of commercial mortgage-backed securities were issued. This year experts believe volume will fall to $60 billion to $75 billion.

    Banks and insurance companies are filling part of the void. But they can charge more and be more selective, making loans primarily backed by trophy and fully leased buildings in strong markets. Borrowers in the riskiest deals, such as land purchases and new construction, are having a more difficult time finding financing.

    “There are deals falling out of the system,” said Josh Zegen, managing principal of Madison Realty Capital, an investment firm with more than $1 billion of loans outstanding. “I’m able to be very choosy.”

    The real-estate debt markets began to tighten at the end of last year as concerns grew about interest rates rising and new regulations on lenders, enacted in response to the world financial downturn, began to take effect.

    Central banks eased up on their tightening of interest rates, but the real-estate debt market remained choppy at the beginning of the year as global stock and corporate-bond markets convulsed amid signs the Chinese economy was weakening.

    As yields of junk bonds soared, real estate became a less attractive investment. At the same time, the spreads between real-estate borrowing rates and Treasury bonds widened greatly.

    Today loans that would have been made with interest rates in the 4.5% to 5% range are now being made above 5%, market participants say. Borrowers who would have lent up to 75% of a property’s value have reduced their so-called loan-to-value ratios to between 65% and 70%.

    Those changes mean that many real-estate investments that would have made sense before no longer do. Higher rates and tougher standards also make it more difficult for prices to continue rising.

    “Buyers have been hearing ‘no’ from lenders for the first time in a while,” said Jim Costello, senior vice president at Real Capital Analytics.

    Market participants point out that some conditions have improved slightly since the beginning of the year. For example, the stocks of real-estate investment trusts have rallied along with the broader market.

    On Feb. 1, shares of REITs that specialize in shopping malls were trading at a 21.4% discount to the value of the property owned by those REITs, according to Green Street. That discount had declined to 19.1% as of March 15. For office property REITs, the discount declined to 21.4% from 24.5% during the same time frame.

    By contrast, in March 2014, when the bull market in commercial property was still raging, malls were trading at only a 0.3% discount to asset value while office REITs traded at a 1.29% discount, according to Green Street.

    Some buyers are looking at the market’s softening this year as a buying opportunity. Atlanta-based real-estate investment company Jamestown LP last month purchased a 49% stake in two New York office buildings–63 Madison Avenue and 200 Madison Avenue–in a deal that valued the pair at around $1.15 billion.

    Michael Phillips, Jamestown’s president, said the firm will continue to pursue properties whose incomes can be increased through higher rents or redevelopment. For example, additional floors could be added to 63 Madison Avenue, according to real-estate experts.

    “Growing net income will reduce the risk of any short-term capital markets challenge,” Mr. Phillips said.

    Brent Spot Chart, China, Atlanta Fed

    Looks a lot more negative since the October 5 Saudi price cuts than the futures markets. These price are more indicative of prices of physical oil vs financial portfolio activities:
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    Note the lack of results of ‘monetary policy’:

    China’s October factory, services surveys show economy still wobbly

    Nov 1 (Reuters) — Activity in China’s manufacturing sector unexpectedly contracted in October for a third straight month, an official survey showed on Sunday, fuelling fears the economy may still be losing momentum in the fourth quarter despite a raft of stimulus measures.

    Adding to those concerns, China’s services sector, which has been one of the few bright spots in the economy, also showed signs of cooling last month, expanding at its slowest pace in nearly seven years.

    “As deflation risks intensify, a further RRR cut before end of this year is still possible,” ANZ said, referring to reducing the amount of reserves that banks must hold in order to free up more funds for new loans.

    The official Purchasing Managers’ Index(PMI) was at 49.8 in October, the same pace as in previous month and lagging market expectations of 50.0, according to the National Bureau of Statistics(NBS). A reading below 50 points suggests an contraction.

    New export orders contracted for a 13th straight month, though the sub-index for new orders – a proxy for both domestic and foreign demand – edged up marginally to 50.3, compared with September’s 50.2.

    Faced with persistently weak demand, factory owners continued to lay off workers and at a slightly faster pace than in September.

    As for the services sector, whose growth has helped offset persistent weakness in manufacturing, the official non-manufacturing PMI fell to 53.1 in October from September’s 53.4. Though still a solid pace of expansion, it was the lowest reading since late 2008 during the global financial crisis, a similar survey showed.

    SMALL FIRMS FACING BIGGER STRESSES

    Activity in small and mid-sized firms continued to contract in October, with more small firms seeing fund shortages compared to big ones, the official survey showed. Small companies account for up to 80 percent of urban employment and 60 percent of China’s GDP.

    The government has cut interest rates six times since November and lowered the amount of cash that banks must hold as reserves four times this year. The latest cut in interest rates and banks’ reserve requirement came on Oct 23.

    Beijing has also quickened spending on infrastructure and eased curbs on the ailing property sector. The latter have helped revive weak home sales and prices but have not yet reversed a sharp decline in property investment.

    Many economists had expected economic growth would bottom out in the third quarter, with a modest improvement late this year and into early 2016 as additional stimulus measures gradually take effect.

    Starting out at 2.5% this quarter. We’ll see how it evolves as numbers are released:
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