Morning report: Earnings season off to a rough start 10/15/15

Stocks are higher this morning after some strong economic data. Bonds and MBS are down.

Initial Jobless Claims fell to 255k last week matching the low set in July. That 255k print is the lowest since 1973. Pretty amazing number given how much the population has increased.

However that is translating into weak real wage growth. Last week real average weekly earnings increased 2.2%, We definitely have a tight labor market in some areas but wage growth has been hard to come by.

Inflation at the consumer level fell 0.2% in September on a month-over-month basis and is flat year-over-year. Ex-food and energy, consumer prices rose 0.2% on a MOM basis and are up 1.9% YOY.

The Bloomberg Consumer Comfort Index edged up last week to 45.2 from 44.8.

The Philly Fed manufacturing index improved to -4.5 in October.

The Fed Beige Book survey reported that the US continued to experience modest economic expansion during the August – October period. Pretty much all districts reported growth except for Kansas City. Labor markets tightened in most districts and some are reporting shortages of skilled labor and are seeing upward wage pressure.

Earnings season is off to a rough start as Alcoa, JP Morgan, Goldman, and Netflix all missed and Wal Mart guided lower. Wal Mart was down 10% yesterday after they announced profit will fall as they retool their stores and face higher labor costs. The strong dollar is weighing on manufacturing and the volatility in the markets over the summer is hurting the banks.

Americans are more sanguine about the real estate market, according to the National Association of Realtors. House prices are up, less and less people are underwater and the economy has improved.

Corporate balance sheets are deteriorating, as many took advantage of the record low interest rates to lever up and fund buybacks. Interest coverage ratios are at the lowest since 2009, and companies are returning 35% of EBITDA back to shareholders via dividends and buybacks. Interestingly, the markets are beginning to punish companies with big buyback programs. One thing to keep in mind: when companies spend money on buybacks, they are making a statement about the opportunity set they see for expansion. The other place corporate funds are going: mergers. AB Inbev plans to issue $55 billion of debt to fund its purchase of SABMiller. Dell will issue something like $40 billion in debt to purchase EMC.

  • No further market volatility
  • Two good jobs reports
  • Solid consumer spending and further improvement in housing
  • No further deterioration in exports
  • No protracted government shutdown

27 Responses

  1. If the Republicans can’t leverage this, then they are truly incompetent politically.

    “Medicare Premiums May Soar as Social Security Payments Stay Flat

    By ROBERT PEAR
    OCT. 15, 2015”

    http://www.nytimes.com/2015/10/16/us/politics/medicare-premiums-social-security-cost-of-living.html?_r=0

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  2. Yep. democrats own the healthcare system now. They wanted it, they’ve got it.

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  3. @jnc4p: “If When the Republicans can’t don’t leverage this, then it will be because they are truly incompetent politically.”

    FTFY.

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  4. It’s like war apparently.

    “Why Solving Climate Change Will Be Like Mobilizing for War

    And even then, victory is far from guaranteed.

    Venkatesh Rao”

    http://www.theatlantic.com/science/archive/2015/10/why-only-a-technocratic-revolution-can-win-the-climate-change-war/410377/

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    • jnc:

      From the link.

      It’s clear that the market is unlikely to solve the problem of climate change on its own.

      Translation: It is clear the market’s solution is not one that I like.

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  5. @brentnyitray: Did you see Gov Kasich’s editorial editorial in the WaPo today?

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    • Kasich has that religion thing going, but I like many of his ideas.

      If devolution is the road being traveled in the UK it is not impossible that it could become a more appealing alternative, here.

      I think it would only take CA and TX – one wanting more liberal policies than DC offered and one wanting more conservative policies than DC offered – pushing for less federal regulation/intervention in their states to start the ball rolling.

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      • Mark:

        I think it would only take CA and TX – one wanting more liberal policies than DC offered and one wanting more conservative policies than DC offered – pushing for less federal regulation/intervention in their states to start the ball rolling.

        You seem to ignore how we got to this point of so much federal intervention in the first place. It seems highly unlikely to me that liberals would ever be involved in a push for less federal power, or devolution. History has taught us quite the opposite.

        The left is ideologically inclined to want to impose its vision on an ever growing number of people. Indeed, much of its project actually depends upon doing so, because it demands wealth confiscation and redistribution, and 1) as Maggie Thatcher sagely observed, you eventually run out of other people’s money to confiscate/redistribute and 2) if the victims of the confiscation/redistribution can easily escape to friendlier environs, they eventually will. So of necessity liberals inevitably demand greater and greater federal involvement, not less.

        There are very few liberal policies that I can think of that California would have been disallowed from imposing locally under traditional federalism. And now even after the destruction of federalism, for the few policies that liberals might want to impose locally but aren’t allowed to (gun control is an example), their inability is a function of a progressive understanding of the constitution, which has invented the notion of incorporation and views the commerce clause as infinitely elastic. The idea that there is some kind of equivalence between left and right, in which the right is trying to prevent liberal states from establishing liberal policies locally, seems to me to have no foundation in reality.

        Mark, if liberals had any inclination at all to want Washington to stay out of the business of the states, we wouldn’t even be having this discussion. It only comes up precisely because of liberals inclination to want to nationalize…indeed globalize…their values and policies. So, sure, I guess you are right to say that all it would take is for CA liberals and Texas conservatives to want less federal intervention, but only in the same way that it would be right to say that all it would take to achieve peace between cats and birds is for cats and birds to want to stop eating each other.

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  6. Thanks for pointing that out. Sounds good. He has a point about whatever advantage Washington had over the states in getting things done is probably irrelevant in this day and age.

    Skeptical about the balanced budget in 8 years, but it is nice to hear someone defend federalism again..

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  7. Fascinating choice of word, “devolution” as it pertains to the Federal Regulatory state.

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  8. Bah, if you support Federalism, that means you love slavery..

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  9. It only comes up precisely because of liberals inclination to want to nationalize…their values and policies.

    Given that we are, in fact, a nation I don’t see a problem with that in many cases. As I’ve said many times, I see no reason why the state you live in should determine the healthcare you can (or cannot) get.

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    • Mich:

      Given that we are, in fact, a nation I don’t see a problem with that in many cases. As I’ve said many times, I see no reason why the state you live in should determine the healthcare you can (or cannot) get.

      This simply emphasizes my point. People of the left either don’t understand or simply don’t care about federalism and its Constitutional import.

      Mark….this is what I am talking about.

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  10. Is the feeling the same about gun control?

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  11. @scottc1: “At some point the Nazi analogy ceases to be hyperbole and becomes perfectly appropriate. The climate alarmist movement is fast approaching that point.”

    I find it more similar to the Catholic church searching for and condemning heretics. Because . . . it’s a religion.

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  12. @Mich: “Given that we are, in fact, a nation I don’t see a problem with that in many cases. As I’ve said many times, I see no reason why the state you live in should determine the healthcare you can (or cannot) get.”

    From a strictly abstract, objective point of view, I see no reason why the state must be involved in healthcare at all, federal or local, in terms of payment. Of course, I don’t see why we have “insurance” that pays for routine healthcare, either.

    Continuing in the abstract, I have no qualms about the state paying for healthcare at whatever level, if such a thing produces better outcomes and is affordable. Neither of these things seems to be true or at least demonstrably true, the ultimate cost of healthcare quickly eclipsing every other budget item anytime the state begins to pay for it, either at the federal level (look at the budget) or the state level (as what happened with TennCare in Tennessee and seems to happen elsewhere as well).

    The cost certainly doesn’t seem commiserate with healthcare outcomes, I’ll say that.

    There are other reasons to at least devolve (or keep) such healthcare down to the state level, which would be the further away control is from the front line, the worse the results tend to be and the more there tends to be no feedback loop that results in actionable intelligence that action is actually taken on. The bigger the bureaucracy, the more intransigent it is, the more ineffective it is, the more expensive it is. This tends to be true no matter what the nature of the bureaucracy is. The federal government now spends more on healthcare than it does on national defense (and some small part of that budget goes to healthcare research, as well as actual healthcare), and I’d argue with similar results.

    I have no desire for us to have an Iraq/Afghanistan result in our healthcare, but I think that’s where we’re headed.

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    • KW:

      I have no qualms about the state paying for healthcare at whatever level, if such a thing produces better outcomes and is affordable.

      What defines a “better outcome”?

      Also, I’m not sure it makes much sense to use the concept “affordable” with regard to government spending. The government doesn’t earn money, it simply takes it. So on the margin everything is “affordable” because the government can always take more money, even if from future generations. (Which of course is exactly what the left wants to do.)

      For me the quality of “outcomes” is not generally a determining factor when deciding whether the government should be involved in something or not. Even if I thought some people would have “better” shoes if the government paid for them, I still would object to the government paying for people’s footwear, because that is not the purpose of having a government in the first place. Government exists to protect rights, not provide “good outcomes” for people’s problems.

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  13. Things that should be federalized: gasoline formulations. The same gasoline should be acceptable everywhere, as that means all gasoline refined can be used in any part of the US, thus limiting shortages as the supply can be dynamically allocated in cases of other disruptions (like Hurricane Katrina). But we’re not federalizing that, because . . . gasoline shortages are desirable to ween people off fossil fuels? I got no idea. But it’s actually a place where federalization makes sense, because it would limit disruptions in the fuel supply nationally, and simplify fuel refining.

    But those aren’t the kind of arguments used when deciding that the federal government knows best.

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    • KW:

      Things that should be federalized: gasoline formulations. The same gasoline should be acceptable everywhere, as that means all gasoline refined can be used in any part of the US, thus limiting shortages as the supply can be dynamically allocated in cases of other disruptions (like Hurricane Katrina).

      Whether or not a particular kind of gasoline can be used is dependent upon the machines using it, not local laws about what is allowed to be used. Ethanol requirements in Illinois are not creating “allocation” problems for New Orleans, as far as I am aware. If Illinois wants to have special gasoline requirements for gas sold in Illinois in order to subsidize its corn farmers, thus driving up the cost of gasoline for people in Illinois, why should anyone outside of Illinois care? And I especially don’t see why anyone would want to federalize those standards. It’s not as though your car will suddenly seize up once you cross the Illinois border because you happen to have filled your tank in Tennessee under different standards.

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  14. @Scottc1: “Whether or not a particular kind of gasoline can be used is dependent upon the machines using it, not local laws about what is allowed to be used.”

    Whether gas stations can sell it if it doesn’t conform to their local formulation is another matter.

    “Ethanol requirements in Illinois are not creating “allocation” problems for New Orleans”

    As I understand it, allocation problems are caused because the gas formulations have to meet regional guidelines, and since regional guidelines are different, we can’t easily reallocate gas refined for Iowa to Tennessee, or vice versa. Thus, in extreme conditions, it leads to gas shortages (not to mention, a limitation of refinery capacity, although it’s obviously not the only thing).

    ” It’s not as though your car will suddenly seize up once you cross the Illinois border because you happen to have filled your tank in Tennessee under different standards.”

    It’s not about that, it’s about saying: we can get this gasoline that doesn’t meet our regional standards (though it is perfectly fine in this other part of the country) thus cannot accept it because local bureaucracy.

    Of course, the other thing that would prevent shortages in extreme conditions is “price gouging”. I’ve discussed before how I consider objections to “price gouging” during shortages to be crazy, because nothing does more to efficiently allocate a limited resource than a rational increase in market prices, and nothing discourages casual stockpiling during shortages than making it expensive to do so.

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    • KW:

      It’s not about that, it’s about saying: we can get this gasoline that doesn’t meet our regional standards (though it is perfectly fine in this other part of the country) thus cannot accept it because local bureaucracy.

      So it is about localities creating shortages for themselves. Again, if they want to do that, why should anyone else care? If, to take up your hypothetical, a hurricane ravaged state needs gasoline, but it “can’t” take it from another area of the country because the gas doesn’t meet its own restrictive standards, that is not a national problem. That is a local problem which can be solved locally by changing or suspending the local law. I see no need for a “federal” solution, which will only encourage them to impose those restrictive standards nationally.

      I’ve discussed before how I consider objections to “price gouging” during shortages to be crazy, because nothing does more to efficiently allocate a limited resource than a rational increase in market prices, and nothing discourages casual stockpiling during shortages than making it expensive to do so.

      I absolutely agree with you on this.

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  15. @Scottc1: “What defines a “better outcome”?”

    Such things are necessarily subjective, but I would argue improved longevity, improved medical treatments, and improvement in the general health by measures such as frequency of hospitalizations, outbreaks of infectious diseases, etc.

    “So on the margin everything is “affordable” because the government can always take more money, even if from future generations. (Which of course is exactly what the left wants to do.)”

    The definition of affordable would likely be something along the lines of: if you have to borrow to do it, it is not affordable. But also, if you look at your income (both taken via taxation and borrowed domestically and internationally) and one portion of your budget is now larger than all others and is still growing, that should suggest that it is, in some significant sense, “unaffordable”.

    “Even if I thought some people would have “better” shoes if the government paid for them, I still would object to the government paying for people’s footwear, because that is not the purpose of having a government in the first place.”

    Even if we would collectively all have better shoes?

    I understand the principle, I just tend to believe that human progress is a net benefit to everybody (which, yes, is a liberal point of view, I realize) and can potentially be beneficial to a majority of people at levels well in excess of the expense, and that as more can be done it should be considered, although I would argue it should be considered much more carefully than we tend to, and expansions of government spending and regulation should not be pursued with naive optimism, but rather a hard eye to the expense versus the likely benefits and the availability of solid exit strategies, should even our conservative expectations not be met.

    Under current circumstances, btw, I see no way anyone could rationally conclude that the government paying directly for healthcare is a net positive, or solves any problems, or does much of anything to improve outcomes. I also feel because it is “healthcare” and thus now a “human right” that lots of waste and fraud and non-healthcare expenses are getting sublimated in the huge slice of the federal budget now being expended on healthcare.

    “Government exists to protect rights, not provide “good outcomes” for people’s problems.”

    Some might argue that government has a role beyond protecting rights, but in improving the societal condition, and possibly in advancing humanity (i.e., NASA). I would tend to fall into that camp, but with the idea of taking a more hard-headed approach. I am not in the “if it just saves one child’s life, spending over a quarter of the federal budget on healthcare would be worth it” camp.

    Though we both may have different ideas regarding the role of government (to some extent), I think our outcomes would often align. As I see no way in which the government paying directly for individual healthcare improves outcomes, nor do I see the ACA (or expanding the number of individuals with health insurance) as doing much (if anything) to improve societal well-being.

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    • KW:

      Even if we would collectively all have better shoes?

      Yes, not least because 1) what is or is not “better” is subjective and 2) cost/benefit trade-offs are always individual, not communal. Money spend on “better” shoes is money not spent on something else. Even if we all could somehow agree that government-paid-for shoes would be objectively better than individually-paid-for shoes, we could never agree that it is necessarily more personally beneficial to have better quality shoes than to have anything else that the money spent on those shoes might otherwise have paid for.

      Some might argue that government has a role beyond protecting rights, but in improving the societal condition, and possibly in advancing humanity (i.e., NASA).

      I would argue that protecting rights is the fundamental method by which government can improve societal conditions and advance humanity. Nothing has been more important towards those ends than the recognition of individual rights and the establishment of rights-protecting governments. And, given the nature of government as a fundamentally coercive institution, if it is not protecting rights, it is violating them.

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  16. @scottc1: “That is a local problem which can be solved locally by changing or suspending the local law. I see no need for a “federal” solution, which will only encourage them to impose those restrictive standards nationally.”

    The reason to federalize would be because the localities are too stupid or move to slowly to do it. I do not know if there are any additional limitations. But . . . it’s never going to happen, so it is an academic exercise. Just as applauding so-called “price gouging” during shortages rather than punishing people for efficiently allocating limited resources is never going to happen. People are goofy!

    🙂

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    • KW:

      The reason to federalize would be because the localities are too stupid or move to slowly to do it.

      Yes, as usual the desire to federalize something comes from a desire to save others from themselves. I reject such thinking entirely.

      Like

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