Morning Report: Manufacturing improves in November 1/3/17

Vital Statistics:

Last Change
S&P Futures 2250.5 15.0
Eurostoxx Index 366.1 3.0
Oil (WTI) 54.9 1.2
US dollar index 93.7 0.4
10 Year Govt Bond Yield 2.51%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 4.28

Stocks are starting the year on an up note on overseas optimism. Bonds and MBS are down.

The highlight of the week will be the jobs report on Friday and the FOMC minutes from the December meeting on Wednesday. We have no Fed-speak until Friday.

Home prices rose 7.1% YOY, according to CoreLogic. They are forecasting an increase of 4.7% for 2017, as higher rates and prices affect buyers. Home prices in 27 states are now above their pre-crisis peaks. Remember, these are nominal prices, not inflation-adjusted prices.

Delinquency rates ticked up slightly in November, from 1.21% to 1.23%. On a year-over-year basis they were down from 1.58%. The peak DQ number was in early 2010 when it hit 5.59%.

Manufacturing improved in December, according the Markit PMI Index and the ISM Manufacturing Index.  New orders and pricing drove the increase. Pricing had been an issue for years. This may simply be a blip, however it does hint at inflation beginning to stir. The current level for the PMI Manufacturing Index (54.7) historically corresponds with GDP growth of 3.6%.

Construction spending rose 0.9% in November and is up 4.1% YOY. Residential Construction rose 1% and is up 3% YOY.

Barry Ritholz has his advice for 2017. His take: the secular bond bull market is over, however inflation is the real risk to bond investors, not mark-to-market losses. He also believes that secular bull markets in stocks aren’t measured from where they bottom, but from where they break out of their bear market range. This would put the beginning of the secular bull (assuming we are in one) around early 2013, not 2009. We had a secular bear market from 1966 to 1982, a secular bull market from 1982 to 2000 and a secular bear from 2000 to 2013 (if this is in fact a change of trend).

Note that corporate tax reform is a priority for the new administration. If you cut corporate taxes, then that means earnings are increasing, and the current forward P/E ratios of the S&P 500 are overstated. Of course higher interest rates, a higher dollar, and increasing wages will offset that somewhat.

Doug Kass has his surprises for 2017. This is usually a fun read and these should be looked as improbables that the markets are assigning a too-low probability to. The punch line is that the year starts off strong, however Trump’s inexperience begins to take its toll on politics and the markets, and the Administration devolves into chaos. Stocks peak in January and end the year down 15%. The 10 year shoots through 3% before falling back to 1.5% as the Fed begins QE unlimited to hold the 10 year at a specific level. Overall, it is a pessimistic take, but remember these are all “go out on a limb” sort of predictions – they aren’t base case scenarios.

Another one of Kass’s predictions is that Trump’s security advisors finally convince him to stop Tweeting and close down his Twitter account, which causes the stock to drop 20%. Meanwhile this morning, Trump fired a shot across the bow of GM:


GM’s stock is down slightly pre-open, however tweets like this could give investors fits.

Larry Summers is skeptical that any sort of repatriation tax break for companies will find its way into re-investment. His view is that repatriated cash will be used for dividends, buybacks and M&A. Of course if companies don’t think there are opportunities for investment, they will return the money to stockholders, however that isn’t necessarily a given that there are no investment opportunities. Capital Expenditures have been moribund for a decade. You can only put that off so long. Secondly, if the psychology of CEOs changes from being worried about costs to being worried about missing out on business, then you will see more investment.

36 Responses

  1. Whatever else you can say about Rolling Stone, at least they fully retracted their story when it became clear that it was total BS.

    Unlike the Washington Post.

    “Russian government hackers do not appear to have targeted Vermont utility, say people close to investigation
    By Ellen Nakashima and Juliet Eilperin
    January 2 at 10:02 PM”

    Liked by 1 person

  2. Good news for home ownership Brent, the millennials are starting to sell out their values:

    “A millennial Democratic Socialist buys a house, reluctantly
    At first, the idea of owning property seemed creepy, against our political values and staggeringly out of reach
    Alex Gallo-Brown
    Monday, Jan 2, 2017 07:30 PM EST”

    They really can’t be caricatured.

    Liked by 1 person

    • He can’t ask for better PR if he made it up himself.

      “”This is a vote of confidence” in Trump and the economy, said Fields. We are “encouraged by pro growth policies, particularly reform around tax and regulatory policies.” ”

      Watch him continue to run campaign ads with things like this and watch the left melt down (again).

      Liked by 1 person

    • Democrats to immediately mount their horses and rush to tilt with this particular windmill.


  3. For what it’s worth, I know of no instance where Assange has lied:

    “HANNITY: Can you say to the American people, unequivocally, that you did not get this information about the DNC, John Podesta’s emails, can you tell the American people 1,000 percent that you did not get it from Russia or anybody associated with Russia?

    JULIAN ASSANGE: Yes. We can say, we have said, repeatedly that over the last two months that our source is not the Russian government and it is not a state party.”

    Of course, the Russians could have always used an intermediary. It would in fact benefit them if Assange didn’t know where the material came from or even better actively believed it came from some other source.


  4. The man is a marketing genius:

    House Republicans back off gutting ethics watchdog after backlash from Trump”

    Liked by 1 person

  5. Liked by 1 person

  6. Happy New Year, gentlemen!

    Liked by 1 person

  7. These announcements by Ford and GM make me think that the big US corporations also sense a shift in the winds and want to get ahead of it.

    Trump is doing what Obama would have been crucified for. Only Nixon could go to China..

    Liked by 1 person

    • How much of that is intentional and just Trump’s good luck, I don’t know. What I do know is that the folks that are jumping on these stories, essentially decrying them or attempting to “debunk” them are as politically naive as I can imagine it is possible to be. Some days the PlumLine could be retitled “Why Americans Having Jobs is Bad: No, Really”.

      Shaming was all the rage when they were trying to get people to stop smoking. Seems to be working even better here. What’s the problem?


    • IMO without the Trump tweets, this wouldn’t have happened, however Trump was in the right place at the right time.

      And yes, the left’s “debunking” makes them look petty and small.

      Liked by 1 person

      • “makes them look petty and small.”

        this is who they are. they are wannabe authoritarian thugs who can’t bench 50 pounds.


      • The more that they attack Trump for pressuring American companies to keep jobs in the US, no matter the quantity, the better it is for Trump.

        He keeps this up, he easily wins the “Cares about people like me” & “Whose side is he on” questions in 2020.


    • Steve Pearlstein spotted it with Carrier.

      I suspect that some CEO’s would also like to be less accountable to Wall Street and if Trump gives them cover, that’s fine with them.


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