Stocks on Tuesday gave up most all of their gains from Monday as oil fell, bank stocks got hammered, and markets saw much of the same action that defined price movements earlier this come back.
First, the scoreboard:
- Dow: 16,448, -172, (-1%)
- S&P 500: 1,923, -22, (-1.1%)
- Nasadaq: 4,507, -63, (-1.4%)
- WTI crude oil: $31.90, -4.4%
It was a busy morning for the US economy as we got housing data, consumer confidence data, and macro commentary from big housing-related companies this morning.
Overall, it was another day that pointed to steady but not stellar growth for the US economy, though we did get some worrying signals that consumers finally began to notice — and react to — recent stock market volatility.
The February reading on consumer confidence from The Conference Board declined to 92.2 from January’s revised 97.8 number, with the report indicating that the short-term outlook for consumers was impacted by the stock market. “Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term,” said Lynn Franco, director of economic indicators at The Conference Board.
And this jives with comments we got from Toll Brothers CEO Douglas Yearly who noted that in February the company’s sales were flat, which he said, “is understandable given the recent stock market decline and global economic uncertainty.”
Elsewhere in Toll Brothers’ report, though, we got signs that the US labour market continues to be putting pressure on employers with Toll’s CFO Martin Connor saying, “We are experiencing modest lengthening of our production timelines associated with increasing complexity in our homes and a tighter labour market.”
Toll Brothers shares gained almost 3% on Tuesday.
And because it wasn’t a busy enough day for the US housing market, existing home sales in January rose 0.4%, besting expectations for a 2.5% decline and bringing the pace of sales to another post-crisis high. Following the report, Ian Shepherdson at Pantheon Macro said, “In one line: Sales need to correct downwards, temporarily but inventory tight and prices soaring.”
Case-Shiller home prices, meanwhile, showed prices rose 5.7% over last year in December.
Inventory tight, prices soaring. That’s the whole story for US housing in 2016.
If you want a company to give you a positive sign on the US economy, look no further than home improvement giant Home Depot.
In the fourth quarter, Home Depot reported same-store sales that rose 8.9% with the company saying it expects sales to increase 5.1%-6% in 2016. Analysts had expected sales would rise about 3.7%-4.5% this year.
Additionally, Home Depot increased its dividend, announced a $5 billion buyback, and shares of the company rose about 1.6% on Tuesday, bringing the stocks’ year-to-date gain to 11%. Simply put, there are few simpler ways to play a strong US consumer and tight US housing market than Home Depot.
When asked on its conference call about impacts from the economy or the stock market, Home Depot CFO Carol Tome said simply, “we’re not seeing that. Our business was good and continues to be good.”
And if you want a bullish picture on the US economy in one paragraph from a corporate executive, here’s Home Depot executive VP of merchandising Edward Decker:
In the fourth quarter, total comp transactions grew by 5%. And for the year, we set a new transaction record with over 1.5 billion total transactions. In the quarter, comp ticket increased 2%. Our comp ticket increase reflects about 32 basis points of contraction due to commodity price deflation in products such as lumber and copper. Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were up 3.8% for the fourth quarter. Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 11.9% in the fourth quarter. The drivers behind the increase in big-ticket purchases were appliances, roofing and special-order kitchens. Big-ticket was also driven by several installation service categories such as roofing, sheds and countertops.
Look, we get it: you’re not that interested in a vote happening in June about whether the UK will leave or remain in the European Union.
And while it doesn’t seem that likely that the UK will vote to leave the EU, it is not something that should completely overlooked by US investors.
For one thing, there is a whole lot of US corporate profitability that comes from the UK and were its business ties with the EU to soften, bottom lines in the US could take a hit. “[G]iven the prominence of the U.K. in driving U.S. global profits, any talk or action that leads to the severing of U.K.-EU ties carries significant risks to the bottom line of corporate America,” Joseph Quinlan, head chief market strategist at Bank of America Merrill Lynch’s US Trust division, said in a note Tuesday.
“A Brexit would squeeze the affiliate earnings of numerous U.S. multinationals strategically ensconced in the United Kingdom, and force many companies to rethink their overall EU strategies.”
But perhaps more compelling is the precedent angle on what a Brexit would mean. Namely: it would allow — in theory — all other EU members who are unhappy about their standing in the Union to move to leave unless they get what they want.
We’d argue that the most important thing is that the UK does not want to be subject to the EU treaty’s language that requires all members to work towards becoming an ever-closer union. And so the deal British prime minister David Cameron brokered with EU leaders last week allows Britain, basically, to stand alone but still inside the “circle of trust,” as it were.
And as Barclays’ Marvin Barth wrote in a note last month ahead of this officially-announced referendum set for June 23: “In our view, markets are overlooking two crucial aspects of the UK referendum on EU membership. First, the referendum is generally seen as a ‘UK’ or ‘GBP’ issue, when it is better seen as a European issue. Second, it has largely been viewed as an economic issue, but should best be analysed through the lens of political economy.”
Hashtag Liquidity Squeeze
The firm writes:
The new SEC proposal would substantially expand requirements with respect to liquidity management practices for fund managers. The proposal is comprehensive and would affect many aspects of funds’ operations. However, we believe the most important changes are along four dimensions, discussed in more detail below.
- Funds would be required to bucket holdings into specific categories based on estimated liquidity.
- Each fund would need to determine a minimum level of “three-day liquid assets” (ie, those that can be converted into cash within three days) that it is required to maintain, based on its experience with inflows and outflows.
- Funds would be permitted to use “swing pricing” to the extent deemed necessary to impose appropriate costs on buyers/sellers in the event of significant inflows/outflows.
- Finally, each fund would be required to disclose its approach to measuring and managing liquidity risk (ie, the decisions made pursuant to 1-3 above).
And look, I think the whole reason we’re still talking about bond market liquidity is because you don’t know if you’ve got a liquid market until you really need to find out. In a way, bond market liquidity always was destined to be the perfect talking point because someone, somewhere, is always going to have trouble finding a market for some bond.
Maybe it’s a high-grade corporate bond that — shockingly — can’t find a bid at a reasonable price. Or maybe it’s junior convertible debt from a shale oil company that never really had meaningful production and needed whatever production it did get to sell at $80/barrel in order to help fund (along with your loan!) exploration for future projects.
Either way. The thing about liquidity, again, is that it comes and goes, it is there and then it isn’t, and you can always argue about whether a market is or is not liquid.
So the SEC’s idea asking funds to put assets in liquidity “buckets” is sensible. Except asking funds to gauge the liquidity of some assets will be an exercise that may, in fact, get the fund into even more trouble should a moment of deep liquidity needs arise because certain assumptions made in good times will not work in bad times. Though this is sort of the whole point of risk management.
I think it is fair to credit Howard Marks’ March 2015 memo with really setting off this conversation.
And for that, we thank him.
In the run-up to Saturday’s expected release of Warren Buffett’s 2015 annual letter to shareholders, we include his observations last year on American business and why he bought BNSF back in 2009.
(Disclosure: I am a shareholder.)
Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United States.”
That kind of commitment was nothing new for us. We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too: Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing.
Indeed, who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).
The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.
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