Tag Archives: Earnings

China’s Stock Market Value Tops $10 Trillion for First Time

Bloomberg, Jun 14, 2015

The value of Chinese stocks rose above $10 trillion for the first time, the latest milestone for the nation’s world-beating rally.

Companies with a primary listing in China are valued at $10.05 trillion, an increase of $6.7 trillion in 12 months, according to data compiled by Bloomberg. The gain alone is more than the $5 trillion size of Japan’s entire stock market. The U.S. is the biggest globally, at almost $25 trillion.

No other stock market has grown as much in dollar terms over a 12-month period, as Chinese individuals piled into the nation’s equities using borrowed funds to bet gains will continue. Valuations are now the highest in five years and margin debt has climbed to a record, all while the economy is mired in its weakest expansion since 1990.

“This a reflection of the risk-taking attitude of the public,” Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong, said by phone on Sunday. “People are taking on an unreasonable amount of risk for deteriorating economic growth.”

Outside of China, investors aren’t showing the same enthusiasm toward the nation’s equities. Funds pulled a net $6.8 billion out of Chinese stock funds in the seven days through Wednesday, Barclays Plc. said in a research note, citing EPFR Global data. Dual-listed Chinese shares cost more than twice as much on average on mainland exchanges than they do in Hong Kong.

Stock Valuations

MSCI Inc.’s June 9 decision against including mainland equities in its benchmark gauge had little impact on the Shanghai Composite Index, which climbed 2.9 percent last week to its highest level since January 2008. Foreigners are limited by quotas when buying shares in Shanghai via an exchange link with Hong Kong, while similar access to Shenzhen-traded stocks will likely start this year, according to the Hong Kong bourse.

The Shanghai gauge has rallied 152 percent in the past 12 months, the most among global benchmark indexes tracked by Bloomberg, and trades at about 26 times reported earnings. Less than a year ago, the gauge was valued at about 9.6 times, the lowest since at least 1998. The Shenzhen Composite Index, tracking stocks on the smaller of China’s two exchanges, trades at 77 times profits after surging 194 percent.

Gains have been fueled by speculation the government will take more steps to boost growth. HSBC Holdings Plc predicts a 50-basis-point cut in lenders’ required reserves in the “coming weeks,” while Societe Generale AG said one more is needed before the end of June. That would be the third reduction this year.

Trading Accounts

While the latest data showed the economy stabilizing, indicators from retail sales to industrial output are still growing near the slowest pace in years and trade remains weak. Exports slumped in May and imports declined for a seventh month.

Profits in the Chinese gauge trailed analyst estimates by the most in six years in 2014 as economic growth slowed to 7.4 percent, the slowest pace in more than two decades.

Mainland investors’ fervor for stocks remains undaunted, with a record 4.4 million trading accounts opened in the final week of May, and margin debt on the Shanghai exchange rising to a record 1.44 trillion yuan ($232 billion) on June 11.


Goldman Sachs Asked Two of the World’s Best-Known Economists If U.S. Stocks Are in a Bubble

Bloomberg, Jun 1, 2015

Finance Professor Jeremy Siegel

Do economists have frenemies?

It’s Shiller vs. Siegel in the battle over equity market valuations.

Even if the S&P 500 is only up about 2 percent year-to-date, it’s still sitting at record levels. This means economists, analysts, and investors are inevitably asking one big question: Are stocks overvalued?

Over the weekend, Goldman Sachs published a massive research piece asking if equity market valuations are in “dangerous territory.” To answer the question, the bank pits Nobel laureate Robert Shiller and Wharton professor Jeremy Siegel against each other. First, though, a preface. U.S. equities look expensive by a number of measures, Goldman notes. For a start, the typical stock in the S&P 500 trades at 18.1 times forward earnings, which ranks in the 98th percentile of historical valuation since 1976. The overall index has an aggregate forward price-to-earnings multiple of 17.3, which is a rise of 64 percent since September 2011, compared with the median expansion of 48 percent during nine previous price-to-earnings expansion phases.

You can see the trend in the below chart from Goldman’s note.

This next Goldman chart shows that after each of the three prior first interest rate hikes from the Federal Reserve, price-to-earnings multiples contracted by an average of 8 percent. This is concerning, Goldman says, since earnings multiples have been a key driver of returns over the past few years. Because of this, the bank’s analysts expect dividends to be the sole contributor to the 2 percent total return they are forecasting for the S&P 500 during the next 12 months.

With those stock market metrics in mind, Goldman turns to Nobel Prize winner and Yale professor Robert Shiller to ask whether equities are overvalued. Shiller points out that one metric he looks at is sitting at levels it hasn’t seen since 2000.

One of the indicators in (my stock market confidence indices) series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000. The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to prove it’s a bubble.

Screen Shot 2015-06-01 at 7.15.26 AM

When asked how worried he is about the prospects for the market over the next six months, Shiller says that his concern has risen with the market and that there could very well be a correction in the next year, although the timing of such market events is inevitably difficult. He advised people to both save more and diversify their investments because their portfolios probably won’t do as well as they had hoped — even over the longer term.

Next, Goldman talks to Wharton professor Jeremy Siegel, who has continued to be on the bullish side with his buy and hold strategy.

Siegel says he believes stocks are only slightly above their historical valuations today and the level is “completely justified” due to low interest rates. To those that claim the stock market is in a bubble, Siegel says he is in complete disagreement. “In no way do current levels that are nowhere near those highs (of March 2000) qualify as a bubble,” he says.

Siegel adds that there isn’t much that would dissuade him from holding equities over the medium term and recommended investors allocate 50 percent of their portfolios to the U.S., 25 percent to non-U.S. developed markets, and 25 percent to emerging markets.

Of course, Shiller and Siegel are also well-known friends so there is at least one place where they are in agreement and that is the bond market. Both economists said it was fair to say bonds are overvalued and some concern is justified, although neither of them would commit to calling it a bubble. Shiller said that historically the bond market doesn’t tend to crash like the stock market. Siegel steered away from calling it a bubble due to his expectation that both short- and long-term rates will remain low.


Why Yellen Is in No Rush to Raise Rates

Bloomberg, May 27, 2015


There’s still more room for the job market to improve

The Federal Reserve’s report on the economic well-being of U.S. households is out, and it contains one very interesting finding: A decent share of Americans want to work longer hours even without a raise.

The Fed asked non-self-employed workers whether they’d prefer to work more, less, or the same amount that they now work if their hourly wage was unchanged. The goal of the question was to help gauge the amount of underemployment in the economy, according to the report.

Thirty-six percent of respondents said they’d prefer to work more hours at their current wage. Among those who work part time, the share is even higher at 49 percent. The results might help Fed Chair Janet Yellen and her colleagues connect the dots in a labor market that’s still flashing mixed signals.

Source: Federal Reserve

“When Yellen says that the unemployment rate probably does not fully capture the extent of slack in the labor market, this is exactly what she’s talking about,” Thomas Simons, a money-market economist at Jefferies LLC in New York, said in an e-mailed response to questions. “Until workers perceive that there are more opportunities available that offer higher wages, they will be content to work for the same rate rather than take a risk for more.”

The question was new to the 2014 report, Fed spokeswoman Susan Stawick said in an e-mail, so unfortunately there’s no history for it for comparison purposes.

Still, if a large enough share of people are willing to work longer hours at their current rate, that limits the pressure employers feel to raise wages. Average hourly earnings were up just 2.2 percent in the year ended April, within the same narrow range in which the gauge has fluctuated since the recovery started and a far cry from the 3 percent to 4 percent pace that’s been the historical norm.

Economists from Washington to Wall Street have been trying to put their fingers on just how much slack is left in the economy, with the unemployment rate at a seven-year low and payrolls clocking fairly steady gains. However some forms of underemployment — such as the college graduate who’s working as a barista — can be harder to calculate.

“It is that the question was asked at all that shows the bias of the Fed under Chair Yellen to find slack in the labor market,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an email response to questions. “But I would grant there is perhaps not enough upward pressure yet on wages from a tight labor market.”


The $364 Billion Real Estate Threat Inside China’s Biggest Banks

Bloomberg, May 8, 2015


The possible bust after a big boom.

Fitch Ratings has called real estate the “biggest threat” to Chinese banks as surging loans tied to properties coincide with defaults and falling sales.

Corporate loans backed by buildings have grown almost fivefold since 2008 and residential mortgages have more than tripled in the period among lenders rated by Fitch, the company said Friday. That’s seen property loans held by China’s four biggest lenders soar to a total 2.26 trillion yuan ($364 billion), according to their annual reports.

“Collateral is supposed to reduce bank risk — but the rise of property collateral in corporate loans may actually increase the chance of bank failure,” Fitch analysts Jack Yuan and Grace Wu said in the report. “This is because the widespread use of such collateral has lowered the perceived risks of lending, fueling China’s credit build-up and spreading real-estate risk to other sectors of the economy.”

Alarm bells sounded last month when Kaisa Group Holdings Ltd. became the first Chinese developer to default on offshore bonds, putting more scrutiny on a sector that made up a third of the nation’s economy in 2013, according to Gavekal Dragonomics. Property prices in 70 Chinese cities have fallen for more than a year, the worst losing streak in at least a decade, while sales have dropped for 11 of the past 24 months, Bloomberg-compiled data show.

Even Higher

Loans backed by properties now comprise 40 percent of all facilities held by Fitch-rated banks, according to the report. Total credit to real estate could be as high as 60 percent if other types of financing besides direct loans are included, Fitch said.

“The property market is usually one of the main revenue contributors to the state,” said Raymond Chia, the head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. “With the weakness in the sector, especially with excess inventory overhang as well as weak earnings by developers, economic growth will be affected.”

Industrial & Commercial Bank of China Ltd., the world’s biggest bank by assets, held 443.5 billion yuan of real estate loans, or 6.6 percent of all facilities, at the end of last year, according to its annual report. The portion for Bank of China Ltd., the nation’s second-largest, was 714.6 billion yuan of advances, or 8.4 percent of its credit book.

China Construction Bank Corp.’s property loans were reported at 520.1 billion yuan, or 5.5 percent of overall facilities. Agricultural Bank of China Ltd.’s real estate loans stood at 581.1 billion yuan, or 11.3 percent.

Be Cheerful

There’s still reasons for optimism on Chinese property, helped by the central bank cutting the lenders’ reserve requirement ratio twice this year, said Owen Gallimore, a Singapore-based credit strategist at Australia & New Zealand Banking Group Ltd.

“The recent data on property sales has shown improvement, especially for the biggest developers,” he said in an interview. “And with the PBOC aggressively easing, it’s hard to be bearish on Chinese property.”

Banks and developers will be hoping the bulls are correct. Chinese loans secured by real estate have increased 400 percent since 2008 at lenders rated by Fitch, compared with a 260 percent rise in facilities overall, according to Fitch.

“We believe a significant portion of China’s 4 trillion yuan stimulus package found its way into the real estate sector,” the analysts said in Friday’s report. “The rise of property collateral is a familiar theme in real estate booms.”


Gain in U.S. Core Consumer Prices Shows Inflation Picking Up

Bloomberg, Apr 17, 2015

The cost of living in the U.S. excluding food and fuel rose 0.2 percent in March for a third month, signaling inflation is starting to firm.

The increase in the core consumer-price index reflected broad-based gains in rents, medical care, clothing and used vehicles, a Labor Department report showed Friday in Washington. The advance matched the median forecast of economists surveyed by Bloomberg. Including the volatile costs of food and energy, the index also rose 0.2 percent.

A strengthening labor market may be giving workers the confidence to seek bigger wage concessions, which would prompt companies to raise prices for goods and services. Federal Reserve policy makers want to see inflation on a trajectory toward their 2 percent goal as they weigh the timing of their first interest rate increase since 2006.

“The inflation picture is improving, and is at least stable going forward,” said Omair Sharif, a rate sales strategist at Societe Generale in New York. For policy makers, “they’ve got to be feeling better about at least one half of their mandate at this point. We’ve got a firming up in the core rate of inflation.”

Stock-index futures held earlier losses after the report and Treasuries erased previous gains. The contract on the Standard & Poor’s 500 Index maturing in June fell 0.7 percent to 2,086.5 at 9:02 a.m. in New York. The yield on the benchmark 10-year was 1.90 percent, after being as low as 1.84 percent earlier.

Survey Results

Estimates for core consumer prices in the Bloomberg survey of 83 economists ranged from gains of 0.1 percent to 0.3 percent. On a year-over-year basis, core prices climbed 1.8 percent in March, the biggest 12-month advance since October, after rising 1.7 percent in February.

The forecast for CPI including all costs ranged from no change to a 0.5 percent increase, with the median at 0.3 percent. Consumer prices dropped 0.1 percent in the 12 months ended March after being little changed in the year through February.

Fed officials are monitoring inflation as they seek reasonable confidence in the trajectory of price growth toward their 2 percent target. The policy-setting Federal Open Market Committee was split at its meeting last month on the timing of lift off. Several participants wanted to normalize policy starting in June, while others favored later in the year, according to minutes of the March 17-18 meeting.

Payroll Report

Disappointing payrolls data were among weaker-than-forecast economic reports since then that have cast doubt on expectations that the central bank will increase borrowing costs in June, making September more likely, according to economists surveyed by Bloomberg.

The Fed’s preferred measure of price pressures, linked to consumer spending, climbed by 0.3 percent in February from a year before, the Commerce Department reported last month. It hasn’t been at the central bank’s 2 percent goal since April 2012.

The Labor Department’s report showed costs for medical-care services climbed 0.4 percent, the biggest increase since August 2013. The category designed to track the rental value of owner occupied housing increased 0.3 percent, the most since December 2013. The cost of clothing also advanced by the most in over a year, while the gain for used vehicles was the biggest since June 2011.

Energy Prices

The increase in the headline price index was spurred by energy costs, which climbed 1.1 percent in March after increasing 1 percent the month before. Food costs dropped 0.2 percent.

Low inflation has been helping boost consumer buying power. Average hourly earnings climbed 2.2 percent in the 12 months ended in March, a separate Labor Department report showed Friday.

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

The Labor Department’s gauge of wholesale prices, which includes 75 percent of all U.S. goods and services, climbed in March for the first time in five months, reflecting higher costs for fuels and motor vehicles, according to data issued Wednesday.