Goldman, which over the weekend turned incrementally more bullish on the economy and hiked its GDP forecast as it now expects that a covid vaccine will be discovered and widely distributed in Q1 2021, resulting in what Goldman believes will be a sharp jump in consumption in the first half of next year (whether that actually happens in a country where more than half refuse to get vaccinated is a different story completely), has done a post-mortem on Q2 earnings season and also found some more "good news."
First, after expecting a 60% plunge in EPS in Q2, Goldman's David Kostin was delighted to report that S&P 500 EPS declined by "only" 34% year/year, well above both consensus expectations for a -45% decline, and Goldman's own forecast of a nearly double drop.
Some more details on soon to be concluded Q2 earnings season: with 445 companies representing 88% of S&P 500 market cap having reported, 58% of firms beat consensus EPS expectations by more than a standard deviation of estimates. This beat rate is well above the long-term average of 47% and nearly matches the previous record high from 2009 post-Financial Crisis. However, as even Kostin concedes, this only happened because consensus bottom-up earnings estimates were drastically cut ahead of 2Q earnings season. As a result of low expectations, companies that beat EPS estimates have only outperformed the market by 36 bp on average during the day following reports, below the historical average of 110 bp.
Aggressive estimate cuts aside, Goldman notes that strict cost management helped S&P 500 margins decline by less than expected, read lower input costs as well as aggressive layoffs.
Company managements across a variety of industries highlighted this theme in their earnings transcripts, ranging from employment and wages (e.g. DAL, KSU, HST) to discretionary expenditures (e.g., ALLE, GM). Both COGS and SG&A expenses as a share of revenues came in below consensus expectations, contributing to positive margin surprises in the quarter.
Kostin then suggests that the composition of the S&P 500 helps explain why 2Q results were stronger than what we expected based on the state of the economy.The US economy contracted by 10% year/year in the second quarter, setting a post-war record. Based on the historical relationship, S&P 500 EPS would have been expected to decline by roughly 60%. However, the shock to economic growth has had a particularly pronounced impact on small firms compared with large firms. The relatively strong balance sheets and elevated profit margins of large-cap stocks helped insulate their profits in 2Q.
And here is the first big surprise: while S&P 500 EPS fell by 34%, Russell 2000 EPS declined by 97%. Looking forward, small businesses continue to face elevated risk from the pandemic. As an example. a recent survey by GS 10,000 Small Businesses survey found that 84% of PPP loan recipients expected to exhaust funding by the first week of August. Further small business weakness could threaten the recoveries of both the US labor market and large-cap revenue growth.
But while small business remain crushed, large businesses are flourishing, and nowhere is this more evident than in the following fascinating observation from Goldman:
The strength of technology broadly and specifically the market-leading FAAMG stocks has also helped S&P 500 earnings fare better than what the economic environment would normally indicate. Info Tech is the largest S&P 500 sector by earnings weight (27% in 2Q) and actually grew earnings by 1% in the quarter, led by strong results within Semiconductors. Excluding Info Tech, S&P 500 EPS fell by 41% in 2Q. The five largest stocks in the S&P 500 (FB, AMZN, AAPL, MSFT, and GOOGL, or “FAAMG”) account for 16% of S&P 500 EPS, and each of those companies beat consensus sales and EPS estimates by more than one standard deviation in the quarter.
The punchline: In aggregate, FAAMG EPS grew by 2% year/year in 2Q compared with an aggregate decline of -38% for the other 495 S&P 500 companies: "The FAAMG stocks benefit from secular trends expedited by the coronavirus, such as cloud spending and e-commerce, and continue to capture an increasing share of their respective market."
In other words, for the "Big 5" techs, the pandemic shutdowns were precisely what the doctor ordered to not only crush what's left of their small and medium enterprise competition, but to boost their own WFH-based earnings.
Earnings shocker aside, Goldman used this unexpected strength in earnings (of really just a handful of companies), to lift its 2020 S&P 500 EPS estimate from $115 to $130 (-21% growth vs. 2019), and adds that of the $15 increase, $11 reflects better 2Q earnings results.
On a quarterly basis, we now expect year/year S&P 500 EPS growth of -20% in 3Q (vs. -30% previously) and -14% in 4Q (vs. -17% previously). High-frequency activity indicators, such as consumer spending measures, have improved since April, but softened in July as virus case counts have surged. Our estimates compare with consensus forecasts of -23% and -14%. Excluding Financials and Utilities, we forecast S&P 500 full-year 2020 sales growth of -4% and net profit margins of 9.1% (-157 bp). However, most investors are looking beyond 2020 and to the outlook for earnings in 2021 and 2022.
The better-than-expected Q2 results also gave Goldman confidence in its above-consensus 2021 EPS estimate of $170, which is largely driven by the bank's above-consensus 2021 economic forecast:
Our economists’ estimates for real US GDP growth in 2020 (-5.0%) and 2021 (+5.6%) are above both Blue Chip consensus and the median from the FOMC’s Summary of Economic Projections. We forecast S&P 500 sales growth of +10% and net profit margins of 10.9% (+181 bp) in 2021. Consensus has already started to revise 2021 EPS estimates higher. At the start of earnings season, bottom-up estimates implied 2021 EPS of $162, but that has increased to $165 today.
The bank also notes that revisions have been most positive in Energy, Consumer Discretionary, Materials, and Info Tech, and "while positive consensus EPS revisions are rare, they typically occur as the economy emerges from recessions."
Finally, Kostin admits that the US election and a reversal of the 2017 corporate tax cut pose substantial downside risks to both the S&P 500 EPS and the bank's earnings forecast. Even a best case scenario, however, means that it will take nearly two years for earnings to fully recovery: "While we expect aggregate S&P 500 earnings to reach 2019 levels by the end of 2021, we do not expect every sector to recover this quickly. Based on our top-down earnings model. we forecast Info Tech (+10% 2019-2022 CAGR) and Health Care (+10%) earnings will surpass 2019 levels by the end of 2021. However, we expect a more gradual earnings growth in cyclical sectors."
The Last Time Spending On Cars Was This Weak, Interest Rates Hit 17%
The Last Time Spending On Cars Was This Weak, Interest Rates Hit 17%
While today’s disappointing Q3 GDP print was generally weak across the board, with spending on goods especially concerning, with the there was one breathtaking statistic:…
While today's disappointing Q3 GDP print was generally weak across the board, with spending on goods especially concerning, with the there was one breathtaking statistic: the nearly record plunge in spending on autos. As the chart below shows, the contribution of personal consumption of motor vehicles and parts to the overall GDP growth number was a whopping -2.4%, the second-worst print on record after Q2 1980.
We highlight the last time the US economy saw such a crash in auto spending because back then Volcker was fighting (near) hyperinflation and the Fed Funds rate was 17% (just shy of its all time high 20% in mid-1980).
Now it is 0%. Which means that the Biden administration better pray that this collapse in spending is all chip shortage/supply-shock driven because if it is due to demand weakness, with QE already raging with trillions in stimmies sloshing in the system and with rates unable to go any lower, then the US economy is truly on the verge of a historic collapse.
To be sure, it wasn't just autos where spending imploded: it was all goods that showed the weakness while spending on services provided a 3.4% bump to growth last quarter (the second-best of the past four quarters). At the same time spending on durable goods wiped off 2.7% of growth last quarter.
Providing some cover for the dismal print is that motor vehicle output indeed dropped 8.3% last quarter, the first quarterly drop since the last three months of 2020; this was largely due to the infamous chip shortage that has crippled all auto suppliers (except, remarkably, that chip hog Tesla). On that note, Ford warned yesterday that chip shortages could last into not just next year, but 2023 (just in case auto suppliers need to baffle with BS when sales stink and they need to keep blaming supply instead of lack of demand).
And while conventional wisdom continues to push the supply-side weakness as the explanation for the plunge in spending, the following comment from Paul Ashworth at Capital Economics, who echos what we said back in August, is certainly troubling: “With enhanced unemployment benefits being withdrawn through the quarter, real personal disposable income contracted by 5.6% annualised, with the saving rate dropping to 8.9%, from 10.5%. That means the saving rate has now returned to its pre-pandemic level, leaving a lot less scope for households to boost their spending, although the current rate doesn’t allow for any savings accumulated during lockdowns.”
So yes, supply chains are broken, and in many cases will take years to get fixed. But worse, at the same time we are entering a phase where consumption is falling off a cliff for two reasons: the end of extended unemployment stimmies and the end of excess savings. We discussed this in detail in "The Global Supply Shock Is About To Enter A Negative Feedback Loop With Weakening Demand" and if indeed the US economy is facing a consumption shock (to go with the supply shock) then it's time to quietly get out of Dodge.
“There’s No Simple Fix”: Maritime Analyst Breaks Down What Supply Chain Hell Means For Shipping Stocks
"There’s No Simple Fix": Maritime Analyst Breaks Down What Supply Chain Hell Means For Shipping Stocks
Submitted by Quoth the Raven at QTR’s Fringe Finance,
This is part 1 of an exclusive Fringe Finance interview with shipping analyst…
Submitted by Quoth the Raven at QTR's Fringe Finance,
This is part 1 of an exclusive Fringe Finance interview with shipping analyst (and friend of mine) J Mintzmyer, where we discuss the state of the supply chain in the country, what’s next for the shipping industry and what stocks appeal to him in the difficult-to-understand and cyclical world of shipping.
J is a renowned maritime shipping analyst and investor who directs the Value Investor's Edge ("VIE") research platform on Seeking Alpha. You can follow him on Twitter @mintzmyer. J is a frequent speaker at industry conferences, is regularly quoted in trade journals, and hosts a popular podcast featuring shipping industry executives.
J has earned a BS in Economics from the Air Force Academy, an MA in Public Policy from the University of Maryland, and is a PhD Candidate at Harvard University, where he researches global trade flows and security policy.
Q: Hi, J. Thanks so much for taking the time to do this interview with me. I want to start simply for those who aren’t experts in shipping like you are. Can you describe in layman's terms what the supply chain shortages are right now?
A: There are supply chain bottlenecks almost everywhere we look! This ranges from a shortage of available ships to log-jams at the nation's top ports, to insufficient storage and warehouse space, missing or broken truck chassis, rail line delays, and shortages of truck drivers.
Despite what politicians or other talking heads like Jamie Dimon might tell you, there's no simple fix to this situation. This has been a long-time coming, primarily due to a decade of underinvestment and delayed port upgrades, and the COVID-19 disruption was simply the straw that broke the camel's back.
Are there any shipping name stocks that have caught your attention over the last few months, since we last talked?
Ironically, despite the rates going higher and higher and our companies earning stronger cash flows than even I expected to see this year, the majority of the stocks have lagged since June.
As the supply chain crisis goes more and more mainstream, it doesn't seem like most investors or traders have figured out that this segment of the market is poised to benefit tremendously.
Folks look at a chart like Danaos Corp (DAC) and see that it has gone up 15x since last fall and they figure, "wow, I'm too late!" What they don't do is run the math and realize that the free cash flows have been surging so significantly that the enterprise values of these firms have barely moved (i.e. the stock is way up, but that's mostly just reflecting a massive debt paydown).
In many ways, a stock like DAC at $73 is cheaper today than it was last December at $20.
How does shipping and freight fit into the broken supply chain equation?
We are currently in the peak shipping season (normally August-November), which is due to pre-Holiday stocking which happens every year.
The supply-chain has already been stressed since Fall 2020, but we have went from 'moderate' stress to 'extreme' levels of disruption. This disruption has caused an increased demand for available ship routes, which have caused global freight rates to soar by more than 4-5x from last year's levels.
Liners such as Maersk, COSCO, and ZIM are scrambling to fulfill the demand and therefore are willing to pay record lease rates to the owners of containerships, so we have a situation where there are both record freight rates and record ship leasing rates.
I read that LA and other ports still aren't working 24 hours a day, like most European ports do. What are the ramifications of this? Will they eventually cave?
The shift to 24/7 operations is years overdue, especially in the peak August-November season; however, the ports simply don't have enough trained manpower and proper procedures to shift to 24/7 ops on a whim.
It's not about people 'caving' as much as it is about the need to design proper shift structures, hire enough workers, and train enough shift managers. Finally, even with the ports open 24/7, this only addresses 1 of about 20 log-jam factors.
Along those lines, ports say that even truck drivers haven't been around in numbers of days past. Is this a contributing factor?
We have a nationwide shortage of truck drivers which has been a slowly developing problem for the past 4-5 years.
This didn't happen overnight, but nobody cared about this stuff until a few months ago. This is a tough career field, but it can be financially rewarding and allow younger drivers with only a high school level education to become financially independent.
Unfortunately the benefits haven't been well explained and with all the hype around 'automated trucks' (which are likely decades, or at least many years, away from being approved), it's not surprising that there hasn't been enough new recruits over the past years.
Does it concern you that our country relies so much on imports and that we don't produce anything here?
It depends which categories you're asking about.
I would like to see more computer chips and other high-tech products manufactured in the United States, but a large portion of these imports are in goods like shoes, clothes, and toys which we simply lack the competitive advantage to produce in the United States.
It is good economic sense to trade with other nations who can produce these lower-tech items more efficiently; however, I would agree that the balance has gone too far. More investment in high-tech manufacturing would be an obvious win for our country.
In Part 2 of this interview, we discuss why J thinks the 6 year bear market in shipping stock is over and he updates us on some names he owns, including one stock that he thinks could pay a monster dividend going forward. You can read Part 2 of this interview here.
Zerohedge readers get 10% off an annual subscription to my blog by using this special link here.
T. Rowe Price Group diversifying investments through a $4.2 billion deal
According to a source familiar with the matter, T. Rowe Price Group Inc. (NASDAQ: TROW) has entered an agreement to acquire Oak Hill Advisor for around$4.2 billion as the money manager seeks to venture into the private-debt investment business. T. Rowe…
According to a source familiar with the matter, T. Rowe Price Group Inc. (NASDAQ: TROW) has entered an agreement to acquire Oak Hill Advisor for around$4.2 billion as the money manager seeks to venture into the private-debt investment business.
T. Rowe Price diversifying to unconventional investments
For decades, Oak Hill has been involved in distressed debt transactions, and last year it offered rescue finance to companies whose operations were harmed by the coronavirus outbreak.
T. Rowe Price, well renowned for its bond and stock-picking funds, is expanding into unconventional investing. Sources told The Wall Street Journal that the firm would pay cash and stock for Oak Hill, s firm that manages $53 billion. T. Rowe Price is making its first major corporate acquisition in over two decades.
Money managers have stepped in as greater lenders to fill the hole left by banks in the aftermath of the 2008 financial crisis, and private-credit investing has risen over the last decade. Private investment firms have been protected from fee wars that money managers focusing on bonds and stocks face.
Bond funds affected by low-interest rates
The low-interest rates have harmed bond fund returns, prompting investors to seek greater yields in the private debt markets. In addition, investors have poured more money into low-cost index funds as traditional managers have failed to keep up with the stock market’s surge.
To compensate for the low-cost funds that dent their bottom line, most large money managers such as Pacific Investment Management Co, JPMorgan Chase & Co., and BlackRock have acquired specialized managers to expand their offerings. Others are pursuing bolder, larger deals focusing on cost advantages and scale.
The transaction is expected to close at the end of 2021. Once the transaction has been finalized, Oak Hill will be an independent entity, with its CEO Glen August continuing to head the firm.
According to The Wall Street Journal, T. Rowe Price’s president Rob Sharps indicated in July 2021 that the company has been exploring acquisition aggressively in recent years. Sharps is expected to take over as the company’s CEO next year. Sharps said:
We do not need to be involved in any acquisition for the benefit of scale. That’s not what we are interested in. We could be interested in extending our capabilities and investment-led culture.
The post T. Rowe Price Group diversifying investments through a $4.2 billion deal appeared first on Invezz.bonds coronavirus nasdaq stocks interest rates
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