US Corporate Income Tax Paid Down 10% YTD

US Corporate Income Tax Paid by Month:  Green indicates monthly payments up year of year (YoY).  Orange indicates payments are down YoY.

I'm starting to see bandwagon jumping analysts starting to talk about expecting another surge in stocks.  Certainly one is possible, since markets can stay irrational for very long periods.  But if this is to be based on corporate earnings there are few signs they are improving, in fact most recent indications are that corporate earnings are generally falling.  Months ago that point was discussed widely, but recently that discussion has fallen off.

The chart above shows US corporate income tax paid, this can be used as a macro measure of US corporate profits.  It clearly shows a long term downward trend in earnings with taxes paid down 10% Fiscal YTD implying a significant 10% drop in earnings YoY.  So far there are no signs this is turning around with more recent months showing a downtrend solidifying as the down months string together.  This is beginning to look a lot like the pattern we saw in late 2007/early 2008.

As in 2007/2008 manufacturing is slowing, most indicators including manufacturing employment are clearly showing this.  However, construction and construction employment is holding up well, even though growth in construction has slowed.

The strong construction sector could continue to hold up the economy and markets overall, however the trend of falling corporate earnings is a huge headwind for stocks.  Any downward blip in construction is likely to have dire consequences for the economy and markets.  To be fair construction employment continues to grow about 4% YoY, down from about 5-6% growth in 2015, so the bell on construction's demise isn't ringing yet, and interest rates are still low enough to hold off a serious downturn.  But as rates creep up, so do the risks.  Worse, stock indexes are again near highs, with overall earnings still clearly well off levels when previous highs were made, and with slower growth rates for the economy and profits, so any move up from here will be built on a weak foundation.

What is most clear is most indexes and commodity prices are now running into very heavy technical resistance with the fundamentals lacking to push them over the top.

Is Housing Bubble 2.0 Forming?

Home Price Index  Source: fhfa.gov 

HPI_PO_monthly_hist

Are we in a housing bubble again?  I say yes a small one, but we are there.  Certainly another bubble is being blown.

The first thing that triggered my interest was that the House Price Index broke the previous peak set in the summer of 2007 and has continued to make new highs every since.  Also the March 2016 increase in the index was 6.1%.  Big red flag when inflation is supposedly under 2% justifying ultra low interest rates.  I've been seeing large home price rate increases for awhile, so today I decided to dig in deeper.  Let's look a  little closer at what the chart above shows.

The blue multi-decade home price trend line created from data going back to 1980 seems to show home prices are right where they should be or only slightly high.  This is a 3.7% annual growth rate.  However we must remember we are in a deflationary period and even now supposedly inflation is only 2%.  Indeed wages certainly haven't been rising 3.7% annually and certainly not since 2008/2009.

From the red 2.5% trend line starting in 2008 we can see house prices are up over 2.5% annually since the end of 2008.  While after multiple years of declining wages and deflation elsewhere, even now wages and overall inflation is only around 2.0% annually.

If we reference current home prices to the 3% annual housing inflation rate that occurred from 1991 to 1998 and that trend line was touched during the recent housing bottom, or a housing inflation rate trend line of 2% starting from the housing bottom,which actually exceeds overall inflation over the same period it is easy to see home prices are very inflated and continue to rocket higher.  Since the data is reported with a 3 month lag I projected where the index is likely to be now and will be at the seasonal summer peak.  It appears by midsummer home prices will be 15% over the long term 3% trend line starting in 1991 that was touched  again in 2011 after the bubble popped.  I guess one can argue there is little to worry about since it is only about 4% over the much longer trend line, but remember we are in a deflationary stage, wages are terrible and few have any savings to speak of.  And we are likely nearing or at the top of the current economic cycle.  Of course the current condition is not near as bad as it was in May 2006 when home prices were over 40% above the green 3% trend line.

But what is most alarming is the current growth rate in home prices.  The orange trend lines show the current growth rate matches the excessive growth rate from 1998 to 2002, that became even more excessive until mid 2006.  This is really alarming knowing the current Fed funds rate is still below 1% and 30 year mortgage rates are under 4%.  During the creation of the last bubble mortgage rates were well above 5%, even in the 6-7% range.  Given the current home price growth rate, ultra low rates, unwillingness of the Fed to even raise rates 0.25% at a time, and projections of maybe only a total of 0.5% in rate hikes this year, it is very likely the Fed is already on the verge of losing control of housing prices.  Given the terrible wage inflation, it could be argued the Fed has already lost control.   How can anyone afford to buy housing in a 5.5% annual growth environment when wages are only rising about 2% annually and have only risen 1-1.5% annually over the last 5 year period when home prices have spiked 5.5% annually.  Wages are about 4 years behind home prices.

In conclusion I'd say Housing Bubble 2.0 is here, we are quite possibly nowhere near the top given the Fed reluctance to raise rates and central banks everywhere continuing to push QE in some form.  But more than likely in the next 2-3 years home prices will again be pulled down to the long term 3% trend line or below meaning home prices are currently over inflated by 15-25%.  How much bigger this bubble blows is yet to be determined,   But along with slowing manufacturing, falling corporate earnings, and NYSE margin debt at or near record levels, and other issues, add this to the list of indicators that things may not be as rosy as they seem, not that many really feel things are very rosy right now.

No Signs of Shale Turnaround Yet

Data Source:  RRC of Texas

EIA Monthly Crude Prod.xlsx

Some are beginning to wonder if shale producers will soon bring on more rigs and increase production with WTI near $50.  They're not.  http://griztrading.blogspot.com/2016/03/wti-above-60-will-drive-rig-increase.html  And well completion rates in Texas and North Dakota support this theory.

The first thing one would expect producers to do to take advantage of rising prices is increase the frack/well completion rate.  This would show up before an increase in drilling rigs as reported by Baker Hughes.  The data clearly shows sudden surges in monthly frack count without a surge in rigs, even a falling rig count.  Sudden spikes in completions can be seen in April and July 2015 with rig counts falling or flat.

Currently Texas oil well completions remain flat through April.   In fact from March to April the completion count fell in the face of rising prices and a typically strong summer price season just ahead.  More troubling is the outsized number of re-completions that occurred in April.  171 of 873 total completions were re-completions compared to 70 re-completions per month in other recent months.  Even 2015 averaged less than 100 re-completions per month even though total completions were at a 50% higher rate.

Canadian Oil Sands Production Slowdown due to Wildfire Still Bullish for Crude

US Supply/Demand Balance:  Calculated from (US Production + Net imports)/Petroleum Supplied psw01 2016-5-18

So many like to believe crude oil prices are completely driven by a Wall Street conspiracy to push prices up.  Of course that completely ignores a 2 year long crash.  Even now many point to a conspiracy based on high inventories.  But really matters is what direction that inventory is trending and where it is likely to trend in the near future.  Of course the here and now will outweigh the future especially given the turmoil in production due to the low prices, wars and the Canadian wild fires that have completely shutdown oil sands production twice in May.

The above chart clearly shows that we are currently in a deficit condition.  This deficit condition is likely to continue for weeks or months with high summer demand for gasoline and other fuels and low supply from Canada.  Even imports could be affected for weeks since the weak Canadian imports in May led to a surge in unloading tankers.  This means that ready supply of crude is no longer sitting offshore.  It may be back in 8-12 weeks as those tankers get reloaded.

This Deficit/Supply indicator above is confirmed by US total inventories of crude + refined products which has flat lined and may have started a decline.  See the chart below.

US Crude + Refined Inventory YoY Comparison  (psw01 2016-1-13)

My earlier blog post prior to the Fort McMurray fire built a bearish case based on strong Canadian imports.  That post included a graph showing how last summers flattening US inventory was completely created by a Canadian slowdown.  Now we have Canadian Summer Oil Slowdown 2.0.  We must wait and see when oil sands comes back before getting excited about shorting oil.
http://griztrading.blogspot.com/2016/04/canadian-imports-up-us-crude.html
And we still have declining US production and falling rig counts projected until we hit WTI $60.
http://griztrading.blogspot.com/2016/03/wti-above-60-will-drive-rig-increase.html

The moral of the story is now is not yet the time to short oil.  The situation with Canadian supply must be sorted out before we know exactly when we will fall into sustained surplus again.  Most were talking a return to balance in Q3 or Q4 before the Fort McMurray wild fire.  Now with a major unexpected slowdown in oil sands production, much support for crude is present.

Real Severity of US Federal Debt

All US Federal Debt vs Publicly Held Debt:  All US debt includes promises to pay within the US government, i.e. take from Social Security Fund to pay something else, while publicly held debt is all debt sold in the form of Treasuries.

While many downplay the severity of the US federal debt and its growth the last 7 years, usually by using a ratio comparing it to GDP, that masks a scary truth.  The amount of publicly held debt has absolutely exploded relative to all debt.  This means the real debt overhang of publicly held treasuries is at a severe record level by any and every measure.  Many point out how that the Fed holds a record amount of this debt, alluding that it isn't a big problem since the big change in the last seven years is held by the Fed and as long as they don't unwind their balance sheet it isn't problem.  However, the Fed only holds $2.5 trillion of the $8 trillion in the additional public debt issued since the end of fiscal 2008.  The chart clearly shows the scary growth in publicly held debt, and removing the $2.5T in Fed holdings does little to alter the picture.

Another way our federal government likes to mislead the public is with how the deficit is reported.  The official deficit ignores debt/interest payments and includes other accounting tricks.  Many like to show how the deficits were low and in some cases were surpluses in 1998-2001.  But what is clear is debt in one form or another actually rose every year.  Even in the years when publicly held debt was actually falling, total obligations were still rising.  Then the dot com bubble exploded, taking tax revenues along with it and all forms of debt exploded.

More recently 2014 and 2015 have been held up as great years since deficits fell to under $500 billion.  Still much higher levels than when we were fighting wars in the Middle East, but this is supposedly a win since it is much less than the $1-$2 trillion deficits in earlier years.  But what really is magical is the $439 billion deficit in 2015.   Even the all debt and publicly held debt change seems to confirm a low deficit for 2015.  But when we see the reporting for early 2016, it appears the low deficit in 2015 is an accounting trick, since the change in all debt has already exploded by over $1 trillion which is matched by a $720 billion explosion in publicly held debt.  A quick check has indicated this type of publicly held debt surge early in the year is not typical, and has not happened in any other recent year.  In other words it looks like some 2015 obligations have been pushed into 2016.

US Federal Spending Out of Control

US Federal Receipts and Outlays in $Billions
Logarithmic scale

employment tracker.xlsx

Many don't seem to realize exactly how out of control federal spending is.  Attempting to say it's not because it isn't that high relative to GDP, etc.  However, what the above chart clearly shows is that once government learns to spend at a new level, it suddenly becomes the new norm.  So the massive spending required to fight wars in Iraq and Afghanistan became a new norm far exceeding levels prior to 2000, but worse that gave way to another new norm when spending grew again after the 2008 crash.  Now that the economy is slightly better, that has given way to rising spending again as 2015 showed a rise from years of flat spending, and 2016 will exceed 2015.

So now that tax revenues are back in line with previous economic peaks in 1999/2000 and 2007, federal spending still far exceeds comparable levels during those time periods and is in fact rapidly diverging from revenues at a time when the economy looks to be peaking.

US Manufacturing is not doing well #3

Manufacturing 2016-2.xlsx

Manufacturing employment levels in 2016 remain below 2015 levels.  Though not in a dramatic fashion.   However the trend does not seem to be an optimistic one.  When you like at inventory levels and the overall projected growth rate, it is very will possible that production employment levels remain at or near April levels over the next several months which would be a significant divergence.  It seems that once growth rates go negative they stay there and tend to accelerate.  The plot shows just how dramatic the situation was between 2006 and 2007.

YoY US Construction Employment Comparison

The early 2016 weather did not skew construction employment.  The huge surge in construction hiring in late 2014 and early 2015 is making construction employment appear weak.  Looking at the above graph you can see that in late 2014 and early 2015 the gap over the previous year became quite wide.  Much wider than the 2012 to 2013 gap.  Now construction employment growth rates are slowing relative to 2015.

In fact for the February to April period construction employment grew at 2.8%, inline with the early 2015 growth rate.  What the data does show is a weak growth rate in March 2015 when employment only grew at a 1.5/% annual rate for the month compared to average 2% annual growth rate for March in the last 4 years.  The March dip is visually noticeable in the 2015 curve vs all other years.

Looks like the BLS is cooking the monthly job gains numbers again.

Total non farm YoY employment comparison  Source:   BLS

Total non farm 2016-5.xlsx

Ever wonder why the markets whipsaw and in the end don't react the way you would expect based on the monthly jobs report.  Maybe it is because the BLS seasonally adjusted employment gains number is being cooked.

If you look at the chart above it is easy to see that the 2016 employment trend is very comparable to 2015.  But it is impossible to tell whether 160k to 250k jobs were added to the 143 million total just by looking.

When April 2015 is compared to April 2016 you find there or 2.658 million more people employed.  This comes out to a monthly rate of 221.5k jobs added.  But the BLS said only 160k jobs were added.  The table below shows the difference between the BLS seasonal employment adjustment and my own using a simply YoY comparison.  I've done the comparison using averaging together several years of employment data or several months and typically come up with the same discrepancy quite frequently.  In fact if we simply average the last 4 months of employment and compare it to the same period in 2015 a 2.684 million jobs increase is found or a monthly rate of 224k, very comparable to the earlier seasonal adjustment method.

Seasonally adjusted job gains in 1000s
	BLS	Griz	Difference
January	168	220	52
February	233	221	-12
March	208	232	24
April	160	221	61
Total	769	894	125

So it looks like in the last four months the BLS has built up a 125k job cushion that can and will be added in a coming month.  Will it be added in a month with a big real drop making it look better than it really is?  This has happened before.  It sure is convenient that now that the Fed is getting serious about interest rate hikes employment growth has suddenly fallen off the cliff.  In fact in October through December of 2015 the BLS was reporting 295k, 280k and 270k jobs added in each month respectively.  Pretty dramatic shift from averaging 280k new jobs/month at the end of the year to only 190k/month so far in 2016.  The Griz method for seasonally adjusting the data only showed a 230k rate at the end of the year.

Job creation is certainly slowing, it is down to about a 1.9% annual rate or 220k/month growth rate from 2.3% annually or about 260k/month in late 2014 and early 2015.  But the extreme gyrations BLS has been reporting in monthly since early 2015 seem strangely timed.  Just when it looks like markets are ready to tank the monthly report suddenly gets better, but as soon as the Fed wants to raise rates job gains tank.

But it is my belief many professional big money traders actually load their models with the raw data and do their own adjusting as I do.  This drives the markets oftentimes in opposite directions than most expect.  In fact today treasury rates stayed solid as did stocks in the face of a "terrible" jobs report, as the media immediately reports a June rate hike is off the table.  Don't be surprised to see the dollar strengthen and rates rise much faster than most will expect in the coming weeks/months.  The underlying data is telling a different story than you are hearing in the press.

Gilead Sciences Strength is Underestimated

Most seem to be valuing Gilead Sciences (GILD) stock solely based on fears over competition over its Hepatitis C drugs Harvoni and Sovaldi.  Gilead has been forced to cut prices and therefore profits to compete with the new drug offers which are generally inferior to Harvoni.  In fact after a year it has been proven that Abbvie has not been able to take significant market share.  Now that Merck has entered the market it looks like they are hurting Abbvie, but the future is likely to show Gilead will remain largely untouched in terms of total scrips, even though prices will be lower.

Merck will soon learn the same lesson that Abbvie learned, that cutting prices is futile.  Therefore, they won't cut prices further.  They need to pay back R&D somehow, while Gilead has already made billions, so can go as low or lower than any competition.  Therefore after taking what appears to be a 15% price cut this quarter, it is likely further cuts are not in store so Harvoni/Sovaldi revenue should grow some from here.

But more importantly most are ignoring the other half of Gilead revenue, which has been growing at almost 38%/year.  Not to mention Gilead's large cash pile and great cash flow that allows them to make any acquisition they'd like.  But let's focus on the details of the non Harvoni/Sovaldi revenue. 

The data clearly shows non Harvoni/Sovaldi sales growing at a rapid pace.  But more importantly for the near future there is a clear pattern of weak Q1 sales growth and even QoQ contraction in Q1 2015 and 2016.  After the latest report this contraction has been interpreted as the beginning of the end caused by lower Harvoni/Sovaldi sales prices.  But what is coming in the next quarters is huge sales gains that appear to be completely unexpected by most analysts who seem to be projecting declining sales forever.

It appears to me the recent dip to about $90 has created a strong buy opportunity.  GILD is carrying a PE of about 7, pays a 2.4% dividend that has been raised twice since the dividend was initiated just over a year ago.  While the company has also approved buying back another $12B in stock or about 10% of float at current prices.

With the right acquisition this stock will explode as bringing the multiple up to sector norms would double the price.  I'm also going to go out on a limb and predict that Gilead blows out revenue and earnings the remainder of the year.  Gilead projects $30-$31B in sales, and many analysts have lowered there estimates.  It looks to me like Gilead will be in the $33-$35B range.

Major US Refinery Slowdown on the Way?

US refinery margins have been hit hard by a distillate glut.  Their stock prices are hurting and many are beating them up over their high inventories of both refined products and crude.  At the same time crude prices are surging.  It looks like it is time for them to slowdown and at least get crude prices to fall back so they can run with crude in the $30s or at least low $40s.

Source:  EIA Weekly Report

psw01 2016-4-27

The last few weeks of data seem to indicate refinery run rates may be on a sustained downtrend.  With very high inventories of gasoline and distillates and rising crude prices a slowdown seems logical.  Also gasoline demand and therefore refinery run rates were strangely high this spring.  Well strange only in year over year terms, but when one considers how cheap gasoline and distillates were this late winter and early spring, it makes sense that many were likely stocking up.

This implies that refiners could move towards 2013 run rates for May and possibly into June or even into July just depending how much gasoline has been spread around and is still in storage.  Certainly distillate inventories are 40-50 million barrels over seasonal norms with a build season coming up where stocks normally build 15-20 million barrels from now until September.  Gasoline inventory is 30 million barrels over seasonal norms.  This seems to imply that refiners have incentive to work off 70-80 million barrels of gasoline and distillate inventory.  If refiners slowed down another 1 million barrels a day inline with seasonal 2013 run rates, it would take 70 to 90 days to work off that inventory provided demand remains unchanged.  This is not unrealistic even through the summer if gasoline has been hoarded while it was cheap, meaning demand will be much lower than expected.

This also implies crude inventories could build at a rate of 1 million barrels per day as well over the same time period.  Certainly it appears that we could be in for more heavy crude builds through May and into June.  I'm expecting a 5-10 million barrel build in crude inventory this week and likely next week as well.

psw01 2016-4-27

psw01 2016-1-13