Courtesy of Lance Roberts via STA Wealth Management
Auto Sales
The media was especially excited this past week when auto sales were announced to have topped 17 million cars. This was the highest level in 10 years and a sure sign of real economic strength.
Let's look at the data.
I am setting aside for the moment that cars are being financed in progressively worse manners as subprime credit, lease terms and length of contracts continue to soar. While cars are indeed being sold, it is requiring further stretches of credit risk to accomplish that feat. Of course, we saw similar gimmicks used to seduce buyers during the last two peaks in sales as well.
It was reported that 17.7 million automobiles were sold during the month of May. That is a pretty astounding number until you realize that is an annualized number. In reality, only 1.48 million were actually sold, but still a large number. History suggests that the reported number is likely overly estimated.
To smooth out any "seasonal adjustment" bias, I have taken the non-seasonally adjusted sales and smoothed it with a 12-month average. I then overlaid the reported "seasonal adjusted" sales and calculated the differential between the two numbers.
As shown, the reports tend to substantially OVER estimate sales during growth cycles and UNDER estimate, particularly during recessions. Also, notice that in the most recent reporting period, sales spiked to levels that were historically unsustainable before being pulled back to the average.
The problem with general media commentary and analysis is the focus on a "single" data point rather than the "trend" of the series. The chart below shows us two important points.
The first is that while the "annualized" reported sales number was the highest in 10-years, the historical average of cars sold is still at levels below both previous peaks.
Secondly, and more importantly, is that both previous peaks in total auto sales were preceded by a decline in the annual percentage change of cars sold. Since 2013, the rate of change in auto sales has declined markedly even as inventories continue to build. This explains the push for dealer incentives, subprime credit loans, longer loan terms, and special lease provisions to continue to push inventory out.
Lastly, all of this data suggests that the auto sales cycle is very long in the tooth and the economy is likely weaker than the latest "annualized" run of auto sales suggests. As we saw at both previous peaks in auto sales, the push to sell autos at "any cost" has generally ended poorly.
Old People Will Drag On The Markets
One of the major issues for the stock market in the future will be the continued aging, combined with longer life expectancies, of the "baby boomer" generation. As "boomers" age and actually do exit the workforce, they will begin to extract assets from the financial markets rather than being strong contributors during their working years.
Millennials, which are a largest share of the population currently, will not be able to replace the drag of exiting baby boomers due to lower rates of employment and wage growth.
My friend Doug Short posted an excellent piece discussing the differentials between these two groups.
"[In other commentary suggesting the secular bear market is over, it inluded] some interesting demographic analysis based on the ratio of the higher earning, bigger spending age 35-49 cohort to less financially empowered age 20-34 cohort. Unfortunately, this ratio is being savagely trumped by a far more powerful demographic shift: The ratio of the elderly (65 and over) to the peak earning cohort (age 45-54). The next chart, based on Census Bureau historical data and mid-year population forecasts to 2060, illustrates this rather amazing shift."
"In the chart above, the elderly cohort (red series) is dramatically increasing in numbers. The ratio of the two, the blue line in the chart, peaked in 2007 and began its long rollover in 2008, coincident with the beginning of the last recession. We have many years to go before this ratio approximately levels out around 2030.
Even more disturbing is the elderly dependency ratio, the label given by demographers to the ratio of the 65 and older population to the productive workforce, which for developed economies is usually identified as ages 20-64. The next chart illustrates the elderly dependency ratio with Census Bureau forecasts to 2060. Note that in this chart we've followed the general practice in demographic research of multiplying the percent by 100 (e.g., the estimated mid-year 2014 elderly dependency ratio is 24.3% x 100 = 24.3)."
"As the chart painfully illustrates, the elderly dependency ratio is in the early stages of a relentless rise that doesn't hit an interim peak until around 2036, over two decades from now."
What Doug's analysis suggests is that the "structural shift" in the dynamics that drove the economy and financial markets in the 80's and 90's will not likely exist again for quite some time. Of course, if this was not the case, would we still be needing massive Central Bank interventions to support global economies and markets?
Buy Backs Gone Wild
In yesterday's missive on the "Bearish Bull Market," I touched on the surge in share buybacks which have been a primary support of stock prices in recent months. To wit:
"In other words, it is not exuberance about the strength of the economy, job security and global stability that is providing investors the confidence to plunge into markets. It is the "anxiety" of missing out on further gains. This anxiety has fueled by Central Banks which continue to create a liquidity driven environment. The excess liquidity has manifested itself in surging levels of subprime auto loans, student debt, corporate share repurchases, rising levels of margin debt and record levels of mergers and acquisitions."
Bloomberg had an interesting take on this from Goldman Sachs, which is suggesting the surge in share buybacks may not be as bullish as some tend to think.
"Goldman strategists led by David Kostin argue that the current price to earnings (P/E) expansion phase has lasted 43 months and will likely end when the Federal Reserve starts raising interest rates. As a firm, you would much rather buy back your stock when it's trading at lower P/E multiples and get a better price. But as it turns out, corporate managers (much like investors) are pretty bad at timing the stock market. Using history as a guide, the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis. "
While buybacks peaked in 2007 at 34% of cash spent, and troughed in 2009 at 13%, that level has now risen back to the second highest level on record at 28% of cash spent on repurchases.
The evidence is quite clear that companies have no intention to listen to Goldman's advice as the temptation to give investors what they seem to want is just too much. As shown in the chart below, via BlackRock, weekly announced buybacks have surged in 2015:
"In recent years, however, we have increasingly seen debt used for stock buybacks and dividends, as the chart below shows, in essence rewarding equity-holders at the (possible) expense of bondholders."
"Should this use of capital crowd out long-term capital expenditure (investment) in a firm's core business, or begin to threaten its credit quality, then it can become concerning.
And this is what we are seeing today. At an aggregate level, the percentage of U.S. corporate cash sources now used for some form of immediate shareholder benefit, such as stock buybacks or dividend payments, has recently exceeded the amount firms are spending on capex. At current interest rate levels, corporate leaders are incentivized to merely leverage firm capital stacks and avoid riskier capex that may not pay off, particularly as shareholders agitate for a return of cash."
Meh? What could possibly go wrong? [sarcasm alert]
