The U.S. Economy Just Keeps Disappointing, Options Market Signals 2007-Like Crash Risk, The Oil Bust Trigger 75,000 Layoffs And Counting
The U.S. economy keeps disappointing.
Last week, we reported
on how the U.S. economy was the most disappointing major economy in the
world based on the Bloomberg Economic Surprise Index, which measures
incoming economic data against economist expectations.
These measures tend to move in cycles, as they reflect both the
absolute economic data as well as the optimism or pessimism of the
forecasters, which is in itself cyclical.
For the U.S. we keep driving lower, hitting depths
not seen since the economic crisis. Again, this doesn’t mean that the
economy is anywhere near as bad as it was then. But whether it’s a
slowdown caused by the harsh winter or something else, relative to where
economists thought we would be, the U.S. is missing by a large margin.
Options Market Signals 2007-Like Crash Risk, Goldman Warns:
Although US equity prices have demonstrated a remarkable propensity
to completely disregard apparently unimportant things like macro
fundamentals, forward earnings estimates, and top-line growth
projections, we’ve long argued that eventually, reality will come
calling and the farther stretched valuations become in the meantime, the
more painful the correction will be. As we noted on Sunday, the cracks
are starting to form as DB became the first sell-side firm to predict that EPS will in fact not grow in 2015, prompting us to remark that “EPS
growth in 2015 [is] now a wash (if not negative), which implies the
only upside for the S&P 500 will once again come from substantial
multiple expansion.” Against this backdrop of declining revenues, declining earnings, and pitiable economic projections (thanks a lot Atlanta Fed Nowcast), we bring you yet another sign that a “correction” may indeed be in the cards: an epic decoupling of put prices and S&P P/E ratios.
Here’s Goldman:
Long-dated crash put protection costs on the SPX have more than
doubled over the past 9 months. We believe it is an important
development to watch as it implies investors are increasingly concerned
about downside risk even as US equities trade near all-time highs. Based
on our conversations with investors over the past few months, it
appears the increase in long-dated put prices has largely gone unnoticed
among equity and credit investors. In fact, Investment Grade credit
spreads have actually tightened slightly over the same period. The
rise in long-dated equity put prices may signal an increasing fear that
a substantial market correction is on the horizon, despite low
short-term put prices which suggest low probably of a near-term drawdown
vs history.
As you can see from the following, this is no trivial divergence — it’s actually quite the anomaly:
(Bloomberg) — Housing starts plummeted in February
by the most since 2011 as plunging temperatures and snow became the
latest hurdles for an industry struggling to recover.
Work began on 897,000 houses at an annualized rate, down 17 percent
from January and the fewest in a year, the Commerce Department reported
Tuesday in Washington. The pace was slower than the most pessimistic
projection in a Bloomberg survey of 81 economists.
“Today’s report leaves me a little concerned,” said Michelle Meyer,
deputy head of U.S. economics at Bank of America Corp. in New York.
“While the initial reaction is to dismiss much of the drop because of
the bad weather, the level of home construction continues to be
depressed.”
Permits to build single-family dwellings fell to the lowest level in
almost a year, indicating home construction is lacking traction after
contributing little to economic growth in 2014. At the same time, the
data underscore a shift toward more demand for rental properties that
make up a smaller part of the market. http://www.bloomberg.com/news/articles/2015-03-17/home-starts-plunge-on-weather-while-u-s-building-permits-rise Itemizing The Oil Bust: 75,000 Layoffs And Counting:
The American Oil Bust of 2015 is making it cheaper to fill up our
tanks at the gas station, but it is decimating our nation’s oil and gas
workforce as companies slash spending in hopes of surviving the
downturn.
I received a very thorough spreadsheet from some well placed friends
in the industry; it tabulates with more precision than I’ve seen
anywhere else which companies have cut jobs, and how many. You can find
the full list below. The conclusion: the worldwide oil and gas industry,
including oilfield services companies, parts manufacturers and steel
pipe makers, has laid off 74,000 so far. [Note: the original version of
this story said 75,000, but we’ve since revised a couple
companies’ numbers.]
Considering that about 600,000 work in the U.S. oil
and gas sector, this is a big hit. And it’s important to note that most
of these are solid middle class jobs. There’s not many industries where
a guy with little more than a high school education can make $100,000 a
year, but that’s a common pay package for drilling rig workers. I’m
told by people who operate a lot of drilling rigs that for every rig
mothballed about 40 people lose their jobs. The U.S. rig count is down
by more than 700 from this time last year.
Furthermore, the usually tight correlation between the cost
of OTM put protection and CDS spreads looks set to break down entirely
as the CDS market doesn’t seem to be pricing in the same type of
nervousness as the options market…
Furthermore, the usually tight correlation between the cost
of OTM put protection and CDS spreads looks set to break down entirely
as the CDS market doesn’t seem to be pricing in the same type of
nervousness as the options market…
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