The Boock Report

The National Association of Business Economics released its January 2023 business conditions survey of 60 of its members taken place between January 4th thru the 11th. According to the NABE the results “indicate widespread concern about entering a recession this year. For the first time since 2020, more respondents expect falling rather than increased employment at their firms in the next three months. Fewer respondents than in recent years expect their firms’ capital spending to increase in the same period.” 

With respect to the earnings outlook, “Wages rose at a majority of respondents’ firms in the last three months of 2022 and more firms added workers than reduced headcounts. But far more firms than in the past three years reported falling profit margins.” A reduced earnings/cash flow picture helps explain reduced expectations for capital spending and hiring.

The positive was the expectations for easing inflation. “Material costs have drifted down significantly since last July, and more respondents expect falling costs in the next three months.” The rest of the earnings flood is going to be real interesting and the direction of profit margins remains a key focus. 

We saw what Discover had to say last week about its credit card exposure and the rise in expected delinquencies. On Friday, another important company in the credit lending space Ally Financial, especially in autos, reported earnings and had a conference call. The stock had a big rally on Friday as credit fears were not realized and numbers were better than expected but I don’t believe the industry is out of the woods yet as used car prices fall below the value of many auto loans and I’ll focus here just on their auto division.

In the call they said “Net charge-offs in retail auto were 97 bps for the year. In the fourth quarter, net charge-offs increased to 166 bps as we saw accelerated normalization within the quarter.” In this cycle, ‘normalization’ is now code word for higher delinquencies after a few years of very low ones. Some more, “30 day delinquencies increased due to typical seasonality and have normalized back to 2019 levels. 60 day delinquencies are elevated vs 2019, given strategic shift in collection practices, but we continue to see favorable flow to loss rates. We expect continued increases in delinquencies and are closely monitoring consumer health and the impact of persistent inflation on spending and savings trends.”

With respect to used car prices, “In 2022, we aw a 19% decline from peak values, most of which was realized during the 2nd half of the year. We are projecting a further decline of 13% from current levels, which will result in a 30% total decline from Q4 2021 to the end of 2023 consistent with previous guidance.” On the breakdown of performance, “We have continued to see strong performance from vintages originated through mid 2021. These loans have now passed their peak loss period and we expect lifetime losses to be favorable to price expectations. We are seeing elevated delinquency and loss trends in the vintages originated from late 2021 through mid-2022 consistent with what others have observed in the industry.” As we’ve been hearing from many CEO’s over the past few weeks, “Our 2023 net charge-off outlook assumes a mild recession in 2023 along with a 13% further decline in used values just discussed.” 

I highlight Ally because of its heavy auto exposure and with the rise in the cost of funding the purchase of a car along with falling used car prices, this is an important sector to watch. And, I’ll continue to focus on anything debt related with the much higher cost of capital environment we’re now in and could be for a while. 

Quietly the euro is back to $1.09 vs the US dollar for the first time since last April as more ECB members are pushing for a few more 50 bps rate hikes just as the Fed is downshifting to 25 bps. Today ECB council member Peter Kazimir said “We need to deliver two more 50 bps moves. The fall in inflation for two months in a row is positive news. But there’s no reason to slow the pace of rate hikes.” Sovereign bonds are down slightly with the 10 yr Italian yield back above 4%. 

So that tremendous US dollar rally last year ended up being just an interest rate differential thing and nothing more. This year, maybe the flaws in the US dollar will more reveal itself, that being the skyrocketing US debts and deficits. That budget deficit as % of US GDP as of December 31st by the way stood at 5.5%. That is the highest since February 2013 not including covid and that was during an economic expansion when it eventually shrunk to near 2% by 2016. 

Euro

US Budget Deficit as % of GDP