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If this email is reaching you, it is because you are still subscribing to I have stopped posting on NTU two weeks ago and I am now publishing on BEARNOBULL.COM. Here’s what you have missed if you did not visit BEARNOBULL.COM lately:

On top of the regular daily NEW$ & VIEW$. This morning’s N&V had a lengthy piece on employment trends.

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NEW$ & VIEW$ (28 FEBRUARY 2014)

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Yellen Sticks to Plan Amid Doubts Federal Reserve head Janet Yellen said bad weather might explain a recent patch of soft economic data, but she isn’t sure—so the Fed’s plan to reduce bond buying will likely continue unless conditions worsen.

“Asset purchases are not on a preset course, so if there’s a significant change in the outlook, certainly we would be open to reconsidering, but I wouldn’t want to jump to conclusions here,” Ms. Yellen said. Earlier in the hearing she said she expected the bond program to be ended by the fall.

Executives Face Weather-Obscured Outlook Amid ‘Winter of a Generation’

Bloomberg economist Richard Yamarone summarizes recent corporate conference calls, also blurred by the weather:

Companies continue to describe underlying macroeconomic conditions as tough and challenging, with most complaining about headwinds of higher transportation costs, currency issues and, where applicable, higher food costs. Colder-than-normal weather is obscuring the outlook because many companies say they aren’t sure the consumer will be willing to return once the storms and seemingly never ending snow piles end.

The CEO Economic Comments Sentiment Index for the week ended Feb. 28 was 49.77, higher than the Feb. 21 reading of 49.74. Sub- 50 readings suggest contractionary conditions, while above-50 is indicative of expansion.

Student NINJAs Pose Growing Threat to Frail U.S.

Commentary by Richard Yamarone, Bloomberg Economist:

Not to be confused with trainee covert agents in feudal Japan, a different type of student ninja is stalking the U.S. economy. So-called NINJA loans extended to
individuals paying for their education with “No Income, No Jobs or Assets” have the potential to be the next subprime crisis. And it doesn’t take much to push this frail
economy underwater. (…)

Today NINJA loans are helping to boost total outstanding debt levels. U.S. household debt increased by $241 billion to $11.52 trillion in the final quarter of 2013, up 2.1 percent from the previous quarter. Education lending rose approximately $53 billion in the quarter. Total household debt increased $180 billion from the fourth quarter of 2012 — student loans accounting for $114 billion of that gain.

Loans to students are essentially the only extension of credit one can get today without a job income, or asset. This form of lending is more disturbing than lending
to would-be homeowners. If a student walks away from a loan, what does the bank get? Because job prospects for newly minted graduates remain bleak — the unemployment rate for those aged 20 to 24 is 11.9 percent — the likelihood of default is elevated. (…)

image image

Yuan’s Slide Gathers Pace The yuan fell 0.9% against the U.S. dollar to a 10-month low, its biggest slide since China ended a fixed peg to the greenback in 2005.
Renminbi suffers fresh sell-off Heaviest weekly fall in years as traders report heavy PBoC activity
German Retail Sales Climb

Retail sales in January jumped 2.5% from the previous month in adjusted terms, more than erasing December’s upwardly revised 2.1% dip, initial data showed. Sales reached a high not seen since February 2007, and were far better than the 1.0% reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales increased a more modest 0.9%, the data showed, helping to offset a 1.5% decline in December, which was also upwardly revised.


NEW$ & VIEW$ (27 FEBRUARY 2014)

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U.S. New Home Sales Surge in January, Led by Northeast

New single-family home sales rose 9.6% to a seasonally adjusted annual rate of 468,000 from a month earlier, reaching their highest level since July 2008, the Commerce Department said Wednesday. From a year ago, new-home sales were up 2.2%.

Last month’s increase was boosted by sales in the Northeast, where activity expanded by 73.7% and reversed the prior month’s declines. The South and West also saw gains, but new home sales in the Midwest fell.

December sales were revised to 427,000 from 414,000. (Charts from Haver Analytics)

 large image large image

Winter woes?

U.S. Durable Orders Fall in January

Click to ViewOrders for durable goods—products from kitchen appliances to bulldozers designed to last three years or more—fell a seasonally adjusted 1% from December, the Commerce Department said Thursday. That marked the second consecutive drop after overall orders fell 5.3% in December.

But excluding the volatile transportation category, orders rose 1.1% last month, the strongest rise since May. Defense spending on capital goods was up sharply. Orders for computers and electronics climbed, but demand for machinery, primary metals, and autos fell. (…)

Pointing up A closely watched measure of business spending—orders for nondefense capital goods excluding aircraft—climbed 1.7% in January, reversing December’s 1.8% fall. Orders in that category have climbed for two of the last three months, though from a year earlier they were down 1.7% in January.

Going sideways lately (Chart from Doug Short).

U.S. Jobless Claims Rose by 14,000 Last Week

The four-week moving average of claims, considered a more-reliable indicator because it smoothes out week-to-week gyrations, held steady last week at 338,250.


Very interesting post from Ed Yardeni: Consumers Seeing More Jobs

The present situation component of the Consumer Confidence Index (CCI) rose to a new cyclical high this month, exceeding the expectations component for the first time during the current economic expansion. Buoying consumers’ optimism about the here-and-now is their assessment that the labor market is improving. In some ways, the CCI survey may provide a clearer picture of this market than the cacophony of data provided each month by the Bureau of Labor Statistics in its employment report. The picture continues to get brighter:

(1) Jobs are more plentiful. I am especially fond of the survey’s series tracking the responses to questions about whether jobs are plentiful or hard to get. The former jumped to 13.9% this month from 12.5% in January. That may not seem like much, but it is the best reading since June 2008. The percentage of respondents agreeing that jobs are hard to get fell to 32.5%, the lowest since September 2008.

(2) More jobs are boosting confidence. I found that the CCI’s present situation component is highly correlated with the difference between the jobs-plentiful and the jobs-hard-to-get series. In other words, jobs drive consumers’ confidence about their current well-being.

(3) Survey response is confirming falling jobless rate. There is even a better correlation between the official unemployment rate and the jobs-hard-to-get series. We all know that the unemployment rate has dropped during the current economic expansion, mostly because of a sharp decline in the labor force participation rate. If people are dropping out because they are discouraged by the lack of jobs, then the jobs-hard-to-get series should not be falling in lock-step with the unemployment rate. But it is suggesting that labor market conditions really are improving and that other factors are behind the falling participation rate.

Hopeful Signs on New-Home Supply Crunch Lending for land development and construction is turning up after hitting a 14-year low early last year, a sign that the supply crunch for new homes could ease in coming months.

Data released Wednesday by the Federal Deposit Insurance Corp. show that the outstanding balance on loans for land acquisition, development and construction rose in the fourth quarter to $209.9 billion, compared with $206 billion in the third quarter. While that’s a relatively small gain, economists note that if the overall balance is growing it means that originations of new loans are likely rising even faster. It was the third consecutive quarter of growth.

An increase in lending would spur additional home construction and possibly put downward pressure on prices, which have been rising rapidly over the past two years and weighing on the housing recovery. Last year, the average price of a new U.S. home was $322,100, up 10.2% from 2012 and the highest annual figure since the Census Bureau began tracking new-home prices in 1963.

While the rising prices are great news for sellers, the tight supply of homes has priced many would-be buyers out of the market. (…)

Even before the FDIC issued its latest data, companies that build homes had noted a change in sentiment from lenders.

“I hadn’t gotten calls for years from banks, but now I get calls from them all the time,” said C. Pat DiFonzo, president and owner of housing developer Zena Land Development LP in Grapevine, Texas. “They’re all chasing deals now.”

Other figures underscore the rebound in lending for residential projects.

According to the FDIC, outstanding loans solely for construction of homes—excluding development, land acquisition and commercial projects—increased to $43.7 billion in the fourth quarter, up from a recent low of $40.7 billion in last year’s first quarter. The FDIC has tracked that measure only since 2007. (…)

Bankers say they are opening their doors a little wider to construction in part because borrowing by companies in other sectors has been weak. “The banks, especially the community and midsize banks here in Atlanta, can’t get all of their loan growth,” said Stephen Palmer, manager and chief financial officer of Home South Communities, a closely held builder in Atlanta. “I have today triple the commitments that I need for construction financing.”

While lenders aren’t keeping their doors tight, they aren’t wide open either. Particularly difficult to obtain are loans for land acquisition and development, which entails installing infrastructure such as roads and utilities—endeavors that lenders consider more risky than home construction. Smaller, cash-strapped builders still face a challenge in landing loans. (…)

France unemployment hits record Number of jobseekers increases 0.3% over December

The latest figure, published on Wednesday by the labour ministry, brings the total number of unemployed to a record 3.32m – about 11 per cent of the workforce. The total number of those seeking a full-time job, including those in part-time work, reached 4.92m.

One bright spot in the figures was that January’s rise was slower than the 10,200 of newly registered unemployed reported in December and the 17,800 increase in November. On Wednesday, Michel Sapin, the labour minister, seized on that fact as a sign of changing fortunes.

China Engineered Decline of Yuan China’s central bank engineered the recent decline in the country’s currency as part of its efforts to prepare the tightly tethered yuan for wider trading. The move is the clearest sign yet that leaders are pressing ahead on financial reforms.

(…) In the past week, the People’s Bank of China has been guiding the yuan lower against the dollar by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars, according to traders. That has helped further push up the price of the dollar against the yuan.

“The PBOC is testing the market as it prepares to widen the yuan’s trading band,” said one of the people familiar with the bank’s thinking. (…)

Surging inflows of capital have been complicating Beijing’s efforts to manage the economy, contributing to soaring property prices and injecting excess cash into the financial system. The central bank and commercial banks bought nearly $45 billion worth of foreign exchange in December, the fifth consecutive month of net purchases. A weaker yuan could also help exporters, whose goods would be cheaper in the U.S. and other foreign markets. (…)

The PBOC decided to tamp down expectations for one-way appreciation in the yuan and curb speculative trading during a two-day currency-policy meeting that ended Feb. 18, the people said.

At the meeting, a deputy governor, Hu Xiaolian, called for greater efforts to prevent risks from cross-border capital flows and joined other officials in expressing concern about “hot money” inflows, according to a PBOC statement issued after the meeting. The PBOC also decided to expand the yuan’s trading band this year in an “orderly” manner, the statement said, as it moves toward making the yuan a freer currency.

On Feb. 19, the day after the meeting, the yuan started its recent slide, falling to the lowest level in almost two months. (…)

PBOC officials have said in the past that the yuan is nearing its fair-market value, or “equilibrium level,” meaning the chances of any drastic movements in the currency are limited. By making the currency more of a two-way bet, officials hope to relieve the pressure for it to rise and ease the way to widen the trading band, according to the people with knowledge of the thinking. (…)

Morgan Stanley Warns Of “Real Pain” If Chinese Currency Keeps Devaluing

The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns “real pain will come if CNY stays above these levels,” leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy. (…)

Brazil’s Economy Picks Up

(…) The economy grew by 0.7% compared with the third quarter, and by 1.9% compared with the fourth quarter of 2012, according to the Brazilian Institute of Geography and Statistics, or IBGE.

For the full year, Latin America’s largest economy expanded 2.3%. According to the central bank’s latest weekly survey, growth in 2014 is expected to be 1.67%, down from a forecast of 1.79% the week before.

Industry contracted 0.2% compared with the third quarter, while agriculture was stable and services advanced 0.7%, according to IBGE.

Consumption, one of the major drivers of the economy in recent years, picked up pace in the fourth quarter. Household consumption expanded by 0.7% in the fourth quarter, while government consumption rose 0.8%.

Investment in 2013 totaled 18.4% of gross domestic product, up slightly from 18.2% in 2012 but still far below the level that economists believe is necessary to unlock faster economic growth. The country’s savings rate was equivalent to 13.9% in 2013.


“We’re definitely in a bull market and a bull psychology,” Terry Morris, a senior equity manager at National Penn Investors Trust Co., said. “Investors are inclined to buy and you don’t want to get in the way.”

“It’s very hard to be a bear on U.S. equities,” said Michael Purves, chief global strategist at Weeden & Co. His year-end target for the S&P 500 is 2,100. “U.S.
equities are the most logical place to go,” he said. “I’m a bull on equity prices but it’s going to be a rockier ride in 2014 than it was in 2013.” (BloombergBriefs)


NEW$ & VIEW$ (26 FEBRUARY 2014)

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Commenting on recent weekly chain store sales:

“Temperatures turned warmer from coast to coast over the past week, but sales remained subdued as consumers enjoyed outside activities rather than shopping,” said Michael Niemira, ICSC vice president of research and chief economist.

Home Depot: US comps were +4.9% with total comp growth driven ~4% by traffic and ~1% ticket, showing that HD drove traffic well despite the poor weather.

Hot Home Prices Due to Cool

U.S. prices rose 11.3% in the fourth quarter compared with a year earlier, according to the Standard & Poor’s/Case-Shiller price index. The Case-Shiller index that measures home prices in 20 major metro areas rose 13.4% during the same span. A separate index, released Tuesday by the Federal Housing Finance Agency, said prices had gone up 7.7%, also to an eight-year high. (…)

Prices rebounded strongly during the past two years as low prices and rates attracted brisk demand, first from investors and later from traditional buyers who competed over a shrinking supply. Higher prices have led investors to slow their purchases in more markets, while rising rates have dented affordability for owners who need a mortgage, especially first-time buyers. (…)

Prices decreased 0.1% in December from November in the 20-city index, the second straight monthly decline. Sales tend to slow in the winter, which can lead to softer prices, but the monthly declines during the fourth quarter were still the smallest for that period in eight years. (…)

Home builders during the past year have boosted profits by building more-expensive homes. Luxury builder Toll Brothers Inc. on Tuesday reported a 21% increase in its average sale price during the quarter that ended in January versus the previous-year period. But those price gains appear to be curbing sales volumes. Toll said new contracts for homes in the quarter fell 6% from a year earlier and it cut its forecast for total closings for its 2014 fiscal year by 4%.(…)

National builder Hovnanian Enterprises Inc. began increasing certain incentives in mid-January to boost sagging sales, J. Larry Sorsby, the company’s finance chief, said at an investor conference Tuesday. Incentives typically include free upgrades on home finishes or assistance with closing costs, which reduce builders’ profit margins. Hovnanian said Monday that its revenue increase for the quarter ending in January would be “meaningfully lower than anticipated.” (…)

Toll Brothers: Net Home Orders Down in Latest Quarter; Weather Only Partly to Blame

From housing economist Tom Lawler (via CalculatedRisk)

Toll Brothers, the self-proclaimed “nation’s leading builder of luxury homes,” reported that net home orders in the quarter ended January 31, 2014 totaled 916, down 5.9% from the comparable quarter of 2013. Net home orders for “traditional” homes (that is, excluding its “city-living” segment) totaled 865 last quarter, down 8.1% from a year earlier. The company’s sales cancellation rate, expressed as a % of gross orders, was 7.0% last quarter, up from 6.2% a year ago. Home deliveries last quarter totaled 928, up 24.4% from the comparable quarter of 2013, at an average sales price $694,000, up 22.0% from a year ago. The company’s order backlog at the end of January was 3,667, up 31.2% from last January, at an average order price of $733,000, up 10.2% from a year ago.
Here are a few excerpts from the conference call.

“The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets, where about 50% of our selling communities are located. While it is still too early to draw conclusions about the Spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics.” “Encouragingly, our average price per home has risen dramatically, representing a combination of price increases and mix shift. Both components have helped boost our gross and operating margin.”

For “traditional” homes, net orders last quarter were down YY in the “North,” up 0.4% in the “Mid-Atlantic” up 9.4% in the “South” (which includes Texas), and off 17.4% in the “West.” The decline in the West was not weather related, but rather reflected potential buyers’ response to Toll’s unusually aggressive price increases in the region, especially California. The average net order price in the West last quarter was $944,000, up 27.9% from a year earlier. (…)

Hmmm…”solid affordability, attractive interest rates, growing pent-up demand”. If you missed it yesterday, see FACTS & TRENDS: U.S. HOUSING TO STAY COLD

Mortgage Purchase Index lowest since 1995

The Refinance Index decreased 11 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier to the lowest level since 1995. “Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s Chief Economist.

Land Investors Brace for Slowdown Texas developer H. Ross Perot Jr. and a few other big land investors are taking some chips off the table, betting that the swift increase in prices on residential land in recent years will abate in 2014.

(…) “Unless home prices go higher, I don’t see land [prices] going much higher,” says Mr. Perot, whose Hillwood Development Co. owns 9,400 residential acres in seven states. (…) “Land’s about as expensive as it can be.”

Hillwood sold 13 residential tracts totaling 4,300 acres in the past year for $125 million, nearly double the amount it had invested in them. Hillwood also bought two tracts last year totaling 1,800 acres, but 2013 was the first year in the past 10 that Hillwood was a net land seller.

It is unusual for Hillwood to sell huge tracts of raw land. Typically, the company develops tracts into dozens or hundreds of home lots—with electricity, roads and other infrastructure—and sells them piecemeal to multiple home builders.

Another Texas land investor, Stratford Land Co., intends to complete sales of at least $400 million of land early this year after selling $100 million of land last year and $150 million in 2012. To sell, Stratford looks to double the money it spent on the land. It still holds about $1 billion of assets.

“We want to take some chips off the table,” Stratford founder and CEO Phillip Wiggins said in an interview. “It seems like we’ve timed this very well. But we have the rest of the portfolio to play a little long on, because we think there’s still some wind behind our sails for a few years.”

Investment-management firm Paulson & Co. since 2009 has amassed more than 20 residential projects spanning 30,000 lots in distressed markets. Last year, Paulson for the first time since then sold tracts in a few markets, though it intends to also keep buying and holding land in markets where it thinks prices still have room to rise. (…)

Starwood Land Ventures LLC, an arm of investor Barry Sternlicht‘s Starwood Capital Group, since 2007 has amassed a portfolio spanning roughly 17,000 lots, buying mostly at the market’s nadir in 2009 and 2010. Last year, Starwood Land posted its largest year of land sales, divesting tracts totaling 2,300 lots for $150 million. Meanwhile, it bought one tract of 675 lots for $25 million.

“The market was right and the prices were very good—in some cases above what they were in the peak years,” says Mike Moser, Starwood Land’s co-CEO. “So, it’s time to start harvesting.” (…)

Lot prices in 2013 increased more than 20% on average nationally from 2012 levels, according to housing-research and analysis firm Zelman & Associates. In red-hot California, lot prices increased in Modesto by 73% in the past year, according to land brokerage Land Advisors Organization.

But the land market lost momentum late last year as home buyers began to balk at rising prices and higher interest rates. That weakening of demand tempered home builders’ appetite for top-dollar land.

A look at the sequential, quarter-to-quarter change in land prices underscores the cooling of the market. According to Zelman’s monthly surveys of builders, brokers and developers in 55 major markets, prices of finished lots receded from their biggest recent gain—6.8% in the first quarter of 2013 from the previous quarter—to a more tepid 2.9% gain in last year’s fourth quarter.(…)

Canadian consumers keep tight grip on wallets over holiday season

The average Canadian consumer’s total debt – excluding mortgage – in the fourth quarter of 2013 increased marginally to $27,368 from $27,355 in the third quarter, according to the latest analysis of credit trends by TransUnion, released Wednesday. (…)

On a year-over-year basis, the latest TransUnion report showed that total debt fell 0.42 per cent to $27,368 from $27,485 – the highest debt level on record. (…)

“The bigger story is the continued decline observed in delinquency rates for credit cards, lines of credit and instalment loans. These are significant drops, and coupled with lower debt levels in some of Canada’s major markets, this is a good story for both consumers and lenders. When both delinquencies and debt go down, we anticipate consumers may find more opportunities to gain access to better credit offers as competition for their business increases.”

EU Forecasts Weak Growth European Union economists forecast tepid growth for most of the region through 2015, while warning that lingering debt burdens and the specter of deflation could sabotage the recovery

(…) Growth in the euro area is forecast at 1.2% this year and 1.8% next, after two consecutive years of contraction. That won’t be enough to make much of a dent in euro-zone unemployment, which is seen hovering near record highs of 12% in 2014 and 11.7% in 2015. The commission report on Tuesday forecast growth in the broader EU—buoyed by strong momentum in the U.K.—at 1.5% this year and 2% next. (…)

The commission forecasts inflation in the euro zone at 1% this year and 1.3% next, well below the European Central Bank’s target of just under 2%. Eurostat on Monday said inflation in the euro area is running at 0.8%.(…)

France has pledged to bring its deficit to under 3% of GDP in 2015, yet the commission forecasts the deficit next year at 3.9% of GDP. In Spain, the government has pledged to bring its deficit to under 3% in 2016. Hitting that target will require significant new cuts, as the budget deficit is forecast to hit 6.5% of GDP in 2015. (…) Italy’s growth prospects, however, remain dim, with the commission projecting growth of 0.6% this year.

China dismisses concern on renminbi fall Central bank says market should not over-interpret sell-off

The State Administration of Foreign Exchange, an agency under the central bank, did not acknowledge its role in guiding the currency. “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies,” it said on Wednesday.

It added that the currency’s movement was nothing unusual: “The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to over-interpret it.”

GAVYN DAVIES: Watch China’s exchange rate policy

(…) The rise in China’s real exchange rate, amounting to more than 40 per cent since 2005, has been one of the forces which has helped the global economy to rebalance in recent years, encouraging a narrowing in the US trade deficit against China, and also allowing other emerging economies to absorb the effects of the devaluation in the Japanese yen without feeling too much pain.

It has also helped China to hold down inflation, and boost consumption, which is a key requirement in its own internal rebalancing. And it has reduced the danger of a severe policy confrontation between China and the US, with the latter having largely dropped its complaints about “manipulation” of China’s exchange rate. Overall, it is one of the things that has clearly gone right in the global economy in recent times.

The benign interpretation of the sudden reversal in the spot rate since mid-January is that it is all part of China’s plan to introduce greater market forces into its economic system in the years ahead. This would include more scope for the exchange rate to be determined by the market, to which end Beijing has said that it will increase the width of the daily fluctuation band from the present plus or minus 1 per cent to plus or minus 2 per cent as soon as possible.

Until the recent reversal, the spot rate had been hugging the bottom end (ie, the strong end) of the band, and some investors had become convinced that long renminbi represented a safe, low volume trade. Capital inflows therefore increased, forcing the People’s Bank of China to intervene in the markets by $500bn in 2013 (an act of quantitative easing similar in scale to the US Federal Reserve’s QE3 programme last year).

Increasing the width of the band could have caused more inflows and a more rapid strengthening in the real exchange rate. To avoid the perception that this is a one-way trade, the Chinese central bank may have decided to mount a sharp but temporary squeeze on the carry traders.

A slightly less benign interpretation is that the PBOC has decided to call a halt to the trend appreciation in the real exchange rate for the time being. This is what the bank did when it was using all available instruments to boost gross domestic product growth in 2008-10, the only prolonged period of stability in the nominal exchange rate since 2005. The reason that this interpretation seems possible is that there has been a clear shift in interest rate policy since the start of this year, with interbank rates being guided much lower than in the second half of 2013.

If the authorities have decided to take their foot off the monetary brakes for the time being, because the deflating of the credit bubble is damaging GDP growth and financial stability, it would make sense to allow the exchange rate to fall, alongside domestic interest rates.

But this would suggest that the authorities have blinked in the face of the January bailout of a high-profile trust product marketed by ICBC. It would also indicate that the process of deleveraging in the shadow banking sector is not going according to plan. Concerns from the rating agencies that China is encouraging yet more moral hazard in the financial system, making the eventual exit from the bubble even more difficult, would then look valid. (…)

China’s Corporate Debt Hits Record $12 Trillion

From Reuters:

China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 percent of GDP – according to Standard & Poor’s estimates.

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

While a credit crisis isn’t expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor’s Rating Services in Hong Kong. “Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.”

Of course, there is also this:

And this:

Winking smile It’s all in the timing:

Dave Camp: How to Fix Our Appalling Tax Code

On Wednesday, I am releasing what a simpler, fairer tax code actually looks like. The guiding principle is that everyone should play by the same rules—your tax rate should be determined by what’s fair, not by who you know in Washington.

Obama to Propose Highway Program President Barack Obama will propose a $302 billion program to support rebuilding and repairing the U.S.’s roads and bridges when he travels Wednesday to a historic rail station in St. Paul, Minn.

Mr. Obama’s plan includes dedicating $150 billion in revenue to the program generated by a proposed overhaul of taxes on businesses, which would close what the White House said are “unfair” loopholes while lowering tax rates. The White House didn’t give further details on what tax loopholes it would close.

The White House said Mr. Obama will also launch a $600 million competition to get people working on transportation infrastructure projects.

Carlyle Doubts U.S. Private-Equity Tax Change Carlyle Group co-founder David Rubenstein said the U.S. is unlikely to make changes this year that could increase taxes on deal profits reaped by private-equity managers

Mr. Rubenstein, often viewed by private-equity watchers as an authority on national politics since his firm is based in Washington, said various factors would likely prevent any measures affecting buyout firms from taking hold any time soon. (…)

“It’s unlikely that will get into law,” Mr. Rubenstein said of Mr. Camp’s proposal before an audience at the SuperReturn International private-equity conference in Germany’s capital. “I don’t think there is likely to be any tax reform legislation passed by this Congress at all.”


Real world examples (see GOOD READ: THE IT THREAT), from the WSJ (J.P. Morgan Dims Its Outlook for 2014)

Another shift outlined Tuesday was a reduction in J.P. Morgan’s expansion of its branch network, which increased by more than 360 locations in the past three years. On Tuesday, executives said they don’t expect to build any net new locations in 2014 and 2015, maintaining about 5,600 branches. If any new ones are built, the branches would be smaller and staffed by fewer employees, two tellers per new branch, as compared with four previously.

Executives attributed the pullback to customer behavior as people turn to mobile and other digital means for their banking needs. Digital logins in J.P. Morgan’s consumer banking, business banking and cards business units were up 28% from 2010 to last year. Meanwhile, calls to representatives and teller transactions fell 3% and 4%, respectively, in that same period.

J.P. Morgan had previously said it planned to cut branch staff by 3,000 to 4,000 by the end of 2014. But in 2013, J.P. Morgan cut 5,500 jobs at branches, and this year the bank said it planned to cut 2,000 more jobs. J.P. Morgan expects its total branch staff to drop 20% by next year when compared with 2011 levels, up from an earlier projected decline of 13%.


NEW$ & VIEW$ (25 FEBRUARY 2014)

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There was no mention of a weather effect in today’s release showing that sales dropped 0.6% last week after the 2.5% jump the previous week. The 4-week m.a. troughed the week of Feb. 8 but it is still up only 1.5% YoY when core inflation is 1.6%.



Nearly 1 in 3 Americans Aren’t Saving Any Money Only 68% of all Americans are spending less than they earn and saving the difference. That’s down from 73% in 2010, the first full calendar year after the recession ended.

A new survey released Monday found that only 68% of all Americans are spending less than they earn and saving the difference. That’s down from 73% in 2010, the first full calendar year after the recession ended.

Some 64% of households have emergency funds, down from 71% in 2010. The survey found 76% are reducing their consumer debt, down from 79% in 2010.

A divide remains along incomes. More than 80% of households earning over $50,000 spend less than they earn. Only about 69% of households making less than $50,000 are able to save.

The pattern holds for reducing consumer debt and maintaining an emergency fund. Nearly 90% of households in the top half are reducing their debt or are debt free, and more than 80% have a “sufficient” emergency fund.

Only 78% of those making less than $50,000 are reducing their debt or debt free, while 63% are content with their emergency fund.

Median household income in the United States in 2012 was $51,017, according to Census Department data.(…)

Natural Gas Falls Most in Six Years

Natural-gas prices dropped 11%, in the biggest plunge in more than six years, as traders locked in profits from the commodity’s weather-driven rally.

Natural gas for March delivery ended down 69 cents at $5.445 a million British thermal units.

Monday’s drop, the largest one-day percentage fall since August 2007, presages a change in focus from near-term weather concerns to demand in the spring. The severe winter across much of the U.S. has eaten away at stockpiles and pushed futures up 29% for the year so far. This spring, traders will focus their wagers on whether the demand will fall enough to allow inventories to be replenished by next winter. (…)

China’s Property Market Shows Strongest Signs Yet of Cool-Down China’s red-hot property market is showing its strongest signs yet of a cool-down, as price growth eases, credit for many developers dries up and some start to cut prices at new housing projects.

(…) Average new-home prices in 70 Chinese cities rose about 9% in January from a year earlier, according to Wall Street Journal calculations based on data released on Monday by the National Bureau of Statistics. While that figure shows China’s housing market remains frothy, it also marks a drop from December’s 9.2% rise as well as November’s 9.1% rise. (…)

Industrial Bank, a midsize lender, said on Monday in a filing to the Shanghai Stock Exchange that it had halted some types of property loans until the end of March, when it will unveil new policies. The bank said the move is aimed at “adjusting its asset structure and to better serve the real economy.”

Banks have periodically tightened lending to developers; the last time was in 2010-2012 when the government worried that easy credit was helping drive up prices. Worries about a slowing economy led to a loosening in early 2013.

Now banks are growing cautious about lending to developers, especially those active in smaller cities that face an oversupply of housing, and Beijing is concerned about a buildup of debt and unoccupied housing.

In Changzhou, the developers of a 21-tower project announced discounts last week. Prices were reduced to an average of 7,000 yuan per square meter, with some units selling for 5,380 yuan per square meter, down from an 11,000-yuan price tag in December, according to data from property broker SouFun Holdings. SFUN -6.23% One of the developers, Agile Property Holdings, 3383.HK -1.23% didn’t respond to requests for comment.

New Yuan Bet: Down A sharp and sudden slide in China’s yuan is forcing investors to rethink one of the most reliable trades in financial markets over the past four years: betting on gains in the Chinese currency.

(…) China’s central bank determines a daily reference point for the yuan, also known as renminbi, then lets it trade 1% higher or lower. Since 2005, it has gradually moved the rate up, allowing the yuan to strengthen 33%. A linked currency, called the “offshore” yuan, trades freely in Hong Kong. (…)

China has halted the yuan’s rise before. It kept the exchange rate steady for two years after the financial crisis. And in 2012, the yuan was allowed to sink about 1.5% over a roughly three-month period. Since then, it has risen more or less steadily. (…)

Yuan Shifts Roil Copper Market Turbulence in the Chinese yuan is percolating in the copper market.

(…) Copper prices have been under pressure since the start of 2014, falling as much as 6.3% in early February amid signs that China’s economy was sputtering. China accounts for about 40% of global copper consumption.

“There’s a lot of fear about a slowdown in China,” said Frank Lesh, a broker and futures analyst with FuturePath Trading.

Rapid shifts in China’s currency, the yuan, have added to these concerns. Copper is traded in dollars and becomes more expensive for Chinese buyers in their home-currency terms when the yuan weakens. (…)

Yuan’s Slide Helps Fix Misaligned Currencies With other emerging-market currencies still under great pressure – see Turkey’s lira today, as well as the Ukrainian hryvnia – China’s hitherto appreciating currency had been creating an imbalance, adding an unwanted burden to its all-important export sector as its economy slowed.

(…) But now that the yuan is trading at six-month lows versus the dollar, the overvaluation is being corrected. Chinese exporters are no doubt relieved, but the question now is: What does that do to investment flows that had been for a long time bet on the conventional wisdom that the yuan would continue to rise? That inflow of funds, particularly from Hong Kong residents earning near-zero rates on their dollar-pegged savings, was an important source of liquidity, both for productive investments and for speculative purposes.

While some of the yuan’s weakness can be attributed to investors’ concerns about China’s slowing economy and latent risks in its financial system, there is also a growing perception that the Chinese central bank has been proactively undermining expectations for the yuan to relentlessly appreciate. With the yuan recently trading closer to the PBOC’s dollar-yuan reference rate, conditions are ripening for a widening of the yuan’s trading band, that by which the PBOC allows the yuan to move 1% above or below the reference exchange rate. The band was last widened in April 2012, when the permitted deviation from the reference rate was 0.5%. Analysts expect Beijing to widen the trading band further, and allow a 1.5% or 2% deviation in the next few months.

From the FT:

(…) The renminbi suffered a sustained period of depreciation in the months following the previous widening of the band. In the middle of 2012, the renminbi dropped as much as 1.4 per cent from its April level, before recovering in September.

However, “it’s still too early to say that the whole market has shifted expectations”, Ms Wang added.

She noted that the economic fundamentals this time are different. In early 2012, China was in a cycle of cutting interest rates and experiencing large capital outflows. Recent data show that China is still experiencing large inflows through its external trade, and few expect an imminent change to interest rates.

“We could run into a 2012 scenario again – that seems to be what [the authorities] want. But unless we see a big narrowing in the trade surplus, then exporters still need to sell dollars [and buy renminbi] in the onshore market,” she said.

But there is a lot more to the story. See The curious incident of the PBOC in the USDCNY market, but be warned that you will get more confused.


NEW$ & VIEW$ (24 FEBRUARY 2014)

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Home Sales Hit 18-Month Low Home sales fell in January to their lowest level in 18 months as higher prices and mortgage rates squeezed buyers who continue to face shortages of properties for sale.

Sales of previously owned homes fell by 5.1% to a seasonally adjusted annual rate of 4.62 million, the National Association of Realtors said Friday. The median sales price in January stood at $188,900, up 10.7% from a year earlier.

Sales volumes are being challenged by reduced affordability of homes and severe winter weather in many parts of the country—two factors putting a damper on demand. But real-estate agents say the market also is being constrained by a lack of supply. There were only 1.9 million homes on the market in January, according to the Realtors’ group. While that was a 2.2% increase from December, only three months during the past 12 years have seen inventories at even lower levels. (…)

Construction of new homes also remains near its lowest level in 50 years. Builders completed fewer than 570,000 new single-family homes last year, down from an average of 1.1 million from 1990 through 2003. (…)

Mortgage Troubles Near Prerecession Levels The number of Americans who are behind on their mortgages and the backlog of homes in the foreclosure process are approaching prerecession levels.

The U.S. mortgage delinquency rate—loans that are a payment or more behind but not yet in foreclosure—fell to 6.39% of loans in the fourth quarter of 2013, down from 7.09% a year ago and the lowest rate since the early months of recession in the first quarter of 2008, according to a report Thursday by the Mortgage Bankers Association.

The backlog of foreclosure inventory also fell to its lowest level since 2008, while the number of loans on which lenders initiated foreclosure was the lowest since 2006, which was when the housing bubble was starting to burst. (…)

Another encouraging sign: Three-quarters of the nation’s troubled loans were made in 2007 or earlier, and delinquency rates for loans made after that point are around historical norms, according to the Mortgage Bankers Association. “The legacy of very high foreclosure rates is a problem of older loans,” said Michael Fratantoni, the MBA’s chief economist.

(…) In October, 11.4% of loans were “underwater,” according to Black Knight, down from about 19% at the start of last year.(…)

Western markets like California and Arizona were among the hardest hit by the real-estate bust, but now have foreclosure inventories that rank among the bottom handful of states. (…) Some 1.25% of California mortgages were in foreclosure at the end of 2013, well below the national average, according to the MBA.

Some states are further along than others in reducing the backlog of foreclosures. Most of the nation’s highest foreclosure inventory rates are in the “judicial states,” where banks must get court approval to foreclose.

Florida, a judicial state, had the nation’s highest share of loans in foreclosure, 8.56%. Still, that was down to a bit more than half of its peak rate. New Jersey and New York—also judicial states—were next on the list and were the only other states with foreclosure inventory rates above 6%. The MBA said that 15 of the 17 states where the foreclosure inventory was higher than the national average were judicial states.

Judicial review has stretched out the foreclosure process, in part because banks have struggled to provide the proper paperwork to demonstrate ownership of mortgages. That has given homeowners more time to work out their debts. But some economists say it has hindered housing markets by slowing the repossession of abandoned or blighted properties.

Real Retail Sales

Doug Short does the math on real retail sales:

With yesterday’s release of the January Consumer Price Index [+0.1% MoM], we can now calculate Real Retail Sales for the underlying sales data released on February 13th. Nominal Retail Sales had fallen 0.4% month-over-month, the second month of contraction, and are up only 0.3% year-over-year (see my detailed overview here). When we adjust for inflation, January sales were down 0.6% MoM. The YoY change was a fractional 0.1% growth. Real sales are down 0.9% from their all-time high in November.

Doug’s numbers reveal that real retail sales have lost in the last 2 months all the gains recorded since June.

Drilling down, from HARD PATCH COMING?:

“Non-Auto Discretionary Sales” (core less food and gasoline) declined 0.3% in each of January and December and are down 0.4% over the last 3 months. During the 3 most important months of the year,nominal non-auto discretionary sales declined at a 1.1% annualized rate. We will get the January CPI later this week but we already know that Core CPI rose 0.3% during November and December. If January comes in at +0.1%, we could infer that real non-auto discretionary sales have dropped at a 2.3% annualized rate between November 2013 and January 2014.

Feds Withhold Water To California Farmers For First Time In 54 Years

The US Bureau of Reclamation released its first outlook of the year and finds insufficient stock is available in California to release irrigation water for farmers. This is the first time in the 54 year history of the State Water Project. “If it’s not there, it’s just not there,” notes a Water Authority director adding that it’s going to be tough to find enough water, but farmers are hit hardest as “they’re all on pins and needles trying to figure out how they’re going to get through this.” Fields will go unplanted (supply lower mean food prices higher), or farmers will pay top dollar for water that’s on the market (and those costs can only be passed on via higher food prices).

OECD warns of new era of slower growth Report pinpoints failure of emerging economies to launch reforms

The world risks slipping into an era of slower growth and high unemployment unless governments push ahead with sweeping structural reforms, the Organisation for Economic Co-operation and Development warned ahead of this weekend’s talks between G20 finance ministers and central bankers in Sydney. (…)

The OECD’s “Going for Growth” report found that the intensity of structural reform measures remained highest in Greece, Italy, Portugal and Spain, where action was being taken to reform the labour market.

But it pinpointed the failure of many emerging economies to launch comprehensive structural reform agenda. (…)


Small Investors Back in the Trading Game Individuals are ramping up trading at discount brokerages, and they are borrowing more against their portfolios to increase bets.

(…) Average daily client trades at E*Trade Financial totaled about 160,000 in the fourth quarter of 2013, up 25% from a year earlier. At TD Ameritrade, clients made 414,000 trades a day on average in the quarter ended Dec. 31, up 24% from a year earlier. Charles Schwab Corp. SCHW +0.50% customers made 488,000 trades a day on average, up 8%.

The trend continued in January, even as stocks fell. At E*Trade, daily trades were up 27% from a year earlier. At TD Ameritrade and Schwab, the increases were 28% and 17%, respectively. TD notched a record number of monthly trades in January, Charles Schwab hit a five-year high and E*Trade reached a level unseen since the “flash crash” of May 2010.

Not only are investors trading more, but they also are borrowing more against their portfolios to increase their bets. In December, margin debt hit an all-time high of $444.93 billion, not adjusted for inflation, up 35% from a year earlier, according to the New York Stock Exchange. (…)

At E*Trade, client trades from mobile accounted for 8.4% of total trades in 2013, up from 4.3% in 2011.

“Mobile remains a major focus for us,” said John Matos, a senior vice president at E*Trade who oversees the brokerage’s digital channels. “Our customers are increasingly engaging with their finances on tablets and smartphones, as evidenced by a record portion of trades being placed” through mobile technologies. (…)

“You see somebody make a lot of money in a day,” he said, “and that shows you it’s possible.”

Crying face Jesus said, “Father, forgive them, for they do not know what they are doing.” Luke 23:34

Investors Like the View in Europe Investors have been buying European stock funds, focusing on a brightening economic outlook and low interest rates.

Investors have sent $24.3 billion into European equity funds this year through Feb. 19, according to fund tracker EPFR Global. U.S. catstock funds have seen $5 billion in outflows.

In the exchange-traded-fund world, three of the top four stock-based funds in terms of investor inflows in 2014 are the Vanguard FTSE Europe, the iShares MSCI EMU and the Vanguard FTSE Developed Markets ETFs—all of which have heavy exposure to Europe. The three have seen a combined $4.23 billion in new money this year, while $19.1 billion has flowed out of the largest U.S. stock ETF, the SPDR S&P 500 fund.

The Stoxx Europe 600 index is up 2.4% this year, compared with a 0.7% decline in the S&P 500 index of U.S. companies and a 2.9% drop in the 30-stock Dow Jones Industrial Average.

Just kidding Just in case you missed what most people seem to have missed:

Total retail volume dropped 1.6% MoM in December in the EA17. Over the last 4 months, retail volume is down 1.8%, that is a 5.4% annualized rate! Core sales volume dropped 1.8% in December and is down 1.5% since September (-4.6% annualized). Real sales dropped 2.5% in Germany (-2.4% in last 4 months), 3.6% in Spain (-6.0%), 1.0% in France (-1.2%).


And this from Markit on January sales:

January eurozone retail PMI® data from Markit showed the first rise in sales for five months. And although only slight, the increase was the fastest since April 2011. Germany was the driver of growth, posting its most marked improvement in trade since August. France’s drag on the currency union’s overall performance meanwhile diminished as sales there fell at a much slower pace than in December, whereas Italy saw another solid decrease.

Don’t believe this is unrelated:

Euro-Zone Consumer Prices Fall at Steepest Rate on Record  Sharp Drop in Prices Is Sign of Weak Domestic Demand

Eurostat, the European Union’s official statistics agency, said Monday that consumer prices in the 18 nations that use the euro fell 1.1% in January from December, a record fall driven by sharpest decline in underlying inflation in a year. That “core” gauge of prices, which excludes the relatively volatile prices of energy, food, alcohol and tobacco, dropped 1.7% on the month.

Eurostat said the annual rate of inflation was unchanged in January at 0.8%, close to a four-year low and less than half the ECB’s target of a little under 2%.

BTW: Italy, the euro zone’s third largest economy, showed a 2.1% MoM decline, the biggest drop from among all euro zone members.

Daimler Truck Sales Rose in January The rise was boosted by demand in the U.S., Asia and Western Europe.

(…) While European demand was healthy in January, orders in Europe were more muted in February, Mr. Bernhard said.

Draghi Highlights Importance of March ECB Meeting

European Central Bank President Mario Draghi Sunday signaled the central bank’s March policy meeting could be critical in determining whether the ECB will provide additional stimulus to shore up the nascent euro-zone economic recovery.

“By then we’ll have the full set of information needed for us to decide whether to act or not,” the central bank chief said here at a meeting of global financial leaders. (…)

Both Mr. Praet and Mr. Draghi dismissed fears of deflation. Inflation expectations in the euro zone are well anchored, Mr. Draghi said.Confused smile

“We still see progress, but we still see downside risks to recovery,” Mr. Draghi said, noting the recovery in Europe is “modest, fragile, with uneven levels of activity.”

China property prices continue to rise Speed of growth cools but prices still up 9.6% year-on-year

New housing prices in China’s 70 biggest cities rose 9.6 per cent year on year in January, down from 9.9 per cent in December, according to a population-weighted average. Of the 70 cities monitored by the national bureau of statistics, six posted price declines from the previous month, up from just two in December.

New home prices in Shanghai and Beijing rose 20.9 and 18.8 per cent in January from a year earlier, respectively, slowing a touch from their 21.9 and 20.6 per cent increases in December.

Global Economy Collapses Despite 4th “Warmest” January On Record

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that ‘weather’ is not to blame, US strategists, ‘economists’, and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

G-10 macro data is collapsing…

Venezuela Youth Drive Protests Against ‘Chavismo’ Students and recent graduates form the backbone of an increasingly raucous movement that has become the most formidable challenge President Nicolás Maduro has faced since taking office last April.
Oil at the heart of Venezuela’s turmoil Scrimping on PDVSA raises likelihood of more unrest

(…) While Venezuela boasts the world’s largest energy reserves, “chávismo” has spectacularly mismanaged the oil wealth, creating the country’s current problems.

“The main problem for PDVSA [the state-owned oil company] is the government’s fiscal voracity,” says David Voght, managing director of IPD Latin America, a consultancy. “Venezuela has focused more on politics than efficiency in its oil sector.”

Siphoning off PDVSA’S investment funds to pay for social programmes has so far helped maintain government support. Most protests have been in better-off neighbourhoods around the country.

“For the protests to be effective, they must include the poor,” says former presidential candidate Henrique Capriles, a member of the opposition’s more moderate wing who cautions it is wrong to create expectations that the government is about to fall.

But scrimping on investment throttles Venezuela’s golden goose, increasing the likelihood of unrest. Less oil production means less money to spend on imports and thus greater shortages, while money-printing to fund a gaping fiscal deficit has fuelled inflation of more than 56 per cent.

Furthermore, much of Venezuela’s output is mortgaged. Production has fallen to some 3m barrels a day, from 3.1m a decade ago, according to official figures, of which 310,000 bpd pays off loans to China, about 400,000 bpd is sold to allies, such as Cuba, for sub-market prices or in barter deals, and about 600,000 bpd is used to meet heavily subsidised domestic consumption.

As a result, there is even less money to spend on imports. By way of illustration, Venezuela’s remaining 1.7m bpd generates about $58bn of revenues a year. In contrast, imports totalled $77bn in 2012, according to UN statistics.(…)

But, in the past, Venezuela solved similar cash crunches by issuing international bonds. That trick is harder to repeat now, given that Venezuelan bonds have posted the biggest losses in emerging debt this year. The country’s benchmark bond due in 2022 yields 18 per cent, almost twice the rate of equivalent Ukrainian bonds.

With foreign reserves of only $20bn, versus principal payments of $4.5bn due this year plus another $13bn of interest, bondholders increasingly wonder where they lie in the pecking order should the government re-prioritise imports over debt. (…)


NEW$ & VIEW$ (21 FEBRUARY 2014)


The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in January to 99.5 (2004 = 100), following no change in December, and a 0.9 percent increase in November.
Philly Fed Misses Forecasts By a Wide Margin

Both the Empire and the Philly Fed declined “due to the harsh winter”. Yet, Markit’s flash PMI was very strong. Confused smile

Following on the heels of Tuesday’s weaker than expected Empire Manufacturing report, today’s Philly Fed also missed expectations by a wide margin.  While economists were forecasting a headline reading of 8.0, the actual reading was -6.3.  This is the lowest reading since February of 2013 and was the biggest miss relative to expectations since June 2012.

As shown in the table, just three (Delivery Time, Inventories, and Prices Received) of the nine components increased this month.  Of the six components that declined, Shipments and New Orders saw the largest drops, which doesn’t bode well in terms of economic strength. 

Once again, given the rough winter we have seen in the Philadelphia region, weather is being cited as the main culprit behind the weakness.  Whether or not you agree that the weather argument has any merit, the reality is that until it warms up, investors seem willing to give the economy the benefit of the doubt.  If you look at the forecast for the New York City area, it doesn’t look like it is going to consistently warm up any time soon.

Good news, though, lensing to small biz turned positive, barely (from BofAML)

(…) lending to small business is positive for the first time since the crisis — although nowhere near the level of the boom days of 2006 when credit expanded by more than a fifth.


imageThe U.S. CPI rose 0.1% in January, in line with the last six months, bringing the annualized rate of inflation to 1.2%. The total CPI’s 1.6% YoY increase should thus come down in coming months, unless monthly inflation picks up sharply.

Core CPI was also up 0.1%, also in line with the last six months (+1.4% a.r.), and is also up 1.6% YoY.

However, the Cleveland Fed median CPI rose by 0.2% for the third consecutive month, continuing to show YoY gains of 2.0%.

The inflation jury is still out, although there seems to be more and more inflation building in the pipeline. Consider that core PPI jumped 0.4% in January following a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Also, nonpetroleum import prices rose 0.4% in January.

Is Food Inflation Coming Back?


We highlighted the CRB/BLS Spot Foodstuffs Index last week. It’s continuing to rise but still remains lower year-on-year at this point. The question is whether this is the start of a broadly-based period of food price inflation?

Fingers crossed Grain prices forecast to fall to five-year lows Crop harvest expected to be close to record, says USDA

(…) We’re anticipating record crops in soyabeans and maybe even in corn with better production,” Joseph Glauber, US Department of Agriculture chief economist, said at the agency’s annual outlook forum. “All that will bring prices down.”

In the coming crop marketing year, corn will cost $3.90 per bushel, soyabeans $9.65 per bushel and wheat $5.30 per bushel, Mr Glauber said. These would be the lowest average prices since the year following a large 2009 US harvest.

Futures prices are currently far higher. CBOT December corn, a yardstick for this year’s harvest, was $4.6850 per bushel on Thursday, while CBOT November soyabeans were $11.4350 per bushel. (…)

High five  Richard Feltes, vice president of research at RJ O’Brien, a commodities broker, said the acreage forecasts did not appear to take into account the amount of land farmers were unable to plant last spring due to heavy rains.

“There is no allowance for the high ‘prevented plant’ that occurred last year. The trade is going to look on that with some degree of scepticism.” (…)


Even China’s Economists Are Singing the Blues China’s state media have long accused foreign analysts of being too bearish on the Chinese economy. Now domestic economist are chanting a pessimistic tune as well.

(…) “We are now in a painful stage,” economist Wang Luolin told a seminar this week.  “Let’s not try to dress things up,” said the consultant to the Chinese Academy of Social Sciences, a government think tank.

Yu Bin, a senior researcher at the influential Development Research Center under the State Council, took a similarly pessimistic view.

“The fact is, China’s economic growth is facing substantial downward pressure,” he said. “I don’t think we should get our hopes up for this year’s growth.” (…)

“We expect the economic growth rate to be just above 7% this year, and that’s about it,” Mr. Yu said. That would be well below the 7.7% expansion in all of 2013.

Mr. Yu added that all three big drivers of China’s growth — investment, consumption and exports— are looking weak.

Overall investment growth is expected to slip to around 18% this year from 19.6% last year, the researcher said. The manufacturing sector has been struggling with overcapacity and cut-throat competition, and oversupply of property in third- and fourth-tier cities will likely dampen overall investment. Meanwhile, mounting local government debt may weigh on infrastructure investment, he said.

Li Daokui, a former central bank adviser who normally has a more upbeat outlook, also sees slowing momentum – at least for now. “We should be prepared psychologically” for a shaky start to the year, he said, adding that growth could drop below 7.5% year-on-year in the first quarter.

Sad smile Slower growth adds to the increasing risk that borrowers won’t be able to repay their creditors.(…)

As a reminder, courtesy of Zerohedge which has a lot more to say about the China syndrome:



Brazil vows $18.5bn cuts to woo investors Move to restore fiscal credibility after downgrade threat

(…) The primary budget goal is predicated not only on problematic cuts to discretionary spending but is also based on an overly optimistic estimate of 2.5 per cent growth this year, says Tony Volpon, an economist at Nomura. “We’ve just changed our estimate to 1.3 per cent.”


Final Earnings and Revenue Beat Rates for Q4 2013

The Q4 2013 earnings season unofficially came to an end this morning with Wal-Mart’s (WMT) report before the open.  For the quarter, 61.9% of US companies beat consensus analyst earnings estimates.  As shown in the first chart below, 61.9% is at the top end of the range the earnings beat rate has now been in since 2011.

The top-line revenue beat rate for the just-completed reporting period finished at 63.8%.  Over the first three quarters of 2013, market bears often noted the weakness in top-line numbers, but they finished the year strong at least versus analyst estimates.  The 63.8% revenue beat rate was the best quarterly reading we’ve seen since Q2 2011.


The Thomson Reuters Same Store Sales Index is expected to struggle to a 1.0% gain in Q4 2013, which ends Jan. 31 at many store chains. That compares to a 1.7% actual gain in the index during Q4 2012 and would be below the 3% gain that indicates a healthy consumer sector. Excluding Walmart, the expected SSS growth rate for Q4 2013 increases to 1.6%, compared to 1.9% a year earlier.

(…) Of the 75 companies in the SSS index, 29 have reported Q4 results. Of these, 39% exceeded their SSS estimates, while 61% missed them.

In the Thomson Reuters U.S. retail universe, there have been 83 negative earnings per share pre-announcements for Q4, compared to only 18 positive EPS pre-announcements. By dividing 83 by 18, one arrives at a negative/positive ratio of 4.6 for the universe. Expect this to worsen for Q1 2014. To date, there have been 18 negative earnings per share pre-announcements vs. only 3 positive – which brings us to a negative/positive ratio of 6 for the universe.

As a result of the negative guidance, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter. At the beginning of the quarter (November 2013) the Same Store Sales growth estimate for the holiday season was 2.0%. Today, it is 1.0%, as seen in the chart below.



                                                                                                Source: Thomson Reuters I/B/E/S

Confidence in global recovery grows Survey reveals new fears over shortage of skilled labour

The latest FT/Economist Global Business Barometer survey, conducted at the end of January during the peak of concerns about emerging market fragility, shows an uptick in all measures of confidence.

Asked about global business conditions, 49 per cent said they expected them to get “better” or “much better”, a rise of 8 per cent on the previous quarter.

Respondents were more bullish about their individual businesses, with 59 per cent expecting conditions to improve (4 per cent higher than the previous survey) and 43 per cent saying conditions were the same in their respective industries (a 7 per cent rise).

While economic and market risk remained by some margin the biggest perceived threat, there was a notable easing of concern as the percentage citing it dropped to 52 per cent from 65 per cent the previous quarter.

As businesses become more confident, they are concerned about skilled labour. The survey showed that “talent and skills shortages” were slowly increasing, and were cited by 34 per cent of respondents as a risk, closing on “political risk” at 36 per cent. Respondents from North America were most concerned about skills shortages with 39 per cent citing it as one of the biggest worries for their business. (…)

The changing geopolitics of energy By David Petraeus and Ian Bremmer

In yesterday’s FT:

(…) The US energy revolution is far from the whole story. In Mexico, President Enrique Peña Nieto is moving forward with a historic energy-sector reform programme. Though much work still has to be done, it is clear the state-owned oil group Pemex will finally be forced to shed its monopoly and allow production-sharing contracts (and thereby reverse years of declining production). Long lead times for exploration and development of deepwater offshore acreage suggest that large production increases will take time, but the long-overdue Mexican reforms are welcome.

The energy boom also extends to Canada. There, America’s number one trading partner continues to increase production as it also seeks to diversify its market outlets for oil and gas exports, though it clearly will continue to export the vast majority of its oil resources to the US, where it supplies more than one-quarter of crude oil imports. Beyond that, after considerable delay, the Obama administration will probably approve the Keystone XL pipeline this year, providing a useful export route from Canadian oil sands to US refining markets. The cumulative effect of the developments in gas and oil production in the US, Canada and Mexico will be a continent that has much greater energy independence.

Meanwhile, discoveries in Brazil, Colombia, east Africa and elsewhere will come on line, adding to the supply surge.

Even in the turbulent Middle East, oil production capacity will rise this year. In Iraq, deteriorating security conditions in the Sunni Arab areas are hundreds of miles from oil facilities in the south, where the bulk of the country’s oil is produced. Oil production in the rest of Iraq represents less than 15 per cent of total volumes, and almost all of this year’s increases in export capacity will come from southern fields – though markets will watch developments in the Iraqi Kurdish region in the north.

In Libya, central governance is severely challenged, but the country’s competing factions have been careful not to kill the “golden goose” by damaging oil infrastructure. And assuming some deals between regional power brokers and the central authorities, export volumes should increase in the first half of 2014 from a few hundred thousand barrels a day to half or more of their pre-crisis volumes of 1.4m b/d.

Over the course of this year, the negotiation over the future of Iran’s nuclear programme will be the wild card to watch.(…) the more likely outcome will be a further extension of the interim agreement, pushing the issue into next year. If an agreement is reached, gradual oil sanctions relief will delay any resumption of full volumes into 2015, at the least, but supplies would then increase sharply thereafter.

All of these developments are bad news for governments that depend heavily on energy exports for their revenue. The Saudis, for example, who are anxious over the possibility of improved US relations with Iran, are watching this market shift closely, because market pressure to restrain output will leave them with less money to spend on projects meant to safeguard the kingdom’s stability at a time when those outlays are increasing substantially.

Russia has headaches too. When Vladimir Putin became president in 2000, oil and gas accounted for less than half of the country’s export revenue. Since then the percentage is now about two-thirds. Moreover, Russia’s European energy customers will have new options as US liquefied natural gas projects progress and as other potential exporters develop natural gas production. (…)

Venezuela’s troubles are the most immediate of all. That country, mired in its worst economic crisis in 30 years, is already plagued with spiralling inflation, consumer good shortages, power cuts and one of the world’s highest crime rates. And it sold much of its future production to China to generate funds to help win the recent national election. The challenges have accumulated so much that Caracas no longer publishes oil production or export statistics. (…) That is why lower oil prices are a potential disaster for Venezuela’s ruling party – and for Cuba’s Communists, who get by with cheap energy imports from their friends in Caracas. (…)

For decades, shifts in energy markets have reshuffled the deck of geopolitical winners and losers. That is now happening again. The latest trend looks here to stay, and the fallout has just begun.

Obama Budget Plan Reflects Partisan Lines President Obama’s 2015 budget proposal will abandon overtures to Republicans and call for a large expansion in spending on education and job training, in a push certain to ratchet up tensions in the already-fractured capital ahead of November’s elections.