NEW$ & VIEW$ (18 Oct. 2011)

Fingers crossed   “THE COMPREHENSIVE PACKAGE”: As we approach the dreadful weekend, expectations are getting lower and lower. A few quotes:

“We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”

Wolfgang Schäuble, Germany’s finance minister, said there would be no “definitive solution” but expected a deal to use an enhanced EFSF in “the most efficient way”. It is unclear whether such plans breach last month’s ruling by Germany’s top court, which said the Bundestag may not transfer “fiscal responsibilities” to EU bodies or take on “incalculable” liabilities beyond German control. Any change would need a new constitution and a popular vote.

Berlin’s DIW institute, one of Chancellor Angela Merkel’s five official advisers, said attempts to boost the €440bn (£384bn) EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up southern Europe would be “poisonous” for France’s credit worthiness.

Pointing up   Der Spiegel runs a good article that pretty well wraps up the situation, placing all the pressure on fence-loving Mrs. Merkel:

The head of Deutsche Bank is raging against politicians, Berlin is raging against Paris and the north is raging against the south. The world is expecting decisive results at this weekend’s EU summit on emergency measures to shore up the euro, but the Europeans remain split. Will German Chancellor Angela Merkel finally take the lead?


Smile   China’s economy remains remarkably stable amid the considerable economic and financial problems throughout the world. China’s third-quarter gross domestic product was +9.1% YoY, slowing from +9.5% in Q2 and +9.7% in Q1.Electricity consumption trends confirm the relatively stable GDP growth rate.

[AM-AP816_CHINAH] image

China’s economy expanded 2.3% on a quarterly basis in the July-September period. In September, retail sales expanded 17.7% YoY, following an increase of 17% in August. Industrial value-added output rose 13.8% YoY in September, up from the 13.5% growth in August. Fixed assets investment rose 24.9% YoY in the first nine months, compared with a 25% gain in the January-August period.

But there is a slowdown and it may be accelerating, unsurprising given what’s happening to China’s major clients. The Composite PMI and the OECD LEI for China point to a more pronounced slowdown:


Domestically, housing is clearly slowing. Also, in the past three quarters, urban and rural residents’ per-capita disposable income rose 13.7% YoY. After deducting inflation, actual growth was 7.8%. The growth of per-capita cash income of rural residents hit 20.7%.

Storm cloud  Fair figures disappoint  The number of buyers on the opening day of the Canton Fair, officially known as the China Import and Export Fair in Guangzhou, Guangdong Province on Saturday were down on what they were last year, exporters say.

I don't know smile   US MANUFACTURING BOTTOMING OUT? The Empire State Manufacturing Survey indicates that conditions for New York imagemanufacturers continued to deteriorate in October. The general business conditions index remained negative and, at -8.5, was little changed.

After a series of negative readings
from June through September, the
new orders index rose to 0.2 in
—an indication that orders were unchanged after declining for a number of months.



Price increases moderated. The index for number of employees rose several points but was at a relatively low level of 3.4, while the average workweek index was negative for a fifth consecutive month.

Storm cloud   UNINTENDED CONSEQUENCES OR COLLATERAL DAMAGE?: The Fed’s QEs and lower dollar policies have contributed to higher commodities and other import prices, thereby reducing consumer purchasing power.

Overall U.S. import prices rose 0.3% during September after a 0.2% August decline. Year-to-year, the lower value of the U.S. dollar as well as higher oil prices have raised prices for imported products by 13.4%. Non-oil import prices rose 0.2% and by 5.5% y/y. Some imports saw big price gains YoY: Imported food & beverage prices (+14.4% y/y), non-oil industrial supplies (15.8%),  apparel prices (9.1%), furniture prices (5.9%), and imported autos (+3.7%). (Chart from Haver Analytics)

Imports from China, also influenced by the yuan appreciation (+30% since mid-2005), have seen their prices rise 3.8% in the last 12 months. No more deflationary contribution from China.

Storm cloud   SPEAKING OF IMPORTS AND CHINA, China’s imports decline of 0.2% MoM in September was weaker than seasonality would have suggested, a further confirmation that China is slowing. Of note, ISI China sales survey has broken down in recent weeks.

image   image

Storm cloud   France pledges to defend triple-A rating Finance minister admits 2012 growth forecast of +1.7% ‘probably too high’.
Storm cloud   German economic expectations deteriorated to approach a three-year low in October.

The ZEW index fell for the eighth consecutive month to minus 48.3 from September’s reading of minus 43.3. The last time the indicator was this low was in November 2008. The current-conditions index fell to 38.4 from September’s 43.6, which was the lowest reading since July last year.

Lightning   Spanish House Prices Plunge Spain’s government said that housing prices remained in free-fall in the third quarter.


Lightning   CPI rose from 4.5pc in October to 5.2pc in September, while RPI was 5.6pc, up from 5.2pc.U.K. Inflation Continues Rise U.K. inflation accelerated to match a record of 5.2% in September, stoked by big increases in the prices households pay for gas and electricity. The retail price index rose to 5.6%, the highest in over 20 years.




Light bulb   ARE STOCK DIVIDENDS BLINDING investors to valuations? That’s what research by AllianceBernstein contends. (Barron’s)

Vadim Zlotnikov, chief market strategist at the research shop, ranked the large cap universe of 650 stocks by their dividends. He compared the stocks in the top quintile with those at the bottom using both price to book and price to forward earnings. The result: The premium of high-dividend payers over low-dividend payers is the highest it has been over the past 40 years.

“The high-dividend trade is the most crowded trade in the world,” Zlotnikov argues. Conversely, deep-value, cyclical stocks are the most undervalued.

As always trends continue until they don’t, and that’s usually longer than expected. (…) within the dividend-paying universe, those in the utilities, staples and telecom sector are far more expensive than those dividend payers in energy, health care and defense.

Freezing   COWARDLY BULLISH!:  Barton Biggs Raises Bullish Bets to 65% of Macro Fund

I’m inclined to stay where I am, which is moderately, cowardly bullish. The thing that makes me want to hang in there is that the high frequency economic news from the U.S. has definitely improved. It’s gotten pretty good.

One-Year Chart for Citigroup Economic Surprise Index - United States (CESIUSD:IND)A case in point is Citigroup’s Economic Surprise Index for the US which turned positive last week. Economic news recently got marginally better but the Index’ rise occurred mainly because economists have ratcheted down their excessive expectations of last spring/summer.

But what is it that has “gotten pretty good”?

  • US VEHICLE SALES, up nicely in September but only to last April’s level. Nice but unconvincing.image
  • MANUFACTURING PMI, +1 to 51.6. However, new orders were flat at 49.6.
  • NON-MANUFACTURING PMI, -0.3 to 53.0 but new orders improved nicely.
  • CONSTRUCTION SPENDING rose 1.4% in August which only erased July’s 1.4% drop. This stat is terribly weak being so dependent on housing.
  • EMPLOYMENT. The 103k gains surprised economists, but what else is new? After netting out the Verizon strike numbers, total employment was 56k in September, down from 102k in August, itself down from 127k in July. Not a friendly trend! Also, the 444k increase in “involuntary part-timers” is huge. These people’s take-home-pay just got slashed.
  • US RETAIL SALES: a big surprise, no doubt about it. Can it be sustained in light of the above?
  • CREDIT MANAGERS INDEX. Same as for Retail Sales.
  • UNEMPLOYMENT CLAIMS, slowly improving.

Meanwhile, real wage gains remain negative, inflation has yet to slowdown, Americans are deleveraging and the fiscal drag is intensifying. Europe is in recession, eying depression, while Asia is catching the Western flu. “Pretty good”? Not quite, in my estimation. I prefer to remain cowardly cautious.

Pointing up   EARNINGS



Punch   Technicians note that 1225 is an important hurdle. More significant in my view is the 1276 and falling 200-DMA.

Pointing up   Note that Apple accounts for nearly 100 of the 135 point gain in the Nasdaq 100 this year, four times greater than AMZN, the next best contributor.

Pointing up   Also, this am WSJ talks about the limited liquidity in this market (Traders Warn of Market Cracks):

LIQUID“That’s why you get 5% moves in a matter of minutes,” he says. “When there are sellers, there are few buyers, creating an air pocket down.” And it’s not just stock markets. Liquidity has also been sucked out of credit markets, too, traders say, from corporate bonds to mortgage-backed securities.


Wilted rose   Gold market suffering ‘very real damage,’ Gartman warns

Gold bars are displayed at the headquarters of Mitsubishi Materials Corp. in Tokyo.“The rally was always disconcertingly tepid; that is, after a vicious decline such as that seen in late August until late September, the bounce, if the market is truly healthy, should have been even more vigorous. It was not, and indeed if anything it was tepid, quiet and placid,” the publisher of the Gartman letter said today.

“Tepid placidity all too often gives way to vigorous selling sooner rather than later.”


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