NEW$ & VIEW$ (19 Oct. 2011)

Fingers crossed   Confused smile   “THE COMPREHENSIVE PACKAGE”:  Today is October 19, a memorable date for anybody involved in financial markets in 1987. Black Monday followed a weekend of frustrating meetings between US and German officials who failed to agree on measures to ease trade and monetary policy tensions, triggering a loss of confidence that economic superpowers were able to coordinate their policies. As we approach D-day, news, rumors, quotes, off-the-records, comments and analysis are swirling around like autumn leaves on a windy day. Not to confuse you but …

The Financial Times Deutschland reported on Tuesday evening that euro-zone leaders have come up with a plan to increase the impact of the European Financial Stability Facility (EFSF) over and above the €440 billion ($608 billion) lending capacity it currently has. The paper said the leveraged EFSF will be able to martial aid worth up to €1 trillion. A similar story in the British daily the Guardian indicated that the ceiling was to be even higher, as much as €2 trillion.

(…) , the backstop would become a kind of insurance fund providing first-loss guarantees to both public and private investors. Essentially, investors will be insured against the first 20 percent to 30 percent losses on their investments in state bonds. (…)

Still, the measure is likely to be unpopular in Germany. In the days leading up to the German parliamentary vote approving the original expansion in September, several lawmakers insisted that they were against any further leveraging. Indeed, Finance Minister Wolfgang Schäuble himself sought to downplay reports that the EFSF would be leveraged, though he never outright denied such speculation. The Free Democratic Party (FDP), Chancellor Angela Merkel’s junior coalition partner, even threatened to strike down the EFSF expansion if a leveraging were planned.

The FDP now appears to be changing its tune. “For me it is essential that the total sum of guarantees agreed to by the Bundestag (Germany’s federal parliament) not be increased,” the FDP’s floor leader in parliament, Rainer Brüderle, told the Financial Times Deutschland. The current plan would not require Germany to increase its guarantees beyond the current €211 billion. (Der Spiegel)

This appears to be the plan’s main merit: it does not require a new round of parliamentary approvals; it does not require pre-funding; and it can be focused on the flow of eurozone sovereign borrowing.

Pointing up   But France’s AAA rating, apparently the cornerstone of the bailout efforts, would be at risk under such a plan:

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.

Dr Ansgar Belke, the group’s research chief, said the leverage proposal emerging as part of the EU’s “Grand Plan” to restore confidence is self-defeating. “It counteracts efforts made so far to stabilise the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told newspaper Handelsblatt. (The UK Telegraph)

Mrs. Merkel has tried to reduce market expectations from the coming weekend meetings.

Officials from Ms Merkel’s Christian Democratic Union said she told allied lawmakers on Tuesday afternoon that talks at EU level were advancing only “millimetre by millimetre”. A day earlier, Ms Merkel’s spokesman had warned already that “dreams” that “everything will be solved and everything will be over on Monday” were misplaced. (FT)

But Sarko wants a quick deal, putting pressure on Merkel:

Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsiblity for resurgence of conflict and division on our continent.”

Meanwhile:  Moody’s cuts Spain’s sovereign rating

No wonder markets are confused given the domino game being played.

S&P 500 index  


Pointing up   China’s 9.1% Q3 GDP growth came a touch below consensus but just above the 9% “threshold”. Economists are going out of their way to convince investors that China is doing ok amid the international turmoil, principally owing to strengthening domestic demand. They point to the 17.7% growth in retail sales in September, forgetting to look at real sales.

CEBM Research does look at the real trend, although it also tries to see a clear uptrend that is not readily apparent at this point. The chart reveals what many fail to see: real consumption is slowing down fast in China.


Storm cloud   A case in point: CHINA ASSOCIATION OF AUTOMOBILE MANUFACTURERS (CAAM) cut its forecast for vehicle sales growth to as much as 3 percent this year, from 5 percent, the newspaper said. It was the second time that the association cut the forecast, it said.

Storm cloud   WHICH MAY EXPLAIN:  Steel Makers Struggle In yet another sign of the weakness in the world economy, steelmakers have begun to slow production amid expectations of lower prices and a poor fourth quarter. World steel demand is expected to slow to 6.5% this year, following 15.1% growth in 2010, according to the World Steel Association. The pace of growth is expected to slow further next year to 5.4%. The association says that steel use in the developed world will still be 15% below the 2007 level, but in emerging and developing economies it will be 44% above 2007. In 2012, the group says, the emerging and developing economies will account for 73% of world steel demand in contrast to 61% in 2007



HSBC PMI™ manufacturing data indicated that new export orders fell for the fifth month running in China during September. Meanwhile, official data published last week also highlighted weakening demand for Chinese manufactured goods, with export growth easing from an annual rate of 24.5% to 17.1%.


Rainbow   Auto   Meanwhile, US VEHICLE PRODUCTION increased 0.2% in September to 8.8M units seasonally adjusted. That follows increases of 1.8% and 9.3% in the two months previous, resulting in a 49% QoQ gain in Q3 to 8.7M units. Ward’s estimates Q4 production at 9.3M, a 31% jump from Q3. Let’s hope the recent uptrend holds. (Chart from Haver Analytics)


Storm cloud   US PPI ACCELERATES: The headline and core reading of the PPI rose 0.8% and 0.2% respectively in September. The headline PPI over the last year is up 6.9%.  The core PPI has accelerated to 2.5% in September and 2.8% using the last 3 months annualized. (Chart from Haver Analytics)



Rainbow   GREEN SHOOTS AROUND HOUSING? Yesterday, I posted the first “not negative” piece on housing in a long, long time. In effect, homes listed for sale have declined to their lowest level since 2007 (Slim Pickings Are Latest Headache for Home Sales). Housing supply needs to shrink to arrest price erosion, real or anticipated, before demand reappears. It has started to happen in Detroit where job growth has been improving lately.

The Detroit Free Press reports that a tight Detroit housing supply has sparked bidding wars among house hunters. Young buyers seem to be shopping for bargains.

Metro Detroit home sales rose for the third straight month in September, boosted by higher demand and lower inventories of homes for sale. The combination also pushed up median sales prices by 10% in September compared with the same month a year ago.

“As soon as anything hits the market, it’s a stampede to get there,” said Plymouth Realtor Andy Hargreaves. “It’s not uncommon for us to see five to eight offers on a good home.”

Foreclosures remain a big overhang but banks appear more willing to accelerate the divestiture process. (Home Short Sales Rise in ‘Dramatic Shift’ That May Boost U.S. House Prices):

There has been a “dramatic shift” in banks’ willingness to sell a property for less than the mortgage balance to avoid foreclosing, said Ron Peltier, chairman and chief executive officer of HomeServices of America Inc., the second-biggest U.S. residential brokerage. (…)

“Banks have become much more supportive of short sales,” said Peltier, whose Minneapolis-based company is a unit of Warren Buffett’s Berkshire Hathaway Inc. (…)

Because short sales typically are occupied soon after the deal, neighboring properties take less of a hit in values, according to Popik. (…)

Pent-up demand has likely been building in the past 3 years and affordability ratios are back at pre-bubble levels:

Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. But by last September, it had fallen to 1.6, matching the lowest level in the 35 years the data have been collected and well below the historical average of 1.9 between 1989 and 2003.

“Based on incomes, this is as affordable as it gets,” said Mark Zandi, chief economist at Moody’s Analytics. (…)

Measured by the price-to-rent ratio, prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall.(…)

A shift in sentiment on house prices might be about to happen nationally. If so, demand will come back, activity would improve and supply would gradually diminish, further helping prices… The recovery process will admittedly be slow and bumpy, when it really happens, but it seems appropriate to monitor housing more actively at this point.

Smile   And this other positive second derivative piece:  NAHB Housing Market Index: 18 imagevs.14. The boost in builder confidence is “a good sign that some pockets of recovery are starting to emerge,” NAHB Chief Economist David Crowe says, but “while some builders have shifted their assessment of market conditions from poor to fair, relatively few have shifted their assessments from fair to good. 18 is better than 14, but only marginally closer to 50. When the supply of existing homes for sale will have declined, demand for new houses will resurface, and so will construction employment.


Money   A TREND BROKEN: Apple had beaten Wall Street consensus profit estimates by at least 13 per cent in each of the past four quarters.  Apple posted a 54% gain in net income, though it missed Wall Street estimates for the quarter. But sales of its most important product, the iPhone, were lower than analysts predicted in the September quarter, as consumers put off purchases in anticipation of the latest model, the iPhone 4S. As a result, earnings per share were $7.05, against estimates of $7.26. The shares fell as much as 7% after the close Tuesday. At around $395, where they traded hands late Tuesday, the shares are valued at roughly 12 times 2012 estimated earnings. Back out Apple’s now $82 billion cash pile, and the valuation is around nine times earnings. Apple sold 11.2 million iPads in the latest quarter, handily beating analysts’ estimates of about 10 million. But this is one area where investors should beware slowing momentum. (Apple Loses Some of Its Shine). 54% growth, 9x PE!

Mr Cook went so far as to say that he believes the tablet market would one day surpass the PC market, which is still an order of magnitude larger.



Bill Ackman gave in mid-September on why we should all be long the HK dollar. Well worth the 43 minutes.


Now this from the WSJ this am: Hong Kong Chief: Another Recession Likely

Hong Kong Chief Executive Donald Tsang said Wednesday he sees “high likelihood” of a global recession and says the financial turmoil will likely slow the pace of appreciation in the Chinese currency.

He also said he believes the Chinese government, which has been allowing its currency to rise, will change course due to the decline in global trade caused by the slowdown. The yuan is now trading at an “optimal level,” he said. (…)

Mr. Tsang said the amount of trade denominated in the yuan will continue to grow rapidly because of the uncertainties over the volatility in the U.S. dollar and the euro. But he said full convertibility in the yuan will take longer than many would expect. “We are not talking about months, we are not talking about years, we are talking about decades.

Star   “But the Chinese leadership is very bright, they may do it quickly,” Mr. Tsang said. (…)


Baring teeth smile   The IEA seems to be intensifying pressures toward Saudi Arabia to stop its high price strategy. Last week, the IEA wrote

Saudi Arabia cut its production by 200,000 barrels a day in September and, “sent the clearest signal yet that it intends to protect revenues, despite declining output, with its decision to raise prices to record levels for Arab Light for Asian buyers for November.


Fatih Birol, the chief economist for the International Energy Agency, said that $1.5 trillion dollars needs to be invested each year if the world is going to meet the energy demands from now until 2035. (…)

“If we don’t find that money, then the production won’t grow as much as it needs to grow, and as a result of that, one can see much higher prices than we have now today,” he said. (…)

That was aimed at the Saudis as a senior oil executive for state-owned Saudi Arabian Oil Co. recently said the kingdom is unlikely to proceed with plans to raise its oil output, as expansion plans in other countries such as Iraq and Brazil should be enough to satisfy world markets.

On Libya’s production, Birol said:

“I would be positively surprised if we see the prewar levels reached before 2013,” he said.

That is roughly in line with the predictions of the country’s oil chief, who recently said he thought full output would return in 14 to 15 months.


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