NEW$ & VIEW$ (27 Jan. 2012)

ChartU.S. GDP Rises 2.8%

The U.S. economy grew at its fastest pace in more than a year and a half in the final three months of 2011, rising at an annual rate of 2.8%.

Growth was lifted by a 2 per cent rise in consumer spending, compared with 1.7 per cent in the third quarter.

But cuts to defense spending weighed on the economy, pulling down government spending and investment by 7.3 per cent, more than three times the 2.1 per cent decrease in the third quarter.

Pointing up   Defense cuts hurt:

Spending on national defense swung from a 5 per cent increase in the earlier quarter to a 12.5 per cent drop in the final three months of the year. That on its own may have subtracted as much as 0.8 per cent from headline growth, said Ian Shepherdson, chief US economist at High Frequency Economics.

Stripping out those cuts, non-defense spending by the federal government actually rose 4.2 per cent.

imageBusinesses Ramp Up Spending on Goods

New orders for durable goods increased 3.0% last month following a 4.3% rise during November and a 0.1% gain in October. Unfilled orders rose 1.5% in December after +1.4% in November.

The increase in durable goods was spurred by demand for airplanes. However, there were gains in every major category, from primary metals to machinery, with the exceptions being electrical equipment and defense products. Orders for nondefense capital goods excluding aircraft—a proxy for business spending—rose 2.9%, after two months of declines.


The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4% in December to 94.3, following a 0.2% increase in November and a 0.6% increase in October. This month’s data inaugurates a number of major changes to the components and calculation of the LEI.

“Revised figures show that adding the new Leading Credit Index™, in conjunction with other changes, makes the LEI a more accurate predictor of U.S. business cycles since 1990,” said Ataman Ozyildirim, economist at The Conference Board. “The improvement is especially pronounced before and during the 2008-2009 recession, and during the current expansion.


In December, the LEI for the U.S. increased again. The gain was widespread among the leading indicators, suggesting economic conditions should improve in early 2012. However, the LEI gain in December was held back by negative contributions from the new Leading Credit Index — which indicates weak credit and financial conditions — and from consumer expectations for business and economic conditions.”


Pointing up Pointing up  The revised LEI now stands at 94.8, nearly 20% below the old reading for November, a more accurate reflection of the economic reality. The new LEI has actually moved sideways in recent months, something worth watching, especially since the coincident/lagging indicator has been weakening.

The Conference Board has decided to replace three of the ten components and make a minor adjustment to another component. The composition changes reflected in the new LEI address structural changes that have occurred in the U.S. economy in the last several decades. The upcoming changes in the LEI composition include:

1) incorporating the new Leading Credit Index (LCI) and omitting the real money supply (M2) component starting in 1990 (real M2 remains in the index before 1990);

2) replacing the ISM Supplier Delivery Index with the ISM New Orders Index;

3) replacing the Reuters/University of Michigan Consumer Expectations Index with an equally weighted average of consumer expectations of business and economic conditions using questions from Surveys of Consumers conducted by Reuters/University of Michigan and Consumer Confidence Survey by The Conference Board (after 1978, Reuters/University of Michigan Consumer Expectations Index remains in the index before 1978 ); and

4) replacing “New Orders for (nondefense) Capital Goods” with “New Orders for (nondefense) Capital Goods excluding Aircraft.”





 Greece Edges Toward Debt Deal

Talks between Greece and its private-sector creditors edged toward an agreement, with bond holders seemingly willing to accept lower yields on their future holdings of Greek debt.

But Bloomberg notes:

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts.

A senior European policy maker said euro-zone governments may have to increase their contributions to Greece’s debt deal, and said he was hopeful agreements could be struck soon to increase euro-zone bailout funds and International Monetary Fund resources.

European Union economics commissioner Olli Rehn also appealed to the U.S. and other countries not to block an expansion in IMF resources—even if they didn’t want to contribute directly.



U.S. Treasury Secretary Timothy Geithner hinted that the Obama administration would support an increase in resources for the IMF to fight the euro crisis – but only if Europe itself puts more of its own money on the line first.

“Without more resources…austerity will feed decline,” Mr. Geithner said.

A meeting of finance ministers of the Group of 20 in late February in Mexico City is the most likely venue for a decision on the IMF.

  • While Eurozone banks feel somewhat better and dive into the ECB financed carry trade:

BBVA Chief Upbeat on Plans to Fix Bank Sector

Francisco Gonzalez, BBVA’s chief executive, said the new Spanish government is planning a deep cleanup of Spain’s most beleaguered banks in order to permanently renew international confidence in the sector.

A new law that would require banks to take bigger losses on bad assets could be unveiled as early as next week, said a person familiar with the matter.

In the latest round of measures proposed by Spain’s new government, stronger banks are poised to snap up weaker ones unable to swallow the losses needed to fully clean up their balance sheets.

Rainbow   Interesting statement:

One-Year Chart for Bloomberg European Financial Conditions Index (BFCIEU:IND)“The European banking system is no longer facing significant problems today,” he said. “Once you sort out the liquidity and you have enough capital—and you know most European banks will have 9% capital—I don’t think [there is] any serious problem, generally speaking.”

The Bloomberg European Financial Condition Index (above chart) reflects the recent improvements.

Euro banks are indeed buying their countries’ sovereign debt with ECB money:

Mr. Gonzalez said the better condition of the banking system allows banks to support their countries’ sovereign debt. “Sovereign bonds, in my view, are very safe…. The likelihood of Spain having to default is zero,” he said.

Another load of ECB loans is coming at the end of February.

“We are really seeing clear signs that this money is not simply staying in the deposit facility, but is circulating in the economy,” ECB President Mario Draghi said earlier this month, pointing to the declining yields of some European government bonds as a sign that banks are using the funds to buy the bonds. “By and large, the banks that have borrowed the money from the ECB are not the same as those that are depositing the money with the deposit facility of the ECB.”

BBVA’s Gonzalez to conclude:

“The cost of funding is going down very rapidly. That will put more money in the margins of the banking system, which is good because in order to give credit you need strong banks,” said BBVA’s Mr. Gonzalez. “We are in the process of filtering that money down to the real economy.”

Which would be most welcome given:

Spain Jobless Rate Hits 22%  The number of jobless Spaniards rose by 295,300 in the fourth quarter from the third, to 5.27 million. That is equal to 22.85% of the work force.

Under intense government pressure, Spanish unions and business leaders have taken some measures in recent weeks that they hope will encourage hiring, including a wage-moderation agreement for the next several years and a commitment to allow more flexible working hours for unionized workers. Analysts say these moves are steps in the right direction but don’t address key problems like Spain’s high cost of dismissal, which discourages hiring, and the inability of companies in difficulty to opt out of sector-wide wage agreements.

MORE EASING COMING:  Brazil Bank Warns of Possible Rate Cut

Brazil’s central bank made an unusually forthright statement on interest rates, saying the benchmark Selic rate could be lowered to single digits after a sharp slowdown in domestic economic growth.



Auto   Japanese Car Makers Post Output Rises

Japan’s top three car makers Friday reported solid increases in domestic production for December, in a sign that the worst is over after natural disasters both at home and abroad disrupted their supply chain networks most of last year.


China Home Prices Must Fall 30% to Reach ‘Reasonable’ Level, Lawmaker Says

China’s property prices need to decline 30 percent to reach a “reasonable” level, according to He Keng, a deputy director of the Financial and Economic Affairs Committee of the National People’s Congress.

Housing prices will be at a “reasonable” level when they are equivalent to about six years of salary for a family, the senior lawmaker said, according to the transcript of an interview with China National Radio.



According to ISI, S&P 500 earnings beats have been roughly 60%. While this is below previous beat rates of 67%, U.S. companies keep beating estimates even in pretty difficult economic environments. Importantly, over the past 2 weeks, the bottom-up estimate for S&P earnings has increased from +9.4% YoY to +11.0%.

Only 38% of companies have beaten on revenues, down from 46% in Q3 and 57% in Q2. Nominal growth in U.S. GDP was a weak +3.7% in Q4 as government spending declined 0.1% YoY, the first decline in over 45 years.

Bespoke Investment looks at all listed companies:

Of the 373 companies that have now reported, just 56.6% have beaten earnings estimates, which is two full percentage points lower than the already very low number that was in place earlier this week.  We haven’t had a beat rate below 55% since the first quarter of 2001, but it looks like there’s a real shot for that to happen this quarter.

Caterpillar Voices Optimism

Caterpillar and other big manufacturers, feeling more upbeat about the global economic outlook, are promising further gains in earnings this year.

The debt-repayment trouble in Greece, Italy and other southern European countries “has been going on a long time and hasn’t tanked the place,” Doug Oberhelman, chief executive officer of Caterpillar, told investors Thursday after it reported a 60% leap in fourth-quarter earnings. “We don’t think it will.”

Western Europe will remain in a mild recession in this year’s first half, predicted Alexander Cutler, Eaton’s chief executive officer. But Europe’s recession appears “more mild than some people had feared,” Mr. Cutler said.


I like Zerohedge, always a good place to find bears on just about everything resembling a rising equity. And when they are short on facts, objectivity or judgment, they are generally entertaining. This one on Apple is none of the above. (Disclosure: I own AAPL). So I thought I could bla-bla-bla on Apple as well but with facts. First, Zerohedge:

In case one was wondering how the Goldman trading team was axed in Apple, we now know that they are pushing their inventory of stock in the name out of the door and to clients harder than ever, having just released a forecast with a $600 price target. However, with nearly 200 hedge fund holders in the name, and pregnant to the teeth in the stock, we fail to find who the incremental buyer of GS’ AAPL stock will be.

The coming shortage of incremental AAPL buyers has been used a lot by the bears during the last, oh! 150 bucks on the stock. A few ideas where new buying may come from, keeping in mind that AAPL is 3.5% of the S&P 500 Index:

  • U.S. institutional equity portfolios are only 69% invested currently. I bet their balanced portfolios are also low on equities.
  • Hedge Funds equity exposure is 44%, nearly as low as in early 2009.
  • Same underinvestment is likely in mutual funds.
  • Foreign investors could decide that the U.S. is a better place to be than, say, Europe, and buy U.S. market ETFs.
  • U.S. individual investors could dip again into equities and also buy market ETFs.
  • Should Apple decide to pay a dividend, many restricted funds might wish to own the name.
  • Apple may launch a stock buyback program with its $96B in cash.

Were any or, god forbid, all of these ideas materialize, lots of marginal buying would show up, even if only to maintain their current exposure in the best large cap stock around (not that there has not been any lately mind you).

I understand that people can be frustrated not owning a stock that has more than quadrupled in 3 years, more than doubled in 2 years and gained 37% in the last year (when its founding visionary passed away). Still not a reason to write such superficial and biased stuff.

For the record, Apple EPS rose 109% YoY last quarter, beating street estimates by 38%. Sales rose 73% YoY. Not insignificant, total net income was $13 billion and net cash on hand rose $16 billion to reach $97.6B. To save you time, cash is $105 per share, and rising nearly $180M per day. Ex-cash, AAPL shares thus trade at $340 or 10.3x trailing EPS (ex interest income), still a huge discount to the overall market.



2012 may be the year of 3D printing, when this three-decade-old technology finally becomes accessible and even commonplace. Lisa Harouni gives a useful introduction to this fascinating way of making things — including intricate objects once impossible to create.


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