NEW$ & VIEW$ (6 April 2012)

Ghost   Euro Zone Heading for Another Hot Summer

[EUROHERD]This renewed market pressure largely reflects three things. First, fears that euro-zone economic conditions are deteriorating as austerity policies bite. (…)

Second, the market fears a lack of urgency on reform efforts. (…)

Third, the market is worried about Spanish banks. (…)

Europe’s Markets Tested Anew

New strains surfaced in European markets as a slide in the euro forced Switzerland’s central bank to intervene in currency markets and Spanish bond yields climbed to their highest level this year.



Storm cloud  Winter Chill Damps German Industry

Unusually cold weather in February dampened German industrial output, data from the economy ministry showed Thursday, adding to signs that the country has joined other euro-zone nations in recession.

Industrial production fell 1.3% on a monthly basis in adjusted terms, the ministry said. The ministry also revised down the previous month’s figures, saying output grew 1.2% instead of the 1.6% first reported.

Construction was mainly to blame for the February downturn, dropping 17.1%. Work was curtailed after temperatures in Germany fell to about 4 degrees Celsius below recent norms.

Markit’s March German Construction PMI confirms the weather impact:

At 55.7 in March, up sharply from 35.3, the seasonally adjusted Germany Construction Purchasing Managers’ Index® (PMI®)  showed that activity levels rebounded following a period of unusually cold weather during February.

New business received by companies operating in the German construction sector increased for the first time in a year during March. A number of panellists suggested that this reflected an improvement in underlying demand, as well as a rise in total industry activity.

Pointing up   (…) cost inflation was the strongest for a year, and well above the average rate recorded throughout the series history.

High five   That said, keep in mind that Markit’s March German Manufacturing PMI revealed a weakening trend in Germany:

At 48.4, down from 50.2 in February, the index pointed to a moderate deterioration in overall operating conditions, and was the lowest since December 2011. Moreover, March’s PMI reading was six index points lower than the average for 2011 (54.8). The output and new orders components of the headline index have both moderated substantially since their highs at the beginning of last year.

Lower new orders were the main factor behind the overall deterioration in manufacturing operating conditions during March, with the rate of decline accelerating to the fastest in three months. Investment goods producers indicated the sharpest drop in new work intakes.

March data pointed to a marked reduction in new export orders, extending the current period of decline to nine months. Survey respondents mainly cited softer global trade flows, with weaker trends in exports to China and across the euro area largely offsetting a recent upturn in demand from the USA.

Employment was broadly unchanged over the month, which represented the weakest trend in recruitment since the slight drop in workforce numbers registered two years ago.

Germany’s services sector is also slowing according to Markit:

At 52.1 in March, down from 52.8, the headline seasonally adjusted Germany Services Business Activity Index dropped for the second month running and pointed to the slowest rate of growth since November 2011. Increased service sector output has now been recorded for six months running, but the strength of the upturn has moderated from January’s recent high amid subdued intakes of new work.

(…) new business growth eased since February amid widespread reports of cautious spending patterns among clients.



Earlier this week, I posted a chart showing how Spanish house prices had not declined as much as in the U.S. Here’s a comparison with Ireland from OpenEurope:

image image

A steep decline in real estate prices will in turn increase the number of residential and commercial borrowers defaulting on their loans, exposing banks to large losses. The increase in the number of mortgage cancellations per month suggests this is already happening.

The next chart illustrates how the government is behind the curve. The thin red line at 50B euros is what the government has ordered banks to reserve for potential losses. Doubtful loans at nearly 8% require 3 times that amount.


Financial markets have begun to reflect the worry that things will get worse before they get better as the next two charts from Moody’s.


Banks are not the only problem in Spain. Regional governments are also in difficult conditions.





Smile   U.S Retailers Pick Up Momentum

U.S. retailers generally reported strong sales for March, as warmer weather, an early Easter and appealing fashion styles attracted shoppers.

The 18 retailers tracked by Thomson Reuters posted a 6.9% rise in March same-store sales when a 5.3% gain was expected. The number compares with 1.7% growth a year ago.


imageExcluding distressed sales, month-over-month prices increased 0.7 percent in February from January. The CoreLogic HPI® also showed that year-over-year prices declined by 0.8 percent in February 2012 compared to February 2011. The report also shows national home prices, including distressed sales, declined on a year-over-year basis by 2.0 percent in February 2012 and by 0.8 percent compared to January 2012, the seventh consecutive monthly decline.

House prices, based on data through February, continue to decline, but at a decreasing rate. Excluding distressed sales, we already see modest price appreciation month over month in January and February.

Pointing up  In fact, non-distressed home sale prices, which represent two-thirds of all sales, have appreciated by just over 1.0 percent since the beginning of the year,” said Anand Nallathambi, president and CEO of CoreLogic.


Sad smile   The U.S created only 120k jobs in March after averaging 246k in the previous 3 months.


While in Canada…

Surprised smile   Number of New Jobs in Canada Surges

Job creation in Canada returned with a bang in March, the best monthly showing in more than three years, with almost all of the employment gains in full-time work.

The data agency said the Canadian labor market added 82,300 net jobs in March, following a small decline in February and months of tepid results. Before March, the Canadian economy had added 17,200 net jobs over the six-month period ended Feb. 29.

The jobless rate in March fell to 7.2%, matching the recent low hit last September. Meanwhile, 52,500 people joined the labor force—a reversal after data indicated 37,900 Canadians stopped looking for work in the previous month.

The last time the Canadian economy created so much employment in one month was in September 2008, just before the financial crisis, when nearly 85,000 net jobs were added. March’s performance was also the fourth-largest monthly job gain in the past two decades.

Most of the new net jobs, or 70,000, were full-time spots. The private sector added 42,600 net new positions—the biggest monthly increase in eight months—while the public sector posted a net job gain of 20,900 (…)


Zacks Research keeps a daily tally of earnings reports. Alcoa officially kicks the earnings season off but some smaller companies have already reported their Q1.

  • So far just 24 firms of the S&P 500, or 4.8%, have reported first quarter results.  Total Income Growth at 3.47%. We have a 2.83 surprise ratio, and 3.09% median surprise, both about normal. Positive Surprises for 70.8% of all firms reporting.
  • Positive year-over-year growth for 14, falling EPS for 10 firms, a 1.40 ratio; 58.3% of all firms reporting have higher EPS than last year.
  • Off to a pretty good start relative to expectations, but far too early to draw any conclusions.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%.  Early on the ratios and medians can be very volatile, but it looks like an OK start to things.

Storm cloud   Alcoa to Curb Alumina Production

Alcoa plans to cut alumina production by about 2% this year, in an effort to match output with its plans to reduce smelter capacity

Party smile   Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc. had a good comment on investors sentiment, noting how Ned Davis Research’s  most widely-followed sentiment measure, its Crowd Sentiment Poll, has surged in optimism into the “uncomfortable” zone. Then,

Finally, we have a new survey from Schwab of its active traders. The latest Charles Schwab Active Trader Sentiment Survey polled 421 individual investors who trade frequently and found 51% now consider themselves bullish—the highest level since we began tracking active trader sentiment in April 2008. This is up from only 25% in October 2011. Only 14% say they are currently bearish.


Rainbow  Drop in Store Vacancies Signals Possible Mall Rebound

Vacancies at shopping malls declined to 9% in the first quarter from 9.2% in the fourth quarter of 2011, marking the first quarterly decline for malls in more than a year, according to Reis, which tracks the top 80 U.S. markets. Still, the vacancy rate remains close to the 10-year high for malls of 9.4% set in last year’s third quarter. Meanwhile, average lease rates at malls increased 0.2% in the first quarter to $39 per square foot   per year, marking a third consecutive increase, according to Reis.

Vacancy rates at strip malls and other neighborhood shopping centers, which have been the hardest-hit sector of the retail real-estate industry, declined for the first time since 2005, falling to 10.9% in the first quarter from 11% in the fourth quarter of last year, according to Reis. As with malls, the strip-center vacancy rate remains close to its all-time high of 11.1% set in 1990. Rates at strip centers increased slightly for the second consecutive quarter, rising by 0.1% to $16.57.


You have to visualize the U.S. malls and shopping centers vacancy rate chart to appreciate this comment:

“I think we’re on the precipice of a recovery, but it’s a little too soon to call it that,” said Ryan Severino, a senior economist at real-estate research company Reis Inc.


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