NEW$ & VIEW$ (7 May 2012)

Lots of stuff today but so little to cheer from! The Greek risk is back. Europe veers to the left. Euro banks sit on their hands. More signs of China slowing. And U.S. earnings not so great finally!. Thank God oil is weakening!




Sad smile  Jobs Engine Sputters in April

The U.S. economy added a disappointing 115,000 nonfarm jobs last month,  following an upwardly-revised 154,000 in March (from an original estimate of 120,000) and 259,000 in February (from 240,000).


The net revision was +53k for the prior two months. The net revision for private employment was +66k which means government jobs were revised down 13k.

Rainbow  The positive view is that the exceptionally mild winter weather has distorted the economy favorably in the first 2 months, pulling jobs forward. Indeed, total employment averaged 173k per month between Sept-Dec. 2011 and 200k per month between Jan-April 2012. Private employment averaged 191k in the earlier period and 207k in the last four months.

As I wrote in my April 2nd FACTS & TRENDS: The U.S. Consumer About to Retrench,

Private employment growth has not exceeded 200k per month since 1999 and even during the boom internet years of 1993-99, private employment averaged 232k per month. Its recent 250k monthly average of the last 3 months is therefore unlikely to be sustained, even more so in the current economic environment. It is much more reasonable to expect private employment growth averaging 150k per month during the next 12 month period which, coupled with an average 5k monthly loss for government jobs would result in total employment growth averaging 145k per month from now on in 2012.

It was +135k on average during the last 2 months (private +148k). Markit adds support:

imageSome reassurance can be gained from the ISM surveys – which act as a reliable indicator of the underlying trend in non-farm payroll growth – signalling that the US economy is probably generating up to 200,000 new jobs per month, even after taking account of a weakening in the non-manufacturing sector’s growth rate in April.

Storm cloud   The less optimistic view notes that government employment fell -15k in April after being revised down 13k for the prior two months.

Gary Shilling explains that

imagein terms of income lost, the elimination of two municipal employees is the equivalent of almost three private sector terminations. On average, municipal employees are paid 43% more than private sector workers, 33% more in wages and salaries and 68% more in benefits. (Via John Mauldin)

Also, NBF Financial warns that

imagethe on-line help wanted index, which leads job creation by roughly three months, showed its biggest decline since 2010 on a seasonally adjusted basis in April (adjustment made by us). The outlook is not very inviting at this point in time. We appear to be hitting a soft patch.


Full-time employment gave back all of its March gain. The workweek was unchanged as was average hourly earnings, continuing the 0.1% average monthly gain of the previous 7 months.  Average hourly earnings are up 1.8% from a year ago but at the current trend rate, the YoY gain will decline towards 1.2% by year-end. As employment growth seems stuck in the 1.5% range, employment income can hardly rise by more than 3% YoY.

No surprise then that retail sales are slowing:

Sad smile  Early Easter Hurt Retailers in April

U.S. chain stores delivered disappointing sales for April, with Macy’s, Target and Saks all falling short of expectations. The early Easter set up a powerful showing in March that largely didn’t extend into April.

April same-store sales rose 2.2% for the 18 retailers that report figures, according to analysts polled by Thomson Reuters. This represented the weakest monthly showing in a year and a half. The 2.2% increase compares with an 11.1% gain a year ago when Easter fell on April 24, and is beneath the range of 3% to 5% that retailers have been reporting so far this year. For March and April combined, to show the shift of the Easter holiday to early April this year, retailers reported a 4.5% gain. The growth is down from a 6.4% rise over the same two months last year.


General retailing appears set to a meaningful slowdown but pent-up demand may continue to support autos and housing for a little while. This would help prevent a “harder patch” in manufacturing activity. Recent stronger car sales have spurred production which is scheduled to rise at a 20% annual rate in Q2, softer than Q1’s +43% but roughly in,line with Q4’11’s +27%.

Pointing up  [ECONOMY]Workforce Productivity Falls

The productivity of U.S. workers fell in the first quarter, suggesting that companies are approaching the limit of how much they can squeeze from their workforce.

U.S. nonfarm productivity—defined as output per hour worked—declined at a 0.5% annual rate in the first quarter, the Labor Department said Thursday. Productivity fell because output rose at a 2.7% rate, while hours worked increased at a 3.2% pace.

“It suggests firms have pretty much maxed out what they can get out of their current employees,” said Erik Johnson, an economist with IHS Global Insight. Mr. Johnson added that, assuming demand continues rising, sluggish productivity should encourage companies to continue hiring and investing in new capital equipment that makes their workers more efficient.


Excluding coal and grain, carloads increased 6.7% YoY in April. YTD carloads are up 6.2% YoY. Seasonally adjusted rail carloads excluding coal and grain were up 0.7% MoM in April. Seasonally adjusted U.S. rail intermodal traffic was up 0.3% MoM in April. (AAR)



High five  However, the Ceridian-UCLA Pulse of Commerce Index, which is based on real-time
fuel consumption data for over the road trucking is in slowdown mode. If trucking is not losing market share to rail, which many people say it is, U.S. GDP is about to turn down.


image image




Fingers crossed  Crude Oil Falls Below $100 a Barrel in N.Y. for First Time Since February

U.S. crude stockpiles increased 2.84 million barrels to 375.9 million in the seven days ended April 27, the most since September 1990, according to an Energy Department report May 2. Domestic output gained 8,000 barrels a day to 6.12 million, the highest level since November 1999.

Gasoline consumption fell 0.3 percent to an average 8.66 million barrels a day in the four weeks ended April 27, leaving demand 4.7 percent lower than a year earlier.




THE EURO SPRING  Surprised smile


Steaming mad  Voter Anger Sweeps Europe

Voters Agree on One Thing: Discontent

Stocks Fall After Vote

The euro, European stocks, bank shares and “peripheral” euro-zone sovereign bonds all suffered as funds moved into the safety of the dollar and assets such as German bunds

In a stinging rebuke to Greece’s two mainstream parties and the austerity policies they backed, the conservative New Democracy party and the Socialist Pasok party garnered less than a third of the vote combined. And in France voters elected Socialist Party candidate François Hollande as president, who has pledged to shift the economic hardship onto the rich and soften austerity measures.

“Political chaos now prevails and the dollar is very strong as investors are fleeing Europe and are seeking any safer ports that might be available to them in this strong and strengthening political storm,” said Dennis Gartman in his daily Gartman letter.

But, why the surprise?


Hollande Vows to Fight Austerity After Beating Sarkozy

“Austerity isn’t inevitable. My mission now is to give European construction a growth dimension.”

The campaigning in France isn’t over. The country elects its lower house of parliament in five weeks, prompting calls from all political leaders to keep fighting. If Sarkozy’s Union for a Popular Movement keeps its majority, Hollande would have to work with a Cabinet controlled by the opposition, constraining his ability to deliver on his pledges.

France will hold legislative elections next month on June 10 and 17. If the left wins, it will control all branches of government. If the right retains its majority, Hollande would be forced to appoint a PM representing the right (as the PM must have the confidence of Parliament) and France would end up with “cohabitation” whereby the President and PM come from different parties (last seen in 1997–2002 with centre-right President Chirac/centre-left PM Jospin).


Coalition Talks To Begin in Greece

Greece’s party leaders will begin cross-party talks in an attempt to form a government, but prospects for a coalition appeared dim after the election delivered a political deadlock.

Steaming mad  More than 60% of the popular vote, instead went to fringe left- and right-wing parties that have campaigned against the austerity program Greece must implement in exchange for continued financing from its European partners and the International Monetary Fund.

In a surprise result, the Coalition of the Radical Left, or Syriza, which seeks to annul the austerity program, saw its share of the vote more than triple from the 2009 elections, to 16.8% of the vote and 52 seats—making it the second-largest party in parliament.

Syriza leader Alexis Tsipras said he would stick by his commitment to annul the austerity package. “The parties that signed the memorandum now form a minority. Their signatures have been delegitimized by the people,” he said in a televised statement.

Labour Gains in U.K. Elections



EU to Show Flexibility on Budget-Deficit Rules  (my emphasis)

“Yes, the EU fiscal framework is rules-based … but at the same time, the pact entails considerable scope for judgement when it comes to its application.”

“The pact entails considerable scope for judgment, based on economic analysis and its legal provisions, when it comes to its concrete application,” Rehn said today at an event sponsored by the Institute for European Studies in Brussels. The pact ’’implies differentiation among the member states according to their fiscal space and macroeconomic conditions.’’

Rehn, who has urged a capital boost for the EIB, said this and other proposals to spur investment could be combined in an “investment pact,” which would also include so-called project bonds to fund infrastructure spending, supporting green technologies and using the EU’s budget to co-finance efforts.

’’We need to enhance public investment and use it in a smart way to unlock further private investment,’’ Rehn said in the text of his speech. “While the single market remains our main growth engine, this kind of investment pact could provide necessary additional fuel for the engine.”

Banking: That shrinking feeling

The International Monetary Fund last month brought the message home to anyone who still believed the European economy – built on a glut of credit-funded borrowing and consumption for a decade and more running up to the crisis – could avoid a sharp correction. It warned that unless policy makers took preventive action, Europe’s banks would shrink their assets by €2tn in the next 18 months. “Synchronised and large-scale deleveraging” would, it said, be more severe than previously anticipated, posing a serious risk to economic growth.

(…) the EBA’s drive to impose higher capital ratios by next month has compounded the problems faced by banks and their customers, as have global regulators with their tough new Basel III rule book on capital and liquidity buffers.

Bankers say the most sensible way to achieve higher capital ratios, given how expensive it is for them to raise fresh equity, is to reduce assets. “What you want to do in the current environment is shrink and lend less, not issue capital at a discount to lend more,” says one bank board member from the eurozone periphery.

It is a train of logic that infuriates regulators. “I do not believe that high levels of capital are a deterrent to new lending,” Mr Enria said in a speech in New York last month. “Banks with low capital levels – or perceived by the market as being so – are those that have had problems in increasing lending. Banks with large capital positions, by contrast, are less sensitive to cyclical shocks and more likely to pursue lending growth strategies.” He said the vast majority of the aggregate €78bn capital shortfall at the 28 banks that failed the EBA’s “stress tests” last year would be offset by capital raising measures. Only 1 per cent would be true cuts to lending.

He’s right! But one first needs to achieve high capital ratios. It’s getting there that inhibits lending.

The BIS highlighted European banks’ continued retreat to their home markets in the last three months of 2011, with lending abroad showing a 7 per cent decline to $17.5tn, the sharpest fall since 2008 (though the slump is inflated by a 5 per cent appreciation in the dollar against the euro over the period). All banks shrank their overall eurozone exposure, too. Lending to eurozone companies declined 6 per cent, with shrinkage in Italy, Spain and Portugal, the countries hardest hit by the crisis, nudging 10 per cent.

Money  European Banks Stash Their Cash

At the end of March, 10 of Europe’s biggest banks had parked a total of nearly $1.2 trillion of cash at central banks around the world, according to an analysis by The Wall Street Journal of bank disclosures. The total is $128 billion higher, or a 12% jump, since December and up 66% from the end of 2010.


The situation is prompting banks to remain conservative. Over the rest of 2012, Spanish banks face about €61 billion of bonds maturing, while Italian lenders face about €43 billion. By keeping most of the money they borrowed from the ECB parked at various central banks, the lenders can tap those reserves if markets remain shut.

Thumbs down  Norway state fund sells eurozone debt

The fund, which has more than $600bn of assets under management and owns 2 per cent of all European equities, said the eurozone still faced big problems and that the Greek debt deal had worsened matters.

It therefore sold all its holdings of Irish and Portuguese government debt, which totalled NKr3.8bn and NKr743m, respectively, at the end of 2011. It has also slashed its Italian sovereign debt position from about €8bn in the middle of 2011 to about €3.5bn at the end of March this year.

Its reduction in its eurozone positions comes just weeks after the Norwegian ministry of finance, which makes the main asset allocation decisions for the fund, said it would over time cut its exposure to European bonds from 60 to 40 per cent and to the continent’s equities from 50 to 40 per cent.

It is also planning to boost its holdings of emerging markets debt as it did in the first quarter when it bought local currency government bonds from Brazil, Mexico, India, South Korea and Indonesia as well as the US.

Pointing up  Schäuble backs wage rises for Germans  Mug
Finance minister says G20 relies on nation powering growth

Germany’s finance minister has backed wage increases for the country’s workers in what may be seen as an olive branch to critics who argue that weak German consumption has exacerbated the eurozone debt crisis.

“Europe and the G20 are relying on us remaining an engine of growth,” Wolfgang Schäuble said in an interview with Focus, a German magazine.

“It is fine if wages in Germany currently rise faster than in other EU countries. These wage increases also serve to reduce the imbalances within Europe.”

Indonesia growth eases to 6.3% 
Foreign investment increase balances fall in exports


Australia Central Bank Lowers Growth Forecast

The Reserve Bank of Australia, or RBA, now expects the economy to grow at a rate of 2.75% through to the fiscal year ending June, compared with a previous forecast of 3.5%. Growth is expected to quicken to 3.0% by the end of the calendar year end, but still below a previous estimate of 3.5%.


Storm cloud Canton fair closes with drop in export transactions  The spring session of the biannual Canton Fair closed on Saturday, with export transactions decreased for the first time since 2009.

The value of export deals dropped by 2.3 percent year-on-year to $36.03 billion, or down 4.8 percent than the figure at the autumn session of the fair, said Liu Jianjun, spokesman with the fair.

“The decline in sales was mainly due to sluggish demand from Europe and the United States,” said Liu Jianjun, the fair’s spokesman.

Affected by the European debt crisis, the number of buyers and transaction from Europe decreased by 15.5 percent and 5.6 percent, respectively, Liu said.

Pointing up  Sales volume to US buyers also decreased by 8.1 percent compared with the last session, according to Liu.


We now have 423 (87%) reports in. S&P calculates that Q1 operating EPS will be $24.13, up 1.7% from Q4’11 and +7% YoY. Q1 EPS would thus beat downwardly revised estimates by 1.5%, nothing to write home about, especially since Q2 estimates ($25.89)are not rising, nor are Q3 ($26.88) and Q4 ($28.33) estimates.

Sales are estimated to have increased 6.5% YoY in Q1’12, down from +7.9% in Q4’11 and +10.4% in Q3’11.

How can earnings rise 19% during the next 3 quarters remains a mystery to me…

imageThe beat rate has declined markedly in the last 2 weeks and is now 67%. It was 70% one week ago. Importantly, the “Missed” rate jumped from 17% last week to 23% this week. So, even with the sharp downward revisions preceding quarter end, nearly one in four companies have missed. The next chart from The Boeckh Investment Letter provides a clue.



ISI reports that China’s public companies have all reported Q1’12 results.  Revenue further slowed to 10.4% YoY from 15.3% in Q4’11.  Earnings rose 0.6% YoY, versus +6.5% the previous quarter.  Gross margin mildly shrank to 17.9% from 18.2% in Q4. Banks contributed 56% of all A-share earnings in Q1’12 vs. 44% in Q4’11. 


David Einhorn: The Fed’s Jelly Donut Policy

Only it’s not counter-intuitive; it is simply misguided thinking that persists among the Fed Chairman and other government ivory tower thinkers. They do not understand or relate to the prime component of capitalism and a free market: greed. And because they do not understand greed, they also do not understand fear, which presents a double whammy for making bad policy decisions.

Red heart  THE MIT CHALLENGE  Red heart

Thank you very, very much to all of you who have taken the time to vote for my son Danny in the MIT Challenge. Danny and his team finished 3rd among the 37 participating teams. They won a $1500 prize and the right to compete in a second round with a $10k prize, all monies to be invested in their new SMART Coops venture launched with MIT grads. Your help is much appreciated.


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