NEW$ & VIEW$ (15 OCTOBER 2012)


Warnings on fourth quarter add to U.S. earnings worries

Outlooks for the fourth quarter – just two weeks old – are so far decidedly more negative than positive. Thomson Reuters data shows 11 negative outlooks so far from Standard & Poor’s 500 companies and no positive outlooks.

Third-quarter guidance, meanwhile, at the comparable period showed 6 negative outlooks and no positive. (…)

U.S. companies so far are having a tougher time beating analyst expectations in the third quarter, with 59 percent of companies exceeding forecasts, below the 62 percent long-term average, based on Thomson Reuters data. (…)

Revenue trends have also been weak: Just 50 percent of companies that have reported have beaten estimates on revenue, compared with the 62 percent average, he said.

Warnings continue to come in for third-quarter reports, helping to drag down earnings estimates for the period. Several of those warnings have come from Kohl’s (KSS.N) and other retailers, which do not report results until early November. (…)

Europe was cited more than any other reason for negative forecasts from S&P 500 companies for the third quarter, a Thomson Reuters survey showed, but China is a growing concern.

  Factset adds:

The 32 companies that have reported to date have surpassed estimates by just 3.0%. Over the last four quarters on average, actual earnings have surpassed estimates by 4.7%.

If the final surprise factor is 3.0%, it would be the lowest final surprise factor since Q4 2008. However, even if the remaining companies were to only beat estimates by 3.0%, the final earnings growth rate for the quarter would still finish in the positive, at 0.15%.

Banks stocks were hit hard late last week after WFC and JPM reported. Yet, banks were supposed to be among the stronger gainers in Q3…


J.P. Morgan, Wells Fargo: Housing Is on Mend  J.P. Morgan Chase and Wells Fargo both reported solid gains in profit and pointed to a recovery in the housing market. Low interest rates, however, continue to pose problems.

“The housing market has turned the corner,” J.P. Morgan Chase & Co. Chief Executive James Dimon said Friday. Wells Fargo & Co. Chief Financial Officer Tim Sloan was just as definitive: “We do believe that we’ve seen a turn,” he said.

At the same time, the headwinds that have kept a lid on the U.S. recovery and weighed on bank stocks were plainly in evidence. Profit margins are being crimped by the same low interest rates that spurred the mortgage-refinancing wave, and investors continue to scrutinize the companies’ operating costs and legal expenses. Bank stocks tumbled on a relatively flat day in the broader stock market. (…)

Surprised smile  J.P. Morgan and Wells Fargo emerged as the two of the sturdiest U.S. banks in the aftermath of the 2008 crisis and together are now responsible for more than 44% of all mortgage volume, according to Inside Mortgage Finance. (…)

Pointing up J.P. Morgan Chase said 75% of third-quarter mortgage volume came from refinancings; Wells Fargo said 72% of its applications during the quarter were for refinancings.

Margin squeeze:

[image]J.P. Morgan’s net interest margin—measuring what it makes on its loans—dropped to 2.43% from 2.66% a year earlier. Wells Fargo’s net interest margin slid to 3.66% from 3.84% a year ago.(…)

With deposit rates already near zero, banks have limited room to further lower their cost of funding. Wells said that its average deposit cost in the third quarter was just 0.18 percentage point, down only marginally from 0.19 percentage point the prior quarter.

Meanwhile, each quarter banks see higher-yielding loans and securities mature, only to replace them with ones that yield significantly less. That contributed to a 0.25 percentage point fall in the margin at Wells to 3.66%. J.P. Morgan’s margin fell 0.04 percentage point to 2.43%. (…)

“We have to be very careful at this point in time not to just go out there and stretch for yield and take on a lot of interest-rate risk,” Mr. Stumpf said on Friday’s call.

Buyers Are Back After Foreclosure

Millions of families lost their homes to foreclosure after the housing crash hit six years ago. Now, some of those families are back in the housing market. Call them the “boomerang” buyers.

(…) Using the three-year benchmark it takes to get an FHA-guaranteed loan, in this year’s second quarter there were 729,000 households that were foreclosed upon during the bust that are now eligible to apply for an FHA mortgage, up from 285,000 in the second quarter of 2011, according to an analysis of foreclosure data by Moody’s Analytics. The company projects that number will grow to 1.5 million by the first quarter of 2014. (…)

Until recently, many of the people who had lost their home to foreclosure or short sale have rented homes, leaving many economists and industry watchers to wonder if the nation would become more of a renter society. In the second quarter, the national home-ownership rate came in at 65.5%, down from 65.9% a year earlier and 69.2% in the second quarter of 2004. Each percentage-point decline represents about one million households.

But as rental rates continue rising—they climbed 0.8% in the third quarter to a national average of $1,090 per month, according to Reis Inc. homeownership is increasingly becoming cheaper than renting. (…)

A housing boom will lift the US economy

Roger Altman, former US deputy Treasury secretary from 1993-94, writes in the FT that the housing market

(…) will be powerful enough, together with rising oil and gas production and other factors, to lift the entire US economy. Indeed, the resultant US economic growth rate may be higher than the Federal Reserve’s long-term forecast of 2-2.5 per cent.

This surge will be driven by a combination of improving house prices, a lower inventory of homes for sale, rising rates of household formation and population growth, and improving access to mortgage credit. Together, they should push residential investment, which includes both new construction and remodellings, to annual growth of 15-20 per cent during the next five years. This alone may contribute 1-2 percentage points to annual growth in gross domestic product and up to 4m jobs over that period.

(…) housing demand is going to be strong, driven by demographics. The International Monetary Fund forecasts that the US population will increase by 15m during the 2012-17 period, more than the increase of the past five years. The two groups of the population that are growing fastest are the over-55s and the so-called echo boomers, the grandchildren of the baby-boom generation. The first group has the highest rate of home ownership. The second has been renting disproportionately, and is primed to start buying. JPMorgan estimates that 6m new units of housing are needed by 2017 just to serve the bigger population.

Then there is the coming recovery in household formation. According to JPMorgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years. (…)

In Canada, mirror image: Why TD thinks Canada is ‘overbuilt’

(…) The latest numbers from Canada Mortgage and Housing Corp., released this week, showed housing starts in September dipping to an annual pace of about 220,000, which TD economist Francis Fong notes tops the average of about 209,000 over the past decade. (…)

image“The current pace of construction is also well north of the average rate of household formation in Canada. According to the 2011 census, only 177,000 new households were created each year since 2006. This would imply that, over time, we have been building more than the demographic need requires.” (…)

The bottom line for Mr. Fong is that the bank believes there’s a “moderate   level of overbuilding” in some cities that will lead to a “gradual price correction” over the course of the next several years as the rate of construction eases.

Also: Canadian housing market peers over the edge


Charting the future of crude oil

image(…) The most dramatic change to the global oil map is the boom in the United States, with the “light, tight oil” that is now being produced in North Dakota’s Bakken field and Texas’ Permian and Eagle Ford plays. The IEA forecasts that the U.S. will increase its production by 3.3 million barrels per day over the next five years to 11.4 million barrels, a level that exceeds the current output of Saudi Arabia.

And it expects Canada’s oil production to grow by 1.1 million barrels a day, primarily from the oil sands. Domestic oil production was about 3 million barrels a day last year. (…)

Some have written about this “potential” game changer in the past year. Doubters claim that optimistic projections take little account from declining production at many mature fields and the apparent high decline rates in shale wells. Political and environmental issues also add to the uncertainties.

Nonetheless, the fact is that U.S. production is growing fast and faster than previously forecast. image

The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results – given the fact that most shale/tight oil resources in the world are still unknown and untapped. What’s more, the application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world’s oil production. (L. Maugeri, Harvard Kennedy School)

I will be shortly posting on that very important trend.

Devil  Iran’s Secret Plan to Contaminate the Strait of Hormuz

Iran could be planning to create a vast oil spill in the Strait of Hormuz, according to a top secret report obtained by Western intelligence officials.

The goal of the plan seems to be that of contaminating the strait so as to temporarily close the important shipping route for international oil tankers, thereby “punishing” the Arab countries that are hostile to Iran and forcing the West to join Iran in a large-scale cleanup operation — one that might require the temporary suspension of sanctions against Tehran.


Wholesale Prices Rise

The producer price index increased a seasonally adjusted 1.1% in September from a month earlier, the Labor Department said Friday. The gain was largely due to energy prices that jumped 4.7% during the month, following a 6.4% rise in August. (…) So-called core prices, which strip out volatile energy and food components, were unchanged from August.

A 1.1% monthly increase in wholesale prices can be rapidly dismissed as inconsequential if it appears to come from rising energy prices. But when it follows a 1.7% jump which itself came after 0.2% and 0.3% gains the two months previous, one should begin to pay attention.

During the first 5 months of 2012, the PPI declined 0.8% or 2.4% annualized. Over the next four months through September, the U.S. PPI rose 3.3%. That’s a 10.2% annualized rate. The core PPI rose 0.9% during the last 4 months or 2.7% annualized, the same annualized rate as for the whole of 2012 so far. Such high inflation is happening while the U.S. economy is barely growing…


Finance Chiefs at Odds

A weekend gathering of the world’s top finance officials deepened—rather than eased—conflicts among some of the largest economies, raising fresh doubts about boosting the flagging recovery.

At the annual meetings here of the International Monetary Fund and World Bank, European officials bickered about the damage caused by austerity; this week they head into a major euro-zone summit with no clear rescue plan for Greece. A territorial row between China and Japan, the world’s second- and third-largest economies, bled into the conference with no sign of resolution, highlighting a new risk to growth. And many top finance officials pointed fingers at the U.S. for casting a new cloud over global markets by failing to make progress on the budget mess in the world’s largest economy. (…)

Some officials at the Tokyo meetings acknowledged that a new round of fear in financial markets could help force action in areas such as the euro zone. “Markets are doing their job,” said IMF chief economist Olivier Blanchard. “They scare policy makers into doing the right things…I’m relatively optimistic that we’ll get there. How we get there, whether it’s completely smooth or not, we’ll have to see.”



China’s Trade Surplus Widens

China’s trade surplus widened in September as exports rose on improved overseas demand and imports recovered slightly, but analysts warned the healthier trade picture may not hold up over the coming months.

(…) Exports were at a record monthly level of $186.4 billion in September, rising a solid 9.9% from a year ago, data from the General Administration of Customs showed Saturday. This was much higher than the 2.7% rise in August (…). Imports were up 2.4%, compared with a 2.6% fall in August (…).

Exports to the U.S. have held up fairly well this year, showing a 9.6% year-on-year gain in the January-September period. But exports to the EU have struggled, falling 5.6% over the same period (…).

Exports climbed to a record last month, with sales to the U.S. increasing at the fastest pace in three months. Shipments to Japan rose for the first time since June and those to Southeast Asian nations jumped 25.5 percent. The gains helped counter a 10.7 percent drop in exports to the European Union.

High five  Before getting too excited on China:

  • Beware of Chinese data.
  • Chinese exporters fear grim outlook
  • On the ground in China the situation looks grimmer than the data reflects. Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

  • Alarm bells jingle over Xmas exports

The traditional export powerhouses in eastern China say many European companies are not buying Christmas products, and those that do put in an order are buying less, or asking for much lower prices – sometimes even lower than the production cost.

  •   ISI’s weekly China Sales Survey broke below 40 and is not far from the 2009 low of 36.1.


  • The generally more reliable electricity stats continue to show weakness:

Statistics from the National Energy Administration showed that in the first eight months, China’s total electricity consumption grew 5.1 percent year-on-year to 3.28 trillion kWh, further easing from the 5.4-percent growth seen in the first seven months.

  • World economies remain weak:

Just 10 of the 30 countries covered by manufacturing PMIs saw an improvement in business conditions in September, and in three of those 10 the increase was only marginal. The remaining seven which saw growth were either north American or non-Asian emerging markets, with a notable exception of India. The bottom of the PMI league table was again dominated by Eurozone and Asia-Pacific countries. (Markit)




image                (Chart from Schwab Market Perspective: Teetering on the edge?)


China’s central bank governor, Zhou Xiaochuan, cast doubts about any fresh monetary stimulus Sunday by saying in a central-bank publication that global policy makers should be vigilantly focused on fending off inflationary risks. (WSJ)

China Inflation Eases

The consumer price index rose 1.9% in September from the same month a year earlier, slower than a 2.0% on-year gain in August, data from the National Bureau of Statistics showed Monday. In sequential terms, the CPI increased 0.3% in September from August, when it rose 0.6% from July.


Food prices, which account for nearly one-third of the weighting in the calculation of China’s CPI, rose 2.5% YoY last month. This was down from the 3.4% YoY increase in August.

(…) the producer price index fell 3.6% in September from the same month a year earlier, after a 3.5% on-year decline in August. The PPI declined 0.1% in September from August, when it fell 0.5% from July.

India’s Inflation Accelerates to 10-Month High

The wholesale-price index rose 7.81 percent from a year earlier, after climbing 7.55 percent in August, the Commerce Ministry said in a statement in New Delhi today.

Fuel prices advanced 11.9 percent in September from a year earlier, today’s report showed. Non-food manufactured goods prices, a measure of core inflation, rose 5.57 percent compared with 5.58 percent in August, calculations by Bloomberg showed.

Auto  Volvo Halts Production at Sweden Plant

Volvo Car Corp. Monday said it would halt production for a week from Oct. 29 at its plant in Torslanda, Sweden, in the latest response to shrinking demand from an auto maker.

“The recession in Europe is deepening and that impacts customers’ willingness to buy new cars,” said Volvo spokesman Per-Ake Froberg. “Therefore we have to continue to adjust production.” (…)

Volvo last month said it would decelerate production at Torslanda, citing the weakness in China. Since Oct. 1, the plant has made 50 cars an hour, having previously produced 57 an hour. The temporary shutdown at the end of this month will further reduce Volvo’s production by about 3,000 cars, representing 0.7% of its total sales in 2011.

The company has also reduced production at its plant in Ghent, Belgium, where it made most of its 449,000 cars last year, and Mr. Froberg said further reductions there are possible.

Tata Motors Global Sales Fall

Tata Motors Ltd. Monday said its global vehicle sales for September fell 4% from a year earlier to 103,656 units, hit by lower volume in the passenger-car segment.

India’s biggest auto maker by sales said its U.K.-based luxury-car unit, Jaguar Land Rover PLC, sold 4% fewer vehicles at 26,461 units. Total passenger-car sales dropped 11% to 48,895 vehicles.

Poland pledges to boost spending  Prime minister warns of difficult year ahead

Poland will fight the economic slowdown by boosting investment spending, Donald Tusk, the Polish premier, promised in a speech to parliament on Friday, breaking with the government’s traditional emphasis on fiscal consolidation.

Money, politics and fear: What the BAE-EADS fiasco says about Europe

(…) Blame the political agenda in Paris, Berlin and London. The rights and independence of the executives and the shareholders were quickly buried under an avalanche of fears that the head office would be in the wrong country; there would be too much state control, or too little; jobs would disappear in one country and pop up in another; and industrial decision-making left entirely in the hands of management and owners risked damaging national agendas and the preservation of national corporate champions.

And so on. The whole affair descended into what’s-in-it-for-me political bedlam.

Now you know why it’s taking so long to fix the euro crisis. (…)


My friend Hubert Marleau at Palos Management Inc. explains why dividend paying stocks keep outperforming.

(…) What is going on? Three Institutional reports may have the answer. These are Black Rock, Columbia Management and Eagle Asset Management.

Firstly, they argue that the demographic shifts to a new generation of retirees are not fully understood by the population at large. A world retirement boom is underway; the number of people aged 60 and older will triple to 2 billion in 2050 from 780 million in 2009. Eighty million Americans will reach retirement age in the next 20 years.

Secondly, quality driven companies that offer both dividends and growth are the few securities that can fill the bill. The dividend payout ratio of the S&P 500 is about 28%. This is far away from the normal range of 40 to 60 percent. Moreover, corporate cash levels are high making it possible for cash flow driven companies to pay more dividends. For example, S&P 500 index companies’ cash as a percentage of market value is very near the historical record level of 13%.

Thirdly, institutional investors have more clout than retail ones and a growing number of them are pushing for favorable dividend actions from companies that can afford to do so.

Goat Schumer to Tax Reform: Drop Dead

A Senate Democratic leader lays down a partisan 2013 marker.

Mr. Schumer says the only way to reform is to broaden the tax base and raise tax rates.


One thought on “NEW$ & VIEW$ (15 OCTOBER 2012)

  1. HELLO .
    well conclusion for all this is if THEY loos in Wall Street the rest of the world is down.
    now one by one
    Standart and Poor
    JMorgan is 2 big institutions who leave with others money (intres)
    wall-street ((parasit and just cordination )
    HOUSE problem ..i have say and other time this is the owner problem (middle class) liket to have a luxery life bat with not tham money (here is and bank ‘s problem too) but they doesn’t care.
    CHine -Japan conflict is one problem who have to find both between GV
    CHINES export ofcours is slow grow even nothing because EU crisis can not help .
    Machinery -car pasagers …you know have so much companies ..and so much line for this so concurence is strong (i think is very good for the mangment to every comp)model cars to find one eazy solution they cost so low and sell with high price is time to change (to much profit)..
    Volvo SW (is good for papou)(i don’t like )
    inflation AH this is one techincal economical financiar problem for me is not difficult if we left more free the people to spend (low prices and low tax tooo)
    we have to see more seriuslye (stock product)..
    OIL price i have to theory when some price go up .cannot slow down but can stay in the same line
    USA i don’t think have problem with oil …thay can take from everywere.

    EU is not good this CHristmass i will do with the same tools and tree..(and if i don’t have ) just with nice sweets chrismat will be nice

    idon’t know who i make good or not good comment i know you are very correct and i like your analysis
    (i learn too)

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