NEW$ & VIEW$ (12 NOVEMBER 2012)

Much to deal with: earnings, valuation, politics. Make sure to read the “oil” part.


Nearing the end of the earnings season. S&P says that of the 451 companies having reported, 63% beat and 24% missed. The biggest beats were in Health Care where 79% beat. Excluding these, the beat rate drops to 61%.

EPS keep sliding and are now seen reaching $24.40, down 3.5% YoY, bringing trailing 12-month EPS to $97.80, down 0.9% from their June 30 level. Revenues are up 1.7% YoY, in line with Q2’s +1.8%. Margins are 9.02% down from 9.5% in Q2 and Q311.

Q4 estimates also keep being revised downward. They are now $25.96, up 9.4% YoY. Q4 estimates have been shaved nearly $1.00 in the last 3 weeks. Factset calculates that almost 40% of last week’s earnings revisions were accounted for by the Insurance industry post Sandy.

Of the 86 companies that have issued EPS guidance for the fourth quarter, 62 have issued projections below the mean EPS estimate and 24 have issued projections above the mean EPS estimate. Thus, 72% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the long-term average (61%), but it is below the percentage recorded in the previous quarter at this same point in time (80%).

Of the 24 companies that have issued EPS guidance since October 29, seven have mentioned the negative impact of Hurricane Sandy in their earnings release or conference call.

U.S. equities remain in deep undervalued territory per the Rule of 20. Earnings are not collapsing, however, providing some downside protection for now. The next few weeks will likely be volatile given the looming fiscal cliff debate in the U.S. and continued serious economic and financial problems in Europe.


Bespoke Investment tallies all NYSE companies:

(…) the current earnings beat rate stands at 59.7%.  After hitting a high of 61.8% on Monday, the beat rate dropped each consecutive trading day to close out the week below 60%. 





Obama, Boehner Open to Bargain  Obama and Boehner hinted compromise is possible, in a bid to defuse tensions before talks next week to avert a fiscal crisis.

[image]Mr. Obama, in his first statement on the fiscal cliff since winning re-election Tuesday, said any deal must include tax increases on “the wealthy.” He also called on the House to immediately pass a Senate bill that would extend the Bush-era tax cuts on household income under $200,000 a year for individuals and below $250,000 for couples. (…)

The following was widely quoted this weekend:

White House press secretary Jay Carney, responding to questions after the president spoke, said Mr. Obama would veto any legislation that extends the Bush-era tax cuts for the top 2% of American income earners.

But this next, important, part was often omitted:

At the same time, he didn’t rule out extending the rates if they were linked to raising revenue from wealthy people by eliminating deductions. (…)

Obama is also apparently open to changes in Medicare and Medicaid.

Mr. Obama also signaled that a deal would include changes to entitlement programs such as Medicare and Medicaid, but he didn’t mention Social Security. (…)

Mr. Boehner said Friday he is open to a deal that raises tax revenue but not rates, leaving open the possibility for a compromise that includes limiting or eliminating tax deductions or other tax breaks for those families. (…)

Hmmm…If these are more than mere words (Fingers crossed) , this might not be a repeat of the miserable 2011 debt ceiling standoff episode.

Senate minority leader Mitch McConnell, interviewed by the WSJ’s Stephen Moore::

“Let me put it very clearly,” says the five-term Republican senator from Kentucky. “I am not willing to raise taxes to turn off the sequester. Period.” (…)

“Look, he may think it would be helpful to his presidency to continue to divide and demonize us,” says Mr. McConnell. “But my answer will still be short and firm: No. We won’t agree to any tax increases that will hurt the economy.” (…)

Republicans are willing to be “flexible” on raising revenues but, he hastens to add, only “in the context of broad-based, comprehensive tax reform.” He’s open to prying more out of the rich by closing tax loopholes. But he and his caucus of 45 Republicans want lower, not higher, rates. (…)

The other unresolved mega-issue is what to do about the scheduled sequester cuts of $110 billion for 2013, half coming from defense and half from discretionary domestic programs. Much like the president, he wants to shut it off, but with a caveat: “I don’t think we should just forget about imagethe spending reductions we promised. We ought to achieve exactly the same amount of spending reductions,” with targeted cuts that the two parties have already agreed to. When pressed on whether he could live with the sequester, as some Republican budget hawks have suggested, the senator dismisses that drive-off-the-cliff option as “Thelma and Louise economics.” (…)

And what if the president insists on raising tax rates? Expect a principled stand by the minority leader and his fellow Republicans: “He’s got to understand he doesn’t fully control the Senate. He doesn’t control the House at all. In order to accomplish things for the country he will need to work with us.”

As Mr. McConnell walks me to the door, he adds: “You know, he doesn’t own the place.” (Image above from Scott Pollack for Barron’s)

Deficit Push Planned

The White House is planning an aggressive public campaign to build support for its proposal to reduce the deficit through tax increases and spending cut, a sharp contrast to its private talks with Republicans that faltered last year.

Mr. Obama’s new approach is in sharp contrast to his strategy last year, when he met privately with Mr. Boehner to try and craft a broad package of tax and spending changes to reduce the deficit. Now, Mr. Obama and his aides have promised to be much more flexible and seek outside ideas.

Mr. Buffett and his secretary will soon do politics again. Things could get nasty as this WSJ editorial shows:

The Hard Fiscal Facts

Individual tax payments are up 26% in the last two years.

(…) The feds rolled up another $1.1 trillion deficit for the year that ended September 30, 2012 which was the biggest deficit since World War II, except for each of the previous three years. President Obama can now proudly claim the four largest deficits in modern history. As a share of GDP, the deficit fell to 7% last year, which was still above any single year of the Reagan Presidency, or any other year since Truman worked in the Oval Office.

Tax revenue kept climbing, up 6.4% for the year overall, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Mr. Obama won’t want you to know this, but this revenue increase is occurring under the Bush tax rates that he so desperately wants to raise in the name of getting what he says is merely “a little more in taxes.” Individual income tax payments are now up $233 billion over the last two years, or 26%.

This healthy revenue increase comes despite measly economic growth of between 1% and 2%. Imagine the gusher of revenue the feds could get if government got out of the way and let the economy grow faster. (…)

Even if Mr. Obama were to bludgeon Republicans into giving him all of the tax-rate increases he wants, the Joint Tax Committee estimates this would yield only $82 billion a year in extra revenue. But if growth is slower as a result of the higher tax rates, then the revenue will be lower too. So after Mr. Obama has humiliated House Republicans and punished the affluent for the sheer joy of it, he would still have a deficit of $1 trillion.

Most of our readers know all this, but we thought you’d like some new evidence to rebut the kids who voted for your taxes to go up when they return from college for Thanksgiving. Maybe they’ll figure it out when they have a job, if they can find one. Punk  (Winking smile)

US plays chicken on edge of fiscal cliff
Politicians on both sides are flirting with the idea of going over the cliff

The issue is not the percentage of spending taken out of the economy; it is the blow to confidence. Going off the cliff would be an emphatic indication that an election had done nothing to make Congress more willing to compromise.

Here’s the rosy scenario:

Hence forth his goal will be to secure his legacy as the president who not only introduced universal healthcare and decapitated Al Qaeda, but also pulled the US economy out of its deepest economic crisis since the 1930s and assured the Treasury’s long-term solvency.

He knows that he can only secure this legacy and avoid lame-duck status
by breaking the gridlock in Washington. These changing political calculations mean that a new willingness to compromise is virtually
guaranteed on both sides of the US political divide. With the job market
improving, the housing crisis largely over and the financial system returning to normal, President Obama and the Republican congressional
leaders will quickly realize that they have to work together and compromise if they want to claim any credit for the US economic recovery that lies ahead. (Gavekal)

What’s at stake?

Nancy Lazar, who along with Ed Hyman heads up International Strategy & Investment, writes that a deal next month for a one-year deferral of a big chunk of the cliff would still result in a $162 billion tax hike in 2013. Moreover, since it would hit Jan. 2, the brunt of it would be felt in the first quarter, during which ISI estimates that real disposable personal income would plunge at a 3.8% annual rate.

Without a deal, ISI estimates, heading over the cliff would slash real disposable income at a 10% annual rate in the first quarter; consumer spending would plummet at a 5% rate and plunge the economy back into recession. (Barron’s)

Gavyn Davies: The anatomy of the US fiscal cliff

There are five main elements in the composition of the cliff. To simplify information that has recently been published by the Congressional Budget Office, they are the following:

The CBO has also estimated the economic impact of each of the separate components of the cliff. This is what the results look like:

The overall impact on US GDP next year, if the entire cliff were to take effect, would be to reduce real GDP by 2.9 per cent, and reduce employment by 3.4 million jobs. No wonder the markets are worried.

During all this bickering:

Partisan fight over “fiscal cliff” will harm U.S. economy: Reuters poll  Any partisan squabbling over the United States’ looming budget crisis will harm its economy, according to a strong majority of economists polled by Reuters after Tuesday’s presidential election.

Keep in mind that all this is happening during the biggest shopping season of the year and just as companies finalize their 2013 budgets. Confused smile


Third Quarter GDP Looking Better, but May Be at Expense of Fourth Quarter Initially viewed as another lackluster period, the third quarter could turn out to be among the most robust economic advances of the current recovery.

After surprisingly positive reports on wholesalers’ inventories and the trade deficit this week, some economists are now forecasting that the gross domestic product increased at better than a 3.0% rate during the third quarter. The government initially pegged it as a 2.0% gain, but will use the latest data to revise the figure later this month.

Economic growth has only twice topped a 3.0% rate since the recovery began thirteen quarters ago. The economy hasn’t grown at better than a 3.0% clip for a full year since 2005.


  • Total construction spending has been rising.

FRED Graph

  • Even though public spending keeps falling.

FRED Graph

  • Private resid. has gained for 6 consecutive months.

FRED Graph

  • Private non-resid.has flattened out. More capex stimulus needed, real or political…

FRED Graph

Pointing up  Also: ISI’s economic diffusion index, which incorporates all the economic indicators they monitor each week. The index made a new high last week. Citigroup’s economic surprise index also made a new high last week.


From the state controller’s office:

October’s numbers on California’s financial condition showed the positive impact of the state’s economic recovery, with tax receipts surpassing both expectations and last year’s numbers. Total revenues of $5.0 billion were $208 million, or 4.4%, above estimates contained in the 2012-2013 State Budget and 19% above last year’s actual figure.




China’s Trade Surplus Widens

China’s trade surplus widened in October as export growth accelerated, the latest encouraging sign for the world’s second-largest economy.

China’s October exports rose 11.6% from a year earlier, faster than September’s 9.9% rise. Imports, however, rose a lackluster 2.4% from a year earlier, unchanged from September’s rise.

Exports to Europe fell 8.0% from a year earlier in October, showing that economic weakness there continues to weigh on demand for Chinese goods. Exports to the U.S., on the other hand, were up 9.1%.

Minister warns of grim trade situation  Chinese Commerce Minister warned of lingering pressure on the country’s foreign trade from weak global demand, rising domestic costs and growing trade protectionism.

(…) “The trade situation will be relatively grim in the next few months and there will be many difficulties next year,” Chen told reporters at a group interview on the sideline of the 18th National Congress of the Communist Party of China, which opened Thursday. (…)

He cited lack of fundamental improvements in global demand, rising production costs of Chinese labor-intensive industries and stronger protectionism sentiment as the main factors dragging down exports. (…)

Is this a real upturn?

An earlier survey from Markit, produced for HSBC, had signalled a similar upturn in manufacturing output, though even more encouraging was a strong rise in the new orders to inventory ratio, which acts as a leading indicator of production trends and suggests that the rate of growth of output will continue to improve in November.


Needless to say, the sharp drop in China CPI to 1.7% in October provides ample working room for Beijing, a luxury no other major country has nowadays. The biggest risk to China now is the U.S. fiscal cliff.


Industrial Output Falls Across Europe

Industrial production fell sharply in a number of European nations during September, an indication that the continent’s economy is on the brink of a sharp downturn.

(…) In its monthly note on the economic outlook, Germany’s finance ministry Friday warned that Europe’s largest national economy will weaken “noticeably” during the winter months as companies hold back on investments because of the euro zone’s fiscal and banking crisis.

“Overall, there will be a noticeably weaker economic dynamic in the winter half-year,” the ministry wrote. (…)

Siemens, the German engineering group that is a bellwether for the European economy, Thursday said the value of orders fell 4% in the three months to Sept. 30. The company, whose products range from power equipment and high-speed trains to washing machines and medical scanners, said new orders in Germany fell 44% from a year earlier. For all of Europe including Russia and its neighbors, Africa and the Middle East, orders fell 5%. (…)

In France, figures released Friday showed industrial production fell 2.7% from a month earlier, while in Italy production fell by 1.5% in seasonally-adjusted terms. The data followed the release of figures Wednesday that showed industrial production in Germany fell by 1.8%, and figures from Ireland Tuesday that showed output fell by a staggering 13.9%. (…)

Figures also released Friday showed output in Sweden was down 4.1% in September, while in Hungary output dropped by 3.8%, despite a pickup in the manufacture of automobiles.

Germans show they mean it:

Germany agrees to cut spending  Economics ministry warns of further slowdown

It will reduce total spending by 3.1 per cent to €302bn, compared with the expected outcome in the current year, and cut the budget deficit from €18.8bn to €17.1bn, thanks largely to increased tax revenues and reduced social security costs. Mug

Japan edges towards 5th recession in 15 years
Economy contracted annualised 3.5 per cent in Q3


India’s Industrial Output Shrinks, Trade Gap Widens

Industrial output contracted 0.4% from a year earlier in September, hurt by the poor performance of the manufacturing sector, government data showed Monday. The government also downwardly revised the output reading for August to a 2.3% expansion from 2.7% reported previously. (…)

Factory output has shrunk in five of the seven months through September as high interest rates eat into demand and slow policy reforms hurt investor confidence. Economic growth in India has slowed to its weakest in nearly a decade. (…)

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said the economy could expand 5.5%-6.0% this fiscal year. It grew 6.5% last year, the weakest pace in nine years.

Singh promises second wave of reform
Indian PM vows to reverse slowdown in economy

India’s prime minister has pledged to follow up his recent burst of economic reforms with more measures to restart stalled infrastructure projects, attract foreign investment and reverse the slowdown in Asia’s third-biggest economy.

Manmohan Singh defended plans to attract capital from abroad, while admitting that India’s precarious public finances needed more international money to plug a growing gap between imports and exports.

Russian Third-Quarter GDP Grew 2.9%, Slowest Since 2010 Rebound

“The main reason for the slowdown is obviously agriculture, as the harvest has been worse this year,” Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said before the release. “The second point is a certain deceleration in industry, and more so in mining than in manufacturing.”


Composite Leading Indicators (CLIs), OECD, November 2012

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to point to weak growth prospects in many major economies, but signs of stabilisation are emerging in Canada, China and the United States.

Compared to recent months where the CLI has pointed to a deteriorating outlook, tentative signs of stabilisation are also emerging in Italy.

The CLIS for Japan, Germany, France and the Euro Area as a whole continue to point to weak growth. In India and Russia the CLIs also continue to point to weak growth. The CLIs for the United Kingdom and Brazil continue to point to a pick-up in growth.



Airplane  Another “down-to-earth” viewpoint:

Cathay Pacific Sees Little Christmas Cheer for Air Cargo


Cathay Pacific Airways Ltd. , the largest carrier of international air cargo, said it has seen only a small increase in freight ahead of the Christmas shopping season, prolonging an 18-month downturn in industry volumes. (…)

The cargo slump “tells you just how pessimistic people are about the economic outlook overall,” said Andrew Herdman, the head of the Association of Asia-Pacific Airlines. “There’s no growth expectations.”

The group’s 15 member-airlines suffered a 3.2 percent drop in cargo volumes in the first nine months of the year, according to data on its website. The proportion of cargo capacity filled with freight dropped 0.5 percentage point in the period to 66.2 percent.

Singapore Airlines Ltd.  said Nov. 3 that it will park one of its 13 Boeing Co. 747 freighters for more than a year starting in January after losses at its cargo unit tripled in the quarter through September. Asiana Airlines Inc., South Korea’s second-biggest carrier, may consider returning its leased freighter if there’s no improvement in volumes, CEO Yoon Young Doo said at the Kuala Lumpur meeting.


US set to become biggest oil producer
IEA report highlights impact of shale revolution

The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.

Pointing up  This marks the first time the IEA, the developed world’s most respected energy forecaster, has made such a prediction. It underscores how the drilling boom that has unlocked North America’s vast reserves of hard-to-get-at oil and gas is changing the world’s oil balance.

In its yearly world energy outlook, published on Monday, the IEA said that by 2030 “the US, which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries”. (…)

The increase in US domestic production – of biofuels such as ethanol as well as unconventional “tight” oil – comes as new fuel-efficiency measures in transport imposed by the first Obama administration are set to reduce oil demand sharply. That will lead to a big fall in oil imports into the US, which the IEA says will plunge from 10m barrels a day to 4m b/d in ten years’ time. The agency says that North America will become a net oil exporter by about 2035.

“The US, which imported a substantial chunk of oil from the Middle East, will be importing almost nothing from there in a few years’ time,” Fatih Birol, the IEA’s chief economist, told the Financial Times. “That will have implications for oil markets and beyond.” (…)

The US Energy Information Administration expects production will rise from 6.3m b/d this year to 6.8m b/d in 2013 – its highest level since 1993. (…)

In its outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase. In contrast, energy demand would “barely rise” in the leading industrialised countries. Global oil demand would reach 99.7m b/d in 2035, up from 87.4m b/d in 2011. (…)

Pointing up However, those projections are based on an extrapolation of the dramatic growth in shale oil production in recent years, which some analysts see as implausible, or at least uncertain.

Related: Facts & Trends: The U.S. Energy Game Changer

BUY LOW, SELL HIGH CHART  They don’t get much better than that (chart from Moody’s).



(…) , emerging & developing economies have seen their official holdings of gold rise to 200 million troy ounces for the first time ever this year. Still, despite a 44% increase in such holdings since 2007, the share of gold in total official reserves remains at a paltry 4.3%. As shown this compares to a share of nearly 24% in the advanced economies.

Given the current environment of surging sovereign debt in the U.S. and the Eurozone (whose government bonds account for the bulk of emerging markets’ official reserves) we think that the central banks of
emerging economies are likely to increase their exposure to bullion to guard against possible currency depreciation. (NBF Financial)


Surprised smile  No hold back in this buy-back

Coca-Cola (NYSE:KO) announced a plan to buy back an eye-popping 500 million shares, or approximately $18.9 billion, of its stock.


One thought on “NEW$ & VIEW$ (12 NOVEMBER 2012)

  1. thank you allways your analysis is very correct ..(ligo-poli) i am informat about all the global economic situation (this doesn’t mean your is not usefull) it is .
    about europe nothing have change ..
    about oil i have ?
    about gold they trying to geted with every price ..”just geted” is not new ….i don’t understand where is the rest of gold they have? not arketa..
    again thu

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