NEW$ & VIEW$ (28 NOVEMBER 2012)

THE “GRAND BARGAIN”: Back to the future

Democrats Harden Budget Positions

The White House and congressional Democrats hardened their budget positions in talks on a fiscal-cliff deal.

White House officials suggested in a closed-door meeting with supporters that talks wouldn’t heat up for about a week. In the meeting, President Barack Obama said he considered the fiscal-cliff debate a defining moment of his presidency.

The next four weeks could define the next four years,” Mr. Obama told a small group of Democrats after joining their meeting in the Roosevelt Room with his top aides, according to a participant. (…)

Complicating the already complex budget talks, Mr. Durbin said the year-end budget agreement will have to include an increase in the country’s statutory borrowing limit to avoid another fight when the federal debt ceiling is reached, likely early next year. “The president isn’t going to sign off on an agreement that doesn’t provide some certainty on the debt ceiling,” he said.

A GOP House leadership aide said Republicans would insist on greater concessions from Democrats, in addition to any fiscal-cliff agreement, to include the debt ceiling in any deal.

Déjà vue, and not funny at all!

Peter Orszag: Vague Plans to Limit Tax Breaks Will Soon Die

As negotiations over the U.S. fiscal cliff get down to details, they will become more arduous — something that financial markets seem to be ignoring. The superficial appeal of proposals to limit tax expenditures, for example, will fade as the details become clearer. (…)

On their face, proposals to raise revenue by limiting tax breaks enjoy unusual bipartisan support — at least when they are described generically as “broadening the tax base and eliminating loopholes.” Enacting legislation, though, requires much more than such platitudes, and therein lies the political difficulty. (…)


Housing Market Propels Economy

The U.S. housing market, which plunged the economy into recession five years ago and was a persistent drag on the recovery, is now a key economic driver at a time when other sectors are slowing. (…)

imageMacroeconomic Advisers projects the economy will grow at a 1.4% annual rate in the fourth quarter, with housing contributing 0.4 percentage point. IHS Global Insight is projecting a 1% growth rate, with housing contributing 0.53 of a percentage point—the largest contribution since 2005. (…)

The housing turnaround has been a boon for real-estate brokers and home builders, some of whom have seen their stock prices more than double this year. Retailers have seen a new stream of customers ready to decorate, furnish and upgrade their homes while investors are spending at hardware stores to renovate previously foreclosed homes. Banks, meantime, have posted record mortgage profits amid high refinance volumes and stronger demand for new loans.

Beyond those direct benefits are a number of indirect effects. Rising home values make homeowners feel better about their finances—making them more likely to spend and, with interest rates low, more comfortable about taking on debt. An index of confidence released Tuesday by the Conference Board rose to 73.7 in November, the highest level since February 2008.

US housing market still in recovery mode

imageThe S&P/Case-Shiller house price index showed the largest annual increase in US property prices since July 2010, up 3.0% on a year ago in September, compared with a 1.9% increase in August. House prices have gained 4.7% since hitting a low in January. (Markit)

Higher prices beget higher demand 

Buried in the Conference Board’s November consumer confidence report was a surge in plans to buy a home in the next 6 months, to an elevated 6.9% of respondents (that’s the highest since August 2007). Potential buyers have been presented with the best affordability in decades for some time, but maybe now they’re starting to sense that home prices are in fact rising again in many cities. In other words, when affordability is high but prices are still falling, what’s the rush? But, when affordability is high and prices have begun to rise, then that’s a different story… (BMO Capital)



Falling Mortgage Balances Offset Rising Student, Auto, Credit-Card Debt

Americans cut their debt further in the summer, with falling mortgage balances more than offsetting increases in other types of borrowing, new data show.

Americans have reduced their debts by more than $2 trillion since household debt peaked in summer 2008, a process called deleveraging.

Deleveraging delivered!


(Chart from FBN Financial)


Smile  Durable goods orders were unchanged in October. They had surged a revised 9.2% in September. Ex transportation, orders rose a strong 1.5% after a 1.7% gain in September.

However, in the latest three months, orders have dropped 5.3% on the prior three month period, the steepest three-month fall since May 2009. However, if volatile transportation goods are excluded, which has a closer correlation with industrial production, orders rose 1.5% against expectations of a 0.5% drop, helping ease the three-month rate of decline up from -3.4% to -2.0%. (Markit)

Unfilled orders rose a modest 0.2%, after a 0.1% gain in September and a 1.7% drop in August. (table below from Haver Analytics)


The good news is from Non-defense Cap. Goods ex-Aircrafts which rose 1.7% after a 0.4% decline in September. Doug Short explains:

Last month Business Insider posted a commentary with the attention-grabbing headline: DAVID ROSENBERG: Here’s Your Big Red Flag That We Could Be Heading For Recession. Rosenberg has frequently included CAPEX among his various recession indicators.

The CAPEX referenced by Rosenberg is the Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft data series, which is conveniently available in the FRED database. The data goes back to February 1992, so we only have two recessions during this timeframe to evaluate CAPEX as a recession indicator. Here is a look at the monthly data.

Click to View


The chart below is the YoY of a 3-month moving average of the complete series. This is the data manipulation used by Rosenberg to support his recession alert.

Click to View

Indeed, the CAPEX 3-month MA has been trending down since March of this year. In fact, the month-over-month data has been trending downward since its interim high on December 2011. I would point out, however, that the latest 3-MA month-over-month change is tiny: -6.6 percent in September slipping to -6.7% in October.

Ultimately my sense is that this data series manipulation (the YoY 3-month MA) has an insufficient track record to be considered a definitive recession indicator.



Smile  Thailand Holds Policy Rate as Economic Data Signal Recovery

Thai manufacturing and exports increased in October, adding to signs from the U.S. and China of a recovery in the global economy. While the central bank last month lowered its growth forecast for 2013, it said today risks to expansion have subsided, and that it doesn’t see much need for more rate cuts. (…)

Thai GDP increased 3 percent in the third quarter from a year earlier, after expanding a revised 4.4 percent in the previous quarter, the government said last week. Still, manufacturing jumped 36.1 percent in October from a year earlier, when the floods shuttered thousands of factories, while exports rose 15.6 percent, the fastest pace in more than a year. (…)

Smile  Philippines 7.1% Growth Surprise May Herald End of Rate Cuts

Gross domestic product increased 7.1 percent in the three months through September from a year earlier, compared with a 6 percent gain in the previous quarter, the National Statistical Coordination Board said in Manila today. (…)

Philippine exports rose 22.8 percent in September from a year earlier, as data signaling a recovery in the U.S. and China boosted the outlook for Asian goods.

The Philippine economy expanded 6.5 percent in the January- September period, today’s report showed. Public construction in the third quarter climbed 23.7 percent from a year earlier, while government spending gained 12 percent and household spending advanced 6.2 percent.

RBC Capital Markets adds:

The OECD’s LEI has rounded the corner and it is important to note that the index usually turns ~6 months ahead of global GDP growth.


Pointing up Also, ISI’s global economic diffusion index, which measure all eco indicators in 38 countries, has clearly hooked up in recent weeks, suggesting the global economy is starting to improve.



Spain’s Bankia says it expects to post a loss of 19 billion euros ($24.6 billion) in 2012, and announces plans to cut 6,000 jobs.

Europeans Scrimp on Gifts

Shoppers across Europe are pinching pennies as the debt crisis enters its third year, forcing retailers to cut prices and push promotions.

imageBoth the Italian national consumer association and Portugal’s commerce-and-services confederation expect Christmas sales to drop about 20% from last year in their respective countries. (…)

According to Deloitte, the average German family plans to spend around €485 for Christmas, compared with €639 for the average French family. (…) Deloitte predicts Irish households will spend €966 on average this year, the most of any country in the euro zone.

Schaeuble Signals Greece May Need More Help as Bild Slams Deal

German Finance Minister Wolfgang Schaeuble signaled that Greece may need additional help as the country’s most-read newspaper slammed a rescue accord as a “never-ending story” financed by German taxpayers.

Euro-area governments may provide additional funding through the European Union structural fund and further interest- payment reduction as long as Greece meets all its obligations under the agreement, Schaeuble wrote in a letter to German lawmakers obtained by Bloomberg News. (…)

They may confront increased public resistance as Bild- Zeitung, a tabloid that’s called in the past for Greece’s exit from the currency union, pilloried yesterday’s late-night agreement in Brussels to ease terms on emergency aid for Greece.

“The Greek patient is beyond help,” Bild said in a commentary, adding that the ever-rising costs were falling on German taxpayers. “One hardly needs to imagine the worst scenario: the patient dies, the paramedic goes bust.”


With 489 reports in, S&P calculates that Q3 earnings came in at $24.37, down 3.6% Y/Y. However, Factset warns that

Of the 103 companies that have issued EPS guidance for the fourth quarter, 75 have issued projections below the mean EPS estimate and 28 have issued projections above the mean EPS estimate. Thus, 73% 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%).


Analysts Cutting Estimates for Q4 & 1st Half of 2013
Since the end of the third quarter (September 30), analysts have reduced earnings growth expectations for Q4 2012 (to 3.9% from 9.3%), Q1 2013 (to 3.1% from 5.3%), and Q2 2013 (to 7.7% from 9.2%).

Despite the reductions to earnings estimates for Q4 2012, analysts are still calling for an increase in earnings growth (3.9%) relative to Q3 2012 (-0.9%). In addition, analysts are calling for slightly higher revenue growth rates in Q4 2012 (2.5%), Q1 2013 (0.9%) and Q2 2013 (3.4%) relative to the current growth rate for Q3 2012 (-1.2%)


Birth rule could be relaxed  Changes to the family planning policy are being considered, and action plans have been drawn up, amid a graying society and other challenges.

(…) According to Zhang, one of the key areas of possible change will concern the criteria for urban couples having a second child. At present, only parents who are themselves an only child are allowed to have a second child. Under the proposed changes, couples will be able to have a second child even if one of them is not an only child. (…)

The national fertility rate (the average number of children a woman has during her lifetime) stands at about 1.7, far below the replacement level of 2.1.

“Even with the policy further relaxing, there won’t be any sharp rise in the population,” Zhang said, adding that an ideal fertility rate should be at least 1.8.

President Hu Jintao said in the report of the 18th National Congress of the Communist Party of China this month that “we must adhere to the basic state policy of family planning, improve the health of newborns, steadily improve the population policy and promote long-term and balanced population growth”.

Observers said it was the first time that “maintaining low reproduction levels” had been omitted, representing the central government’s wish to ease the policy.

There are things that never change.  I have always thought that airlines and steel were two sectors that investors should simply avoid.

Problem: There’s Too Much Steel

This year, steel mills around the world have a production capacity of 1.8 billion tons but will take orders for only 1.5 billion tons. And instead of consolidating, the industry is building still more capacity.

By 2016, an estimated 100 new mills, with total estimated supply capacity of 350 million tons, are expected to come on stream, according to industry executives and consultants. Companies in Vietnam, Argentina, Ecuador, Peru and Bolivia, all backed in some way by their governments, are building or planning new mills. (…)

Getting a definite count on the number of steel mills in the world and actual production capacity is difficult in large part, say industry officials and analysts, because there are hundreds of small, uncounted mills in China, which accounts for 46% of world steel output. Estimates for the number of steel mills in China range from 600 to 800 mills. (…)

The world’s top five steel companies control only 18.2% of global steel supply. (…)

Meanwhile, governments continue to subsidize mills, despite weakening demand, to maintain jobs and sustain local economies.

Wolfgang Eder, president of the European Steel Association, has called for European politicians to organize a coordinated scheme of capacity-cutting. Confused smile

“The steel industry could fall back into the mistake of the 1980s, in which it would demand subsidies and keep obsolete plants running for social and political reasons,” he said in a recent interview.

France Escalates Steel Fight

A dispute pitting France against the world’s largest steelmaker escalated Tuesday after Socialist President François Hollande threatened to nationalize a plant that owner ArcelorMittal MT -2.32% wants to partially close, fueling concerns about the country’s treatment of foreign investors.


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