NEW$ & VIEW$ (10 DECEMBER 2012)


The Labor Department’s latest job-market overview showed employers added 146,000 jobs in November. That is better than the previous two months, which were revised down, but still too weak to get many of America’s 4.8 million long-term unemployed back to work.

The biggest surprise in the report was the government’s pronouncement that Superstorm Sandy didn’t significantly affect the findings. (WSJ)

The change in total nonfarm payroll employment for September was revised from +148,000 to +132,000, and the change for October was revised from +171,000 to +138,000. Most of the downward revisions were in government employment.


Few people accept the BLS view that Sandy had little impact on the November data.

As it happens, the week the household survey was conducted was around the time Sandy made landfall. Oddly, by the Bureau’s own count, some 369,000 workers couldn’t make it to work, yet it insists the hurricane did not “substantively impact the national employment and unemployment” totals for last month. Go figure. (Barron’s A. Abelson)


The BLS’ own household numbers point to a meaningful impact from Sandy. In addition, the 20k drop in construction employment is highly suspicious in light of the clear improvement in construction spending in recent months (chart below from Lance Roberts and AAR).



Here’s what the National Federation of Small Businesses said recently:

Sandy will have a substantial impact on the jobs numbers. Although large
national firms will not experience much of an employment impact, thousands of small firms were shut down along the East Coast, and large numbers have not re-opened and their customers can’t shop. Segregating the responses in the “Sandy States” from the rest of the U.S. (including western Pennsylvania and New York which weren’t affected), it is clear that there was less hiring and more job loss in Sandy States. (NFIB via John Mauldin)

Meanwhile, up North where Sandy had no impact: Canada Nov. Employment Rises More-Than-Expected 59,300

Canadian employment rose almost six times faster than economists forecast in November, countering recent signs of slowing economic growth.

The increase of 59,300 lowered the unemployment rate to 7.2 percent from 7.4 percent, the first decline in five months, Statistics Canada said today in Ottawa.

Full-time employment rose by 55,200 in November and part- time positions increased 4,100, Statistics Canada said. Private companies added 48,200 workers and public-sector employment climbed 5,400.


LEI Says Slow Growth, Not Recession

For now, leading economic indicators are not pointing toward recession—but they continue to suggest “stall-speed” growth. The Conference Board’s Composite of Leading Economic Indicators just hit a new high for the current expansion. As you can see in the chart and table below, the six-month rate of change in the LEI is consistent with nearly 2% gross domestic product (GDP) growth. Going off the fiscal cliff would almost certainly take the economy into a recession, but the present fundamental picture remains out of the contraction zone.

LEI Says Slow Growth, Not Recession

LEI Says Slow Growth, Not Recession

Smile Rail stats point up

Excluding coal and grain, U.S. carloads were up 2.2% M/M in November and 5.5% Y/Y, the biggest percentage increase in six months. (AAR)image image

Pointing up Also, the diffusion index of ISI’s company surveys made a new high last week.

But there is the cliff:

[image]As recently as September, about half of consumers were largely ignoring the issue, according to a regular survey by RBC Capital Markets. But in the most recent survey, completed last week, 71% of respondents said they were following the cliff debate, and more than half said the threat had hurt their confidence or led them to hold back on spending.

Will Churchill is already seeing the issue affect his business. Mr. Churchill, co-owner of Frank Kent Motor Co. in Fort Worth, Texas, saw strong sales growth at his Cadillac and Honda dealership until early November.

But sales started to slow after Election Day, with many customers attributing their caution to the Washington budget debate. “Fifty percent of the customers we talk to, it comes up at some point,” he said. “They’re in the market, they want to buy, but the hesitation is that they don’t know what’s going to be the result in Washington.” (WSJ)

In the twilight zone:

Boehner Says Week Wasted in Talks to Avert Fiscal Changes

An agreement won’t be possible “if the president insists on his position, insists on my way or the highway,” he said. “That’s not the way to get an agreement.”

High five Boehner said that Friday but before Nancy Pelosi met with President Obama and came out with:

“It’s not about the rate—it’s about the money,” Mrs. Pelosi told reporters. She said the point was not “about being punitive to the high end—it’s about getting money to reduce the deficit, to grow the economy.”

To me, this sounds like progress: “It’s not about the rate—it’s about the money,”

Who will blink first?

Pointing up  In the end, the President of the U.S.A. is Barrack Obama. He is the ultimate person responsible for what happens. No president would knowingly do anything that would clearly and effectively result in a recession which, after all, would make things even worse for the United States and the world.

Obama will blink.


Pay attention to this Ned Davis Research chart via Liz Ann Sonders (Charles Schwab & Co.):

Investors' Extreme Pessimism Starting to Reverse

Investors' Extreme Pessimism Starting to Reverse

And to this basic technical reading which suggests that equities have decent support around the still rising 200-Day MA (1390) and resistance on the 50-Day MA (1420).

Stocks Move Back Above Trendlines



Earnings Growth Rate Cut By Nearly 2/3 since September 30 (Factset)

The estimated earnings growth rate for Q4 2012 is 3.5% this week, slightly below last week’s estimate of 3.8%. Estimate cuts to companies in the Financials sector were mainly responsible for the decrease in the growth rate this past week. Overall, the growth rate for the Financials sector decreased to 20.0% from 20.9% during the week.

Since the start of the quarter (September 30), the estimated earnings growth for the index has dropped to 3.5% from 9.3%. Seven of the ten sectors have witnessed a decline in expected earnings growth over this time frame, led by the Materials, Information Technology, Financials, and Industrials sectors.

The estimated earnings growth rate for the Materials sector is 6.4% today, down from an expectation of 24.0% at the start of the quarter. The projected earnings growth for the Information Technology sector is -2.4%, down from an expectation of 8.7% at the beginning of the quarter. The predicted earnings growth rate for the Financials sector is 20.0%, below an expectation of 27.8% at the start of the quarter. The expected earnings growth rate for the Industrials sector is -4.2%, down from a projection of 3.3% on September 30.

Guidance: High Percentage of Information Technology Companies Guide Lower

The reduction in expected earnings growth for Q4 2012 can attributed in part to a high percentage of companies issuing negative EPS guidance for the quarter, particularly in the Information Technology sector.

Of the 108 companies that have issued EPS guidance for the fourth quarter, 79 have issued projections below the mean EPS estimate and 29 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 five-year average of 61%, but below the percentage at this same point in time in Q2 2012 (80%).

An unusually high percentage of companies in the Information Technology sector have issued negative guidance. Of the 32 Information Technology sector companies that have issued EPS guidance, 29 (or 91%) have issued EPS projections below analyst estimates. This percentage is well above the five-year average of 56%.

I did the calculation for you. Excluding IT, 76 companies have issued Q4 guidance and 50 (66%) were below the mean estimate.

Slow demand is hurting revenue but operating margins are necessarily impacted by lower capacity utilization (charts from AAR):


Pointing up The current decline in capacity utilization is similar to the early 2008 experience. Then we had the Lehman failure and all hell broke loose. Nothing similar is expected in 2013, barring the fiscal cliff, but capacity utilization needs to stabilize if current margin expectations are realized:


Smile  China’s recovery gains momentum 

The monthly flood of Chinese data:

  • [image]Industrial output rose 10.1% Y/Y in November, up from 9.6% in October and the strongest since March. On a MoM basis, VAI rose 0.86%, up from 0.82% in October and the fastest pace since May. 
  • Electricity production accelerated to 7.9% growth from 6.4%. That was the fastest pace for 2012.
  • Retail sales rose 1.5% M/M vs. 1.4% in October. Retail sales growth rose to 14.9% Y/Y from 14.5% in October. Real retail sales rose 13.6% Y/Y, up from 13.5% in October and the fastest pace of the year.
  • Investment in fixed assets grew 20.7% Y/Y, down from 22.2% in each of the prior two months. FAI rose 1.3% M/M vs. 1.9% in October. FAI by state-owned firms rose 17.1% Y/Y last month, while FAI by private firms rose 22.7%.
  • Real estate investment showed a marked rebound, registering 16.7% in the first 11 months, compared with 15.4 percent for the first 10 months.
  • China’s exports rose just 2.9% Y/Y in November, much lower than October’s 11.6% rise. Imports were flat against a 2.4% increase in October. Exports to the EU fell 18% Y/Y in November. For the first 11 months of the year, China’s exports to the EU were down 7%. China’s exports to the U.S. fell 2.5% Y/Y after rising between January and November.
  • China property November 2012, floor space sold, new starts - UBSNew floor area under construction in the real-estate sector showed signs of recovery, as residential sales rose 31.6% year-to-year,up from 25% in October and from -3.3% in November 2011. In the nine months through June, sales were down Y/Y each month, while since then sales have been up Y/Y in four of five months. Residential investment rose 21.8% Y/Y in November, up from 13.2% in October and 10% in September.
  • New home starts jumped 6.3% Y/Y last month, following declines of -9.4% in October and -28.1% in September. 
  • Land purchases by developers rose 16.8% last month, after -36.6% in October.
  • The Consumer Price Index rose to 2% Y/Y in November. CPI rose 0.1% M/M with food prices up 0.4% and non-food prices flat.
  • China’s PPI dropped 2.2% in November, the ninth straight month of decline.

Auto  November vehicle sales hit top gear  Passenger-vehicle sales in China hit a record in Nov as a series of positive indicators boosted the market.

A total of 1.419 million cars, sports utility vehicles, multi-purpose vehicles and minivans were sold in November, a 13 percent year-on-year increase, according to data from the China Passenger Car Association on Friday.

The number showed that total sales for the first 11 months jumped 6.6 percent year-on-year to 13.12 million, paving the way for an increase of at least 5 percent in passenger-vehicle sales this year.

Cui Dongshu, deputy secretary-general of the association, said the Guangzhou Auto Show last month helped passenger-vehicle sales surge more than 20 percent in the last week of November.

“More impressively, China’s homegrown brands recovered in the domestic market as their share of the passenger-car sector reached 35.1 percent, the highest in 20 years,” Rao said.



Chinese Survey Shows Higher Jobless Rate

A new survey shows that the real unemployment rate in China is double the official level, and layoffs rose sharply among migrant workers in the past year, underlining the challenge for China’s new leaders to maintain growth.

The survey of 8,000 households shows the urban unemployment rate hit 8.05% in June, up slightly from 8% in August 2011 and nearly twice as high as the official 4.1% rate.

The unemployment rate for China’s army of 160 million migrant workers has risen sharply to 6% in June 2012, up from 3.4% in August 2011 according to the survey, suggesting 10 million unemployed as a result of the sharp slowdown in exports and real-estate construction.

China’s official unemployment rate is based on urban residents registering for unemployment benefits. That measure leaves out key sections of the workforce—notably migrant workers, who go uncounted because they can’t register for such benefits in the cities where they go to work. For the last 15 years it has stayed in a tight range between 3.1% and 4.3%, failing to capture wrenching changes in China’s labor markets.

Mr. Gan’s survey attempts to overcome the problems of the official data by dispatching student researchers into households up and down the country.

OECD Composite Leading Indicators, December 2012

The CLIS for Canada, Japan, Russia, Germany, France and the Euro Area as a whole continue to point to weak growth. In Brazil tentative signs have emerged that the positive growth momentum predicted in recent months is dissipating.

In China and Italy, on the other hand, signs of turning points in the cycle are beginning to emerge. Tentative signs of a stabilisation in growth have also emerged in India.

In the United States and the United Kingdom, where consumer confidence picked up strongly last month, the CLI continues to point to economic growth firming.



Lightning  Japan sinks into fresh recession Revised GDP indicates contraction in six months to September

Japan quarterly qoq annualised seasonally-adjusted GDP - Soc Gen Revised quarterly gross domestic product data on Monday showed that output fell 0.9 per cent in the three months to September, in line with earlier estimates. However, the government also marked down its previous estimate of 0.1 per cent growth in the second quarter to a shade below zero, with growth in net exports cut almost in half. That meant that the six-month period met the textbook definition of a technical recession.

Storm cloud  Turkish growth below expectations
Exports perform less well than hoped

Gross domestic product grew 1.6 per cent in the third quarter compared with the same period last year, significantly below analysts’ consensus forecast of about 2.6 per cent.

GDP advanced 2.6 per cent the first nine months of the year on the same period in 2011. The government forecast for the year as a whole is 3.2 per cent, but some economists say such projections will now be revised downwards.

Storm cloud  Mexico warns of economic headwinds New government says finances in US and Europe will hit growth

Mexico’s new centrist administration says weakness in Europe and concerns about US finance will limit economic growth next year to 3.5 per cent. The figure is in line with previous official forecasts, but below that of most independent economists who had expect 4 per cent growth.

ECB – symbolism matters  Central bank should have cut its benchmark interest rate this week

(…) the ECB also appears to be signalling that a cut is more likely than not, and probably soon. But why wait, especially since it is the symbolism as much as the fact of the cut that really matters?

Lightning  Italian bond yields jump sharply higher
Monti’s decision to step down early leads to wave of uncertainty


Italy’s Bersani Vows Steady Hand

Pier Luigi Bersani, the center-left politician tipped in polls as Italy’s next leader, pledged to uphold his country’s economic commitments to Europe and not dismantle the current government’s overhauls, if he is elected.

Pointing up  Spain Bailout Caution Grows as Business Lobby Backs Rajoy

Spain’s biggest business lobby is getting as cautious as Mariano Rajoy’s government on a possible bailout request because of concern how stringent conditions might be to trigger European Central Bank bond-buying.

A rescue “could impose a criminal pace of reduction in public spending,” Alberto Nadal, vice secretary-general of CEOE, Spain’s main business group, said in an interview.

The group’s newfound skepticism contrasts with their earlier support for a request following the ECB’s unveiling of its bond-buying program in September after President Mario Draghi committed to do “what it takes” to save the euro. Rajoy has refrained from seeking such aid and pressure on him to do so has eased, with the yield on Spain’s 10-year bonds now 214 basis points lower than in July.

Encouraged by the impact of the ECB’s announcement on borrowing costs, business leaders share Rajoy’s optimism that the five-year slump is reaching a low and that measures to overhaul the economy will pave the way to a recovery next year, with already resilient exports and declining labor costs helping resorb Spain’s current account deficit.

…until yields rise again


Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the
imagedynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs.

Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced
consumption. Those approaching their seventh decade need fewer cars and new homes. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years. (Bill Gross, Pimco)

The Collapse Of Microsoft’s Monopoly

(…) This chart comes from Goldman Sachs, and it shows Microsoft losing its market dominance of computing devices as smartphones and tablets have come into the market. (…)

Microsoft’s inability to make a smartphone people really love could be a deadly mistake. As people became comfortable with the iPhone, they became open to the idea of the iPad. As the iPad takes off, it is slowing PC sales. As people become comfortable with the iPad, they’re going to be more inclined to buy a Mac to stay in Apple’s ecosystem.


Here’s my humble contribution: two shots taken at the Aventura Mall in Florida within 5 minutes. Guess which is which.

image image


To Quote Thomas Jefferson, ‘I Never Actually Said That’

(…) Mr. Langworth says Chris Matthews, a fellow Churchill Centre board member and host of MSNBC’s “Hardball,” has misquoted Churchill. Last year Mr. Matthews made a promotional ad for MSNBC in which he recounted Churchill being told during World War II that he should cut government funding for the arts.

“Then what are we fighting for?” Churchill replied, according to Mr. Matthews.

Mr. Langworth says Churchill never said it, though many over the years have used what Mr. Langworth calls “this famous ‘red herring’ nonquote.”

Mr. Matthews, a self-described “Churchill nut,” insists he hasn’t misquoted his hero, but adds, “How can you prove someone never said something?” Confused smile


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