NEW$ & VIEW$ (17 DECEMBER 2012)


A fresh proposal from House Speaker John Boehner to raise tax rates on millionaires marked a breakthrough in stalled budget negotiations with President Barack Obama, suggesting a potential framework for avoiding year-end spending cuts and tax increases known as the fiscal cliff.

The proposal, which the speaker offered privately to Mr. Obama Friday, calls for raising $1 trillion in tax revenues over 10 years, up from the $800 billion Mr. Boehner previously proposed, and cutting about $1 trillion from spending.

The Boehner proposal would extend all current tax rates, while raising rates only for income above $1 million, which would rise to 39.6% from 35%. Previewing an argument likely to be used in selling the idea to conservatives, GOP officials argued Sunday that Mr. Boehner’s proposal would not call for Republicans to vote for a tax increase: The plan will simply allow rates to rise, as scheduled, for income over $1 million.

While the White House objected to major parts of the proposal, senior Democrats described it as a tipping point that moves talks away from deadlock. (…)

Mr. Boehner’s proposal calls for a two-stage process, providing for enactment of a small-scale deficit-reduction plan by year’s end, coupled with a second phase next year, in which lawmakers would embark on a revamp of the tax code and entitlement programs, using a final agreement as a guide.

Mr. Boehner offered to include an increase in the U.S. borrowing limit as part of the deal—enough to avoid another fight over the issue for perhaps a year if it is matched by comparable spending cuts. (…)

Centrists who are seeking a big deficit-reduction deal, however, saw promise in Mr. Boehner’s willingness to take a politically risky move toward compromise. (…)

Smart move from Boehner.

The Washington Post adds:

Senior White House officials remained in contact with Boehner’s staff throughout the weekend in a sign that serious negotiations had finally begun after weeks of stalemate and partisan posturing.

Fingers crossed  No grand bargain now but an agreement on a two-step program seems possible.

Smile  Consumer Prices Fell in November

U.S. consumer prices dropped 0.3% in November as the cost of gasoline declined.

Gasoline prices dropped 7.4% in November, the largest decrease in nearly four years. Retail fuel prices have fallen in eight of the past nine weeks, according to a different government measure. Overall energy costs fell 4.1% in November.

(…) core consumer prices rose 0.1% last month. That number reflects higher prices for shelter, transportation services and medical care. Food costs rose 0.2%, the sixth consecutive monthly increase.

Year over year, consumer prices were up 1.8% and core prices were 1.9% higher.

This is good news from the Rule of 20 point of view. Inflation dropping from +2.2% to +1.8% means fair P/E rises from 17.8 to 18.2, more than offsetting the 0.5% decline in trailing earnings after Q3. If only politicians could do something smart…



Buy high, sell low charts from RBC Capital. Institutional investors, as a group, are no smarter than individual investors.


Deflation is not a big threat at this time:

Median CPI remains above 2.0%

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.



Open-mouthed smile  U.S. Retail Sales Restrained By Lower Gas Prices

Total retail sales recovered 0.3% last month following an unrevised 0.3% October decline. Retail sales were unchanged excluding autos, as expected, for the second consecutive month. The mix of sales, however, was more encouraging than these top-line numbers suggest.

Consumers spent less on gasoline last month as prices fell. A 4.0% drop (+0.8% y/y) in gas purchases accompanied a 2.5% decline in seasonally adjusted prices, as calculated by Haver. Also adding to volatility was a 1.4% recovery (5.4% y/y) in motor vehicle sales. Excluding gasoline and autos, retail sales rose a notable 0.7% (3.3% y/y) and more than recovered their 0.2% October falloff.

Also adding to volatility was a 1.6% rise (5.4% y/y) in sales of building materials. A good indication of consumers’ underlying ability to spend on discretionary items are sales without these volatile components. Excluding autos, gas and building materials, retail sales rose a respectable 0.5%. However, the 2.9% y/y increase was lower than the peak y/y gain of 7.1%, ending October of last year.



Looking at the last 3 months, total retail sales are +1.2% or +4.9% annualized. Non-Auto less Gasoline sales are +1.4% or +5.7% annualized. The U.S. consumer is not retrenching just yet. That is in spite of slow income growth:

The recent 3.2% yearly increase by employment income limits the upside for retail sales growth. After slowing from the 6.4% of 1991-2000’s recovery to the 4.5% of 2002-2007’s recovery, employment income’s average annual increase subsequently slowed to the 3.4% of the current upturn. (Moody’s)





Thinking smile  But, for how long? Americans may be willing to spend but can they? (Chart from Gary Shilling).


U.S. Industrial Output Recovers After Sandy, But The Trend Weakens

The rebound in industrial sector output from Hurricane Sandy totaled 1.1% (2.5% y/y) last month following a deepened 0.7% October decline, last month reported as -0.4%. The Fed indicated that virtually all of last month’s increase in output was due to the passage of the storm. A weakening trend is indicated by the 1.2% y/y increase in factory sector output which was down from the 4.3% rise during all of last year as well as versus 5.7% in 2010.

In the manufacturing sector, a 0.9% increase (1.2% y/y) in output just made up for October’s 1.0% drop. The pattern is the same for the 1.3% m/m gains in consumer goods and business equipment output, although the latter’s 7.5% y/y rise easily outpaced the 1.2% y/y increase for consumer goods.

The capacity utilization rate rose to 78.4% and recovered its October fall. In the factory sector, the rate also rose to 76.6% and made up for the October decline to 75.9%.



Markit’s December flash PMI offers strong hopes that the manufacturing sector is re-accelerating:



U.S. Business Inventories Continue To Accumulate

Business inventories rose a slower 0.4% (5.7% y/y) during October following a 0.6% September rise. Factory inventories ticked up just 0.1% (3.1% y/y). The slower 0.6% gain in merchant wholesalers inventories reflected a 3.1% decline (+2.4% y/y) in petroleum inventories with lower crude oil prices. Elsewhere, wholesale inventories increased a firm 0.8% (6.8% y/y) during October. Inventories at the retail level gained a firmer 0.6% (8.2% y/y). That was led by a 0.9% jump in autos (21.2% y/y) after a 0.9% September increase. Nonauto retail inventories gained 0.4% (3.2% y/y) reflecting strength in building materials (4.0% y/y) and clothing stores (3.8% y/y).

Business sales fell 0.4% (+3.1% y/y) after a 1.2% September jump. Wholesale sales dropped 1.2% (+2.3% y/y) with the decline in petroleum prices. Even without oil, however, wholesale  sales fell 0.3% (+1.6% y/y).

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Auto  The U.S. auto sector, particularly GM, seems to be caught with excess inventory even with reasonably strong sales recently. Imports from Canada are already weakening which is not positive for Canada’s GDP as this chart from RBC Capital shows:image

In effect, Canada is also at the edge of the U.S. fiscal cliff!

Sun  Global outlook brightens as flash PMIs rise in the US, China & Eurozone

The strongest gain was seen in the United States, where’s Markit’s flash PMI hit an eight-month high in December. The survey had correctly signalled the downturn in official data, which showed a contraction of manufacturing output in October, and therefore bodes well for a rapid return to growth. The December PMI was broadly consistent with US manufacturing output growing at a 4% annualised rate.

The US PMI came on the heels of Markit’s PMI for China, produced for HSBC, which hit a 14-month peak in December. The PMI has now risen for four successive months in China, rising above the no change level of 50 in the final two months of 2012, providing strong evidence to suggest that industrial production growth will have continued to revive after the annual growth rate picked up to 9.6% in October.

Even the Markit Eurozone Manufacturing PMI improved in December, rising to its highest since March. However, although well up on the three-year low seen in July, the rise in the Eurozone PMI was only very marginal, and the index remains firmly in contraction territory, contrasting with the expansions seen in the US and China. The PMI data therefore add to worries that the Eurozone recession deepened in the fourth quarter after GDP data showed a surprisingly mild 0.1% contraction in the third quarter. But, the rise in the PMI nevertheless suggests that the picture is beginning to brighten for even the hard pressed Eurozone as we move in 2013.

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I agree with Markit’s view on the U.S. and China, but not on the Eurozone where the picture will only begin to brighten when new orders turn positive. The Euro has not depreciated sufficiently to offset the very slow progress to date on the lack of competitiveness of the Euroblock.


Right on cue, Eurostat released October’s trade data this morning: exports fell 1.4% M/M after dropping 1.3% in September. Imports rose 0.6% in October but they had declined 3.6% in the previous 2 months.

Coincidentally, Eurostat also released Hourly Labor Costs: they are up 2.0% Y/Y in Q3, up from +1.9% in Q2 and +1.6% in Q1.

Just kidding  In case you think that the Eurocrisis has ended:

Lightning  Spanish House Prices Quicken Decline

imageIn an indication that the market isn’t yet bottoming out, Spanish housing prices are now falling at the fastest pace on record, after double-digit falls over the past year. House prices fell on average by 15.2% in the third quarter from the year-earlier period, compared with the 14.4% decline in the second quarter, the country’s statistics agency, INE, said Friday.

Unlike other markets faced with a housing slump, like the U.S. and Ireland, house prices in Spain fell at a slower pace in the first few years after the 2008 property bust. The pickup in the rate of decline comes after Spain’s government urged the banks to unload foreclosed properties more quickly.

More pain in Spain (chart below from Gary Shilling):


More from Gary Shilling, this time on Canada:





Looks like an accident waiting to happen. As I said earlier, Canada is right at the edge of the U.S. fiscal cliff.

Green with envy  Portugal Moves to Cut Corporate Tax

(…) The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said.

The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview.

That would be the lowest in the European Union along with Cyprus and Bulgaria, which have blanket 10% corporate tax rates, according to consultancy firm KPMG. The average corporate tax in the EU is above 22%. (…)

Mr. Santos Pereira, who was an economics professor at Simon Fraser University in Vancouver, Canada, before taking over the Portuguese ministry, said Portugal’s economic revamping will pay off.

Changes to make the labor law more flexible and companies easier to be set up, fiscal incentives to new investment and the use of EU funds to train the Portuguese to work in export-led industries will provide sustainable economic growth, he said.

“Fifteen years ago, Germany was the sick man of Europe, and it regained its competitiveness by reforming its laws and legislation and by investing quite a lot of resources in technical training. Their model in terms of industries, exports and technical training is the model we are getting back to in Portugal,” Mr. Santos Pereira said.

Let’s see how the EU reacts to that…

Abe Sets Economic Agenda in Japan

To revive the sickly economy, incoming Japanese Prime Minister Shinzo Abe vowed a hefty spending package and increased pressure on the central bank to pull the country out of recession and deflation

Singapore Home Sales Fall

Singapore’s clampdown on home loans is showing some signs of success, as sales of new private homes fell to their lowest level so far this year in November.

Sales of new private residential units fell to 1,087 units in November, down 44% from October, according to data from the Urban Redevelopment Authority. October’s tally was 26% lower than the previous month’s.

The Energy game Changer

US sees $90bn boost from shale gas boom  Europe fears widening divide amid America’s industrial renaissance

Manufacturers have announced more than $90bn worth of investments in the US to take advantage of its cheap natural gas, according to new calculations, underlining how the shale revolution appears to be driving the country’s industrial renaissance.

Petrochemicals, fuel, fertiliser and steel companies are among those that have committed to or are considering multibillion dollar investments based on their ability to source cheap energy and feedstocks. (…)

Industry executives say low-cost feedstocks and energy are already having an effect on the US economy.

Pointing up  Since the start of 2010, industrial production is up 12 per cent in the US, while it has fallen 2 per cent in China, 3 per cent in Britain, and 6 per cent in Japan.

Germany’s production has risen 11 per cent over the same period, but German industrial companies including Bayer and BASF have been warning that they expect to lose competitiveness against US rivals over the coming decade because their energy costs are rising.

For more on that see Facts & Trends: The U.S. Energy Game Changer.


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