NEW$ & VIEW$ (22 JANUARY 2013)

Back from beautiful California, finding investorse in a jolly mood:
  • Economic news from the U.S. are good, primarily on housing which keeps recovering faster than most “experts” predicted. The effects of the continuing budget problem remain to be seen, however. ISI’s company surveys remain positive so far in January.
  • China is showing better and sustained economic momentum.
  • Inflation in the U.S. remains subdued.
  • Earnings seem to be holding well.
  • Threats of another political showdown between Congress and the White House have diminished somewhat.

Fingers crossed This is a big week: flash PMIs and over 300 earnings reports. Fingers crossed


Lots of numbers early in the season. So far, so good.

It’s still too early to draw any significant conclusions about this earnings season, but one positive we’ve seen so far is the revenue beat rate.  As shown below, 60.2% of the companies that have reported so far this season have beaten revenue estimates.  One of the big negatives of the past two earnings seasons was a very weak revenue beat rate, so if companies can continue to post strong top-line sales numbers, the market should like it.


For those wondering, the bottom-line earnings beat rate for the 101 companies that have reported so far this season is 59.4%.  As shown below, this is about inline with what we’ve seen for the past seven earnings seasons. 

  • Bespoke tallies all NYSE companies. Here’s Factset on S&P 500 companies:

Of the 54 S&P 500 companies that have reported earnings to date for the fourth quarter, 65% have reported earnings above estimates. This percentage is slightly below the average of 69% recorded over the past four quarters. In terms of revenues, 69% of companies have reported sales above estimates. This percentage is well above the average of 50% recorded over the past four quarters.

The S&P 500’s blended earnings growth rate for Q4 2012 is 1.9% this week, above last week’s growth rate of 1.6%. The increase in the growth rate this week can mainly be attributed to upside earnings surprises reported by companies in the Financials sector (including Goldman Sachs, JPMorgan Chase, and Bank of America), partially offset by downward revisions to estimates for companies in the Telecom Services sector (including Verizon and AT&T).

Pointing up  In terms of preannouncements, 10 companies have issued negative EPS guidance for Q1 2013, while just one company has issued positive EPS guidance.

  • And here’s the official stuff from S&P (as of Jan. 17): 43 of 67 (64%) companies beat, 14 (21%) missed. Q4 estimates are now $25.18, down from $25.29 on Dec. 31. Q1’13 estimates are $26.25, up from $26.18 on Dec. 31.

GE lifted by strong emerging markets growth  Sluggish rich-world demand offset by countries including China

(…) industrial revenues rose 4 per cent to $111bn.

Emerging economies and other high-growth markets were responsible for much of that increase, with sales to China up 19 per cent, Latin America up 22 per cent and Russia up 23 per cent for the year.

“We definitely saw China strengthen again at the end of the year,” said Jeff Immelt, chief executive of General Electric (…)

Profit margins continued to rise, with an increase of 1.2 percentage points in operating margins in the fourth quarter compared with the equivalent period of 2011, and a rise of 0.3 percentage points for the year over the previous year, thanks mainly to productivity gains. (…)

Order intake was healthy, with the company booking 1.2 times as many orders as it billed during the quarter, and a record order backlog of $210bn at the end of the year.

Emerging economies also showed strong growth in orders, which were up 15 per cent in Latin America, 17 per cent in Russia and other former Soviet countries, and 60 per cent in sub-Saharan Africa.

Thumbs up Thumbs down OIL

The price of oil is a big unknown for 2013. World supply and demand trends suggest lower prices but OPEC, particularly the Saudis, continue to manage supplies to keep price above their budgetary needs. As this Bespoke Investment chart suggests, U.S. gasoline prices could jump some 10% in coming weeks if world prices hold at current levels. Combined with higher taxes and rising food prices (up 3.3% annualized in the last 3 months), higher gas prices would seriously erode discretionary spending right when the economy is gaining some momentum.

China’s recovery is helping the Saudis manage prices:

IEA warns on tightening oil market  China growth and reduced supply to aid higher prices

(…) “All of a sudden, the market looks tighter than we thought,” the International Energy Agency, the western countries’ oil watchdog, said on Friday. But it cautioned: “It may be too early, however, to declare the . . . return to the bull market of yesteryear.”

The IEA revised up its forecast for global oil demand growth both for 2012 and 2013, citing higher consumption in China, the US and Brazil. The agency now estimates that global oil demand grew by 975,000 barrels a day in 2012, up from a previous estimate of 850,000 b/d. For this year, it forecasts demand growth of 930,000 b/d, up from a previous estimate of 865,000 b/d.

The Paris-based agency noted that the acceleration in Chinese oil consumption in the final months of last year, after months of lacklustre demand growth, “surprised with its velocity”. (…)

Opec production has fallen sharply over the past two months as Saudi Arabia cut supply. The IEA blamed the reduction on seasonal factors such as the end of the Saudi summer, which accounts for reduced domestic oil consumption.

“The dip in Saudi supply, for one, seems less driven by price considerations than by the weather,” the watchdog said in its monthly oil market report. “Lower output in recent months also reflects a seasonal cutback in demand by refiners for the country’s crude.”

The IEA estimates that Riyadh produced 9.4m b/d in December, down significantly from a 30-year peak of more than 10m b/d earlier in 2012. The cartel collectively produced 30.6m b/d, the lowest in a year, as the drop in Saudi output was compounded by lower supply from Iraq, Kuwait and the United Arab Emirates.

Even though …

U.S. Oil Sector Sets Record

U.S. oil production grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013.

Daily crude output averaged 6.4 million barrels a day last year, up a record 779,000 barrels a day from 2011 and hitting a 15-year high, according to the American Petroleum Institute, a trade group.

The U.S. Energy Information Administration predicts 2013 will be an even bigger year, with average daily production expected to jump by 900,000 barrels a day. (…)

Amid a sluggish economic recovery and tightening fuel-economy standards for U.S. cars and trucks, oil demand fell to a 16-year low in 2012, according to the trade group. Total oil imports for the year fell by 6.9%, to a 15-year low, API said.

Refiners that spent billions of dollars upgrading and expanding facilities last decade now find themselves with excess capacity, leading them to target consumers in South America and elsewhere for their surplus diesel and gasoline production.

Exxon Mobil Corp. predicts in its annual energy outlook that North America will become a net exporter of all energy by 2025, through continued growth of crude from Canada’s oil-sands region as well as growing exports of gasoline and diesel.

Peak oil theories ‘increasingly groundless’, says BP chief

(…) Bob Dudley’s remarks came as the company published a study predicting oil production will increase substantially, and that unconventional and high-carbon oil will make up all of the increase in global oil supply to the end of this decade, with the explosive growth of shale oil in the US behind much of the growth. (…)

BP predicts that by 2030, the US will be self-sufficient in energy, with only 1% coming from imports, the company’s analysts predict. That would be a remarkable turnaround for a country that as recently as 2005, before the shale gas boom, was one of the biggest global oil importers. (…)

BP’s projections confirm some of those made by the International Energy Agency, which late last year forecast that the US would be the world’s biggest oil producer by the final years of this decade, surpassing Saudi Arabia and other Opec countries.

(…) While gas prices have plunged in the US, to about $2 a unit, they have remained high elsewhere around the world, at over $10 in Europe, as the US lacks exportation infrastructure and domestic demand has soaked up the supply. The ramifications of such low-energy prices in the US have yet to be fully felt in industry. Cheap energy will make US manufacturers more competitive, which is worrying many European rivals. (…)

BP also forecast that global energy demand would continue to increase at an average of 2% a year to 2020 and then by 1.3% a year to 2030. Almost all of this demand growth is forecast to come from currently developing economies, with China and India alone responsible for half the increase in demand. (…)

Another threat: WTI vs Brent (BCA Research)

According to our Commodity & Energy Strategy service, the Brent/WTI spread will stay wide, despite the Seaway capacity expansion this month. The upcoming planned capacity addition was insufficient from the start to fully resolve the Cushing storage issue.

Furthermore, U.S. oil production keeps surprising to the upside. Cushing inventories have risen above 50 million barrels and petroleum railroad transportation is skyrocketing. This highlights that transportation bottlenecks will persist.

(Charts from Bespoke Investment)


German Data Helps European Markets

Data from the Center For European Economic Research, or ZEW, showed business confidence jumped to 31.5 in January, from 6.9 in December—its highest level since May 2010 and significantly above expectations for a reading of 12.

German Opposition Victory Is Blow to Merkel’s Hopes

Germany’s opposition Social Democrats and Greens narrowly defeated Angela Merkel’s center-right coalition parties in a state election Sunday, in a tight race that showed the complications the popular chancellor may face in winning a third term in a general election later this year. (…)

The loss of Lower Saxony is blow to Ms. Merkel, marking the fourth consecutive state election defeat for her ruling-coalition parties and underscoring the difficulty she is having translating her popularity into votes. A recent poll by the Election Research Group showed that 65% of German voters prefer Ms. Merkel as chancellor. The CDU won 36% of the vote on Sunday. The SPD came in lower, polling at 32.6%, but were lifted to victory by the Greens, who won 13.7% of the vote. (…)

Ms. Merkel’s problem is the collapse of her partner, the FDP, whose weakness nationally threatens her chances of staying in power beyond 2013. (…)

On the national stage, the coalition math will be more complicated. Even if the race is tight in September, the Left will almost certainly get into the federal parliament because of strong support in Eastern Germany.

“That means that it will not only be difficult but almost impossible for the SPD and Greens to form their own majority in the federal parliament,” said Mr. Decker. “My guess is that there will be a grand coalition of the two big parties in September and Angela Merkel will remain in power.”

Pointing up  BOJ Moves to End Deflation

Japan’s central bank agreed to adopt a 2% inflation target and strengthened its monetary-easing program in a bid to rid the economy of long-running deflationary pressures.

The Bank of Japan made an “open-ended” commitment to ending deflation, adopted a firm inflation target and reached a pact with the government that calls on both sides to help restore growth in the long-stalled economy. (…)

The central bank “will pursue monetary easing and aim to achieve this target at the earliest possible time,” it said in a statement released after the closely watched policy-board meeting, the first since Mr. Abe came to office late last year. (…)

The BOJ also decided to pursue “open-ended” monetary easing, pledging to carry on purchases of financial assets and a virtual zero interest-rate policy as long as it is deems necessary to achieve the 2% inflation target. Previously, the asset purchases were due to finish at the end of this year. It was the first time in nearly a decade the BOJ took easing measures at two consecutive policy-board meetings. (…)

And BOJ Gov. Masaaki Shirakawa warned that hitting the 2% target wouldn’t be easy. “Considerably drastic efforts are necessary to achieve the 2% inflation target,” he said at a press conference, adding that the government will also need to make efforts to raise the economy’s growth potential.

Even some of the BOJ policy board’s most dovish members—widely expected to back Mr. Abe’s pro-easing views—said the target was unrealistic. Two of the nine members, Takehiro Sato and Takahide Kiuchi, voted against adopting the target. Separate forecasts released by the central bank showed it expects the consumer price index to rise just 0.9% in the fiscal year starting April 2014. (…)

Mr. Abe is expected to soon hold greater sway over the BOJ after Mr. Shirakawa steps down in early April. Both deputy governors on the policy board will also be retiring in March. (…)

High five  Bundesbank Chief Cautions Japan

Bundesbank President Jens Weidmann warned Japan not to “politicize” its exchange rate by pursuing an overly aggressive monetary policy, reflecting mounting concern in Europe that other central banks may cheapen their currencies as a means of stimulating economic growth.

Japan’s government as well as Hungary’s “are intervening heavily in the duties of the central banks, pressuring for a more aggressive monetary policy” that threatens central-bank independence, Mr. Weidmann said in a speech on Monday.

“A consequence, whether intended or not, could lead to an increasingly politicized exchange rate. Until now, the international monetary system has come through the crisis without a race to devaluation, and I really hope that it stays that way,” Mr. Weidmann said. (…)

It is rare for central bankers, including Mr. Weidmann, to criticize the monetary policies of other countries. Monday’s warning to Japan was the German banker’s most explicit to date.

Bundesbank officials worry that, because of Japan’s economic might, the Bank of Japan’s policies could have a signaling effect to other central banks, particularly if they are successful at weakening the yen and boosting exports. Such policies, if enacted around the globe, could lead to inflation and a loss of central-bank independence.

Mervyn King, who heads the Bank of England, said last month that 2013 “could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns.”



More on this? A Evans-Pritchard: Revolutionary Japan is suddenly the centre of world affairs

Other than oil, currency movements are the other big thing for 2013.

Princess  Richemont Watch and Jewelry Sales Growth Slows


Swiss watch and jewelry maker Compagnie Financière Richemont SA said third-quarter sales growth slowed, a performance that follows competitors Swatch Group AG and Tiffany & Co. and underscores easing growth in Asia.

The Geneva-based company, which owns the Cartier and Montblanc brands, posted a 9% rise in sales to €2.86 billion ($3.81 billion) in the three months to Dec. 31, compared with 24% growth a year earlier.

“At this stage, it is unclear how business patterns may develop and how the business in the Asia Pacific region will evolve in the near future,” Richemont said.

Sales in the Asian-Pacific region rose 6% to €1.12 billion, but at constant exchange rates were flat. Sales in Europe, where tourists from Asia bought watches, pens and jewelry as souvenirs, rose 11%. In the Americas they increased 18%.

Earlier this month, Swatch Group AG reported record gross sales of 8.14 billion Swiss francs in 2012. The figures indicated, however, that second half sales growth slipped to 13.6% compared with 14.4% in the first six months of the year. Tiffany & Co also reported lower-than-expected sales for the two months to Dec. 31.

Obama defends role of strong government
Speech appeals to president’s left-leaning base of support

Barack Obama mounted a vigorous defence of interventionist government and the role of a social safety net in an uplifting and uncompromising speech that marked the formal opening of his second term as president.

Chinese labour pool begins to drain
Working age population shrinks for first time in recent history

China’s working-age population shrank in 2012, marking the beginning of a trend that will accelerate over the next two decades and have profound implications for the world’s second-largest economy.

By the end of December China’s population aged between 15 and 59 was 937.27m, a decrease of 3.45m from 2011, according to figures released by China’s National Bureau of Statistics on Friday. “In 2012 for the first time we saw a drop in the population of people of working age … We should pay great attention to this fact,” said Ma Jiantang, head of the National Bureau of Statistics.


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