NEW$ & VIEW$ (23 JANUARY 2013)

Sun  Housing Recovery Gained Pace in 2012   U.S. existing-home sales last year rose to their highest annual level in five years and registered their largest annual jump since 2004, the latest sign that more housing markets hit bottom last year.

The National Association of Realtors reported Tuesday that an estimated 4.65 million previously owned homes were sold in 2012, up 9.2% from 2011. Total home sales were higher than in any year since 2007, when 5.04 million homes were sold; at the time, that was the lowest annual tally since 1998.

Sales in December edged down by around 1% from November but still stood nearly 13% above the year-earlier level. Sales have now increased from their year-ago level for 18 consecutive months. (…)

Surprised smile  The number of homes for sale fell to 1.82 million units at the end of December— down by 8.5% from the previous month and 21.6% from one year ago—to the lowest level since January 2001.

While inventory typically declines during the winter, the dearth of supply is frustrating home buyers and real-estate agents who frequently say that there is little to buy. “If we had twice as much inventory, we’d have twice as many sales,” said Syd Leibovitch, president of Rodeo Realty, a Los Angeles-based brokerage. (…)

Even the shadow inventory of existing homes, which could satisfy some demand, is dwindling. CoreLogic estimates an October supply of 2.3 million homes that could potentially go on the market, down 12.3% from year-ago levels.

Raymond James on housing inventory:

After declining by 121,000 units last month, existing home listings fell by another 170,000 units in December. We would note that the sequential decrease (-8.5%) in inventory is in-line historical trends, as listed inventory (since 1990) has averaged an 8.8% seasonal decrease between November and December. Overall, though, the 1.82 million homes listed for sale is the lowest level since December 1999, driven in part by: 1) a lack of traditional listings (attributed to the negative equity situation and a lack of seller confidence); 2) a growing emphasis on short sales; and 3) a surge of investor capital soaking up lower-priced units with all-cash bids for future rental housing portfolios.

Move-up and luxury segments continue to be the sweet-spot for housing demand. We believe the balance of the incoming data (including November new home sales next week) will continue to suggest that incremental new-home buyers are still skewing toward more expensive “move-up” units relative to the traditional entry-level homes. Notably, according to NAR, first-time buyers accounted for just 30% of purchases in December, well below historic norm of 40%. We view this as further evidence that the move-up and luxury segments remain the sweet-spot for housing demand as stringent mortgage underwriting standards continue to limit potential entry-level demand.

Investors accounted for 21% of transactions in December, up from 19% in November and unchanged from a year ago.

Pointing up  CoreLogic estimates that 1.3 million properties regained positive equity during the first half of 2012 as prices rose. Another 2 million would if prices appreciated another 5%, out of a total 11 million underwater mortgages. Now, that’s a wealth effect!

CURRENCY WAR
 
Euro could be next to join currency war

(…) Europe’s single currency has risen almost 7 per cent on a trade-weighted basis since late July. It is up about 25 per cent against the yen and 10 per cent against the dollar. (…)

A stronger euro threatens to strangle one remaining source of growth: net exports have contributed positively to eurozone gross domestic product in each of the past 10 quarters, according to Barclays.

Even Germany’s resilient exporters have reason to worry – the euro/yen rate matters for the country’s powerful car manufacturers. Jean-Claude Juncker, Luxembourg’s prime minister, who has just relinquished his chairmanship of eurozone finance ministers meetings, warned last week that the euro’s level was “dangerously high”. (…)

Japan hits back at currency critics
Economy minister hits out at Germany

image(…) In an interview with the Financial Times on Wednesday, Mr Amari rejected Mr Weidmann’s characterisation of the Japanese moves as “alarming infringements” of central bank independence that could lead to “politicisation of the exchange rate”.

“Germany is the country whose exports have benefited most from the euro area’s fixed exchange rate system. He’s not in a position to criticise,” Mr Amari said. (…)

Mr Amari rejected the notion that Japan was trying specifically to weaken the yen, saying its efforts were aimed at reviving the domestic economy and reversing price declines.

“The market is in the process of correcting on its own from an excessively strong yen,” he said. “We aren’t guiding it, we aren’t doing anything.” (…)

Sure! A falling yen is great for exports and bad (read good) for inflation.

China added to the criticism on Wednesday. In a harsh editorial, the official Xinhua news agency said the “decision to crank up money printing presses is dangerous” and could lead to “currency wars” that could knock the global economy off track. (…)

Pound pressure
Eurozone stability leaves sterling exposed

Sterling is the worst-performing developed nation currency in the year to date. It has fallen 2.3 per cent against the dollar, trading at its weakest level since August at $1.58. And it is down 3.5 per cent against the euro, at a 10-month low. (…)

Still, any further weakening in the pound would be welcomed by UK officials. Ian McCafferty, member of the BoE’s MPC, was reported last week as questioning whether sterling was at a competitive enough rate for the UK economy to recover.

BOE Cites Pound as Rebalancing Obstacle in 8-1 Stimulus Vote  Bank of England policy makers said the pound’s level may prove an obstacle to rebalancing the economy and David Miles cited the currency as he repeated his call for an expansion of stimulus.

“Substantial headwinds to recovery remained, including the drag to activity from fiscal consolidation, a further squeeze in household real incomes, and the deterioration in U.K. competitiveness over the past couple of years,” the minutes said. “The sterling real exchange rate might be above the level compatible with the necessary rebalancing of the economy.”

U.K. Jobless Claims Unexpectedly Fall to 1 1/2-Year Low: Economy  U.K. jobless claims unexpectedly fell in December and a quarterly measure of unemployment also dropped, underlining the resilience of the labor market in the face of a weak economic recovery.

Unemployment claims declined by 12,100 from November to 1.56 million, the lowest since June 2011, the Office for National Statistics said today in London. In the quarter through November, unemployment measured by International Labour Organisation methods fell to 7.7 percent, the lowest since the three months through April 2011. The report also showed that wage growth slowed. (…)

Employment rose 90,000 during the quarter through November, taking the total to 29.7 million, the ONS said. That’s the highest since records began in 1971. The employment rate of 71.4 percent is at the highest since February-April 2009. The ILO unemployment level fell by 37,000 to 2.49 million, a 10th consecutive decline. The unemployment rate has come down from a peak of 8.4 percent in December 2011.

The labor-market report showed that consumers remain under pressure from subdued wage increases. Weekly pay growth slowed to an annual 1.5 percent in the three months through November, while pay excluding bonuses rose 1.4 percent, the least since June 2010. That compares with inflation of 2.7 percent.

Lightning  Spanish economic woes deepen
GDP declines 0.6 per cent in fourth quarter

(…) Gross domestic product in the last three months of 2012 declined by 0.6 per cent compared with the third quarter, according to preliminary figures released by the Bank of Spain on Wednesday. The sharp drop means the overall fall in GDP for the year is predicted to reach 1.3 per cent, the bank said.

Thai Exports Climb for a Fourth Month as Global Demand Improves

Overseas sales rose 13.45 percent last month from a year earlier to $18.1 billion after climbing a previously reported 26.86 percent in November, the Ministry of Commerce said in a statement today. (…)

The Bank of Thailand Governor Prasarn Trairatvorakul said yesterday risks to growth have declined amid a firmer global recovery and that shipments show signs of a broad-based recovery. Still, Finance Minister Kittiratt Na-Ranong said last week the exchange rate is “not at a good level” and that exporters will face difficulties should the baht strengthen further.

Taiwan’s December Industrial Output Climbs Less Than Estimated

Production climbed 2.39 percent from a year earlier, compared with a revised 5.87 percent gain in November, the Ministry of Economic Affairs said in Taipei today. (…)

Manufacturing in Taiwan gained 2.84 percent in December from a year earlier, while construction fell 20.42 percent, the report showed today.

THE CANADIAN DOLLAR OVERVALUED?

While 2012Q4 data isn’t out yet, it’s safe to say that Canada’s current account deficit widened further in 2012, likely to around 4% of GDP, the worst in over two decades. A weak global economy is partly to blame for the massive external deficit but so is an overvalued Canadian dollar. The
loonie is now almost 10 cents stronger than what it was back in 2008, despite similar terms of trade (i.e. export prices divided by import prices).

So why has the Canadian dollar diverged from the terms of trade? For one, as today’s Hot Charts show, strong foreign demand for Canadian
securities have brought added support to the loonie — net purchases have averaged about C$8.5 bn/month over the last four years, more than four times the average of the preceding 20 years. Foreign investors, weary of currency devaluation strategies by central banks and shaky fiscal situations in several OECD economies, have understandably found some comfort in Canada.

The loonie’s divergence from the terms of trade can also be explained by the fact that markets continue to link the loonie to movements in global oil prices, and not to prices received by Canadian oil exporters which, due to pipeline capacity constraints, tend to be much lower than say WTI. The C$’s movements have indeed been more correlated with WTI than with prices received by Canadian exporters e.g. Edmonton Par. Clearly, by tying the loonie to the “wrong” oil price, markets are perpetuating the Canadian dollar’s overvaluation. (NBF Financial)

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THE U.S. ECONOMY IS CLEARLY DECOUPLING

This chart from Macrobeat shows the diverging trends between the U.S. leading indicators and that of the rest of the world.

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EARNINGS WATCH

Google / IBM: breathe easy
Tech groups’ earnings reveal no nasty surprises, leaving investors reassured

Technology’s fourth-quarter earnings season has passed its two most important tests. Google and IBM, which both reported on Tuesday evening, are the most important players in two huge swaths of the digital world and indeed the world economy – internet advertising and corporate information technology. (…)

Google – far more sensitive to economic softness than Big Blue – presented numbers that were a model of steadiness. Adjusting for currency and Motorola, revenues grew by 24 per cent, exactly in line with the previous two quarters. Growth in “clicks” on Google ads slowed, but ad price declines slowed too, leaving the spread between the two unchanged. Cost ratios, always a cause of heartburn for Google investors, were consistent with the previous quarter. “Steady as she goes” was what investors wanted to hear: the shares rose 5 per cent in late trading.

Reproducing last quarter’s effort would not have been enough for IBM. In that quarter, hardware revenues continued a long slump, gross profit growth in tech services and software slowed to nearly nothing, earnings per share growth slowed to 10 per cent (the bottom of IBM’s target range), and the company uncharacteristically declined to raise its earnings per share target. But the fourth-quarter results managed to reassure, to a greater or lesser extent, on all of these fronts, with hardware sales near the previous-year level, firming margins, and better EPS growth. Not a great quarter, but a relieving one. Shares rose 4 per cent. The market is free to keep rising, for at least one more day.

DELEVERAGING

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Auto  Iran’s car industry output falls sharply
Decline of about 50% in volume ‘unprecedented’

Iran’s output of cars – the country’s biggest non-oil industry – has fallen by about 50 per cent, as the tightening international sanctions over the country’s nuclear programme aggravate economic woes.

Production dropped to 677,000 cars in the first nine months of the Persian year that started in March, from 1.2m during the same period last year. (…)

Domestic media have reported that more than 110 auto part makers shut down and thousands of workers lost their jobs over the past year.

Moreover, Iran’s two largest state-run carmakers , Iran Khodro and Saipa, are reportedly now suffering from overstaffing – or “hidden unemployment”, as the domestic media call it – due to the decline in output. (…)

In a move to support carmakers, the government has allowed them to raise the prices of cars by about 25 per cent since last October. The official price of the cheapest models of Kia Pride – the South Korean car which accounts for up to 40 per cent of vehicles on the country’s roads – has officially increased from 75m rials ($3,053) to 119m rials ($4,845). The market rate is about 20 per cent higher still.

But carmakers argue the price rises do not cover the losses they have sustained, as their costs have more than doubled over the past year because of the plunging rial. (…)

For months, the government has promised to pay 20tn rials ($814m) to the two leading carmakers so they can pay their suppliers.

But the banks that would underpin any bailout are themselves grappling to deal with international sanctions, with overdue loans now exceeding deposits.

Iraj Nadimi, a member of the parliament’s economics committee, said this month that carmakers should not “tie their survival to banking loans” because “banks are empty”. (…)

Meanwhile, some of the Iranian producers’ European and South Korean partners, including France’s PSA Peugeot Citroën, have left the market due to sanctions.

France’s Peugeot Renault appears to be the lone European carmaker still operating in Iran.

The gap created by this exodus is opening up an opportunity for Chinese car and auto part makers. Sales of some makes of China’s Chery Automobile Co, such as the MVM and X33, have more than doubled since last April, although the company’s share of the Iranian car market is still less than 6 per cent.

“This is another example that Chinese are the main beneficiaries of the sanctions, while Iranians and Europeans are losing,” said one economic analyst.

Firms Keep Stockpiles of ‘Foreign’ Cash in the U.S.

Much of the estimated $1.7 trillion in cash American companies say they have indefinitely invested overseas is actually sitting at home.

imageSome companies, including Internet giant Google Inc., software maker Microsoft Corp. and data-storage specialist EMC Corp. keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies’ cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn’t flow back to the U.S. parent company, the U.S. doesn’t tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

In accounting terms, the location of the funds may be just a technicality. But for people on both sides of the contentious debate over corporate-tax reform, the situation highlights what they see as the absurdity of rules that encourage companies to engage in semantic games, legal gymnastics and inefficient corporate-financing methods to shield profits from U.S. taxes. (…)

The U.S. is the only major economy whose tax authorities claim a share of a domestic company’s profits no matter where those profits are earned. But auditors don’t require the companies to account for possible taxes on foreign earnings as long as they declare that the funds are permanently invested overseas. The upshot: American companies have a strong incentive to find ways of earning most of their profit overseas and keeping it in the hands of foreign units. (…)

 
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