NEW$ & VIEW$ (25 JANUARY 2013)


So far, over 70% of the releases have exceeded estimates for earnings.  Revenue gains have not been as robust as only 50% of the releases have exceeded estimates. (ISI)

From Zacks Research:

Not only are positive surprises at levels better than the previous quarter and comparable to the last many, but neither are we getting much negative guidance from management teams. One could discount the positive surprises as largely a function of lowered expectation, which had sharply come down in the run up to the start of the earnings season. But the absence of negative guidance has to count as a net positive in an otherwise no-growth earnings environment.

Total earnings for the 136 S&P 500 companies that have already reported results are up +1% from the same period last year, with 62.5% of the companies beating expectations with a median surprise of +2.4%. Revenues are up +5.5%, with 52.9% of the companies beating top-line expectations and a median revenue surprise of +0.6%.  (…)

Finance is the key driver of earnings growth, with total Finance sector earnings that have come out up +29.6% from the same period last year. High five  Excluding Finance, total earnings growth for the reports that have come out would be down -6.8%. (…)

Pointing up  Total earnings for the 364 companies that have still to report results are expected to be down -1.9%, with the remaining Finance and Tech companies accounting for most of the weakness.


Yesterday was flash PMI day for China, Europe and the U.S.. Europe’s show glimpses of green shoots although France remains in a steep slide. China’s economic turn seems sustainable. The great news came from the U.S. where just about everything looks pretty solid entering 2013. Markit’s flash PMI contrasts with the regional PMIs and Fed surveys which were weak in January, all of them reporting contracting orders in January. Hopefully, the fiscal drag underway will not bring everything to a halt. Markit sums up the state of global manufacturing:

Purchasing manager surveys indicate that the global economy has picked up further momentum at the start of 2013. Markit’s flash manufacturing PMIs, which cover the world’s three largest goods-producing economies, showed growth rising to 24- and 22-month highs in China and the US respectively, while the euro area saw the smallest fall in activity for ten months. (…)

The New Export Orders Indices from the three flash PMI surveys have also risen sharply from the lows seen last year, pointing to an upturn in global trade flows. In all three cases the indices remain well below their averages seen in the first two years of the recovery from the 2008-09 recession but are nevertheless either acting as an additional source of
growth or, in the case of the eurozone, acting as a significantly less severe drag on economic growth.

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Why is the U.S. doing better? Here’s a good analysis from Moody’s on the effect of a cheap currency on an economy. Many countries are beginning to wake up and currency wars are brewing.

Very cheap dollar exchange rate befits weakest US recovery since 1930s

The weakness of the dollar exchange rate is striking and offers vivid testimony to the perceived vulnerabilities of the current US economic recovery. The dollar was recently down by 17% compared to 2002-2007’s recovery, off by 20% vis-à-vis 1991-2000’s upturn, and an even deeper 33% under its average of 1983-1990’s recovery. In fact, the dollar exchange rate index was recently down by nearly 50% from its record high of early 1985.


(…) US real exports grew a relatively brisk 5.3% annualized, on average, since Q2-2002. By contrast, when the dollar exchange rate index appreciated by a cumulative 38% from Q2-1995 to Q1-2002, real exports rose by a slower 4.0% annualized.

In addition, from Q2-1995 to Q1-2002, exports’ share of US GDP fell from 10.6% to 9.6%. By contrast, exports recently attained a record 14.0% of GDP. Moreover, since mid-2007, exports have exceeded US business investment spending in the GDP accounts. In fact, exports’ share of GDP now exceeds business capital spending’s record 13.7% share.


(…) since the month-long average of the dollar last bottomed at the 78.1 yen of September 2012, the dollar has climbed higher by 14.1% to 89.4 yen. (…)

The euro’s appreciation against the yen has been even more striking. Compared to July 2012’s month-long average, the euro has soared higher by 22.8% in terms of yen. The weaker yen could temper the recent surge by US exports of motor vehicles and parts, which have been major beneficiaries of a cheap dollar.

Ordinarily, policymakers do prescribe exchange rate appreciation for a recession-bound economy. The euro’s latest climb not only will make it more difficult for Europe’s peripheral economies to stabilize, the pricier euro also threatens the global competitiveness of Europe’s core economies. (…)

In terms of a moving 3-month average, the year-to-year growth of US exports slowed from November 2011’s 12.1% to November 2012’s 2.7%. Worse yet, an ISM-derived index of US export orders warns of a possible outright contraction by exports.


Japan’s attempt to cheapen its currency warns of similar actions by other countries suffering from an underutilization of productive resources, especially those burdened by especially high unemployment. US exports would suffer if the dollar were to strengthen in the context of subpar global economic growth.


Yesterday’s flash PMI for the U.S. showed a decline in the New Export Orders index from 52.6 in December to 51.3. To be closely monitored, along with the growing threat of currency wars.

Merkel Takes Swipe at Japan Over Yen

Angela Merkel stepped into a growing debate over the threat of a global currency war, taking a swipe at Japan’s recent moves to weaken the yen.

Weighing into the discussion at the annual World Economic Forum summit of executives and policy makers in Davos, Switzerland, Ms. Merkel echoed the increasing concern in Germany that some countries, most notably Japan and the U.S., are using monetary policy as a way to enhance their economic competitiveness.

“In Germany, we believe that central banks are not there to clean up bad policy decisions and a lack of competitiveness.” (…)

Last week, German Finance Minister Wolfgang Schäuble lashed out at Tokyo and Washington in a speech in the Bundestag, or lower house of the German parliament. He suggested that while the world points the finger at the euro zone, Japan and the U.S. through monetary policy easing are pouring excessive liquidity into global financial markets and creating new risks to the global economy.

Thailand to Avoid Currency War as Ghost of 1997 Crisis Looms

“The shadow of 1997 is there,” Kittiratt said in an interview in Bangkok. “I will never encourage Bank of Thailand to go and trade against the market-determined rate unless it’s only part of the daily stability, the weekly stability.” (…)

“In the short term, if I can hope for, I would like to see a little bit weaker baht,” Kittiratt said yesterday before flying to Davos, Switzerland, to attend the World Economic Forum. “For the exporters, a strong baht really pushed them into pressure. While they are adjusting themselves to higher human resources costs, a weak Thai baht may help them.”

Pointing up  Interestingly, nobody is talking about China’s currency management these days. Yet, here’s what NBF Financial wrote last December:

Emerging Asia accounts for a larger share of global IP than the U.S., the Euro zone and Japan combined (40% vs.37%). This is a dramatic change from just twenty years ago when the roles were reversed (10% for emerging Asia vs. 58% for U.S., Europe). The development has most certainly been amplified by the managed currency regimes of emerging Asia. In our opinion, an orderly rebalancing of the global economy argues for a change in the FX regimes of many emerging economies, the sooner the better. Failure to do so would risk precipitating a return of
protectionist forces in 2013. That would be bad for everyone.


Open-mouthed smile  Conference Board Leading Economic Index Posts A Strong December

The index increased 0.5% to 93.9, following no change in November and a 0.3% gain in October. Large positive contributions from initial claims for unemployment insurance (inverted) and financial components together with building permits offset negative contributions from consumer expectations and manufacturing new orders. (Charts below from Doug Short)



The best recession indicator remains in positive territory.

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BofA Merrill Lynch Chief Investment Strategist Michael Hartnett has been out in front of the rest touting the “Great Rotation” theme for 2013 – and he says it’s already begun. (Via Business Insider)

(…) The past seven years have seen a Great Divergence in terms of fund flows. Investors have poured $800bn into bond funds and redeemed $600bn from long- only equity funds. But recent data show the first genuine signs of equity-belief in years. The past 13 days have seen $35 billion come back into equity funds ($19 billion of which is via long-only).

And while the industry flow data does not show “rotation” out of bonds, our private client data does. The structural long position in fixed income is simply threatened by low expected returns thanks to low rates and the mathematical reality that a small rise in rates can cause total return losses in portfolios. Table 1 shows that negative returns would occur if the 30-year Treasury yield rose from 3.03% to above 3.26% anytime in the next 12 months (and note the same yield was 4.53% just 3-years ago).

Open-mouthed smile  Claims Breaking Out of Range Supports Equity Rally

The breakout in most North American equity indices to new 52-week (or better) highs has been supported by a move in claims below the range that had been in place for much of the past year. While there are still some seasonal distortions in the claims data that could lift claims again in the coming weeks, the recent move is an encouraging indication for equity markets. (BMO Capital Markets)


Euro Climbs on German Data

German business confidence rose for the third month in a row in January and hit a seven-month high, according to the German Ifo survey, boosting the DAX index and other stock indexes across the euro zone.

The Ifo survey data results add to recent strong manufacturing surveys for Germany and the ZEW indicator for economic confidence. The euro climbed against the dollar and the DAX outperformed peers. Over the last 12 months, Germany’s benchmark index has risen close to 22% versus the FTSE 100, which is up only 9%.

ECB Says Banks to Repay More Than Forecast of 3-Year Loan  The European Central Bank said banks will next week repay more of its emergency three-year loans than economists forecast in another sign the region’s debt crisis is abating.

Banks will hand back 137.2 billion euros ($184 billion) of loans in their first early repayment of the ECB’s so-called Longer-Term Refinancing Operations, the central bank said today. That’s more than 84 billion euros economists predicted in a Bloomberg survey.

“The number is higher than expected, and it shows that banks are quite comfortable in terms of off-loading excess liquidity,” said Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in Amsterdam. “This goes along with the theme of a reduction in the flight to safety and is consistent with the theme that we’ve seen this year of a reduction in risk.” (…)

Italy’s 10-year bond yield fell seven basis points to 4.09 percent, while rates on Spain’s January 2023 securities also dropped seven basis points, to 5.17 percent.

U.K. Economy Shrinks

The U.K. economy shrank in the final quarter of 2012, leaving Britain at risk of entering its third recession since 2008.

ChartIn its preliminary estimate, the Office for National Statistics said gross domestic product contracted 0.3% between October and December compared with the third quarter. On an annual basis economic output was flat. (…)

Output is now 3.3% below its precrisis peak in the first quarter of 2008, and has grown just 0.5% since the third quarter of 2010, immediately after the coalition government took power. (…)

The ONS said the main driver of the GDP contraction was the mining and quarrying industry, which saw output fall 10.2% in the fourth quarter compared with the previous quarter—the largest quarter-to-quarter drop since records began in 1997.

The slump in mining and quarrying output was due to the Buzzard oil field—the largest oil field in the North Sea—being closed for maintenance.

The decline in GDP in the fourth quarter also reflects the absence of extra activity associated with the London Olympic Games, which boosted output in the third quarter.

Confused smile  What’s the problem in the U.K.? (FT Alphaville)

The problem is that none of this seems to correspond with what’s going on the ground or to correlate with other metrics, like employment. The UK’s so-called productivity puzzle.

As the Economist emphasized on Friday:

Yet the job market is humming. Data released on January 23rd show that employment has topped previous peaks (see first chart). The combination of economic slowdown and plentiful jobs means output per worker has fallen 12% further than at the same stage in previous recessions. That is equivalent to the loss of the entire manufacturing sector. Britain is now startlingly unproductive compared with other rich countries. What is going on?

One obvious answer is that the GDP calculation has become inaccurate. It presents the wrong impression of what’s really going because it fails to capture a whole bunch of alternative non monetary inputs.

For one, real adjustments in standard of living aren’t always captured. Neither is the “added value” delivered from free inputs which are not monetised. Everything from time spent surfing on Facebook, to the beneficial effects of the collaborative economy. Other things hard to quantify: the productivity burst from smartphones.

Creative industries have for a long time faced this monetary problem. How do you value a creative entity’s “thinking and inspiration” time? Do you remunerate journalists and artists based on the quantity of posts and articles they write or on the substance?

What about the care, voluntary and charity sectors? And last but not least there are the huge wealth effects associated with completely free access to entertaining content on the internet.

In short there is wealth and growth being added, it’s just that it’s not the sort of wealth and growth that you can express in monetary terms.

3M Optimistic on China

3M said profit grew 3.9% in the fourth quarter as strength in health care and office supplies offset weaknesses elsewhere. The conglomerate also said demand in China is improving.


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