NEW$ & VIEW$ (28 JANUARY 2013)

U.S. housing, the U.S. sequester, risky bonds, China’s recovery, Europe’s non-recovery, currency wars.


The headlines report that new home sales unexpectedly fell -7.3% in December to a 369k pace.  Few have noted that November’s sales were revised up sharply from 377k to 398k and even fewer said that figures for September through November were revised upward..

Home builders are saying the lack of new home inventory, which is historically low, is restricting demand.

The home sales report also showed builders were able to sell more higher-priced homes, not just in absolute terms but also as a share of all new homes sold. During the housing bust of 2007 though mid-2011, lower-price homes (those selling for less than $200,000) grabbed as much as 44% of the new-home market, while homes priced above $300,000 accounted for as low as 26%. The middle-price range of $200,000 to 299,999 stayed fairly stable around 30%-32%.

In 2012, however, the share of sales coming from higher-priced homes jumped to 34%, while cheaper homes fell to 33%.

High five  Raymond James warns:

(…) we expect this trend of weaker sales comps (at least at the national level) will continue near term, given: 1) the bevy of regulatory changes that are impacting the mortgage industry; 2) growing skilled labor shortages in specific trades; and 3) a dwindling supply of developed homesites in sellable locations.

(…) sales in the West fell for the second consecutive month and are now down 22% since October. We believe this is an important trend worth monitoring as it does not jive with our regional housing reports and commentary from several public builders who continue to highlight strengthening sales in the West. Meanwhile, sales in the South (the most important region for the builders) also fell 8% in December after jumping 23% in November.

Pointing up  New home inventory of 151,000 (seasonally adjusted) currently stands near the lowest levels on record dating back to 1963, up 1.3% from November, but down 1% from year-ago levels.

Housing Recovery Opens Spigot  Sales are improving for products like power tools, air conditioners and furniture, as the housing recovery starts to show up in corporate results.

[image]Honeywell International Inc., which derives about 10% of its sales from residential construction, said sales of heating and cooling systems rose 6% in the fourth quarter compared with the year-earlier period.

“That is the first sign of life that we have had in a while, and that is a good sign,” Honeywell Chief Financial Officer Dave Anderson said. (…)

Elsewhere, Oshkosh Corp. said orders for its McNeilus cement mixers and JLG extended forklifts, both used for home building, rose in the last three months of 2012. DuPont Co. said demand for its Sorona carpeting fiber was stronger during the quarter thanks in part to the housing recovery. And Stanley Black & Decker Inc. said sales of power-tool sales rose 5% last year, a sign that Americans are investing in home repair. (…)

Rail-freight operators are benefiting from the increased movement of furniture and supplies. Union Pacific Corp., which posted a 7% rise in quarterly profit, said lumber shipments increased 17% as housing starts showed solid year-to-year improvement.

In the second half of this year, Union Pacific’s business that transports goods by land, sea and air will be driven by furniture and “the things that you build housing with,” said the railroad’s marketing executive, Eric Butler. (…)

Fed Seems Set to Keep the Money Spigot Open

Federal Reserve officials are likely to continue their easy-money policies when they gather this week to weigh a mixed economic outlook and a recent run of low inflation.

Baring teeth smile  US faces fresh financial shock
‘Sequester’ could cut $1.2tn from budget as Congress digs in

(…) “I think the sequester is going to happen,” said Paul Ryan, the influential Republican congressman on NBC’s Meet the Press. While he and other Republicans are expressing regret that defence will take the brunt of the hit, a fact that the Obama administration has warned threatens national security, he and other Republicans say the reduction in spending is paramount.

Pat Toomey, the Republican senator from Pennsylvania, told the Financial Times: “While I would prefer to see the specific spending cuts configured differently . . . I’m not convinced that we’ll be able to agree with the president and the Democrats in the Senate on how those shifts should occur.”

“[Sequestration] is a much better outcome than suspending or eliminating the sequestration, so if that’s what has to happen, so be it,” he said. (…)

Democrats are also digging in, with many of the most liberal lawmakers content to see the cuts occur because they exempt Medicare and Social Security benefits, the government programmes for the elderly. Democrats would only replace the $1.2tn cuts with a deal that would increase taxes on the wealthy. But Republicans said they would not consider any new taxes.

(…)  According to forecasting firm Macroeconomic Advisers, the sequester would knock 0.7 percentage points off growth in 2013, taking its forecast down from 2.6 to 1.9 per cent. (…)

At the same time, Republicans in the House led by Mr Ryan are preparing a 2014 budget that is expected to be far tougher in spending cuts than the controversial budget they previously passed that revamped Medicare. This time, Republicans have said they will balance the budget in a decade. (…)

Call me   Yielding to Bonds’ Dark Side By keeping interest rates ultra low, central banks including the Federal Reserve may have created a ticking time-bomb for investors in the bond market.

But markets can shift suddenly if sentiment changes. Should investors become convinced that a sustainable economic recovery is under way, or lose confidence in central banks’ ability to contain inflation, then yields are likely to move sharply higher.

That would inflict even more pain than in the past. Old bond-market hands remember the carnage of 1994, when the Fed raised rates unexpectedly, causing a sharp selloff. But now the stakes are higher. Money has flowed into bonds at an extraordinary pace in recent years. In the past two years alone, investors put just over $1 trillion into global mutual and exchange-traded bond funds, while pulling a net $9 billion from equity funds, J.P. Morgan says. (…)

The benchmark 10-year Treasury was yielding around 1.95% on Friday, only a sliver more than inflation, which is running at 1.7%. If yields were to return to more normal levels of around 4%, investors would see the price of the bond fall from 97.15 on Friday to around 81, a fall of more than 16%, a huge hit for an asset many see as super safe. (…)

Number of the Week: Why Disability Figures Are Good for Job Market The number of people applying and getting approved for disability benefits hit multiyear lows in 2012, a potential sign of an improving labor market.

Last year some 2.8 million people applied for Social Security Disability Insurance, the lowest level since 2009, and about 980,000 approvals were issued, the lowest level since 2008. Historically, both numbers remain elevated and are likely to continue to be high as the average age of SSDI applicants is about midway through the Baby Boom generation.

There has long been a link between high unemployment and rising applications for disability. A 2011 report from the White House noted that as many poor Americans reach the end of their unemployment benefits, they apply for disability benefits. (…)

The drop in applications in 2012 likely is a positive sign for the labor market. There have recently been indications that unemployed workers are re-entering the labor force as hiring conditions improve, meaning that discouraged workers aren’t turning to disability benefits. That also is occurring even as unemployment benefits expired for more out-of-work Americans. About 2 million Americans were receiving payments through federally backed emergency unemployment programs at the end of 2012, down from more than 3.5 million at the start of the year.

If the labor market improves further in 2013, as expected, it could be good news for the SSDI program that has been under increased pressure since the recession hit. Last year, the Social Security and Medicare Boards of Trustees projected the disability trust fund would be exhausted as soon as 2016, two years earlier than was projected just one year prior. That’s because even though new applications and approvals are lower, the total number of recipients is steadily growing. There were a total 8.8 million people receiving SSDI benefits in 2012, and though the rate of increase may slow, the number isn’t likely to drop soon. Once someone starts receiving disability, they often continue for life.


January’s final MNI survey (75% manufacturing, 25% services) rose a strong 1.6% M/M sa. The recovery continues.  Note that the Lunar (Chinese) New Year is late this year (Feb 9-15) which will likely help some January stats and hurt February. (ISI)

China’s SME development index rebounds

An index measuring the growth of small and medium-sized enterprises (SME) in China rebounded in the fourth quarter of 2012.

The SME development index rose 3.3 points to 90.8, the China Association of Small and Medium Enterprises (CASME) said in a statement.

The index remained at a low level and was expected to continue to stabilize, but a strong recovery was hard to realize, the CASME said.

In breakdown, the sub-index for industrial firms climbed 1.6 points to 88.1, ending a dropping streak since the second quarter of 2010.

The real estate sub-index surged 10.5 points to 101.3, the only sector with an index above 100, which demarcates expansion from contraction.

The recovery trend is evident in China’s economy, but companies still face a difficult business environment and are particularly troubled by overcapacity, the CASME said.

Higher costs, especially labor costs, have exerted great pressure on SMEs, it said.

Industrial profits show economy recovering   Chinese industrial firms’ profits climbed in December, adding evidence that the world’s second-largest economy is gaining steam.

Chinese industrial firms’ profits climbed for a fourth consecutive month in December, adding evidence that the world’s second-largest economy is gaining steam after seeing its lowest growth rate in 13 years.

Profits at major industrial firms, or those with annual revenues of more than 20 million yuan ($3.17 million), climbed 17.3 percent year-on-year last month to reach 895.2 billion yuan, the National Bureau of Statistics said on Sunday.

The growth, however, eased from November’s 22.8-percent increase and October’s 20.5-percent rise.

Chinese industrial companies recorded negative profit growth in each of the first eight months last year, with the only exception being March, when a 4.5-percent rise was registered.

The industrial companies’ profits rose a mere 5.3 percent in 2012, compared with the 25.4-percent surge registered in 2011, as slowing growth at home and global economic woes dented corporate earnings.




Gleanings from the elite…

After a private meeting of leading commercial bankers, government officials, central bankers and trade union officials, Swedish Finance Minister Anders Borg told Reuters: “There is a clear divide between the financial markets, who think a lot of this is fixed, and the people in the real economy and particularly from our side as the governments.” (…)

“So it is very dangerous to declare that the crisis is over because that would undermine the crisis insight that we need to have among the companies, among the population, among the unions, to be able to go through this process,” Borg said.

BTW: Peugeot halts Slovak output on weak demand

France’s carmaker PSA Peugeot Citroen halted production in Slovakia for the day on Monday and will add another four stoppage days next month in response to weak demand across Europe, the Slovak unit said.

Demand for new cars in Europe is continuously falling. Decreasing trends in sales transform into production cuts by several carmakers,” PSA Peugeot Citroen Slovakia wrote in an emailed statement.

ISI expects that the Eurozone real GDP in 4Q probably declined at a -2.0% q/q a.r. but suggests that it may be the weakest quarter. I am not sure about that…

  • Currencies

Chinese central bank deputy governor Yi Gang, who attended the session, said he had voiced most concern about trade protectionism and the negative consequences of money-printing by the U.S., Japanese, British and other central banks.

“Protectionism is a big problem and also you see quantitative easing of developed economies is generating uncertainties in financial markets in terms of capital flow,” he told Reuters in an interview.

There is too much liquidity, a glut of global liquidity. Competitive devaluation is certainly one aspect of that. If everybody is QE or super QE and you want to depreciate, what currency do you depreciate against?”

  • Currencies

South Korea’s central bank governor on Saturday questioned the efficacy of Japan’s decision to ease monetary policy, saying its decision to start buying assets in 2014 could have unintended long-term consequences.

The move by the Bank of Japan was also done in a hasty manner and would lead to large movements in the foreign exchange market, said Bank of Korea Governor Kim Chong-soo.

“What they did created a couple of problems,” Kim said in an interview at the World Economic Forum in Davos. “One is that the level (of the currency) is affected, and the pace of change is also a problem. They did it too hastily.”

Key for the Bank of Korea is a stable exchange rate, Kim added. (…)

Kim’s comments come as top executives at Japanese companies say that the Bank of Japan has been too slow in responding to the yen’s rise after the financial crisis.

“There is no explanation why the Japanese currency should appreciate 40 percent to the dollar after the financial crisis, while the won decreased compared to the dollar,” said Nissan’s Chief Executive Carlos Ghosn on Friday.

“Euphoria is misplaced” and more depreciation is needed, Finance Minister Eveline Widmer-Schlumpf told reporters at the World Economic Forum in Davos, Switzerland on Jan. 26. “The franc is still very strong.” (…)

While the franc has depreciated 3.2 percent against the euro this year, it’s still 9.1 percent stronger than the five- year average and 35 percent above an October 2007 low of 1.6828. The euro traded at 1.24588 francs at 11:16 a.m. in Zurich today.

Swiss Economy Minister Johann Schneider-Ammann echoed Widmer-Schlumpf’s comments, telling reporters the same day that the franc still is “too strong.” He said he “hopes it will devalue further.”

The prospects for the franc are “a question of how the euro develops,” Widmer-Schlumpf said. She said she also hopes the depreciation continues. (…)

Jordan said on Jan. 25 that he expects the franc “to weaken further,” according to comments to Swiss state broadcaster SF. (…)


I don’t have much time to watch videos but I always find time for Ed Hyman and Dennis Stattman. They both appeared on the same Jan. 18 WealthTrack video. If you’re too late and it is no longer freely available on the WealthTrack site, try AdvisorAnalyst here. Well worth your time.

Winking smile  Watch Out, Economists Increasingly Agree on 2013 Outlook Economists are famous for not agreeing about much of anything. But when it comes to their forecasts for U.S. economic growth in 2013, they’ve achieved a remarkable consensus.

(…) In a survey of economists the Federal Reserve Bank of Philadelphia conducted in the fourth quarter, individual forecasts for the change in gross domestic product from the end of 2012 to the end of 2013 were unusually clumped around the average forecast of a 2.3% gain. The forecast at the top of the 25th percentile—that is, a pessimistic outlook in which three-quarters of forecasts were higher—was for a 2.1% increase in GDP. The forecast at the 75th percentile, or the optimistic camp in which just a quarter of forecasts were higher, called for a 2.5% gain.

The gap between the average pessimist and the average optimist was bigger at the end of 2011, ranging from 2.2% GDP growth in 2012 to 3%. It was also bigger at the end of 2010, with a range of 2.5% growth in 2011 to 3.2%.

In fact, in the 45-year history of the Philadelphia Fed survey, the dispersion in economists’ annual GDP forecasts was slimmer only two times, ahead of both 1994 and 1996.


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