NEW$ & VIEW$ (26 FEBRUARY 2013)

Italian elections. Chicago Fed National Activity Index. More on China’s PMI. Sentiment watch. Corporate pension gap. India taxes. Asia moving to the left. Life expectancy.




Italian Vote Brings Gridlock

In a national election meant to push Italy further down a path to economic reform, voters delivered political gridlock that could once again rattle Europe’s financial stability

imageMarkets fell in response to returns. Yields on 10-year Italian bonds jumped 0.45 percentage point in mid-morning trading to 4.81%, their highest level this year.

In early trading, stock markets in France, Germany, Spain and Italy were each down around 2%. Hardest hit was the Italian benchmark, which traded down around 4%. (…)

A majority of voters endorsed parties that had promised to tone down or even reverse the financial sacrifices Italy has promised its European partners, giving surprise lifts to both the center-right coalition of former premier Silvio Berlusconi and a party of protest led by a former comedian. (…)

The apparent stalemate reflects the groundswell of support for former comedian Beppe Grillo’s Five-Star Movement. His throw-the-rascals-out platform drew enough voters to give it nearly as many votes as Italy’s mainstream coalitions—25.6% in the lower house, according to final data from the Interior Ministry, making it the single largest party in that house.

Surprising, too, was the comeback of Mr. Berlusconi, whose party was in the doldrums as late as November. (…)

Pointing up“The cost of austerity led to an electoral rebellion,” said Enrico Letta, deputy head of the Democratic Party.

This, I am sure, has been heard loud and clear by all politicians in Europe…and in the U.S. as well…

The election surprise poses a challenge for euro-zone creditor nations such as Germany, which have demanded that financially stressed euro-zone countries overhaul their economies in exchange for supporting the European Central Bank’s pledge to save the currency union if necessary. A public rejection of austerity policies could rapidly spread to Spain and beyond, forcing European authorities to accelerate their response to the regional crisis or risk another round of the kind of contagion that effectively closed a host of euro-zone credit markets. (…)

The only way either of the mainstream parties can claim a majority in the Senate, according to the latest vote tallies, is by allying with each other or with Mr. Grillo. Those are seen as implausible scenarios.

Lightning  “The situation looks ungovernable, and that’s the worst outcome you can imagine,” said Guido Rosa, president of the Italian Foreign Bank Association.

Via FT Alphaville: Gary Jenkins from Swordfish Research sums up these eurozone-wide political fears:

From a longer term perspective the risk to the Eurozone is that the rise of Mr Grillo’s party encourages others across Europe to challenge the status quo. The financial meltdown that began in 2007 and became an economic and sovereign debt crisis was always likely to at least produce the background situation that could potentially lead to social, economic and political change on a scale not seen in Europe since the French Revolution and the surprise to some is that there has been so little real political change. Mr Grillo may be seen as the start of that change, if indeed it comes.

Chicago Fed: Economic Activity “Moderated” in January

According to the Chicago Fed’s National Activity Index, January economic activity declined from December, now at -0.32, down from December’s upwardly revised 0.25 (previously 0.2). The CFNAI headline euphemistically used the term “moderated” to summarize the change.

Pointing up Particularly astonishing in today’s report was the dramatic upward revision to the November data from 0.27 to 0.96. This index has been negative (meaning below-trend growth) for eight of the past eleven months. However, the substantial revisions to the previous two months have lifted the 3-month moving average into positive territory for the past three months. (…)

The next chart highlights the -0.7 level. The Chicago Fed explains:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

Click to View


The flash PMI fell in February but, because of the Chinese holidays, it is better to look at the combined Jan-Feb data to better assess the trend. Markit did just that:

imageLooking at data for January and February combined, the PMI indicates that the Chinese manufacturing sector is enjoying its strongest quarter of growth since the first quarter of 2011 despite February’s dip in the PMI. The average PMI reading for the first quarter so far of 51.4 compares with a fourth-quarter average of just 50.5, and is broadly consistent with annual GDP growth of 9.5%, up from 8.9% in the fourth quarter.

Furthermore, inventories of finished goods fell during the month, and the combination of falling warehouse stocks of finished goods and ongoing growth of new orders suggests that firms will continue to raise production in coming months, provided demand does not fall back further.

imageThe signal from the orders:inventory ratio is not as strong as in prior months, but nevertheless indicative of stronger production growth than was seen throughout 2012. The latest official data showed industrial production growing at an annual rate of 10.3% in December; the fastest for nine months. Even taking into account the recent dip, the PMI’s
orders:inventory ratio is running at a level consistent with 12% growth.

Taiwan’s Export Orders Climbed Most in Over Two Years in January

Orders, an indicator of shipments in the next one to three months, rose 18 percent from a year earlier after a previously reported 8.5 percent gain in December, the Ministry of Economic Affairs said in Taipei today. (…)

Orders from China jumped 28.7 percent in January from a year earlier, while those from the U.S. gained 15.5 percent, today’s report showed. Electronics advanced 13.1 percent and information and communication products rose 22.2 percent.


The following charts are extracted from a good FT analysis (Equities: A sentimental wager). Realize that 5 of the 6 charts cover a very short period. See also INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!)

Panic or euphoria: six ways to measure the market

AAII bull-bear ratio

Investors Intelligence

Futures market positioning

Equity put/call ratio

Combined measures

Investment bank equity weighting

Why the Corporate Pension Gap Is Soaring

Big companies have disclosed yawning pension gaps this earnings season, widening the deficit between what companies expect to owe retirees and what they have on hand to pay them to a near record.

(…) Across America’s business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners. (…)

The combination of low rates and longer life spans has made it tough for pension plans to keep pace. Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management. (…)


Glencore’s CEO Says Rival Mining Chiefs ‘Really Screwed Up’

Glencore International Plc’s billionaire Chief Executive Officer Ivan Glasenberg criticized his recently departed mining CEO peers for swamping the industry with mines and new production that’s crimped profits.

“The big guys really screwed up,” Glasenberg, 56, who runs the world’s largest publicly traded commodities supplier, told investors yesterday in a presentation.

“We’ve always been wanting to keep building and keep putting the cash which we generate into new assets,” he said. “That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply.” Confused smile (…)

“Now we have a new generation of CEOs; I hope CEOs have learnt their lesson,” Glasenberg told the BMO Capital Markets conference in Hollywood, Florida. “They built, they didn’t get the returns for their shareholders. It’s time to stop building.”

Don’t bet on that!

India to Foreign Firms: Pay More Taxes

India’s tax authorities are seeking billions of dollars from some of the world’s biggest multinational companies, saying that they haven’t properly valued transactions with their Indian subsidiaries. (…)

In the past few weeks, oil company Royal Dutch Shell PLC and U.K.-based cellular-phone operator Vodafone Group PLC have received notices saying that they owe higher taxes than they have paid because they transferred shares between their Indian subsidiaries and other overseas units at too low a price, the companies say. Multinational companies frequently buy shares of overseas units as a way to inject cash into the overseas units. (…)

The tensions reflect growing debate over how multinational companies should report their income through subsidiaries around the world. Emerging economies such as India want to grab a larger slice of such income, while the U.S. and other countries where the multinationals are based want to keep profits—and taxes—at home. (…)

Corporate tax lawyers say that India’s scrutiny of share transfers is unprecedented for the country and unusual compared with other countries.

Hong Kong May Boost Spending on Poor as Income Gap Widens

“The wealth disparity is the most pressing issue,” said Jennifer Wong, a tax partner at KPMG China who follows Hong Kong’s budget. “Resources should be spent on redistributing wealth through measures such as tackling youth unemployment and enhancing welfare coverage.”

Park pledges to reward ‘sweat’ of people
S Korean president promises fairer wealth distribution

(…) Coming five years after her predecessor Lee Myung-bak took power promising annual growth of 7 per cent, Ms Park’s speech reflected South Korea’s shifting priorities.

A slowdown driven by the global financial crisis has cast the spotlight on a creeping increase in income inequality. Despite being the candidate of the centre-right New Frontier party, Ms Park sought to cater to this trend, taking victory in December’s election after a campaign peppered with talk of “economic democratisation”. (…)

Ms Park won the presidential race on a platform that promised to boost social spending, tackle competition abuses by big corporations and give more support to small businesses. But since the election, Ms Park has been beset by speculation that she will be unable to deliver. (…)

Some critics have questioned Ms Park’s claim that this spending can be funded without significant tax or debt increases, through cutting other parts of the budget and cracking down on the informal economy. (…)

Scientists claim 72 is the new 30  Life expectancy rises faster since 1900 than previous 200 millennia

(…) The pace of increase in life expectancy has left industrialised economies unprepared for the cost of providing retirement income to so many for so long.

The study, published in the Proceedings of the National Academy of Sciences of the United States, looked at Swedish and Japanese men – two countries with the longest life expectancies today. It concluded that their counterparts in 1800 would have had lifespans that were closer to those of the earliest hunter-gatherer humans than they would to adult men in both countries today.


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