NEW$ & VIEW$ (4 FEBRUARY 2013)

Employment. Car sales. Construction. Earnings. Mutual funds flows. Pension expense. China economy. China unionization. Oil. Sequester 101.


Busy but good Friday: We had the PMIs which were very good for the U.S., better for China, and somewhat less bad for Europe.

Then we got a good employment report, thanks particularly to the revisions:

  • U.S. Adds 157,000 Jobs  The U.S. added 157,000 jobs last month, signaling a slow start to the year, though revisions showed 2012 job growth was stronger than once thought. The unemployment rate ticked up to 7.9%.
  • Private payrolls expanded by 166,000 and government payrolls fell by 9,000. Within the 166,000 increase in private payrolls, service-providing sectors added 130,000 jobs, mainly centered in retail trade (33,000), business services (25,000), education and health (25,000), and leisure and hospitality (23,000).
  • Construction payrolls rose by 28,000 and the January employment report marks the fourth consecutive month of solid construction sector job gains, suggesting that the sustained recovery in the housing sector and the substantial rise in housing starts over the past year may finally be carrying over to employment gains. The sector is also being buoyed by a push to repair damage from October’s superstorm Sandy.
  • Revisions: +41,000 in December and +86,000 in November. The private sector payroll increase in November is now 256,000 as opposed to the previously reported 161,000 and the December private sector number now stands at 202,000 compared with 168,000.
  • Fourth-quarter employment growth now stands at a 201,000 average (vs a full year average of 181,000), a solid increase despite all the fiscal-cliff fears, which underscores that the Q4 GDP contraction isn’t giving the right picture.
  • Average hourly earnings rose four cents to $23.78 and have risen 2.1% over the past year.

Then we got better car sales during a normally soft month:

January U.S. Auto Sales Jump

U.S. car and light-truck sales climbed 14% over a year earlier to 1.04 million vehicles in January, according to researcher AutoData Corp.


U.S. Construction Spending Recovers in December

Construction put-in-place gained 0.9% in December after a minuscule 0.1% rise in November, when activity was restrained following Hurricane Sandy. The November amount was revised upward from a 0.3% fall reported before, and October was revised markedly higher from 0.7% to 1.6% in this report.

The rebound was entirely in private construction sectors. Private residential building went up 2.2% in December after a 0.6% rise in November. This put December a substantial 23.6% above the year earlier and put 2012 as a whole up 15.9% from 2011. And the strength here was in multi-family housing construction, with a 6.2% m/m surge after a 1.8% gain in November. Single-family building was hardly weak, though, with an 0.8% m/m gain in December, but this is extending a slower trend that had November’s rise at 1.5% and October at 3.8%. Recent firming of single-family starts may support higher amounts in coming months, however.

Public construction weakened in December. It fell 1.4%, after a 0.1% decrease in November. The latest month was 5.6% below the year-earlier month and 2012 was down 3.0% from 2011. State and local construction, by far the larger segment, is continuing to ratchet lower, with a 1.7% decline in December after a modest 0.4% increase in November. December was down 4.3% from a year ago and the year was off 1.5% from 2011. Federal spending gained in December by 1.3%, but earlier drops put it down 16.5% from the year before and 2012 down 15.8% from 2011.



Earnings and Revenues Beat Rates for Q4 2012

We’re through another week of earnings season, and as shown below, the earnings beat rate still stands above 63.1% for the fourth quarter.  If the beat rate holds at this level, it will be its highest reading since the fourth quarter of 2010.

Even better is the strength in the revenue beat rate.  As shown in the second chart, the percentage of companies that have beaten top line estimates so far this season stands at 62.2%.  The past two earnings seasons saw a significant drop-off in companies beating revenue estimates, but the beat rate has come roaring back this season.

barrons record dowAll leading to this Barron’s headline and cover:

Record High In Sight  At 14,009, the Dow is within a hair’s breadth of its all-time high, set in 2007. Why the market could hit 15,000 this year—or more. Energy stocks and financials could lead the way.

And to this new “trend”:

U.S. Mutual Funds Reaping Record Deposits as Markets Rise  Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds.

Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data goes back to 1984.

Money flowed into both international and domestic stock funds in the first three weeks of last month, according to the ICI, whose data for the fourth week will be released Feb. 6.

All really good stuff right when we need it. As I explained on Jan. 28 in BULLS ARE BACK IN FASHION, earnings, the most important ingredient of equity prices (let’s never forget that), are no longer rising:

This means that equity values have little back wind to advance “naturally”, unlike 2009-2012 when earnings were sharply rising and inflation declined. Until earnings rise again, equities need investor enthusiasm if undervaluation is to be narrowed, a pretty fickle ingredient if there is one.

But as one pundit remarked last Friday:

“We’ve had so many negatives fading away—geopolitical negatives, congressional negatives, they’re all fading away,” said Jerry Harris, chief investment officer of the asset-management arm of Birmingham, Ala.-based Sterne Agee, which manages about $17 billion in assets.

Better news, an ok earnings season, ample liquidity, improving money flows and supportive media all combine to make previous concerns fade away, pushing PEs (the other ingredient) up.

The Rule of 20 fair value for the S&P 500 Index has been stabilizing around 1800 since May 2012 (currently 1784) when undervaluation troughed at -27%. Equities have gained 15% since, narrowing the valuation gap to -15%.


Investor sentiment needs to be closely monitored here given the stable earnings (see below on that). Some experts are now suggesting that the U.S. economy may be becoming self sustaining. We heard that in the spring of 2010, 2011 and 2012. It is now fashionable to be bullish on stocks and the media are joyfully feeding the beast. We shall see how this potential self-feeding phenomenon translates into higher mutual funds flows and equity prices.

Meanwhile, take note of that:


Earnings are beating estimates which makes good headlines but estimates are actually coming down. The official tally by S&P gives a 66.1% beat rate and a 22.3% miss rate for the 54% of the 500 companies that have reported Q4. As revealed in my Jan. 30 post EARNINGS: Pensions Costs Begin To Bite, Q4’12 estimates have actually come down 5.3% to $23.83 as many companies have elected to start amortizing their higher pension liabilities.

In S&P’s Jan. 24 update, only Q4’12 estimates were affected. The Jan. 31 update shows that analysts have begun to reduce 2013 numbers as well. Q1’13 and Q2’13 estimates have declined 1.5% and 1.1% respectively. The full 2013 estimate, for what it’s worth, has declined 0.9% to $111.51, up 14.4% from the $97.50 expected for 2012.

image image

That said, the fact is that trailing earnings, essentially unchanged over the past 4 quarters, will soon resume growth, reaching $99.12 (+1.7%) by April-May if Q1’13 estimates are met. To be closely monitored.

imageWhile recent economic news are encouraging, many dark clouds remain immediately ahead:

  • How will consumers react to the 2.5% fiscal drag on their income underway?
  • What will happen with the sequester?
  • Will oil and gasoline prices keep rising?
  • Housing (2.7% of GDP) is doing better but U.S. exports (14%) are showing signs of fatigue.

So, let’s enjoy the rally as investors’ fears are “fading away”, helping close the valuation gap. There remains an 18% upside to fair value against a technical downside of 5% to the 100 day moving average and of 7.3% to the 200 day m.a.

Pointing up  Low Rates Force Companies to Pour Cash Into Pensions

Some of America’s biggest companies are shifting cash that could be used for development or expansion into pension funds as low interest rates designed to spur the economy push up pension liabilities.

  • Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.
  • Verizon Communications Inc. contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies’ sensitivity to this issue—Boeing Co. now reports “core earnings” to separate out pension expenses.Devil
  • Andrew Liveris, chief executive of Dow Chemical Co., which posted a loss of $716 million for the fourth quarter, said the company faces a “massive pension headwind” because of the change in the discount rate that added $2.2 billion to its pension liability. Pension expense this year is going to rise between $250 million and $300 million.

Overall, pension plan funding fell by $79 billion last year at about 400 large companies with defined benefit plans, according to preliminary estimates by Towers Watson. The total estimated deficit at those firms now stands at $418 billion, 23% more than in 2011, and the highest since the firm began tracking.

Companies, which by law must keep defined benefit pension plans funded within a certain period of time, are taking a variety of paths to address the issue. They are buying out pensioners, unloading pension accounts to third parties and upping their contributions. (…)


This is not from any overexcited talking head but rather from the serious and smart ISI group (my comments):

  1. U.S. stock are undervalued. Interestingly, ISI tracks 13 valuation metrics, 11 of which suggest the market is undervalued (7) or fairly valued (4). The surprise for me is that ISI lists the Rule of 20.
  2. U.S. earnings growth is positive. S&P 500 earnings (excluding accounting changes) will probably be up in 2012, 2013 and 2014. This is not a solid reason for reasons I have explained earlier.
  3. Profit margins should climb higher. The fundamentals driving higher margins should remain positive in the next 2 years. Maybe, maybe not. Pension expenses are already eating into margins.
  4. The Fed is pushing investors farther out on the risk curve. Clearly.
  5. Dividend growth, one of the best forward indicators of biz confidence, is solid. I don’t agree. Corporate execs don’t sound that optimistic on the conf. calls I listen to. Truth is, they are flush with cash which is hurting their returns.
  6. The U.S. market is the only game in town these days. Valid point.
  7. Bonds have outperformed stocks for so long and so much, there must eventually be an end to that. Not a solid argument.
  8. Housing activity will double in the next 2 years and housing has a huge multiplier effect. Economists often mistakenly equate economy with equity markets.
  9. The manufacturing and energy renaissance are major cyclical and secular boost to the economy. Long term positive.
  10. U.S. household sector is underweight stocks. Long term potential positive.


As today’s hot Chart shows, service employment (private and public) rose to 116.3 million, surpassing its pre-recession peak. Such a milestone remains elusive for the goods sector where employment is still down 4 million jobs from its prerecession peak. The good news, however, is that the construction sector has shown encouraging signs in the recent months (+100 K jobs in 6 months). We would expect this development to persist through 2013.

Even though we do not expect overall job creation to accelerate much in the coming months the good news is that the combination of higher
employment, a longer workweek and a rise in hourly earnings in January is helping support personal income. As shown, the aggregate wage bill of all employees (private and public) is already up an
annualized 3.5% early in Q1. The wage gains will bring some support to consumption spending, and provide some offset to the tax hike earlier this year. So expect a GDP rebound in Q1. After that, much depends on the
size of the spending cuts to be approved by Congress. (NBF Financial)


Storm cloud   From the National Federation of Independent Business (via John Mauldin)


Job creation improved a bit from the December reading, with the average change in employment per firm increasing to 0.09 from 0.03 workers. This is the best reading since April, 2012 and is the second positive month in a row. Transportation, Professional Services and Finance Insurance and Real Estate were the only sectors reporting positive job creation (not seasonally adjusted). Construction, Retail and Agriculture reported large declines as did Manufacturing, a bit of a surprise as it was strong most of 2012.image

U.S. small-business borrowing rises in December, but barely

Borrowing by small U.S. businesses rose marginally in December, eking out a tiny gain for the year and suggesting headwinds for economic growth for the first few months of 2013, a report on Monday showed.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small U.S. companies, rose to 112 from an upwardly revised 111.1 in November, PayNet said.

Borrowing was up just 1 percent from a year earlier.

PayNet had initially reported the November figure as 108.3.

PayNet founder Bill Phelan, located in Chicago, said the index suggests small businesses “haven’t come out of their shell.” PayNet’s lending index typically correlates to overall economic growth one or two quarters in the future. (…)

“It’s underwhelming,” he said. “The next two to five months are going to be pretty slow.”


China Services Industries Expand as Retailing Improves: Economy  China’s services industries grew at the fastest pace since August as gains in retailing and construction aid government efforts to drive a recovery in the world’s second-biggest economy.

The non-manufacturing Purchasing Managers’ Index rose to 56.2 in January from 56.1 in December, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement yesterday.

China Tries to Restrain Lending

Chinese regulators have moved in rein in bank lending in recent weeks following a rush of new loans, according to people familiar with the new restrictions.

Bank of China Ltd. received a warning from the People’s Bank of China that the bank had exceeded its new loan quota by more than 30 billion yuan (about $4.8 billion), some of these people said. The lender also received a warning from the China Banking Regulatory Commission for approaching the limit on loans in relation to deposits, the people said. Loans are capped at 75% of deposits under China’s current Commercial Bank Law.

Meanwhile, Industrial & Commercial Bank of China Ltd. used up its loan quota during the first 20 days in January and had to stop issuing all new loans for the remainder of the month, according to people familiar with the matter. (…)

Foxconn plans Chinese union vote
Landmark move to boost workers’ rights comes amid growing unrest

Foxconn, the contract manufacturer whose biggest customer is Apple, is preparing genuinely representative labour union elections in its factories in China for the first time, a powerful sign of the changes in the workshop of the world demanded by an increasingly restive workforce.

This would be the first such exercise at a large company in China, where labour unions have traditionally been controlled by management and local government. Foxconn is the country’s largest private sector employer with 1.2m mainland workers.


Gasoline in the Amsterdam-Rotterdam-Antwerp oil hub traded from $1,073 to $1,076 a ton, according to a Bloomberg survey of traders and brokers monitoring the Argus Bulletin Board. That’s the highest since Oct. 11 and compares with deals from $1,056 to $1,062 yesterday. The product advanced 12 percent last month.

Panetta: Iran Threat Grows

Defense Secretary Leon Panetta accused Iran’s paramilitary force of an intensified campaign to destabilize the Middle East by smuggling antiaircraft weapons to its militant allies.

Iran’s export of so-called manpads—antiaircraft missiles that can be carried by a single person—represent what Mr. Panetta called a dangerous escalation.

“There is no question when you start passing manpads around, that becomes a threat—not just to military aircraft but to civilian aircraft,” Mr. Panetta told The Wall Street Journal in an interview describing shifting threats to the U.S. as he prepares to leave his post. “That is an escalation.”

Western officials have long worried about the spread of such weapons and the risk they pose to airline passengers as well as to military helicopters and jets. Recent U.S. intelligence pointed to new efforts by Iran to smuggle manpads, but few shipments had been intercepted before Jan. 23, when Yemen, aided by the U.S., intercepted a boat carrying the weapons.


ISI did a good piece on the coming sequester. Here’s what we must know:

  • The sequester is scheduled to take effect on March 1, cutting defense spending, domestic discretionary spending and Medicare reimbursement rates.
  • It is likely to go into effect because Republicans now see the sequester as the only mechanism left to cut spending. Dems remain oppose but they only offer to replace it with a mix of spending cuts and tax increases which the GOP adamantly refuses.
  • There are actually two sequesters. The one that takes effect on March 1 is the “penalty” sequester, the enforcement mechanism for the $1.2T in cuts the supercommittee was supposed to find. The second sequester, to take effect March 27, is the enforcement mechanism for the first part of the 2011 debt ceiling deal, the caps on discretionary spending. If total discretionary spending exceeds the caps (which it does this year), an “after-session” sequester kicks in during the fiscal year after OMB determines the excess spending.
  • Current estimates are for a 9% cut in the Pentagon budget ($534B) and that $48B in savings would come in the last 7 months of the fiscal year (Mar. 1- Sep. 30).
  • The Medicare 2% across-the-board cuts will save $11B.
  • Domestic discretionary spending total some $500B. Annual cuts would be $38B ($30B for the current fiscal year).

Coming to an economy near you pretty soon!

Storm cloud  Euro Tremors Risk Market Respite on Spain-Italy, Banks  Europe’s political tremors risk spoiling the region’s market calm, with corruption allegations buffeting Spanish Premier Mariano Rajoy and Italy’s Silvio Berlusconi narrowing the front-runner’s lead as elections loom.


America’s Baby Bust

The nation’s falling fertility rate is the root cause of many of our problems. And it’s only getting worse, writes Jonathan V. Last.


Leave a Reply

Your email address will not be published. Required fields are marked *