NEW$ & VIEW$ (7 FEBRUARY 2013)

Economic storm coming? Low mortgage rates helping consumers. Slower growth in S. Korea, India. China car sales. Oil price management. Social security fund depletion. Beware earnings estimates.


Storm cloud Storm cloud Brace for Uglier Data as Cliff Meets Sequester

(…) The payroll-tax increase on Jan. 1 has been taking a bite out of paychecks for more than a month, though key gauges of consumer spending for January haven’t been released yet. The last-minute passage of the fiscal cliff deal also will delay tax refunds, deferring some consumer spending and complicating the seasonal adjustments in data for retail sales and consumer spending. Both of those forces are set to hit just as the government prepares for widespread spending cuts on March 1, followed by a potential government shutdown in late March. (…)

Storm cloud Consumers Skid From Fiscal Cliff to Oil Slick

Consumers are taking a wild ride this quarter, from peering over the fiscal cliff to skidding on an oil slick.

(…) The 18-cent jump in gasoline prices in the past week–the biggest weekly gain in almost two years–adds another negative risk to the consumer outlook this quarter. Not only are workers taking home less pay, more of that smaller stash is being spent at the gas pump. (…)

The general rule is that a 10-cent increase in the price of gas costs drivers about $1 billion a month. If prices remain at their current high level with no change in buying habits, households will have to spend less on other goods and services, creating a drag on the overall economy. (…)


Boehner: Spending Must Be Tackled  The chances of avoiding roughly $85 billion in government spending cuts scheduled to begin next month are dwindling, as House Republicans resist overtures from Democrats to replace the spending cuts with some tax increases.


Mortgage refinance applications remain at a relatively high level early in 2013. That is good news for homeowners as it comes against a backdrop of record low mortgage rates (courtesy of the Fed’s QE campaign). As today’s Hot Chart shows, the recent wave of refis has resulted in a tangible decline in the effective interest rate on mortgage debt outstanding. To the extent that job creation remains on track and that home prices remain on an uptrend, we think that there is room for refis to further reduce the spread between the market and effective mortgage rates.

According to Feddie Mac’s just-released quarterly analysis, the average interest rate reduction on refinancings was 1.8 percentage point in Q4, a
savings of about 33 per cent in interest rate. That is the largest percent reduction in 27 years. Our research has found that households get a windfall of around $70 billion annually at the economywide level from every one percentage decline in the effective mortgage rate. (NBF Financial)

Storm cloud  Weak sales hit S Korea growth hopes
Data follow warnings from exporters of darkening outlook


Sales at South Korea’s top department stores and discount shops fell sharply last month, renewing concerns about the country’s fragile economic recovery.

The weak data were a blow to hopes that Asia’s fourth-largest economy had bottomed out, and came soon after leading exporters warned of a darkening outlook for the coming months. (…)

In addition to weak domestic spending, South Korea also faces challenges on the export front as the won’s strength threatens the country’s export competitiveness. (…)

Storm cloud  India Expects GDP to Grow 5% This Year

The Indian economy is estimated to grow 5% in the fiscal year through March, the lowest in a decade, significantly slower than the 6.2% expansion last year.

In December, the finance ministry had cut its growth projection to about 5.8% from an initial forecast of 7.6% made when the federal budget was unveiled in March.

Auto  China Passenger-Vehicle Sales Surge as SUV Sales Double  China’s passenger-vehicle sales surged 49 percent to a monthly record, beating analysts’ estimates, as demand for SUVs almost doubled and Ford Motor Co. extended gains in market share.

(…) Wholesale deliveries, including multipurpose and sport utility vehicles, climbed to 1.73 million units in January, the state-backed China Association of Automobile Manufacturers said in an e-mail today. (…)

Total sales of vehicles rose 46 percent to 2.03 million units last month, according to the association. (…)

High five  The holiday distortion means that sales may decline in February. Economists and analysts typically calculate January and February figures together to explain the Chinese market. (…)

PBOC Signals Inflation Concern as Economy Rebounds

China must be alert to changes in price-gain expectations and to imported inflation, the People’s Bank of China said yesterday in its fourth-quarter monetary policy report. The costs of labor-intensive products, services and agricultural goods may rise persistently on slowing labor-supply growth, the PBOC said.



Brent Crude Rises to Four-Month High, Extends WTI Premium  Brent crude climbed to its highest level in more than four months in London, extending its premium over West Texas Intermediate for a seventh day.



Saudi Arabia Stabilizes Oil Output as OPEC Maintain Cap


The world’s largest crude exporter produced 9.05 million barrels a day in January, little changed from last month when output reached the lowest in 20 months, the Persian Gulf official said on condition of anonymity.

The kingdom, while keeping its production stable, supplied 9.26 million barrels a day to the market compared to 9.15 million a month ago, he said. The difference of 210,000 barrels between supply to market in January and production figures is made up for by deliveries from inventories, he said.

The Organization of Petroleum Exporting Countries trimmed output by 465,000 barrels a day in December to 30.4 million as budget wrangles in the U.S., speculation about stimulus measures in Japan and Europe’s struggle to boost growth clouded the outlook for fuel demand. Cuts were led by a reduction in Saudi Arabia, the group said last month in its monthly report, citing secondary sources. That’s 800,000 a day more than the 29.6 million the group estimates it will need to provide this year.

Saudi Arabia started producing at about 9 million barrels a day in December after pumping at 9.9 million for most of the second half of 2012, according to data compiled by Bloomberg.

Remember, Saudi Arabia’s budget is based on $100 Brent.

Punch  U.S. Treasury Considers Ways to Extend Debt Maturity

The U.S. Treasury and its Wall Street advisers are weighing steps to more rapidly extend the maturity of government debt, a development that could partially blunt the Fed’s effort to lower long-term interest rates.

(…) The U.S. Treasury Wednesday said the average maturity of its outstanding debt had risen to almost 65 months at the end of 2012, up 34% since an October 2008 trough. That is the longest average maturity in a decade.

The trend looks set to continue. Under current policies, the average maturity of debt is set to rise to 80 months by 2022.

And the Treasury Borrowing Advisory Committee, composed of executives from some of Wall Street’s largest banks and bond investors, at its most recent meeting explored more aggressive measures to extend the maturity even faster.

Scenarios under consideration included the issuance of the 50-year and 20-year bonds. (…)

Crying face  Social Security Trust Fund Likely To Run Out In 2031

Social Security’s financial outlook took another hit this week, as the Congressional Budget Office hiked its estimate for cash deficits from 2013 to 2022 by $212 billion.

The wider deficits — mainly due to weaker revenue estimates — mean a quicker depletion of Social Security’s trust fund, after which the program could only afford to pay about 75% of benefits. (…)

To offset a 25% lifelong benefit cut with 18 years of saving would require that average earners set aside about 6% of annual wages, assuming Treasury returns and a lifelong annuity. (…)


Just kidding  How accurate are analyst annual EPS projections one year in advance?

Over the past 15 years, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has been +10.3%. In other words, analysts on average have overestimated the final EPS number by about 10% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in ten of the fifteen years and underestimated the final value (i.e. the final value finished above the estimate) in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded three months after the end of each calendar year (March 31) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season (January through March).

However, this 10.3% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+35.9%), 2008 (+53.4%), and 2009 (+27.4%). Using the median instead of the average, the median difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +5.5% over the past 15 years. (Factset)

S&P 500 Bottom-UP EPS: One-Year Prior EPS Estimate vs. Final EPS Number


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