NEW$ & VIEW$ (11 MARCH 2013)

U.S. employment growth accelerates. Canadian employment surges. Mexican stimulus. Brazil inflation problem. China economy slowing, inflation rising. Japan machinery orders slump. French IP slumps. Sentiment watch. U.S. foreign profits.

Sun  Employers Ignore Economic Clouds

Employers stepped on the accelerator last month, hiring briskly enough to bolster the recovery but likely not enough to prompt the Federal Reserve to turn off its easy-money spigot.

The U.S. added 236,000 jobs in February, notching gains in almost every corner of the private sector. February’s gains were well above the 195,000-job-a-month average of the previous three months and pushed the jobless rate to a four-year-low of 7.7%.

“The overall 236,000 number is nice, but the breadth of jobs growth across industries tells me that the recovery is broadening and likely gaining momentum,” said Mark Vitner, senior economist at Wells Fargo Securities LLC. “The mix of jobs is also changing. We’re creating higher-paying ones.” (…)

The ranks of temporary workers, often seen as a hiring bellwether, surged by 16,000 after declining by 3,000 in January.

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Other details:

  • The net revisions to January and December was -15,000.
  • Wage and salary income growth in February looks to be very solid combining the 0.5% increase in hours worked with the 0.2% increase in average hourly earnings.
  • If the participation rate holds at 63.5% and employment growth averages +200,000/mo, then we won’t hit a 6.5% unemployment rate until October 2014 …
  • Government payrolls fell by 10,000 in February, the fifth straight month of declines. The total number of government jobs in the U.S. — about 21.8 million at the local, state and federal level — is now the lowest since October 2005.

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(Charts from Markit)

Pointing up  Stronger labour market provides some offset to tax hikes

(…) the goods sector, whose share of private sector payrolls hit a historic low last October, is now bouncing back sharply thanks to strong job gains in cyclical sectors like construction and manufacturing. With housing on the rise and factories benefiting from enhanced competitiveness (e.g. low
energy costs and a competitive US dollar), those favourable employment trends could persist and offset the expected sequester-related job cuts in government.

The labour market’s acceleration comes at a good time for consumers who have had to deal with the twin blow of tax hikes at the start of the year and gasoline price increases. So, consumption spending should find some support in Q1 despite the headwinds. With February’s data, wage growth is tracking +4.3% annualized so far in Q1, while aggregate hours are tracking +2.3%, both consistent with a pick up in GDP growth in the first quarter after a weak end of 2012. (National Bank Financial)

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Obamacare Effect? (Mish Shedlock via Doug Short’s blog)

Obamacare is in play. Recall that under Obamacare, the definition of full-time employment is 30 hours. The BLS cutoff is 34 hours. At 30 hours, companies have to pay medical benefits so they have been slashing the number of hours people work. This reduced the number of hours people worked and provided an incentive for many to take on an extra job.

We can see the effect in actual BLS data.

Multiple Jobholders

In the past month there was a surge of 679,000 in the number of people working multiple jobs. The seasonally-adjusted increase, as shown above, was 340,000.

McDonald’s Posts Lackluster Sales

Factoring out the calendar impact, McDonald’s said its global same-store sales were up 1.7% last month. McDonald’s same-store sales in the U.S. fell 3.3% in February, but came in flat excluding calendar effects.

McDonald’s Asia/Pacific, Middle East and Africa region posted 1.6% lower same-store sales as positive results in China and Australia were offset by Japan. They were up 1.5% excluding the calendar shift.

In Europe, same-store sales were down 0.5%. Excluding the calendar impact, the metric was up 2.7%, led by performance in the U.K. and Russia.

Canadian employment in February blows past best forecasts

Defying even the most optimistic of forecasts, the economy created 50,700 jobs in February, marking employment gains in six of the past seven months.

Most of Canada’s gains were on the services side of the economy, specifically in professional jobs, such as computer system design and management services, along with food services and public administration.

The goods side fared less well, with factories shedding more than 25,000 jobs last month, bringing employment to below last year’s levels. And – in a sign of a recent challenges in the sector – natural resources lost 6,000 positions.

Mexico’s Central Bank Slashes Rates, Ending Years of Inaction  Mexico’s central bank slashed interest rates Friday, ending almost four years of inaction with a move intended to support sluggish economic growth in Latin America’s second-largest economy.

(…) the central bank cut the overnight lending rate by a half-percentage point to 4%, its first shift in the rate since July 2009. The bank made it clear it was a one-time cut and not the start of an easing cycle. (…)

The Mexican economy is closely linked to the U.S., sending almost 80% of exports north of the border. In 2009, when the U.S. economy shrank 3%, Mexico’s gross domestic product plummeted 6%.

Brazil’s February Consumer Prices Rise Faster Than Forecast

Prices as measured by the IPCA price index rose 0.60 percent in February, the national statistics agency said. That was down from the 0.86 jump posted in January. Annual inflation accelerated for the eighth straight month to 6.31 percent from 6.15 percent the month before.

With inflation running faster than in Mexico, Colombia or Chile and approaching the 6.5 percent upper limit of the central bank’s target range, the monetary policy committee unanimously decided to hold the benchmark rate at a record low for the third straight meeting on March 6.

Surprised smile  “Approaching the 6.5% upper limit”? Annualized inflation was 9.0% in the last 2 months!

CHINA SLOWING

China released its monthly stats on Saturday, combining January with February to mitigate the impact of the Lunar Year holidays:

China’s Retail-Industrial Data Signal Moderating Rebound

  • Retail sales were up 12.3% on-year in January and February, compared with a 15.2% rise in December.

The gain in retail sales was below the lowest economist projection of 13.8 percent and was the smallest for a January- February period since a 10.5 percent pace in 2004.

Pointing up Revenue of large catering firms, which includes higher-end restaurants, declined 3.3% YoY during the first two months.

Likely the consequence of the new leaders’ crack down on extravagance.

  • Electricity output, which is closely watched in China because of concerns about the quality of other data, was up 3.4% in the same period compared with growth of between 6% and 8% in the final months of last year.
  • Fixed-asset investment rose 21.2% Y/Y in January and February, compared with a 20.6% rise in the whole of 2012.
  • Industrial production grew 9.9% Y/Y in January and February, after a 10.3% gain in December.
  • Residential floor space sold jumped 55% off a weak base.

Remember last week’s release of 20%+ growth in exports?

Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, said the industrial-production data suggest that recent export numbers were exaggerated. “In view of the strong export figures in the last two months, such IP growth should have been higher than currently reported,” Qiao said in an e-mail.

China Passenger-Vehicle Sales Top Estimates  China’s passenger-vehicle market had its strongest start since 2010, indicating auto demand is thriving relative to other industries at a time when broader indicators are slowing in the world’s second-largest economy.

Wholesale deliveries of cars, multipurpose and sport- utility vehicles, rose 20 percent to 2.84 million units in January and February, from 2.37 million units a year ago, according to the China Association of Automobile Manufacturers.

Total sales of vehicles, including buses and trucks, rose 15 percent to 3.39 million units during the first two months, the association said.

China Inflation Climbs

China’s policy makers are grappling with an uptick in inflation just as industrial output and retail sales seem to be softening. Compounding the government’s challenges are soaring property sales.

China’s consumer inflation jumped to 3.2% year-on-year in February, up from 2% in January, for the highest increase since April last year. Prices were likely boosted by the Lunar New Year holiday, which often brings a spike in prices for food and other goods.

CPI-food rose 6% and non-food prices rose 1.9%. On a M/M basis, CPI rose 1.1% in February after 1% in January.  Food prices were up 2.7% last month while non-food prices rose by only 0.2%.

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Storm cloud  [image]Japan Machinery Orders Drop Sharply

Japanese core machinery orders fell 13.1% in January from the previous month, the government said Monday, the first decline in four months, as Japan’s economic recovery has yet to gain momentum amid a recession in Europe and slower growth in China. (…)

Unadjusted core orders fell 9.7% from the same month a year earlier.

Lightning  French Industrial Output Tumbles as Recession Looms French industrial production fell more than expected in January as Europe’s second-largest economy teetered on the brink of its third recession in four years.

Output from factories, mines and utilities fell 1.2 percent in the month from December, national statistics office Insee said today. Factory output fell 1.4 percent in January and 4.6 percent in the three months through January, led by a slump in car production.

Thumbs down  Italy Downgraded by Fitch Fitch downgraded Italy’s credit ratings, citing inconclusive elections results and a deeper recession, and gave a negative outlook.

The firm lowered Italy’s issuer-default ratings to triple-B-plus, or three steps above junk territory, from A-minus. The outlook is negative. (…)

Fitch also noted that the latest data showed the continuing recession in Italy is one of the deepest in Europe, while the unexpected fall in employment and persistently weak sentiment indicators increase the risk of a more protracted and deeper recession than previously expected.

One in four Germans would back anti-euro party

(…) the poll conducted by TNS-Emnid for the weekly Focus magazine showed 26 percent of Germans would consider backing a party that wanted to take Germany out of the euro and as many as four in 10 Germans in the 40-49 age bracket would do so. (…)

A new eurosceptic movement called ‘Alternative for Germany’ (AfD) comprising mostly academics and business people is due to hold its first meeting later on Monday in a northern suburb of Frankfurt.

SENTIMENT WATCH

  • Dow Surges to Record Highs, Finishes Up 2.2%  Investors shed fears, pushing stocks up to their fourth all-time record high in five days. Banks get a clean bill of health

  • It’s Not Just the Fed The market has more going for it than easy monetary policy. If the Fed starts to tighten, stocks could fare surprisingly well.

  • Funds flow:

Investors continued to focus on adding equity exposure to their portfolios. Overall, stock mutual funds and ETFs reported net inflows of $5.7 billion for the week. It was the strongest week for equity products in the last four as both mutual fund (+$3.2 billion) and ETF (+$2.5 billion) investors showed confidence in a continued upward trend for stocks. It marked the ninth consecutive week of inflows for equity mutual funds, bringing their year-to-date total to an impressive $59 billion. Domestic equity funds contributed $22.2 billion of that total, while nondomestic equity mutual funds saw $27.4 billion of net inflows for the year so far. Net flows YTD for emerging markets products were almost flat, and net redemptions for ETFs (-$1.023 billion) nearly wiped out all of the net inflows for their mutual fund brethren (+$1.026 billion). (Lipper via Barron’s)

  • The Odds Favor the Bulls Chances are good that the Dow Jones Industrial Average will finish the year above 15,000—and the odds are 50-50 it could approach 18,000 by the end of 2014.

(…) Even with the Dow reaching a nominal record of 14,329 last Thursday, the performance of the market over the past five years is still below par. That bodes well for the bulls. Lower-than-average returns over five years are generally followed by higher-than-average returns over the following two years.

Accordingly, the Dow has four chances in five that it will be flat or higher by year-end 2014, and a 50-50 chance of approaching 18,000 over the same time frame.

(…) these market odds are derived from long-term market patterns whose source is University of Pennsylvania’s Wharton School finance professor Jeremy Siegel, author of the aptly titled best seller, Stocks for the Long Run.

Professor Siegel has amassed numbers on stock-market performance dating back to 1871, the earliest year for which unimpeachable data are available. The numbers, compiled with the help of one of Siegel’s former students, Jeremy Schwartz, provide the basis for projecting the likely path of the Dow. (Schwartz is research director of the New York-based WisdomTree Asset Management, a firm with which Siegel is associated.) (…)

Last year, the five-year returns were in the lowest quartile of all returns for five-year cycles. This year, the five-year returns through March 5 were in the lowest third of all returns for five-year cycles. Schwartz found 45 five-year periods in the lowest third. The median annual return on these 45 two-year periods was 14.59%. Median annual return on all two-year periods was 9.62%.

To apply that 14.59% to the Dow, we first subtract 2.48 percentage points for dividends, leaving a median price return of 12.11% a year. Grow the Dow at 12.11% from the March 5 close of 14,254—the final number in our last five-year interval—and you get 17,915 within two years.

Schwartz also found that of these 45 two-year periods, in 38 cases the market was either flat or higher over the next two years. How high? The strongest annual rebound post-World War II was 32% in the two years ended in 1976. Grow the Dow 29.5%—again, subtracting 2.48 percentage points for dividends—and you get 23,904.

There you go!. Oh!, don’t forget that markets rise about 65% of the time…

Gross, co-chief investment officer of Pimco, doubled his forecast for growth in U.S. gross domestic product to 3 percent for this year, up from the firm’s December forecast of 1.25 percent to 1.75 percent in 2013.

U.S. home prices probably will rise 8 percent this year, up from a previous estimate of a 4.7 percent increase, according to Bank of America Corp.

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said in the report, dated yesterday. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

(…) There are many factors, both technical and fundamental, that will continue to drive stocks higher. JPMorgan notes that the average mutual fund is trailing its benchmark by about 100 bps so far this year. Speculation is that these managers are using market dips to get invested. Factor in some “asset rotation” into equities and the favorable technical backdrop for equities becomes clear.

More importantly, however, are fundamentals. Announced stock buybacks in the US are currently at a “buyback yield” of 8% (annualized announced buybacks over aggregate market cap). Historically, in the US, 95% of announced buybacks are executed. Companies are also returning cash via dividends. The dividend yield of the top 20% of the S&P 500 is 4.2% compared to a 3.5% yield for investment grade bonds. This spread of 123 bps is the largest it has been since 2009. Valuations and earnings tell a similar story. TEV / EBITDA multiples are currently at 9x versus 11x before the financial crisis and consensus estimates for the S&P 500 are for 10%+ growth in 2013 and 2014.

More U.S. Profits Parked Abroad

U.S. companies are keeping more of their profits offshore, a Journal analysis of 60 big companies found. The moves shielded more than 40% of the companies’ annual profits from U.S. taxes.

A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. (…)

Overseas balances have grown in part because U.S. multinational companies are paying less tax on their overseas operations. Offshore subsidiaries of U.S. companies paid an average 14% tax rate in 2008, according to the most recent statistics from the Internal Revenue Service, down from 16% in 2004.

Corporate filings offer a glimpse of the low rates companies pay outside the U.S. Apple said it held $40.4 billion in untaxed earnings outside the U.S. as of Sept. 29, 2012. Apple estimated that it would owe $13.8 billion in tax if it brought that money back to the U.S. That is a 34% tax rate, just shy of the federal 35% rate. Since foreign income taxes are creditable on U.S. taxes, that means Apple has paid less than 5% tax on those earnings to date, says Ms. Blouin, the Wharton professor.

 
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