NEW$ & VIEW$ (4 MARCH 2013)

Soft patch ahead. What happened to all the QEs? Eurozone risk. China risk. Earnings risk. Sentiment risk. Student loans risk. Canadian dollar.


Here’s what I have noted from the last several weeks of economic data:

  • China’s economic recovery has slowed to a crawl, by China’s standards..
  • Europe is nowhere out of the woods. Italy’s election results are troubling to say the least.
  • The U.S. economy showed resiliency in the face of a strong fiscal drag, thanks to pent-up demand in housing and cars and strengthening capex but Markit’s U.S. PMI suggests weakening momentum late in February.
  • ISI’s company surveys have moved sideways (not down, though) for six consecutive weeks. Retailers and restaurant surveys have fallen, particularly in the past 2-3 weeks.


Are we about to experience another soft patch like in 2010, 2011, 2012?

Americans In Jan. Paid Record Taxes On Fiscal Cliff DealFriday’s report showed that disposable personal income—income after taxes—fell 4.0% in January, the biggest drop on record. The Commerce Department said the figures reflected the December boost for wages and the higher payroll taxes that started in January.

But instead of spending less, Americans opted to save less in January. The personal-savings rate dropped to 2.4% from 6.4% the prior month. That was the lowest rate since November 2007.

The price index for personal-consumption expenditures, the Fed’s preferred gauge for inflation, was up 1.2% year over year in January. The Fed targets a level of about 2%. On a monthly basis, the index was flat.

The closely watched core PCE index, which excludes volatile food and energy prices, was up 1.3% from a year earlier. (Chart above from IBD)


The U.S. income and spending stats for November through January were significantly distorted by the impact of the fiscal cliff. December income was boosted by advanced bonus and dividend payments while January was hit by the increased payroll tax and delayed tax refunds. Combining the last 3 months, we get essentially flat income and a surprising 2.8% annualized growth rate in spending. Americans again refused to restrain their consumption and rather dipped seriously into their savings.

The fact remains that the fiscal drag is not a one off event and it will impact disposable income throughout 2013.


The other fact is that the American savings rate has fallen to the low end of its 2000-2012 range. The risk is clearly to the upside from here. (Related: Investors Rethink Consumer Resilience)

FRED Graph


The year-end dividends and bonuses windfall has helped car sales.

U.S. auto sales rose 3.7% to 1.2 million. The rate of sales, adjusted for seasonal fluctuations, equates to a full year of sales of 15.38 million, according to Autodata Corp. (…)

Importantly for U.S. auto makers, sales of pickup trucks continue to rise. GM said sales of its Chevrolet Silverado pickup rose 30% from a year earlier to 41,634 and Ford said its F-series pickups rose 15% to 54,489. Chrysler’s Ram brand trucks rose 3% to 23,289. (…)

2Q vehicle production is scheduled to increase at a +10% q/q a.r.

This chart from CalculatedRisk reveals that the annualized rate of sales has stalled in recent months. Yet, many pundits expect car sales to return to the 2006-07 level of 16 million units. Why not!

Here’s why not:

This next CR chart, providing a longer term perspective, is even more suggestive of a soft patch coming our way. The 16 million sales levels of the early 2000s were actually an anomaly, being a direct result of mortgage refinancing, something totally “out of fashion” nowadays. The chart really suggests that light vehicle sales are near their peak. Pent up demand has been largely satisfied. The best hope is a sales rate sustained around the 15 million annual rate like we saw in the late 1980s and the mid-1990s.

Outlays dropped 2.1 percent, the biggest decrease since July 2011, to a $883.3 billion annual rate, a Commerce Department report showed today in Washington. Figures for December and November were revised up to show gains of 1.1 percent and 1.9 percent respectively, the best performance since the same two months in 2011.


It seems that stats on private power plant construction disrupted total constructions figures between November and January. This other CR chart (Bill McBride’s charts are really nice) shows that residential construction remains up but non-resid has stalled while public construction just keeps falling. 

Plot of ADS Business Conditions Index in the Most Recent Two Years

  • RBC Capital’s Economic Scorecard has also peaked out:


Is this the only hope?




Fingers crossed Gasoline futures declined -14 cents last week.

High five  But recall that Saudi Arabia has put a floor at $100 Brent.

Hence, given all the above: 

Fed Chief Stands Pat on Easy Money

Federal Reserve Chairman Ben Bernanke offered strong new assurances that he wouldn’t back away from his easy-money policies, despite worries at the Fed.

It would be “quite costly” to the U.S. economy, and possibly counterproductive, for the central bank to pull back too soon, he said in a speech late Friday in San Francisco, amplifying a message he delivered to Congress earlier in the week. (…)

As part of that message, he made clear that interest rates wouldn’t stay low forever. He took the unusual step of discussing forecasts of long-term rates, sharing projections that show long-term rates could rise from about 2% today to 4% or 5% by 2017 as the economy strengthens. The move appeared in part to be a signal to markets not to become complacent about low rates.

High five  Wait! What happened to all the QEs?

imageIneichen Research & Management AG



EU feels pressure on austerity policies
Popular frustration on rise in southern Europe


(…) “Anger and frustration are on the rise in the whole of southern Europe,” says Jean Pisani-Ferry, head of the Brussels think tank Bruegel. “They show up in the polls or in the streets or both, but whichever way they cannot be ignored.” (…)

Mr Monti this week argued he is a harbinger, warning that tough reforms risk the same kind of backlash elsewhere unless the EU finds ways to show voters more quickly their sacrifices are bearing fruit. (…)

Dutch Cuts Are Deferred Until 2014

The Netherlands confirmed it won’t seek extra austerity measures this year to meet European Union budget targets, making it more likely that it won’t meet its commitment to cut its budget deficit to less than 3% of annual output.

Presenting a package that would add austerity measures beginning in 2014, Dutch Prime Minister Mark Rutte said Friday he would combine extra cutbacks next year with economic stimulus measures, as he seeks to revive a sluggish economy. “The Dutch economy needs to be pulled out of the crisis,” he told a news conference in The Hague.

The Netherlands remains committed to the budget rules, said Mr. Rutte, adding that he hopes the European Commission, the EU’s executive arm, will allow it more breathing room.

Mr. Rutte’s comments came one day after the Dutch government’s budget watchdog said the country’s deficit will continue to breach the EU limit in 2013 and 2014, despite a package of sweeping austerity measures already under way.

European rules are like Chinese traffic regulations: mere suggestions!

Euro-Zone Deal Faces Hurdles

German objections are endangering a deal to prevent heavy losses at European banks from undermining the solvency of euro-zone states.

(…) The political disunity over the supposedly agreed solution—direct ESM capital injections—has become so entrenched that the ESM’s head, Klaus Regling, warned over the weekend that the measure might never be implemented. (…)

That warning is likely to increase concerns that Europe’s efforts to fix the flaws of its currency union are losing urgency, following months of relative calm in European financial markets.

Portugal to Seek New Bailout Terms

Portugal is seeking to renegotiate parts of its international bailout agreement amid worse-than-expected forecasts for an economy in recession and growing popular protest over deficit-cutting austerity measures imposed by its lenders. (…)

The request, along with a similar one by Ireland, would mirror the terms Greece obtained under its latest bailout agreement. (…)

Euro Leaders Demand Austerity as Italy Nears New Vote  European leaders demanded that euro members press on with budget cuts to end the debt crisis as Italy edged closer to a new election after an anti-austerity vote last week resulted in political deadlock.

Merkel, speaking three days ago at an event held by her Christian Democratic Union in Greifswald on Germany’s Baltic coast, urged Italy not to stray from reforms, saying that her stance on deficits is “not about liking to whip people.”

Rehn, the EU’s budget enforcer, said the bloc has no leeway to depart from its course of reining in spending and debt. (…)

“I’m certain that we’ll find a solution that addresses the concerns of all euro countries,” Rehn told Spiegel. Sarcastic smile

Italy’s Post-Election Chaos Isn’t What You Think

This is from Carlo Bastasin, an Italian economist, and a visiting fellow in global economy and development and foreign policy at the Brookings Institution (my emphasis).

(…) Almost half of those Italians who cast their ballots for one of the traditional parties switched their vote this time. You think Americans are fed up with Congress? In Italy, trust in the government stands at 5 percent, and trust in Parliament at 8 percent. The rate of abstentions is high. The party holding the majority of seats in the Chamber of Deputies — 54 percent, as required by law — won the support of just 20 percent of the electorate.

On top of all this, the timeline to form a new government is tight. The Parliament convenes for the first time March 15. Amid all the confusion, the parties must agree within 10 days on the leaders of the Chamber of Deputies and the Senate. Then they have to nominate a prime minister, who must form a government and take an oath in front of the president of the republic. All this before April 15, when the Parliament meets to elect a new president of the republic.

Pointing up (…) the real problem is the breakdown in Italy’s supply of credit. From the beginning of the euro crisis three years ago, Italy has seen a faster shrinkage in total credit supply than most euro-area countries, as foreign banks have repatriated their loans. This widespread lack of credit has crushed the private economy. Businesses and households can’t get loans and are cutting investments and consumption at an unprecedented rate.

Reviving the market for credit is the first job. This would be far more effective than delivering a new fiscal stimulus. In fact, continued budget discipline is vital in ending the credit crunch. The new government must negotiate a deal with the European Union and with the European Central Bank, so that the ECB can support the Italian banks. But this can’t happen unless the ECB is sure that it has a reliable partner in the Italian state and that Italy will remain as fiscally stable as possible.

Italians understand this, and so the political crisis may be a little easier to resolve than many think. Under the pressure of markets, Italian parties are likely to close ranks behind another technical prime minister, just as they did in November 2011 behind Monti. They will nominate someone familiar with financial issues — some high official at the Bank of Italy, or maybe even Monti himself. They will call it an “institutional government” and ask it to make the political system more honest and functional, reining in the anger and recrimination of the citizens.

It’s a strange way to run a country — but don’t write off Italy.

Economist wishful thinking in my view. First, Monti and his policies have clearly been rejected by Italians. Second, there is no clear market pressure yet. Commedia continuerà. A replay of the divine comedy … But there’s no pope!

Europe is already in bad shape after the debacles of Greece, Spain and Portugal. We now have France and Italy in turmoil. This would be much worse!

Moody’s warns:

We would consider downgrading Italy’s sovereign rating if there is additional material deterioration in the country’s economic prospects or further difficulties in implementing reforms. A deterioration in funding conditions would also put downward pressure on Italy’s rating. Should Italy’s access to public debt markets become constrained and if the country were to require external assistance, Italy’s sovereign rating would be downgraded to substantially lower rating levels.


China Property Stocks Plummet

China’s State Council said authorities will strictly enforce a personal income tax of 20% on profits from home sales, among other measures, to curb exuberance in the housing market.

The new rules would mean that a seller would have to pay a 20 million yuan ($3.2 million) tax on a home bought for 100 million yuan and sold for 200 million yuan, a sharp increase from the previous 2 million to 6 million yuan the seller might pay under current rules.

Real-estate construction remains the biggest single contributor to China’s domestic demand, and land sales are a key source of revenue for cash-strapped local governments.

Ninja  China well-prepared for currency war: official China is fully prepared for a looming currency war should it, though “avoidable,” really happen, said deputy governor of China’s central bank Yi Gang.

“China is fully prepared,” Yi said. “In terms of both monetary policies and other mechanism arrangement, China will take into full account the quantitative easing policies implemented by central banks of foreign countries.”

Bad loans increase for fifth quarter Banks have reported a fifth consecutive quarterly rise in the value of their bad loans, the China Banking Regulatory Commission said on Friday.

However, the non-performing loan ratio showed a 0.01 percentage point fall, to 0.95 percent.

Non-manufacturing sector shrinks in February The purchasing managers’ index of the non-manufacturing sector declined to 54.5 percent in February, down 1.7 percentage points from January.

The figure marked the first decline since October, said the CFLP.

The sub-index for new orders retreated 1.9 percentage points from a month earlier to 51.8 percent, while new export orders also lost 1 percentage point to 51.6 percent.

BOJ Pick Vows Action on Deflation

Haruhiko Kuroda said he would do “everything possible” to beat deflation, including buying more government debt.

(…) “I believe that [the BOJ] is not doing enough in terms of the size of its asset purchases or the range of assets being bought,” he (Kuroda) added.(…)

Mr. Kuroda also said it is “very possible” for the bank to start its “open-ended” asset buying program sooner than January 2014 as is currently scheduled. (…)

Mr. Kuroda said he might consider scrapping the bank’s self-imposed rule to limit the value of its JGB holdings at or below that of bank notes in circulation. The rule is meant to reassure markets that the central bank would not monetize Japan’s debt, a perception that could undermine confidence in its fiscal policy and lead to spikes in interest rates.

Mr. Kuroda also hinted he might call for increasing the amount of riskier assets the bank buys, such as corporate debt and exchange-traded stock funds, noting that the BOJ in the past had purchased shares in individual firms. (…)


Q4 earnings season is essentially over. Of the 481 companies that have reported, 315 beat estimates (65%) and 118 (24.5%) missed. Ex IT companies, which beat by 84%, the beat rate declines to 62.5%.

Q4 estimates stabilized at $23.32, down 1.7% Y/Y. Trailing 12-ms EPS are now $96.99, down 0.4% Q/Q and -1.7% vs their Q2’12 peak level of $98.69. No tail wind for equities.

Q1’13 estimates are $25.55, stable with last week. Full year 2013 estimates are $111.20, up 14.7% but don’t bet your house on that!

image image

Pointing up  Five of the six consumer-discretionary companies that offered guidance last week released downbeat figures, Thomson says. (WSJ)


As explained before, since earnings have stalled, stocks can only rise if P/Es rise. We must therefore pay close attention to sentiment.

Bullish Sentiment Plummets

All it took was a couple of bad days to send skittish bulls running for the exits.  According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment plummeted from 41.79 down to 28.39.  This was the largest weekly decline since November 2010, and it was the lowest weekly reading since last July.

One unique characteristic of this bull market is the fact that there is very little commitment on the part of investors.  With the nightmares of 2000 and 2008 still fresh in their minds, these fair weather bulls are quick to head for the exits at the slightest hint of trouble.  This week’s drop in sentiment shows that this mentality remains in place.  All it took was a drop of less than 3% in the S&P 500 to send a third of bullish investors into the bearish or neutral camp.



Bearish Stock Bets Drop 53% as Bull Market Enters Fifth Year

Short sales in the Standard & Poor’s Composite 1,500 Index fell to 5.6 percent of shares available for trading in February, down from a record 12 percent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. The last time the number of shares borrowed and sold short approached this level, the equity gauge lost 3.3 percent in the next three months. (…)

Investors are adding to U.S. stock mutual funds after pulling out almost $400 billion the past four years, data from the Investment Company Institute in Washington show. About $16.3 billion went into stock funds the first three weeks of February, with about $2.5 billion to U.S. equities, the trade group said last week.


Back to Stocks In our asset-allocation survey, wealth managers see smoother sailing.

It’s finally starting to happen: After five years of extraordinarily defensive investing, the nation’s largest wealth-management firms are growing wary of bonds and more upbeat on stocks.

In another article, Barron’s says that

Americans remain underinvested in stocks. U.S. private pensions have only 35% of their assets in equities, well below the long-term average near 45%. BofA tracks the suggested allocation to stocks recommended by its peers, and while that percentage ticked up from 43% last summer to nearly 50% recently, it has now dipped to 47%. That’s well off the 61% average over the past 15 years, or highs pushing 66% seen at recent market tops.

Ghost Ghost Student-Loan Securities Stay Hot

The hunger for yield is driving investors to snap up securities backed by student loans, even as borrowers are falling behind on their payments at a faster clip.

SLM Corp., the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.

Meanwhile, SecondMarket Holdings Inc., a New York-based trading platform best known for private stock shares, said it would roll out on Monday a platform to allow lenders to issue student-loan securities directly to investors. Ghost

“The catalyst for this new suite of services is investor demand,” said Barry Silbert, founder and chief executive of SecondMarket.

(…) According to a Thursday report by the Federal Reserve Bank of New York, 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter, up from 24% in the fourth quarter of 2008. (…)

The average yield for floating-rate student-loan-backed securities stood at 1.48% on Thursday, down from 2.01% at the end of August, according to Barclays. That compares with roughly 0.75% for comparable Treasury securities. (…)

The Canadian Dollar Should Stabilize

By Hubert Marleau, Palos Management Inc.

In a weekly commentary, dated February 8, 2013, I argued that the sustainability of the exchange value of the Canadian dollar was fragile and subject to some correction. I based my conjecture on the observation that the current account deficit was financed more with volatile money than with reliable long term capital inflows. This was a change from what we had previously seen. Currently, the Canadian dollar is trading for 97.15 US cents. The Loonie was as high as $1.03 last September.

There are other good reasons for the present softness because a number of economic data points printed below expectations. In this regard, many speculators took very large short positions that could reverse on a dime and, in turn, stabilize the loonie near current terms. It should be noted that the “Misalignment Model” of Morgan Stanley, which incorporates data across bonds, commodities, monies and equities, suggests that the C$ fall may not be enough to fulfill the perma-bears but adequate to satisfy the speculators and traders. Based on Canada’s terms of trade, the loonie should trade between 0.965 and 0.985 US cents.

As a matter of fact, the Canadian economy is laboring along at a rate that is equal or better than most advanced countries. In the December quarter, Canada’s GDP expanded 0.6% compared to 0.1% for the US. The Macdonald-Laurier composite leading index increased 0.2% in January. Please note that Canadian investment intentions show continued growth despite the anticipated moderation in the resource sector. Capital formation is a major source of long term capital inflow.

If you are of the opinion, as we are, that the Bank of Canada is not going to ease ahead of the US even if economic conditions would allow it, the C$ should trade in the aforementioned fair value range. Moreover, there are a growing number of central banks which think Canada is an attractive destination for official reserves.


Leave a Reply

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