NEW$ & VIEW$ (8 MARCH 2013)

U.S. employment explodes. Consumer deleveraging done. Government deleveraging, none. Unit labor cost rises. Transport biz ok. China economy remains slow. Cash flows. U.S. bank unstressed. Eurozone economy stressful, leading to instability. Sentiment watch.


Surprised smile  February Nonfarm Payrolls: +236K vs. consensus +160K, 119K previous (revised from +157K). Unemployment rate 7.7% vs. consensus 7.9%, 7.9% previous.


Weekly Unemployment Claims: 4-Week Moving Average at a Five Year Low

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Money  Freshly Flush, the Consumer Is Back  Fresh data suggest a growing number of Americans are becoming more comfortable borrowing—a development that could fuel more spending and give the sluggish recovery a lift.

imageU.S. households ramped up their borrowing at an annualized rate of 2.4% in the final three months of 2012, the biggest jump since the beginning of 2008, according to a Federal Reserve report released Thursday. Mortgage borrowings outstanding dropped only 0.8%—the lowest percentage drop since early 2009. Meantime, other kinds of consumer borrowing expanded at the fastest pace since the third quarter of 2007. (…)

The net worth of U.S. households—the value of homes, stocks and other investments minus debts and other liabilities—rose 1.8% in the fourth quarter of 2012 to $66.07 trillion, the highest level since the final quarter of 2007, when the recession began, the Fed said. Americans continued to borrow in January, mostly for education and cars, another Fed report Thursday showed. And a separate report by the Federal Reserve Bank of New York last week showed Americans late last year took on more debt for the first time since the throes of the recession as households took out more mortgages and far fewer fell into foreclosure. (…)

The nascent recovery of the housing market is playing a key role in making Americans more confident about the economy by raising the value of their homes, often their most valuable asset. The value of real estate owned by households climbed nearly $450 billion in the fourth quarter of 2012, the Fed said. Americans also have much more equity in their homes: a measure of owners’ equity as a percentage of household real estate hit 46.6%, the highest since the first quarter of 2008.

Meanwhile, the stock-market recovery is also making some Americans feel more flush. The value of stocks owned by households rose over $150 billion in the fourth quarter, even as the Dow Jones Industrial Average dropped 2.5% during the period—reflecting rising prices of foreign stocks and more investors moving into stocks in general after shying away. The stock market has seen substantial gains since then—the Dow is up over 9% this year, at a record high—suggesting household balance sheets have improved further.


High five   U.S. Deleveraging? Not So Fast

In the private sector (nonfinancial businesses and households) deleveraging has been substantial. In the financial sector, it has been even more substantial and continues.

In the public sector, most notably federal, there has been a substantial buildup in debt. Taken altogether, total U.S. debt today is higher as a percentage of gross domestic product than ever before, due to federal borrowing.

Pointing up  Slower Productivity Creates Risk for Stock Bulls

(…) After depending on productivity to fuel growth, however, companies have nearing the end of doing more with less.

Businesses are recognizing their existing staff are hitting their limits. According to a survey of manufacturers done by the New York Fed, 40% of respondents who plan in hire this year said the first or second most important reason was that their current employees are overworked. (…)


Charts from Haver Analytics


imageAn increase in shipment volumes in February reversed a four‐month downward slide, putting levels back on pace with 2012. (…)  All modes have been experiencing up and down shifts in volume for the last eight months, with no signs of change in the coming months. Although there are some strong indicators of improvements in the economy, many of them do not translate to improvements in the freight logistics market. Others signal weak demand for freight.

The 5.6% increase in shipments in February reversed last month’s 4.8 percent sequential drop. (…) The turn‐around followed four consecutive months of declines, and still puts 2013 only 0.6 percent of December 2012. February’s sharp increase is partially due to the strong showing for rail over the last four weeks – carloadings are up 3.7 percent and intermodal units are up 6.9 percent over the preceding four weeks.

Breaking it down week by week, however, demonstrates the uneven performance of the transportation sector; both carloadings and intermodal loadings were up two weeks and down two weeks. The most significant drop was 5.2 percent in intermodal loadings for the week ending February 28th.

The ATA’s truck tonnage index has shown growth during the last two periods (December and January), which would seem contrary to the trend in this index. The Cass shipments index is not a reflection of tonnage carried, so the two could vary for a variety of reasons. The most likely reason for the difference in the last few months is that the average weight of a shipment rose during the period. In addition, the trucking industry remains at near capacity and there was no indication of capacity pressure or truck shortages, suggesting that the same number of trucks were handling more tonnage per shipment. Anecdotal evidence also supports fuller loads for LTL carriers.

Rail Traffic Continues to Point to Economic Strength

“Rail intermodal traffic continues to grow.  In February, year-over-year intermodal volume on U.S. railroads rose for the 39th straight week, and February saw the first double-digit year-over-year increase in two years,” said AAR Senior Vice President John T. Gray.  “Shippers find intermodal appealing for a lot of reasons, including fuel savings, higher trucking costs, and service that has become much better in recent years.” (Via PragCap)

rails Rail Traffic Continues to Point to Economic Strength



China Exports Beat Expectations

China posted a surprise trade surplus in February thanks to stronger-than-expected exports as the global economy recovered, and a drop in imports.

Exports were up 21.8% from a year earlier—slower than January’s 25% pace but well above economists’ expectations of 5%, and a positive sign for the world’s second-largest economy. (…)

Exports to the U.S. were up 15.7% from a year earlier, and exports to the European Union were up 16.5%. But exports to Japan were down 6.5% and imports from Japan were down 36%, reflecting heightened political tensions between the two countries as a territorial dispute lingers.

High five  The FT has this important info:

Because the Chinese New Year holiday fell in January last year and in February this year, analysts said it was better to look at aggregate trade data for the two months to make sensible year-on-year comparisons.

On that basis, Chinese export and import growth both held up reasonably well. Exports were up 23.6 per cent in the first two months of 2013 from a year earlier, while imports were up 5 per cent.

But even this two-month comparison might be misleading since the slowdown in factory activity has carried through into March because the New Year celebration fell later than usual in February.

“This can mean even the January and February combined data are distorted on the upside and the unwinding of the Chinese New Year distortions would happen in March,” said Song Yu, an economist with Goldman Sachs.

So, read on:


Our (CEBM Group) survey basically reflects the weakness of both spot and futures markets for steel after Spring Festival. Over 45% of respondents stated that actual sales were lower than their expectations, much worse than the previous survey.

Construction projects and cement production restarted after the Lantern Festival (Feb. 24) (…) However, actual demand had not been confirmed in the short term; only 23% producers were optimistic about sales in March.

The survey suggests that around 90% of copper merchants surveyed indicated that orders have declined slightly M/M due to the holiday break. Copper merchants did not see a strong recovery after the Chinese New Year due to soft downstream demand.

In the March survey, real estate developer respondents reported strong sales before Chinese New Year (CNY), in-line with developers’ expectations. Sales decreased slightly after CNY, but developers can still sell 70%-80% (75%-85% in January) of their supply in Tier-1 cities and 60%-70% (60%-80% in January) in Tier-2 cities. None of surveyed developers have introduced new supply in February, but they observed strong low-end demand and high-end property sales.

Surprised smile  As March is the beginning of the peak season in property sales, respondents showed strong motivation to raise prices in March even when they knew a rapid rise in property prices would have a negative impact on their own sales. According to the survey, average prices in March for new properties will increase by 5%-10% M/M in Tier-1 cities, and by 3%-5% M/M in Tier-2 cities.

Few surveyed developers said they would launch new sales campaigns in March due to low inventory. As most developers stopped purchasing land in 1H12, respondents agreed that a shortage of new supply is a real problem for them until late April.

The CEBM machinery manufacturer survey shows that the demand recovery after the holiday has not been observed. (…)  New orders of machinery tools in January and February were still weak.

The result from the survey shows that uncertainty of auto sales conditions has increased.

Exports recovered weakly after the festival; total exports in January and February remained flat Y/Y, barely changed from 4Q12. (…) Export volume surged in March 2012 due to the significant increase in shipping fees. A high Y/Y base will likely weigh on March exports Y/Y.

China warns over fresh currency tensions
Competitive devaluations will hurt emerging nations, says Beijing

Beijing has issued a new warning against competitive devaluations by rich countries, saying that emerging markets will pay the price for so-called currency wars.

“For the global economy this year, I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,” commerce minister Chen Deming said on Friday.

Martini glass  Chinese parliament holds 83 billionaires
Report identifies 17% rise in super-wealthy delegates

Not quite what Lincoln thought of a “government of the people, by the people, for the people…”

Brazil’s central bank adopts hawkish tone
Benchmark Selic rate left unchanged at low of 7.25 per cent

(…) But in the accompanying statement, for the first time since August 2011, it left open the possibility of an increase to tackle rising inflation.

This represented a sharp turnround from previous statements that rates would remain low for a “prolonged period”, leading economists to predict central bank president Alexandre Tombini could increase them as early as next month. (…)

Profit squeeze hammering emerging equities

(…) Godet’s calculations show a steep decline in return-on-equity (ROE) in emerging markets to around 12 percent, a fall of 3 percentage points in the last 18 months and well below pre-crisis levels of 16-17 percent.

That lags developed markets’ 13.5 percent. But U.S. firms – “the ultimate quality and growth markets” in Godet’s words – have usurped EMs’ ROE supremacy with a 15 percent average. ROE shows how well a company is using shareholders’ equity investment to generate profits. (…)

Money  [image]Firms Return Record Cash To Investors

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.

(…)American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market [image]research firm. (…)

The Federal Reserve on Thursday paved the way for more activity. In its “stress tests” of banks’ financial health, the Fed said 17 of the largest U.S. financial groups have enough capital to keep lending even if the economy were to take a sharp downturn. Several banks are now expected to boost dividends and share buybacks.

(See on that NORTH AMERICAN BANKS RANKING (March 2013))

‘Stress Tests’ Show Banks on the Mend

The Fed in its latest “stress tests” said the largest U.S. banks have enough capital to keep lending in a hypothetical sharp economic downturn, potentially clearing the way for the return of billions of dollars to investors.



Storm cloud  German Industrial Production Unexpectedly Stagnates  German industrial production unexpectedly stagnated in January as Europe’s debt crisis weighed on company spending and investment.

Production was unchanged from December, when it rose 0.6 percent, the Economy Ministry in Berlin said today. December output was revised up from an initially reported 0.3 percent increase. From a year earlier, production fell 1.3 percent when adjusted for working days. (…)

Spanish industrial output shrank 5 percent in January from a year earlier. In Finland, production slumped 3.6 percent in January from December, while in Turkey output rose 2.3 percent. (…)

ECB should cut rates, allow higher inflation: Lagarde

The European Central Bank should cut interest rates further and strong economies such as Germany should allow higher inflation and wage growth, the head of the International Monetary Fund said on Friday.

ECB Chief Plays Down Italy Fears

European Central Bank President Mario Draghi played down fears that Italy’s indecisive election could reignite Europe’s debt crisis, saying that financial markets have taken the election results in stride and that Italy’s current political mess doesn’t threaten its budget discipline. (…)

A majority of Italian voters supported political parties, especially those led by comedian Beppe Grillo and former Premier Silvio Berlusconi, that have pledged to soften or reverse fiscal austerity measures that Italy has already enacted.

Italian Banks’ Bad Loans Seen Rising as Gridlock Hampers Growth

(…) Italian corporate and household non-performing loans rose to a record in December, reaching 125 billion euros, according to data from the Italian Banking Association. Banks’ gross non- performing loans as a proportion of total lending increased to 6.3 percent from 5.4 percent a year earlier. (…)

Italian banks tied their fortunes more closely to the financial strength of the state in 2012, increasing holdings of the country’s sovereign debt by 58 percent to 331 billion euros. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. (…)

Hollande faces pressure over jobs pledge
Unemployment hits highest level since 1999 as police and protesters clash

Figures published on Thursday by Insee, the statistics office, put the country’s jobless rate at 10.6 per cent in the final three months of 2012, up from 10.2 per cent in the previous quarter. Excluding France’s overseas territories the rate was 10.2 per cent, which compared with 5.7 per cent in Germany and an 11.7 per cent eurozone average.

Stratfor: Europe, Unemployment and Instability 

Excerpts from a good Statfor piece via Economic Intersection.

(…) Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.

Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.

This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.

History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.

It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.

It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.

The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has not encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.


World shares hit highest since June 2008

World shares hit their highest level since June 2008 and the dollar touched a fresh 3-1/2-year high against the yen on Friday, ahead of U.S. jobs data expected to point to a continuing pick up in the world’s biggest economy.

AAII Bullish Sentiment Posts Small Increase


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