NEW$ & VIEW$ (1 APRIL 2013)

The U.S.economy: good but not so good. Weakness persists in Eurozone, spreads elsewhere. Earnings watch. Sentiment watch. Investor indebtedness.

Jobless Claims Higher Than Expected

Like most of this (last) week’s economic indicators, initial jobless claims came in higher than expected today.  While economists were looking for claims to come in at 340K, the actual level of claims came in 17K higher at 357K.  This is the highest level since February 15th, and the largest weekly increase since late January.  With this week’s increase, the four-week moving average of claims rose from a post-recession low of 340.8K up to 343K, so there was not a large impact here.


Consumers Step Up Their Spending

Americans saw bigger paychecks and stepped up their spending last month, despite higher taxes and gas prices, boosting the economy’s growth outlook for the first quarter.

Consumer spending rose 0.7% last month, the Commerce Department said Friday. The gain was the largest since September and prompted several economists to revise upward their growth estimates for the first part of 2013.

Macroeconomic Advisers said it now expects 3.5% growth in the first quarter, up three-tenths of a percentage point from earlier estimates.(…)

Personal income also went up last month, by 1.1%. A driver of that was an 11.9% jump in dividend income, which had dropped even more sharply the month before. Dividend payments were roiled when many companies pulled payments forward into 2012 to avoid higher tax rates.

The fact is that the last several months have be pretty messy as personal income data have been whipsawed by Hurricane Sandy, personal tax rate changes and special dividends. The reality is that with all the turbulence and a big dip in the savings rate, real spending has remained stuck at +2.0% Y/Y while real income has meaningfully slowed from +1.5% between July and October 2012 to +0.6% in January and +0.9% in February.

Consumers will not sustain expenditures much above their disposable income growth rate for very long. In fact, the odds are that they will seek to restore their savings rate back to the 3.5-4.0% range.


Let’s not forget that special dividends were one-offs and benefitted the wealthier segments. On the other hand, the tax rate changes are permanent and hit just about everybody. the next 2 months will be crucial if the U.S. is to avoid another spring soft patch.Selected Dividend Trends – 20 Years(Factset)

US growth revised higher
Fourth-quarter figures point to commercial real estate revival

ChartBut the quarter was still dragged down by big falls in defence spending and business inventories, both of which analysts regard as temporary, suggesting that underlying growth continued at a slow but steady 2 per cent.

The big change in the latest revision was a much higher estimate of business investment in buildings. The Bureau of Economic Analysis now estimates that it added 0.46 percentage points to the growth rate instead of a previous estimate of 0.16 percentage points before.


Economic Indicators Ending March on a Down Note

During the first half of March, we saw a remarkable amount of economic indicators beating estimates.  As March comes to an end, however, it looks as if economists have begun to get ahead of themselves. (…)   As shown, there were 15 indicators released this week, and 11 of them came in weaker than expected.  For comparison’s sake, during the weeks of 3/4 to 3/8 and 3/11-3/15, there were 30 indicators released and 24 of them came in better than expected.




The important stuff is that new orders dropped from an average of 59.2 in Jan-Feb to 53.0 in March and that order backlogs fell back to 45.0.

The Richmond and Philly Fed surveys were also uninspiring in March. This week, we get the final PMIs for the U.S. The flash PMI was pretty strong so if the final reading comes in weaker, it would mean that the economy is getting softer as we speak. The sequester’s gotta hit at some point.


Lightning  Record fall in French sales weighs on Eurozone retail sector in March

The downturn in the Eurozone retail sector gathered momentum at the end of the first quarter, Markit’s retail PMI® data for March showed. The rate of decline in sales in the latest period was the fastest since May 2012, and the trend over the first quarter as a whole was the second-weakest since Q1 2009.

Retail PMI data by country signalled steep falls in sales in both France and Italy, and a broadly stable trend in Germany.

In particular, the month-on-month rate of decline in French retail sales accelerated further to a new survey record (data were first collected in January 2004). Italian sales continued to fall sharply, but at a weaker rate than the trend shown over 2012.

image image

Blow for ECB as wider loan rates hit south
Bank measures fail to ease credit conditions in periphery

(…) Since mid-2012, the spread between yields on Spanish and Italian sovereign 10-year debt and the German equivalent has narrowed significantly. Goldman Sachs’ interest rate divergence indicator – measuring cross-border variations in interest rates charged by eurozone banks on a variety of business loans – also dipped initially.

But the indicator has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals. (…)

France misses 2012 deficit target
Deficit reached 4.8 per cent of GDP

Official figures showed the nominal deficit last year was 4.8 per cent of gross domestic product, overshooting the government’s target of 4.5 per cent. The 2011 deficit was also revised slightly upwards to 5.3 per cent.

The government has already acknowledged it will overshoot this year’s target deficit of 3 per cent previously agreed with the European Commission. With the figure now forecast to hit 3.7 per cent, France is seeking a year’s delay from the commission for reaching the target, the level at which growth in the public debt should stabilise.

Hollande says employers to pay 75% tax rate  Switch is attempt to preserve key election pledge

French President François Hollande has moved to preserve his controversial promise to impose a 75 per cent marginal income tax rate by making companies pay the levy.

The president’s original proposal to impose the tax on individuals earning above €1m was in effect blocked by France’s constitutional council and, last week, by the state council, the government’s legal watchdog. (…)

Speaking in a television interview on Thursday, the president said shareholders would have to be consulted on pay and, where a company paid more than €1m, it would have to pay a levy to meet the 75 per cent rate. The measure would last for two years.


Storm cloud  S. Korean Output Unexpectedly Falls as Growth Forecast Cut

Output fell 0.8 percent last month from January when it fell 1.2 percent, Statistics Korea said today. (…)

The government cut the 2013 growth outlook from 3 percent to 2.3 percent as South Korean exporters including Samsung Electronics Co. and Hyundai Motor Co. grapple with a won that’s risen 17 percent against the yen in the last year.

South Korea Offers Tax Breaks to Revive Flagging Home Sales

South Korea will give tax breaks to home buyers and cut borrowing costs as the government seeks to revive home sales that tumbled to the lowest level since 2006, threatening a rebound in Asia’s fourth-largest economy.

First-time home-buyers with annual income less than 60 million won ($53,900) will be exempted this year from taxes on property purchases worth no more than 10 times their salary, according to a government statement. Multiple-home owners will see rules relaxed on capital-gains taxes. (…)

Transactions fell 14 percent to 47,288 in February, the least for that month in seven years, according to the land ministry. Prices are also sliding, with values in Seoul lower than any time since March 2008. January’s total of 27,070 home transactions was the second-lowest for any month dating back to 2006, when the data was first released, land ministry data show.



Stocks, Commodities Part Ways

imageCommodities have posted their worst first quarter since 2010. The Dow Jones Commodity Index, which tracks commodities ranging from oil to corn, is down 1.1% in the period. The S&P GSCI commodities index, which also follows a variety of commodities but has more exposure to energy prices, has performed slightly better, rising 1.5%.

CHINA BACK IN GEARS? CEBM’s survey suggests that the economy has picked up moderately in late March.

Respondents from the cement and construction machinery sectors reported above-expectations sales data. Some respondents reported that most construction projects had resumed during the last two weeks of March, which has led to improving demand. Most respondents from the cement sector indicated that the current demand recovery is stronger than last year. In addition, sales of construction machinery also exceeded expectations, and utilization hours also improved. Most respondents from the machinery sector believe that the demand recovery was later than previous years due to leadership transitions at central and local governments.

However, demand recovery for steelmakers and machinery tool manufacturers remained relatively weak, as 45% of surveyed steelmakers reported increasing inventory levels of finished goods. Auto sales were also below expectations, and automakers became more cautious as a result.

Storm cloud  Japan’s Business Pessimism Shows Challenges for Kuroda: Economy

The quarterly Tankan for large manufacturers was at minus 8 in March, rising from minus 12 in December, the central bank said in Tokyo today, as companies said they’ll cut investment by the most since the global recession.

Storm cloud  Turkey’s economy slows sharply  Data highlight Turkish government unease with central bank policy

Storm cloud  Russian Fourth-Quarter Growth Probably Fell to 3-Year Low


Q1’13 earnings season is about to begin.

March was a relatively quiet month for guidance from S&P 500 companies, as just eight companies issued quarterly EPS guidance for Q1 2013 and 22 companies issued annual EPS guidance for the current fiscal year during the month.

If 78% is the final percentage, the Q1 2013 quarter will have the highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006. (Factset)


Pointing up  The only silver lining in the above table is that March was a quiet month for quarterly negative guidance. However, as Factset points out, negative annual guidance has stepped up in recent weeks.

For the current fiscal year overall, 168 companies have issued negative EPS guidance and 77 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for the current fiscal year stands at 69%. This marks the third consecutive month that the percentage of negative EPS guidance has increased, as companies in the index transition to issuing annual guidance for 2013 as the new current fiscal year (instead of 2012).



S&P Milestone Marks Embrace of Stocks

(…) Individual investors, who have spent the better part of the last several years shunning U.S. stocks, are showing signs of returning to the market. So far this year, U.S. stock-focused mutual funds—excluding exchange-traded funds—have taken in $32.6 billion, according to Lipper. Investors had pulled a net $445 billion from domestic stock mutual funds from 2007 through the end of 2012. (…)

“Despite the recent rise in equity markets, we believe an enormous gap exists between the apparent bullish consensus on equities and effective low positioning in equity markets,” Didier Duret, chief investment officer for the private bank of Dutch financial services giant ABN Amro, told clients last week. Mr. Duret increased his exposure to stocks, particularly riskier ones with more growth potential.

I wonder if Mr. Duret reads Doug Short who recently graphed the current level of investor leverage:

The chart below illustrates the mathematics of Credit Balance (the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt) with an overlay of the S&P 500.


And now this:

Betting the House on the Stock Market

Lenders say a growing number of luxury homeowners are turning to a prerecession tactic of withdrawing equity from their homes. And just like during the housing bubble, many of these affluent borrowers aren’t using this cash to renovate their homes. Instead, they’re pumping it into investments, including the stock market, other real-estate purchases or even using the money to purchase art, which they expect will generate large returns going forward. In other cases, they’re choosing to use this cash to pay for their children’s college tuition or other expenses that they’d otherwise finance with higher-interest debt.

Bullish Sentiment Unchanged This Week

The “Not-So-Great Rotation”

(…) Fund flow data has yet to show a large-scale shift away from bonds, even as rates rose in the early part of the year. ICI data shows that the net new investment of $53 billion in bond mutual funds in the first two months of this year slightly exceeds the $52 billion for stock funds. The steady continuing demand for debt held up in January and February despite respective annualized losses of 1.7% and 0.8% for Treasuries and investment grade corporate debt in the Barclays indices. The hangover from the last market crash and the increasing popularity of ETFs has produced a cumulative $467 billion worth of outflows from stock mutual funds in the past five years. During that same period, $1.1 trillion worth of net new investment went into bond funds, as global investors retained a strong premium for US dollar debt.


A subset of the fund flow data that tracks changing asset allocations shows only marginal evidence of an investor shift from bonds to stocks. The total monthly flows sum up the cash going into or out of funds and the net exchanges of one type of fund for another. Year-to-date net exchanges out of bond funds and into other fund classes of $4 billion are nearly mirrored by $5 billion in flows into stock funds from other funds (…)

Rather than siphoning assets from bonds, cash for equities has come in large part from money market funds. Total current retail and institutional money market funds outstanding of $2.4 trillion represents a dramatic fall from its 2009 peak of $3.6 trillion. (…) If investor psychology continues to heal in the wake of two sharp market crashes in the past dozen years, the $11 trillion sitting in money funds and bank deposits is a more likely source than bond holdings for stock investment.


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