NEW$ & VIEW$ (20 MAY 2013)


Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.

Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

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Click to View

Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

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Click to View

Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

  • Auto  Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, Sputteringaccording to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.

Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.

The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.

The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

  • Mexico’s First Quarter GDP Down, But Far From Out  Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

ChartMexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.

Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.

But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.

Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.

The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011. (…)

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.

However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting. Confused smile

Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.

At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)

This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.



Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile  (Looks like devaluation is more effective than austerity)




Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.

Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.

It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)


March 2013 CCRSI National Results Highlights

  • PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period. 
  • SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively. 
  • TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013.  Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010.  Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity. 
  • DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.



U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace
Obama approves wider LNG exports as door opens to Japan and EU



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