NEW$ & VIEW$ (19 JULY 2013)

Conference Board Leading Economic Index: Unchanged in June

The Conference Board LEI for the U.S. was unchanged in June. The improving indicators were yield spread, the Leading Credit Index™ (inverted), initial claims for unemployment insurance (inverted) and consumer expectations for business conditions. Negative contributions came from building permits, ISM® new orders and declining stock prices.

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Philly Fed Survey: Manufacturing Conditions Improved


The latest gauge of General Activity rose to 19.8 from the previous month’s 12.5. The 3-month moving average came in at 5.0, up from 2.9 last month. Today’s headline number is the highest since March 2011, and the 3-month MA trend is well above its interim low set in July of last year.


The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 12.5 in June to 19.8, its highest reading since March 2011. The percentage firms reporting increased activity this month (37 percent) was greater than the percentage reporting decreased activity (17 percent).


Other current indicators suggest continued growth this month. The shipments index increased notably, from 4.1 in June to 14.3. The demand for manufactured goods as measured by the current new orders index
remained positive, although it fell back 6 points to 10.2. Firms reported a drawdown of inventories this month: The inventory index fell 15 points, from -6.6 to -21.6.image

Labor market conditions showed a notable improvement this month. The current employment index, at 7.7, registered its first positive reading in four months. The percentage of firms reporting increases in employment
(18 percent) exceeded the percentage reporting decreases (10 percent). Firms also indicated an increase in the average workweek compared with June.



Baring teeth smile  Bernanke: Recent Tightening Unwelcome

During his testimony Wednesday before a House panel, Mr. Bernanke stressed that the Fed would be watching for any adverse impact to the housing market from recent rate moves. He said the Fed would act if necessary to ensure the housing recovery doesn’t falter. (…)

Mr. Bernanke said Thursday that at least part of the interest-rate spike in recent weeks happened because investors misinterpreted what he was trying to say at that news conference.

“We’ve not changed policy. We are not talking about tightening monetary policy,” Mr. Bernanke said, repeating the message he delivered repeatedly throughout the two days of testimony before Congress as well as at an economics conference last week.

(…)  “I want to emphasize that none of that implies that monetary policy will be tighter at any time in the foreseeable future,” he said.

Mr. Bernanke also cautioned that “it’s way too early to make any judgment” about exactly when the first reduction to the bond program will happen. He demurred when asked about market speculation that the first reduction will happen at the Fed’s Sept. 17-18 policy meeting, saying it will depend on economic data.

Pointing up There hasn’t been enough data since the June policy meeting to make such a determination, and the data that has come in has been “mixed,” he said. (…)

He’s getting clearer: they just don’t know what’s going to happen. Another truth: Bernanke: Nobody Really Understands Gold Prices

Fed Surveys Highlight Job Risk in Healthcare Reform  Surveys released this week by two regional Federal Reserve banks highlight how the Affordable Care Act may have the unintended consequence of keeping the labor market’s share of part-time workers historically high.

In New York state, 7.6% plan to fire or refrain from hiring in order to stay under the mandate, and 6.5% plan to shift from full time to part-time workers.

In Philly the answers are 5.6% and 8.3%, respectively. Many also planned to outsource work. (…)

During the 2000s expansion, the percentage of workers who had part-time jobs because of economic reasons hovered around 3%. Then in the last recession, the share jumped to 6.6%. It has come down, but stood at a historically high 5.7% in June. If the two Fed surveys prove correct, the percentage will remain elevated.

These surveys were done with manufacturers. Retailers, restaurants and other service providers are the most likely to change their hiring practices.

Electrolux Sees Higher U.S. Demand

Electrolux said the worst of Europe’s recent economic doldrums may finally be in the rearview mirror, potentially allowing the Swedish company to lessen its reliance on American appliance buyers.

Electrolux, the world’s No. 2 maker of home appliances after Whirlpool Corp. of the U.S., said its operations in Europe continued to suffer in the second quarter with demand remaining weak, albeit slightly higher than a year earlier. But while the company expects overall market demand in Europe to decline by 1% to 2% for the full year, it says it sees some signs of a turnaround.

“There are some signs that we are at or near the bottom,” Chief Executive Keith McLoughlin said, adding that market conditions are improving in most of Northern Europe, but that the market remains weak in Spain, France and Italy.

In North America, where the company makes nearly a third of its sales, Electrolux maintained strong sales and earnings growth, supported by a recovering housing market, which it expects to continue throughout the year. It raised its guidance for North American demand for appliances in 2013 to 5%-7% from 3%-5% previously. The company’s North American operating margin reached a record level of 7.8%.


US crude oil rallies to 16-month high
WTI discount to Brent narrows to near three-year low




First Reading on EPS and Revenue Beat Rates

Roughly 150 companies have reported earnings since the second quarter reporting period began on July 8th.  While this is less than a tenth of the total amount of companies set to report throughout earnings season, it’s enough to get an initial reading on the percentage of companies beating earnings and revenue estimates.

As shown in the first chart below, 69% of companies have beaten earnings estimates so far this season. It’s still very early, but compared to the final quarterly readings over the past few years, the earnings beat rate has gotten off to a great start.  The revenue beat rate, on the other hand, has been below average at just 50%.  Top line numbers have struggled in three of the last four quarters, and it’s looking like the same could be in store this quarter as well.

Morning MoneyBeat: What’s That You Said About a Strong Earnings Season? Almost a fifth of companies in the Standard & Poor’s 500-stock index have reported earnings for the second quarter, and things are already looking grim.

Earnings for S&P 500 companies are on track to grow 1.5% from the previous year. That isn’t exactly screaming growth—and is solidly below the 4.1% of growth analysts expected at the beginning of the quarter—but it’s not a decline, either. Of the 82 companies that have reported so far, 74% have beaten analyst estimates for their earnings. Sales are on track to grow a relatively meager 0.9% this quarter, but that marks a sequential improvement from their 0.1% first-quarter decline.

High five  But the results look different when you leave out bank stocks. You know, the group with the exceptionally easy comparisons from last year? When financial shares are excluded, S&P 500 companies would actually see earnings shrink 2.7% from last year, according to FactSet. That’s worse than Wall Street expected at the beginning of the quarter, when analysts were aiming for a decline of 2.3% in earnings without financial stocks.

Sales are on track to grow just 0.1% if banks are excluded, according to FactSet. Any growth still seems like a good thing, right? But there’s one big asterisk on that growth. Kinder Morgan Inc. alone has contributed that much to sales expectations in the S&P 500, after a quarter in which its revenue grew 56% from the previous year.

Even when banks and Kinder Morgan are included, the top line still looks shaky. Companies are missing analyst estimates for their sales figures, with just 48% of firms beating expectations for the second quarter.

Pointing up  The pain probably isn’t over yet, either. A flurry of companies have announced that their second-quarter profit would be lower than expected. United Parcel Service said last week that its earnings would be worse than expected. Other companies that have recently warned about lower-than-expected profits include E.I. DuPont de Nemours & Co., Ingredion Inc., Valero Energy Corp., and Nabors Industries Ltd.

As of last Friday, 97 companies in the S&P 500 had projected that their second-quarter earnings will be lower than Wall Street’s forecasts, compared to 16 that had said their results would be better than expected, according to Thomson Reuters.

That is the highest rate of lower-than-expected guidance since the first quarter of 2001–making it pretty tough to be optimistic on earnings.

Meanwhile, the crowd is moving back in…

Wall of money shifts into US equity funds
Weekly inflows at highest since June 2008

Some $19.7bn was invested in global equity funds in the past week, the most for six months, while $700m was pulled from bond funds, according to Bank of America Merrill Lynch citing EPFR figures. The amount put in US equity funds was the most since June 2008, the bank said.

China, U.S. companies’ great hope, now a drag

It’s official. China’s slowdown is starting to hurt corporate America.

The slowing has occurred as major U.S. names garner more revenue from Asia. Among 18 S&P companies with large exposure to China, 12 of them were underperforming the broader S&P 500 .INX index year-to-date, including Yum Brands Inc and Intel, which noted the slower growth in China as a headwind.

“The China impact is becoming more and more significant because the (U.S.) companies’ exposure has grown so much over the years,” said Robbert van Batenburg, director of market strategy at Newedge in New York.

G-20 Poised to Back Global Tax Overhaul

The G-20 is set to back a major reform of international taxation designed to eliminate loopholes that enable many companies to keep their tax bills low.

The 15-point action plan has been developed by the Organization for Economic Cooperation and Development, and is being discussed by finance ministers from the G-20. They are likely to endorse the plan in a communiqué to be issued at the end of their two-day meeting Saturday.

The action plan aims to plug the gaps created by a complex web of bilateral tax treaties that has expanded since the 1920s, and which now allow for “aggressive” tax planning, where companies adopt legal structures designed to shift their profits to the lowest tax jurisdictions, regardless of where those profits are earned.

More fundamentally, it seeks to modernize the international tax system to match the increasingly globalized operations of companies, and move away from a system in which tax administrations are largely focused on what happens within their national borders.

The plan aims to do that by updating rules on how services and goods transferred between units of a company located in different countries are priced to reflect the fact that many are now “intangible,” and take the form of licenses and the use of branding.

The action plan also includes steps to widen legislation that allows governments to tax profits that have been shifted to low-tax jurisdictions, eliminate opportunities for avoiding tax through the use of complex financing structures, and the use of contracts to avoid having a taxable presence in a country in which a company operates. (…)

Clock  Tax experts warned that the OECD’s action plan will be difficult to implement, and may not have the full support of all G-20 members.

“Notwithstanding the fact that the G-20 leaders are far from united on how to proceed, any global reforms will have to be brought in through changes between countries on a bilateral basis…and also amend existing domestic laws,” said Sandy Bhogal, head of tax at international law firm Mayer Brown “This process will take a considerable amount of time, even with the cooperation of all the relevant parties.”

The drive is on and we should all keep in mind that corporate profits, at least as measured by the S&P 500, are currently taxed at low rates which may not prevail a few years hence.


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