NEW$ & VIEW$ (24 JULY 2013)

Mid-Atlantic Manufacturing Activity Goes Negative

The Empire and Philly surveys were better than expected, but the Richmond survey was very weak.

The Richmond Fed’s manufacturing current business conditions dropped to -11 in July, from a downward revised 7 in June, which was the first positive reading since March.

The new orders index this month dropped to -15, from 9 in June. The shipment index this month fell to -15 from 11. Demand for labor stalled. The employment index held at zero, while the workweek index slipped to 2, from 11. The wage index fell back to 8, from 11. (…)

Despite discouraging present conditions, manufacturers appeared to remain optimistic looking out over the next six months.

The shipments-expectations index ticked up to 24 from 21 last month, and the orders-expectations index rose to 24 from 21 as well. The employee expectations slipped to 5 from 9 in June.

Activity on the service side also weakened in July. The Richmond survey’s revenues index fell to -6, from 12 in June.

This chart from Doug Short shows the volatility of the Richmond Fed Index.


Easing of Mortgage Curb Weighed Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis.

The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation.

The plan, which hasn’t been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago. (…0

Regulators also have discussed asking for public comment on a possible 30% down-payment requirement, people familiar with the situation said.

Federal Reserve governor Daniel Tarullo and Federal Deposit Insurance Corp. Chairman Martin Gruenberg have pushed to abandon the down-payment requirement and were sympathetic to arguments that it would add complexity for lenders without reducing the risk of borrowers’ defaults, according to a person close to the process. Confused smile

More on the last NAR report:

Listed inventory in June rose by 40,000 units from May to 2.19 million for-sale homes. Relative to last year, total listings are still down 7.6% and months’ supply still registers at a very healthy 5.2 months. Nevertheless, the sequential inventory increase (+1.9%) was larger than typical May-June patterns, as listings are typically flat between May and June (dating back to 1990). Inventory increases have now exceeded historical patterns in four of the last five months.

(…) the NAR reported 17% of homes purchased in June were bought by investors (down 2% y/y and 1% sequentially). That said, we note that 31% of all sales in June were still “all-cash” transactions (normally less than 10%), indicating that investors and other affluent households still remain a critical component of current housing demand. With rising home prices, distressed sales continued to dwindle to just 15% of sales (reaching the lowest level on record since tracking began in October 2008). Also highlighting the unusual nature of this housing recovery, first-time buyers represented just 29% of transactions – down substantially from normalized levels in the 40-45% range and usually even higher in early stages of previous recovery cycles. (Raymond James)

Majority of Americans Say U.S. Still in Recession

A majority of people — 54% — in a new McClatchy-Marist poll think the country is in an economic downturn, according to the survey conducted last week and released Tuesday.

One bright spot: July’s figure marks the lowest proportion of Americans who have held that view since 2008. About a third of those surveyed don’t think the economy is in a slump, while 8% are unsure, according to the poll. In March, 63% thought the economy was in recession. (…)

The McClatchy-Marist poll found that Americans who earn less are more likely to think the economy is in a recession. Of those earning less than $50,000 a year, nearly two-thirds say the downturn is still underway. For those earning more than that, only 47% think so.

Looking ahead, the study asked if Americans believe they will be better off economically in the next year. The group was split. Nearly a third said they will be, 32% thought they will be worse off and 39% said they will be in the same economic position.



Signs Suggest Beijing May Look at Stimulus

China’s government appears to be warming to the idea of stimulus measures as it is confronted with a steady drizzle of bad news on the economy.

In widely reported, though unverified, remarks this week, the premier stressed his commitment to meeting the 7.5% GDP target for this year. Growth fell to 7.5% on year in the second quarter from 7.7% in the first and many economists think it will slow further, making the annual target a write-off. That would make Mr. Li the first premier to miss the target since 1998. (…)

Of particular concern to policy makers is the labor market. HSBC’s employment subindex came in below the headline number at 47.3, the lowest level since March 2009, when firms laid off workers en masse in the teeth of the global financial crisis.

Pointing up Menzie Chinn at Ecobrowser adds this:

It’s in this context that one has to understand the recent liberalization of the deposit floor. This in itself has little effect; however to the extent it signals an imminent liberalization of deposit rate ceilings, we might soon see actual moves to ending the financial repression that has limited interest income to households and hence slowed consumption. [4] A more explicit and comprehensive linkage between financial reform and domestic rebalancing away from investment to consumption is provided by Nick Lardy (shorter here).

Pointing up China bans building of government offices
Xi’s austerity campaign rises to new level

China has banned the construction of government offices for the next five years, ratcheting up an austerity campaign that has already taken a toll on the economy.

The State Council, China’s cabinet, and the Communist party late on Tuesday said the ban, which takes immediate effect, would also apply to the expansion of existing buildings. (…)

Xi Jinping’s first move as party chief late last year was to bar lavish banquets, red-carpet receptions, wasteful travel and other trappings of corruption that have stained the public’s perception of the government.

Those measures have had a clear impact on the economy, leading to slower consumption growth in the first half of the year and dealing a blow to luxury goods companies around the world.

Whether the latest ban has a similarly negative impact on the property market will depend on how it is interpreted by state-owned companies. Chinese corporate executives have felt pressure to comply with Mr Xi’s earlier austerity policies even though government officials, not companies, were his targets. (…)



Smile  German Manufacturing Unexpectedly Expands as Services Accelerate

A manufacturing index based on a survey of purchasing managers rose to 50.3 from 48.6 in June, London-based Markit Economics said today. Economists in a Bloomberg survey predicted 49.2. A similar gauge for services rose to 52.5 from 50.4, compared with the median estimate of economists of 50.7.

High five  Markit added these meaningful comments, given the importance of exports for the German economy:

In the manufacturing sector, an improvement in order books was driven by rising levels of domestic demand as new export volumes dropped for the fifth consecutive month. Anecdotal evidence from survey respondents suggested that stronger demand from the domestic construction and autos industries had helped offset subdued spending patterns among clients in China and the euro area.

Storm cloud  Dutch Economy Springs Leak, Faces Stagnation

(…) The Netherlands is in its third recession since 2009 and faces a prolonged period of economic stagnation, according to the Dutch central bank.

As a result, the government—one of the main allies in Germany’s call for austerity—is wrestling to satisfy the EU’s budget rules and faces growing pressure to loosen its fiscal policy. (…)

Unemployment rose to 6.8% in June, statistics bureau CBS said, using a definition of the International Labour Organization. (…)

CBS said on Friday that household spending fell 1.8% on an annual basis in May and has declined for two years. Car sales in particular were down, but sales of clothing, home furnishings and domestic appliances and household products were also sharply lower. (…)


The Netherlands suffers from a so-called balance-sheet recession—one characterized by high debt levels that prompt households to save rather than spend—and they are usually longer and more severe than the average cyclical downturn.

While households are cutting spending to reduce debt, banks and the government are also cutting back to fix their finances. As a result, domestic demand is plummeting. (…)

Pointing up  ECB Sees Consumer Credit Standards Easing First Time Since 2007

A measure of consumer credit standards climbed to a net easing last quarter from a net tightening in the three months ended March, the Frankfurt-based ECB said in its quarterly Bank Lending Survey today. Banks tightened credit standards less for home loans and at the same rate for companies as in the previous quarter.

Euro-Area Debt-to-GDP Ratio Still Rising, Led by Greece

The debt-to-GDP ratio increased in every euro country during the year, Eurostat data show. Euroarea debt rose to 92.2 percent of GDP in the first quarter from 88.2 percent in the same quarter last year. Greece, Ireland and Spain had the largest increases in their debt ratios during the period, of 24.1 percentage points, 18.3 points and 15.2 points, respectively. Estonia had the lowest debt ratio – 10 percent of GDP. (Bloomberg Briefs)


 Hungary Cuts Interest Rates After 12 cuts in the past year, the central bank also gave notice of more to come.

Czech Central Bank Chief Signals Preference for Easing

The Ceska Narodni Banka would keep zero interest rates “for quite a long future” even if monetary conditions were “relatively more relaxed,” Singer said yesterday in an interview at the bank’s headquarters in downtown Prague. With no room left to cut borrowing costs, weakening the koruna is the next tool policy makers may use for easing, he said.


The latest S&P report on earnings, dated July 22, tallies 22% of the S&P 500 companies. Of the 109 companies that have reported, 63% beat estimates and 27.5% missed. Some 31% of the reports were from financial companies and their beat rate was 80%. Only 58% of the 84 non-financial companies that have reported beat estimates and 32% missed.

S&P says that Q2 EPS are coming in up 3.3% YoY, same for revenues.

Q2 estimates are now $26.57, down $0.20 from their June 28 estimate. Q3 and Q4 estimates are also being shaved but only by a few pennies.

Bespoke Investment tallies all NYSE companies: Earnings Beat Rate Picks Up

Last week we posted our first reading of the earnings and revenue beat rates for the second quarter reporting period.  At that time, 69% of companies had beaten earnings estimates and 50.3% had beaten revenue estimates.  A good chunk of companies have reported since our last post, and below are updated readings of the earnings and revenue beat rates.  As shown, the earnings beat rate has actually picked up a bit and is now at 71.2%.  The revenue beat rate has also increased 3 percentage points up to 53.2%.  


By S&P’s Howard Silverblatt:

In 2002, S&P Dow Jones Indices deleted foreign issues from the S&P 500, rendering the index a pure U.S. play. However, being an American company doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels are, unfortunately, difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intra-company sales, and therefore profits, are sometimes structured to take advantage of trade, tax and regulatory policy. The resulting reported data available for shareholders is therefore significantly less substantial than what we’d need to complete a truly comprehensive analysis.

However, by using what data is available, we offer annual reports on foreign sales, which are designed to be starting points that provide a rare glimpse into global sales composition but should not be considered statements of exact values.

imageOverall, company reporting has remained poor at best. While nice pictures and messages from senior management abound, tabular tables—not required under Generally Accepted Accounting Principles (GAAP)—are far and few between in the reports. Investors need to be careful when determining what data and statistics to use. To illustrate this point, based on the current 2012 reports, foreign sales appear to account for 28.1% of total sales. However, if we use only the companies that reported foreign sales, the rate increases to 43.2%. If we eliminate some of the “stranger” values, such as companies reporting over 100% or reporting a zero rate due to where (and how) the sales were booked, the rate calculates to 46.6%, an increase from the 46.1% rate for 2011. This adjusted rate is the rate we use for guidance and as a “holding spot” for the actual value.

Now let’s dig deeper. In 2012, European sales represented 9.2% of all S&P 500 sales, down from 11.1% in 2011 and 13.5% in 2010. The U.K. represented 1.7%, down from 2.4% in 2011, which had risen from 1.4% in 2010. The result is that European ex-U.K. sales represented 7.5% of all S&P 500 sales in 2012, down from 8.7% in 2011 and 12.0% in 2010. Asian sales increased to 7.7% from 7.2% in 2011 and 6.1% in 2010. Canadian sales continued to be volatile, even as Canada boasted a larger portion of sales than any other single country. Accounting for 4.0% of S&P 500 sales, Canadian sales are down from 4.3% in 2011, but up from 1.9% in 2010.

Information technology continued to be the most successful (and exposed) sector in terms of foreign sales. In 2012, 58.6% of its declared sales were foreign. The percentage of financial sector sales that were foreign again declined, coming in at 30.0%, down from to 34.7% in 2011 and 37.1% in 2010. Few telecommunication services and utilities companies report foreign data, and it is generally accepted that their sales are predominantly domestic (with some exceptions).

It would be helpful if there were current legislative or policy proposals to require reporting, but there aren’t. Compounding the issue, companies often prefer not to report the actual values. From an investor perspective, it would be beneficial to be able to create a matrix based on production and sales that accounts for parts made in China, assembled in Europe and sold in the U.K., with profits translated into U.S. dollar. Investors could then fill in the currency rates and see the income impact. Our editorial: unfortunately, don’t count on it. For now, we’re using 46.6% as a holding position for foreign sales as a percentage of total S&P 500 sales, and assuming that over half of pre-tax operating earnings hail from abroad.
We will release a full foreign sales report in August, which interested parties can find on our website:



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