NEW$ & VIEW$ (2 AUGUST 2013)

Auto  U.S. Vehicle Sales Remain Firm

Unit sales of light motor vehicles slipped 1.8% during July versus June to 15.67 million (SAAR) according to the Autodata Corporation. Despite the dip, sales remained up 11.2% from July of last year and were nearly their strongest since December 2007.

Auto sales dipped 1.0% m/m (+10.4% y/y) to 7.88 million last month.  Light truck sales declined 2.7% (+12.1% y/y) in July to 7.79 million.

Imports’ share of the U.S. car market recovered m/m to 29.0% but remained down from its 37.8% monthly peak in 2010.


Pointing up  Japan carmakers accelerate as yen falls

(…) The fall in the yen, which has been driven in large part by a monetary expansion by the Bank of Japan aimed at ending prolonged consumer-price deflation, has allowed carmakers to book more profit while, in some cases at least, reaching for greater market share by cutting the prices they charge foreign customers.

Nissan’s US sales expanded 20 per cent last quarter after it cut prices on seven models including its top-selling Altima saloon.

The beneficial effects of the yen have been magnified by cost cuts implemented by Japanese carmakers during the currency’s relentless climb between 2007 and last year.

Taken together, the competitive shift has put carmakers in other countries on the defensive. Last month Ford’s top executive in Washington attacked the Japanese economic policies that have weakened the yen and said Japan was unfit to join the Trans-Pacific Partnership, a proposed regional trade pact that it began talks to enter last month. (…)

Karl Brauer, senior analyst at Kelley Blue Book, the car information service, said Toyota could struggle to protect its share of the market as Americans rediscover their preference for larger vehicles – Detroit’s traditional strength.

“It’s confirmation Toyota has revitalised its production efficiency. That’s impressive, but it can’t stop a US market shift toward large trucks and SUVs,” he said. (…)

U.S. Construction Spending Backpedals

The value of construction put-in-place declined 0.6% (+3.3% y/y) during June after a revised 1.3% May jump, initially reported as 0.5%. April’s increase also was revised up to 1.1% from 0.1%. Declines in building activity were logged across sectors. The value of public sector building experienced the largest decline and was off 1.1% (-9.3% y/y).

Private sector building activity also showed weakness, posting a 0.4% decline (+9.7% y/y) in June. That reflected a roughly unchanged (18.1% y/y) level of residential building. It  owed to a 3.3% collapse (+40.6% y/y) in multi-family construction and a 0.8% drop (+28.2% y/y) in single-family building. Spending on improvements rose 1.7% (4.4% y/y). Nonresidential building activity declined 0.9% (+1.4% y/y), pulled lower by a 6.6% slump (-0.8% y/y) in education and a 5.6% drop (0.0% y/y) in commercial building.

 large image

ISM Manufacturing Spikes to Highest Level Since June 2011

Following on the heels of stronger than expected Manufacturing PMIs across the world, the ISM Manufacturing jumped from 50.9 to 55.4 in July for its largest one month increase since June 1996.  That’s right.  The ISM Manufacturing report has not had a one month increase like this in 17 years!

Looking at the internals of this morning’s report shows that six components rose this month, while just three declined.  Relative to last year, this month’s report was even stronger as the only two components that declined were Business and Customer Inventories.  Besides the big jump in the headline reading, the most notable aspect of the ISM Manufacturing report for July was the Production component, which increased from 53.4 to 65.0.  That is the highest level since May 2004 and represents the 7th largest monthly increase going all the way back to 1948.

Global manufacturing growth remains lacklustre in July

The global manufacturing sector made a subdued start to the third quarter. At 50.8 in July, the JPMorgan Global Manufacturing PMI™  remained only slightly above the no-change mark of 50.0.


Rates of expansion in production and new orders were broadly unchanged from the modest levels signalled during the second quarter of the year. July nonetheless saw output and new orders rise for the ninth and seventh successive months respectively.

National PMI suggested that the Asia region was the main drag on global manufacturing growth during July. Production volumes declined in China, India, Taiwan, South Korea and Vietnam, stagnated in Indonesia, while growth slowed to a five-month low in Japan. Elsewhere, Spain, Brazil, Russia, Mexico, Australia and Greece also reported contractions.

In contrast, output growth hit a four-month high in the US, near two-and-a-half year high in the UK and returned to expansion for the first time since February 2012 in the eurozone. Eastern Europe also faired better, with production rising in both Poland and the Czech Republic. The upturn in Canada extended into its third successive month.

The level of new export orders – an indicator of international trade flows – rose for the fourth time in the past five months, although only slightly. Growth of new export business was registered in the US, the eurozone, Japan, Canada, India, Poland, Czech Republic, Singapore and Russia.

Pointing up  Here’s a good, realistic, economic snapshot from Moody’s, unlike most brokerage reports:

The Limpest Recovery Since WWII Weighs on Revenues and Profits

Though 2012’s real GDP growth was revised up from 2.2% to 2.8%, the 2.2% average annualized rise by real GDP for the current recovery to date was slower than the 2.8% of 2002-2007’s upturn, which was the erstwhile “worst recovery since the Second World War.”

The Fed is more likely to begin tapering if fourth quarter 2013’s real GDP grows by at least 2.3% to 2.6% year-over-year. However, as inferred from Q2-2013’s 1.4% yearly rise by real GDP, real GDP is unlikely to achieve the Fed’s threshold by the final quarter.

After edging higher by merely 1.4% annualized during 2013’s first half, the consensus expects that real GDP will grow by between 2.5% and 3% annualized through the middle of 2014. This forecast assumes an end to the sequester and a rise by the annualized growth of real consumer spending from first half 2014’s 2.0% to 2.6%.

However, the current political dynamic favors a continuation of sequestration. Moreover, consumer spending may have difficulty reaching its projected growth if home sales subside and incomes do not accelerate.

Jobs growth may slow according to the sluggishness of revenues, profits, and labor productivity. Ordinarily the recent 1.6% yearly increase by payrolls would be joined by 3% growth for real GDP, which is well above the actual 1.4% growth rate. The latest deficiency of GDP growth relative to what otherwise is suggested by payrolls reflects a notable deceleration of labor productivity. The slowdown by productivity suggests a drop in the quality of new jobs. And lower quality jobs tend to be associated with below-trend income growth.

And, let me add, lower productivity likely means lower profit margins (see below on that). And if margins don’t rise, it might be difficult to report strong profit gains, especially if revenues grow only 2.0% YoY like we are seeing in Q2.


S&P’s tally of Q2 earnings is now 72% complete. The beat rate is 66%, unchanged from last week, and the miss rate is 24.8%, also in line with last week’s. The overall beat is slim, however, being only 0.4% above estimates. It looks like operating margins will shrink a little.

Note however that the bulk of the remaining companies to report are in Energy, Consumer, Telecom and Utilities where the miss rates have been well above average.

Q2 earnings are now seen at $26.41, down $0.27 or 1.0% from last week’s estimate. Analysts have shaved their forward estimates just a little: Q3 is now estimates at $27.33 (vs $27.42 last week), up 13.9% YoY, and Q4 is $29.18 (vs $29.25), up a truly spectacular 26% YoY. If you are using forward earnings, 2013 EPS are estimated at $108.70 and 2014 at $122.42. Beware, however, since Q1 EPS were up 6.3% and Q2 are on track to rise 3.9%. Also. consider that other than during 2010 when profits bounced from the appalling low base of 2008-09, growth rates in the high 20’s are truly exceptional, the last sighting being in early 2004. For reference, I include Ed Yardini’s chart below:

Here’s another proxy for sales: total business sales (YoY):


Same series but monthly rates of growth. see any growth pattern there?

FRED Graph

I keep using trailing EPS and these are now seen at $99.33 after Q2, barely breaking the $97-98 range of the last 6 quarters. Meanwhile, the S&P 500 Index soared 21% while inflation remained stable at 1.7-1.8%.

As a result, the Rule of 20 fair value remains stuck at around 1800 where it has been since April 2012 (yellow line on chart), leaving only 6% upside to fair value (blue line meeting yellow, or black line hitting the red “20” line). Equities were 29% undervalued in early June 2012 (1278 on the S&P 500 Index). The whole rally has been from the result of higher valuations, courtesy of central bankers and gradually more upbeat media coverage.


Since trailing earnings will remain unchanged for another 3 months, market sentiment will be the only support for equities which currently trade 5% and 10% above their 100-day and 200-day moving average respectively.

This is the 3rd time since March 2009 that the S&P 500 Index has been at or close to fair value (black line on chart). Equities dropped 16% in early 2010 and 18% in mid-2011, even though earnings were still rising nicely (rising yellow line), providing a value backstop that is not apparent at this critical juncture.



Fingers crossed Europe Sees Bottom of Downturn as Daimler Leads Rebound From German luxury carmaker Daimler AG and French builder Vinci SA to International Business Machines Corp. and 3M Co., global companies say the worst is over for Europe.


Money Europe Banks Pare Cash Stockpiles

Some European banks are planning to deploy a counterintuitive tactic to improve the appearance of their financial health: whittling down their huge cash stockpiles.

The maneuver will boost the banks’ so-called leverage ratios, which a growing number of regulators and investors are using as a key gauge of banks’ financial safety.

But by reducing their cash hoards by billions of dollars, the banks would be moving away from the ultimate low-risk asset. Some analysts said the move is a gamble that is unlikely to please regulators or risk-averse investors.


With a financial crisis raging and regulators pushing banks to be ultraconservative, many European banks in recent years amassed ever-greater sums of cash on deposit at central banks. The total cash holdings of a dozen of Europe’s largest banks soared to about $1.3 trillion at the end of last year, up 55% from 18 months earlier, according to a Wall Street Journal tally.

That trend started ebbing earlier this year. But in the past week, at least three big European banks—Barclays PLC, Deutsche Bank AG and Société Générale SA signaled that they plan to accelerate their shifts away from cash.

The moves coincide with U.S. and European regulators’ recent embrace of the leverage ratio as an important measure of banks’ safety. The leverage ratio consists of banks’ equity as a percentage of their total assets. Shedding assets therefore represents an easy way for banks to strengthen their ratios. (…)

To the frustration of many bank executives, the leverage ratio doesn’t take into account different levels of risk among assets. So for two banks with similar amounts of equity, their leverage ratios would be the same even if one bank was brimming with toxic assets and the other was holding nothing but cash. (…)

Some analysts, though, suspect banks are threatening to drain their liquidity pools in an attempt to cajole regulators to back away from the leverage ratio. (…)

Indeed, some banks are pushing regulators to let them exclude assets in their liquidity pools from the denominator of their leverage ratios, industry officials say. Such a change would boost most banks’ leverage ratios and make it easier for them to avoid issuing new equity or dramatically cutting costs.


Leave a Reply

Your email address will not be published. Required fields are marked *