NEW$ & VIEW$ (26 SEPTEMBER 2013)

Durable-Goods Orders Tick Up

Orders for long-lasting manufactured goods inched ahead in August, suggesting businesses and consumers are holding back on big purchases amid slow economic growth and an uncertain outlook.

Total orders for durable goods rose 0.1% to a seasonally adjusted $224.92 billion in August, the Commerce Department said Wednesday.  Durable-goods orders dropped 8.1% in July, lower than the 7.4% decline initially reported. Economists had forecast a 0.6% drop from the prior month. (…)

A key gauge of business investment—nondefense capital-goods orders, excluding aircraft—increased 1.5% from the prior month, retracing some of the prior month’s 3.3% drop. So far this calendar year, business investment is up 4% compared with the same period in 2012. (…)

Markit has a different, less buoyant view:

Orders for US-made durable goods rose 13.7% on a year ago in August, the largest annual increase since December 2011. However, orders were up just 0.1% compared with July; a month in which orders slumped 8.1%. The quarterly rate of growth has consequently weakened, registering an increase of just 3.0% in the three months to August, down from 5.6% in the three months to July and 6.6% in the second quarter.

Excluding volatile transportation goods, the picture is somewhat bleaker. Orders fell for a second month running in August, down 0.1% after a 0.5% fall in July. Over the latest three months, orders for durables other than transport goods were up just 1.2%. By comparison, these orders were rising at a quarterly rate of 3.2% at the start of the year.

Growth is likely to have weakened again in September. Markit’s manufacturing PMI survey showed growth of new orders slowing sharply to a five-month low in September. The lack of demand also hit job creation, which slumped to one of the lowest seen since the height of the financial crisis four years ago.

Both the official data and the survey evidence therefore point to a renewed slowing of growth in the manufacturing economy after a brief pick-up earlier in the summer. Fed policymakers will be further worried that the pace of recovery for the US economy has taken a step back since earlier in the year, when robust growth made a strong case for policy to start being tapered.



Deja Vu for Wal-Mart

Shares of Wal-Mart (WMT) as well as the broader market just took a new leg lower this afternoon after a Bloomberg story hit the wires suggesting that based on emails the company obtained, WMT is cutting orders to suppliers due to higher inventories.  

If this story sounds familiar, that is because it is.  Back on February 15th, the S&P 500 saw a 50 bps decline intraday after another Bloomberg story hit the wires quoting an executive saying that same store sales were off to their worst start in seven years.  Here’s a link to that story.  As shown in the chart below, following the prior Bloomberg story, the S&P 500 regained nearly all of its declines by the end of the day.

So how did Wal-Mart (WMT) perform following the February article?  As shown below, you couldn’t have picked a better buying point.


The S&P 500 digested the negative WMT news a bit differently back in February.  While the market bounced back intraday in the immediate aftermath, we did see a decline over the next week before ultimately surging higher in late February and early March.

Ergo: we should all rush out and buy WMT or the whole market for that matter.

But maybe WMT was right after all. Sales have been very slow since last Christmas.


It could well be that the slow consumer demand has made merchants worried that their inventories might be too high coming into the holiday season. If I have to bet on street economists or on Wal-Mart for a sense of what’s really happening, I’ll take WMT anytime.

Keep that chart in sight:



Careful out there!


U.S. Running Out of Cash More Quickly

The government is closer to running out of money to pay its bills than previously thought, the Treasury Department warned, clarifying the fiscal deadlines confronting Congress.

ClosedTreasury Secretary Jacob Lew said the government would be left with just $30 billion cash on hand “no later” than Oct. 17, and the Congressional Budget Office predicted these funds would be used up between Oct. 22 and Oct. 31 if legislation isn’t enacted to raise the ceiling on government borrowing.

That little cash could make it difficult, if not impossible, for the government to pay the roughly $55 billion in Social Security, Medicare and military payments due Nov. 1. (…)

The Bipartisan Policy Center, a group founded by lawmakers from both parties to forge consensus, has estimated that the government would be unable to pay 32% of its bills in the first month if the debt ceiling isn’t raised in time.

Congress has raised or suspended the debt ceiling five times during President Barack Obama’s tenure. Among those instances, the White House and Republicans brokered an agreement after a bitter debate in August 2011 that put spending restraints in place through 2021. And early this year, Congress agreed to suspend the debt ceiling for several months in exchange for an agreement that both the House and Senate would pass budget resolutions.

The suspended debt ceiling expired in May, and the Treasury has been using emergency steps since then to buy itself more time. Treasury had estimated that by mid-October it would have $50 billion remaining to pay government bills, but it lowered that estimate on Wednesday.

Investors Brush Aside Washington Brinkmanship Washington is in for another ugly battle on the budget and debt ceiling, but markets haven’t exhibited much anxiety at the moment.

(…) Pimco’s Mr. Crescenzi said fiscal impasse was one of the reasons why the Federal Reserve decided not to cut back bond buying last week. The Fed’s decision has sooth fears over rising interest rates, sending benchmark 10-year Treasury yield lower and encouraging buying in stocks.

The 10-year Treasury note yielded 2.643% recently, near a six-week low. The yield earlier this month briefly rose above 3%. (…)

From Credit Suisse:

Credit Suisse strategists have also estimated exactly when markets will run out of patience with the situation. “Markets…are not likely to get much beyond October 10 without pricing for some potential mishap,” they wrote. As of now, the path to a political solution remains unclear, and if politicians follow the same script they did in 2011, they will only act at the very last minute – prolonging the collective panic attack as long as possible. President Barack Obama is taking a hands-off approach to the problem this time around, saying that it is up to Congress to come up with a plan. That’s a very different tack than the public courtship that took place in 2011, when even a well-publicized 18 holes of golf with House Speaker John Boehner, R-Ohio, followed by a meeting at the White House, ultimately failed to lead to a deal.

There’s a needle of good news in that haystack of Washington dysfunction: Credit Suisse’s strategists noted that House Republicans appear willing to have separate debates over the budget and the debt ceiling this time around. That’s important, because it decreases the possibility that the GOP will insist on further budget cuts before agreeing to increase the debt limit. As the strategists noted, the government has already made significant cuts in discretionary spending over the last three years, leaving only entitlement programs such as Medicaid, Medicare and Social Security with any room to yield spending cuts of any significant size. The problem is that changes – especially cuts – to these popular programs are a political minefield for politicians of either party. Still, the strategists think that some small changes may be possible, such as changing the formula by which benefit levels increase each year.

For now, the country — nay, the world — can only hope that a potential compromise is in the offing. But that hope assumes that a conversation is even happening in the first place. With only a month to go before the U.S. runs out of spare cash once again, the Wall Street Journal reported Tuesday that no known talks are going on in Congress around the debt ceiling issue. Get the antacid ready, investors. This fall, it may well come in handy.

Government Closure Would Hurt More Now Than in 1995

As we careen toward a possible shutdown of most of the U.S. federal government, it’s worth looking back at the last time this happened during the combined four-week span from November 14 to November 19, 1995 and from December 16, 1995 to January 6, 1996. Real federal government spending shrank 12% annualized in the fourth quarter of 1995, carving 0.9 percentage points from GDP growth.

But growth slowed only moderately and remained healthy at 2.9% in that quarter because of broad strength in the domestic and external economy. Yet, private-sector payrolls still weakened. Stocks wobbled initially before turning higher, while Treasuries firmed. With the economy on softer ground this time amid sequestration and much higher rates of unemployment and foreclosure, the consequences could be more severe—especially for workers. Congress might want to consider this since most of their jobs are up for renewal next November. (BMO)



Prices of New Homes Start to Level Out

Prices of new homes, which have risen at double-digit rates in the past year, are starting to level out, the latest evidence that builders are backing away from aggressive increases.

(…) Contracts for sales of new homes remained relatively brisk in August, rising 7.9% when compared to the previous month, to a seasonally adjusted annual rate of 421,000 units, according to data released Wednesday by the U.S. Census Bureau. But the average sale price registered $318,900 in August, roughly on par with the July figure of $318,500 and up 4.4% from August 2012, according to Census release.

Industry executives said the sales data, which are highly volatile from month to month, are masking a slowdown that began over a month ago and is starting to show up in builders’ financial reports.

National builder Hovnanian Enterprises Inc. said this month that it dialed back prices in August after being too “aggressive” with increases in some markets this year. Lennar Corp. said Tuesday that it is using incentives such as down-payment assistance to bolster slow sales in some markets. Texas builder Castle Rock Communities recently started offering more incentives to spur sales after its 12% increase in prices this year deterred some buyers.

Much of the sales falloff has occurred in the Western U.S., where average new-home prices increased 15.7% in the second quarter from a year earlier to $363,300, Census data show. Meanwhile, August sales in that region declined 21% from a year earlier. (…) “And we have seen that trend continue into September, as well,” he said.

Household Wealth Hits Peak

Rebounding home prices and a rising stock market helped boost household wealth by more than $1.3 trillion in the second quarter of this year, Federal Reserve data showed Wednesday. The gain marked the seventh consecutive quarterly increase and pushed household net worth—the value of homes, stocks and other assets minus debts and other liabilities—to $74.8 trillion, an all-time high. Adjusting for inflation, net worth is about 4% below its peak, meaning households have made back about 80% of what they lost during the bust.

Households’ net worth rose about 6% in the first two quarters of 2013, and have likely increased further in the past few months. Stock prices and real-estate values have continued to advance with the Standard & Poor’s 500-stock index up 5% since the end of the second quarter.

(…)  The Fed’s figures showed that the value of corporate equities and mutual funds owned by households rose nearly $300 billion, while the value of real estate owned by households climbed about $525 billion. Americans also have more equity in their homes. A measure of owners’ equity in household real estate as a percentage of household real estate holdings hit 49.8% from 48.1% a quarter earlier.

Household Net Worth: The ’’Real’’ Story




French Budget Relies on Tax Rises

The government unveiled a 2014 budget that still relies on tax increases, threatening to further dent household spending power and President François Hollande’s record low popularity.

(…) net new taxes are still set to increase by €3 billion, with households shouldering the greatest burden, including an increase in the sales tax. (…)

French companies and households have been hit hard by a steady increase in taxation since Mr. Hollande was elected 16 months ago. He introduced more than €7 billion ($9.3 billion) of fresh taxes after coming to power and another €20 billion in the 2013 budget, in a bid to restore France’s public finances and rein in its budget deficit.


The government went to great lengths Wednesday to stress it is undertaking more spending cuts than tax increases and detailed €15 billion in savings. But the effort to constrain spending is focused more on fighting an automatic increase in expenditure that would otherwise have happened, rather than a net decrease in outlays. For example, at the level of the central state, the €9 billion of savings cut the nominal level of spending by €1.5 billion next year compared with this year.

Overall spending will still rise 0.4% in 2014, even if that is below the 2% annual increase between 2002 and 2012, Budget Minister Bernard Cazeneuve said at a parliamentary hearing. Such efforts to control spending will have more potency if economic growth picks up.


Leave a Reply

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