NEW$ & VIEW$ (30 SEPTEMBER 2013)

Back from Europe, up quite early with much in the news. I strongly encourage you to read this post through the end. There is much to consider, especially on the earnings side, while most economies are showing poor momentum, if any.

Government Heads Toward Shutdown

The nation braced for a partial shutdown of the federal government, as time for Congress to pass a budget before a Monday midnight deadline grew perilously short and lawmakers gave no signs Sunday they were moving toward a resolution.

(…) The stalemate was a monument to problems that have increasingly gripped U.S. politics, especially over the last three years of divided government. The growing polarization of the parties, a diminished willingness to compromise on spending and an epidemic of brinkmanship have made it more difficult for Congress to address even the most routine budgeting questions.

Mr. Obama and other Democrats have said that agreeing to GOP demands now would invite Republicans to press for more in the future, with each fiscal deadline. Next up is a battle over terms for raising the nation’s borrowing limit, which the Treasury says must be approved by mid-October. Most economists predict that the financial consequences of failing to raise the debt limit would be greater than a government shutdown. (…)

Uncertainty Poses Threat to Recovery

(…) “American businesses have this mentality where no one wants to make a decision because you have no idea what’s lurking around the corner,” said Jeremy Flack, president of Flack Steel, a Cleveland steel distributor. “Government needs to make us feel more solid about the state of affairs, and they’re doing the exact opposite.”

Flack Steel’s business took a hit from all three crises in 2011 and 2012. “You can watch our earnings evaporate three months after each event,” Mr. Flack said. “Our customers start pulling back their business” in the weeks around every fiscal deadline in Washington. (…)

Sinking Feeling

Fiscal warfare can harm the economy directly and indirectly. Cutting government services—either temporarily in a shutdown, or permanently through spending reductions—can disrupt a broad range of commerce and hit American workers and businesses tied to the public sector. Indirectly, the annoyance from disruptions alongside the threat of damage to markets and the economy can dent confidence and weigh on corporate planning. (…)

In August, one benchmark of economic confidence registered its first decline in six months. The Equipment Leasing and Finance Association’s index of new business was down 11% from July—and 7% from August 2012.

The drop in the index, which measures leasing and financing activity for commercial equipment used in technology, health care, energy and other sectors, is due to waning confidence, said Adam Warner, president of Key Equipment Finance, the Colorado-based arm of financial-services firm KeyCorp.

Instead of stepping up their leasing, businesses are postponing commitments. “They are thinking,‘Let’s push this off and see what’s going to happen,. Is the economy going into a tailspin because of a possible government shutdown?'” Mr. Warner said.

Such retrenchment ripples through the broader economy and can be a bellwether for the labor market. “When a business is acquiring equipment, chances are you are going to be hiring someone to operate that equipment,” Mr. Warner said. “When we see a fall in that activity, typically there is going to be less employment.”

Italy Makes Final Bid To Save Government Prime Minister Letta launched a last-ditch effort to rescue his government from collapse after Silvio Berlusconi pulled support for the government, plunging Italy into a fresh political crisis.

image(…) Italy’s political chaos, which inflamed the euro-zone crisis two years ago, could be the biggest test so far of Europe’s defenses against a revival of the financial panic that has afflicted the region in recent years. This time, faith in the European Central Bank’s promise to safeguard stability is so strong that many political leaders and economists believe a full-blown run on Italy’s bond market is unlikely.

If Mr. Letta loses Wednesday’s vote, Mr. Napolitano, who has opposed calling new elections, has signaled he would try to piece together Italy’s fourth government in two years, either headed by Mr. Letta or another figure. But that attempt is likely to take weeks. (…)

The government crisis now threatens to thwart the recovery of the Italian economy, which is badly in need of reforms to help pull it out of a two-year recession and create jobs. While Mr. Letta passed some modest measures, his five-month government has been largely paralyzed by infighting. (…)

Meanwhile, the absence of a government could actually lower Italy’s budget deficit and bring it closer to the European Union-mandated limit of 3% of gross domestic product. That would happen because of existing measures that were to be scrapped, including an unpopular property tax on primary residences, a scheduled increase in the value-added tax rate and a tax amnesty for the gaming industry would remain on the books, bringing in more than €3 billion in revenue.

Even if Italy survives this latest political upheaval without reigniting bond-market turmoil, its current travails betray deeper problems that threaten Italy’s longer-term solvency and ability to prosper inside the euro zone. Italy’s political class has struggled to deal with the underlying causes of the country’s malaise, including a loss of international competitiveness and the stagnant productivity of its business sector that began well before the European financial crisis of recent years.

The economy’s meager growth rates have pushed up the national debt to over 130% of gross domestic product. The level of debt could become critical if investors conclude that Italy’s long-term growth prospects are so poor that the debt will rise endlessly. Unlike other crisis-hit countries such as Spain and Greece, Italy has yet to implement major economic overhauls or to push down labor and other business costs to levels that would make its industries more competitive abroad.

Companies Holding Lots More Cash

U.S. nonfinancial companies has $1.8 trillion in cash on their books at the end of the second quarter, according to the Federal Reserve’s quarterly “flow of funds” report (now known formally as the “Financial Accounts of the United States”). (…)

The sharp rise in holdings of hard cash doesn’t appear to reflect a broader caution among executives. The $1.8 trillion in liquid assets — the line item most people are referring to when they talk about “corporate cash” — accounted for 5.4% of all assets held by nonfinancial corporations in the second quarter, down from 6% in 2009 and pretty much flat for the past two years. (…)

U.S. Personal Income Gain Leads Personal Consumption Higher


Personal income in August matched expectations and increased 0.4% (3.7% y/y) following a 0.2% July rise, revised from 0.1%. An improved 0.4% increase (3.5% y/y) in wage & salaries followed a 0.3% July decline. (…) Disposable personal income increased 0.5% (2.8% y/y) and inflation adjusted take-home pay rose 0.3% (1.6% y/y).

Personal consumption expenditures improved 0.3% (3.2% y/y) last month after a 0.2% rise in July, revised from 0.1%. The gain also matched expectations. Spending on durable goods jumped 0.5% (5.9% y/y) as motor vehicle purchases gained 1.1% (7.7% y/y). Home furnishings purchases rose 0.2% (4.4% y/y) with the strength in home buying; but spending on apparel fell 0.5% (+2.2% y/y). (…)  Adjusted for price changes, personal consumption rose 0.2% (2.0% y/y).

The personal savings rate moved up to 4.6% but remained down slightly from 4.9% twelve months earlier.

The PCE chain price index inched 0.1% higher (1.2% y/y) in August and matched the July rise. Durable goods prices again fell 0.3% (-1.9% y/y) while prices for nondurables rose 0.2% (0.4% y/y). Services prices increased 0.2% (1.9% y/y). Less food & energy, the chain price index rose 0.2% (1.2% y/y).


Nominal spending matched income growth since June at 1.1% or 4.4% annualized. In rwal terms, personal expenditures are up 0.5% during the last 3 months or 2.0% annualized.

Fingers crossed  Gasoline Prices Stall Out

Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September as supplies reached their highest level in three years and the peak summer driving season ended. (…)

“We have plenty of supplies and low levels of demand. The fundamental picture isn’t pretty,” said Addison Armstrong, senior director of market research at Tradition Energy, an energy-investment adviser in Stamford, Conn. (…)

In the U.S. retail market, the price of regular gasoline averaged $3.42 a gallon on Friday, a decline of 13 cents from a month earlier and down 38 cents from a year before, according to AAA. (…)

 Tighter Mortgage Standards Stalling Recovery

(…) The paper was written by Jim Parrott, a former housing advisor in the Obama White House who is now a senior fellow at the Urban Institute, a left-leaning think tank, and Mark Zandi, chief economist of Moody’s Analytics.

The clearest sign of tighter credit standards are seen in average credit scores, which in June stood nearly 50 points above their pre-housing bubble levels. Credit scores are not only higher, but they also understate the quality of recent borrowers, who have earned these scores during a much tougher environment. In the early 2000s, borrowers had an easier time building their credit because unemployment was low and home prices were rising. In other words, a 750 credit score coming out of the financial crisis counts for more it did ten years ago.

Easing lending standards to return credit scores to pre-bubble levels would boost home sales by around 450,000 units and new single-family home construction by around 275,000 units, according to estimates from Zandi. (…)

Parrott and Zandi concede there’s little evidence that credit is tighter based on either average loan-to-value ratios and debt-to-income ratios. But they say there are other problems, particularly around banks’ verification of borrowers incomes, scrutiny of appraisals, and other factors that have led to a tighter credit box. (…)

The problem is that Fannie, Freddie and the [Federal Housing Administration] have stepped up their put-backs in ways that lenders cannot address adequately through better underwriting or pricing. This includes disagreements over judgment calls made by lenders or their agents; changes in circumstances occurring after the underwriting process has been completed; small mistakes that bear little relation to either the credit risk or the subsequent default; and inconsistent interpretations of the rules.

The upshot is that because lenders can’t predict how they could be penalized, they’ve chosen to lend less. This last point is the most important, the authors said, because it’s the one where policymakers can exercise the most control.

But the problem is difficult to solve because it’s not as easy as changing specific lending criteria. As it is, banks are putting in place standards that go beyond those required by Fannie, Freddie or the FHA. What’s needed instead, the authors argue, is better clarity around when banks could be forced to take back loans. Regulators overseeing those housing entities, they write, “must embrace the challenge with a good deal more urgency” than they have so far.

Mexico struggles to stem faltering growth Tepid US recovery and catastrophic floods weigh on GDP

(…) Though there have been some newly encouraging signs – such as a boost in retail sales in July for the third month running and promising economic activity data that could help rev up growth – the Ingrid and Manuel storms that battered both coastlines simultaneously will only deepen Mexico’s sudden slowdown in gross domestic product growth.

The storms, which killed at least 147 people and caused an estimated $6bn in damage, are likely to trim another 0.1 per cent off 2013 growth, bringing this year’s official forecast to 1.7 per cent, Luis Videgaray, finance secretary, has concluded. That is less than half the 3.5 per cent predicted last December when Mr Peña Nieto took office and Mexico was the region’s success story.

With government aid already expected to exhaust a 12.5bn peso ($950m) emergency fund, some economists consider even the lower growth target too generous.


Fed May Not Start Taper Until January

(…) “We’re not on a pre-set course,”Charles Evans, president of theFederal Reserve Bank of Chicago told reporters on the sidelines of a monetary policy conference in Oslo. He said the Fed’s decision to start reducing its $85 billion in monthly bond purchases “could be in October, it could be in December, but it also could be at the January meeting.”

Mr. Evans was among ten central bank officials who have expressed a wide range of views on the program since their most recent policy meeting September 17-18. (…)


German August Retail Sales Rose While Missing Estimates

Sales adjusted for inflation and seasonal swings increased 0.5 percent from July, when they fell a revised 0.2 percent, the Federal Statistics Office in Wiesbaden said today. Sales advanced 0.3 percent from a year earlier.

Renewed decline in eurozone retail sales in September

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August. The average PMI reading for Q3 (49.5) was nevertheless the best since Q2 2011.

The overall drop in retail sales mainly reflected a fresh contraction in France following two months of growth, and an ongoing decline in Italy. Encouragingly, the fall in Italian retail sales was the slowest in two years. German retail sales rose at the weakest rate in four months.



Euro-Area September Inflation Slows More Than Forecast on Energy

Consumer prices rose an annual 1.1 percent after a 1.3 percent increase in August, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 34 economists was for 1.2 percent growth. The core inflation rate, which excludes volatile food and energy costs, was 1 percent.

Siemens Targets 15,000 Job Cuts

Siemens AG, the German industrial giant, said Sunday that it will have cut a total of about 15,000 jobs world-wide by the end of the next business year, defining for the first time the scope of the reductions it plans under a two-year restructuring program aimed at boosting profits.

Jobs eliminated during the business year that ends Monday account for about half the total. Another roughly 7,500 jobs will be cut in the new business year, which begins on Oct. 1, a company spokesman said. (…)

Spain Outlines Austere 2014 Budget

Government ministries will get on average 4.7% less funds to spend next year, the budget minister says with eyes on an economic recovery.

The Spanish government outlined an austere 2014 budget that includes further cuts in spending by its ministries and a salary freeze for public employees despite the country’s emergence from recession.

The budget highlights the huge imbalances created by five years of economic crisis: Spain will set aside €36.6 billion ($49.5 billion) to service its fast-rising pile of public debt, €2 billion more than it will spend on the 13 government ministries.

And it is pledging about €31 billion for welfare and entitlements, up almost 20% from last year. That includes unemployment benefits for the more than a quarter of the working population that is registered as out of work. (…)

Spain will keep public sector wages frozen for a fourth straight year, while pensions will grow by a meager 0.25% next year.

On Friday the government raised its estimate for gross domestic product growth next year to 0.7% from an April estimate of 0.5%. It said private consumption, which has been depressed since Spain’s massive housing bubble burst in late 2007, will grow marginally next year and exports will keep growing at a robust pace.

Finance Minister Luis de Guindos said he expects the economy to start adding jobs in the second half of next year. (…)

Medvedev Warns on Economy

Prime Minister Dmitry Medvedev renewed calls for Russia to end state dominance of the economy and take steps to boost smaller firms to avoid an economic “abyss.”

(…) In a commentary for the country’s leading business daily Vedomosti and a keynote address to an investment forum Friday, Mr. Medvedev presented the gloomiest picture of Russia’s challenges by a top official since its economy started slowing a year and a half ago.

“We are at a crossroads,” he said in the newspaper article. “Russia may continue to move slowly with a close to zero economic growth, or make a leap forward. The latter is risky, but the former is…even more dangerous; it’s a path to the abyss.”

The government last month cut its growth forecast for this year to 1.8%, far below that over-5% expansion called for by President Vladimir Putin. Russia’s economy grew at 7.2% per year from 2000 to the peak of the global financial crisis in 2009, fueled by huge oil and gas revenues.

Mr. Medvedev said the economy could no longer rely on state investments and spending for growth. (…)

In the article and the speech, Mr. Medvedev called for more security for investors by strengthening the rule of law, without mentioning the word “corruption,” which many investors call one the main Russia’s problems.

Mr. Medvedev noted that the state budget and state-controlled companies were the main drivers of the growth in recent years, calling for steps to help small- and medium-size companies grow.

“Amid slowing economic growth we must ensure that the state is not taking up unreasonably large role in the economy,” he said.

Jump in output hints at S Korean recovery
Industrial production at nine-month high


New figures from Korea’s National Statistical Office showed output jump 1.8 per cent in August, pulling up the year-over-year gain to 3.3 per cent from 0.9 per cent in July.

HSBC called the figures “particularly impressive” in light of recent strikes in the auto industry and argued the data is indicative of resiliency that could fuel a broader rebound:

Korea is well poised for meaningful recovery towards year-end. But while economic activity is still below potential, the Bank of Korea will likely maintain an accommodative stance. We expect rates to stay on hold at 2.50% on 10 October.


[image]Now that the dreaded September is past, keep your fingers crossed for another month. Over and above all the political farces, Q3 earnings season officially begins shortly.

High Time for Profits to Catch Up to Stock Prices

(…) earnings growth has been in the mid-to-low single digits since the middle of 2012. The third quarter is seen registering 3.5% growth, according to S&P. Earnings grew by 3.8% in the second quarter. (…)

Here’s the latest Factset:

  • The estimated earnings growth rate for Q3 2013 is 3.2%. The Financials sector is
    predicted to report the highest earnings growth for the quarter, while the Health Care sector is predicted to report the lowest earnings growth for the quarter.
  • Earnings Revisions: On June 30, the earnings growth rate for Q3 2013 was 6.5%. All ten sectors have recorded a decline in expected earnings growth over this time frame, led by the Materials sector.
  • Earnings Guidance: For Q3 2013, 89 companies have issued negative EPS guidance and 19 companies have issued positive EPS guidance. As a result, 82% (89 out of 108) of the companies that have issued EPS guidance for the third quarter
    have issued negative EPS guidance. This percentage is consistent with the percentage recorded in the previous quarter at this time (81%), but well above the 5-year average of 62%.
  • Earnings Scorecard: Of the 17 companies that have reported earnings to date for Q3 2013, 12 have reported earnings above the mean estimate and 11 have reported revenue above the mean estimate.

Over the course of the third quarter, analysts have lowered earnings estimates for companies in the S&P500 for the quarter. The Q3 bottom- up EPS estimate has dropped 2.6% (to $26.94 from $27.65) since June 30.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 4.4%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 6.4%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.2%.

Thus, the decline in the EPS estimate recorded during the course of the Q3 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages. In fact, the decline in the bottom-up EPS during the third quarter was the lowest since Q1 2011 (-0.7%).

Just kidding  Please, keep reading:

More than $1bn has been wiped off earnings estimates for Wall Street’s five biggest banks in the past month on growing fears of a sharp decline in trading revenues coupled with increased legal costs.

JPMorgan Chase has borne the brunt of forecast cuts, with consensus estimates of net income down $526m to just under $5bn. Its growing legal bills alone are expected to add $2bn in costs when it kicks off the banks’ earnings season on October 11.

But the depressed forecasts have extended to all banks with big fixed income trading operations, after several warnings of slow activity throughout the last three months. Hopes of a final trading flurry in the last few weeks of the quarter have been dashed, with fixed income trading revenues particularly hurt. (…)

Analysts reduced their expectation of net income by $210m for Citigroup, $128m at Bank of America, $123m at Goldman Sachs and $97m at Morgan Stanley, according to Bloomberg data. Those forecasts strip out the distorting effect of an accounting rule that forces companies to take profits or losses from changes in the value of their own debt.

Pointing up  Here’s the punch line from Factset:

The Financials sector is projected to have the highest earnings growth rate (9.3%) of any sector for the third consecutive quarter. It is also expected to be the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 1.9%.

At the company level, Bank of America and Morgan Stanley are the key drivers of growth in the sector, due in part to comparisons to weak earnings in the third quarter of 2012. The mean EPS estimate for Bank of America is $0.20, relative to year-ago EPS of $0.00. The mean EPS estimate for Morgan Stanley is $0.44, compared to year-ago EPS of -$0.55. If both of these companies are excluded, the growth rate for the sector would fall to -0.4%.



I have posted a lot about that. The revolution is happening but it is a zero sum game. From the losers side:

Eon chief warns of US energy advantage
Comments fuel concerns heavy industry will abandon EU

The head of Germany’s largest utility has warned it will be years before Europe can hope to counter the US’s growing advantage in energy costs and predicts that the disparity will meanwhile lead heavy industry to abandon the continent.

Johannes Teyssen, chief executive of Eon, said there were no obvious options for Europe to narrow the US advantage – whether by drilling for shale gas, importing more liquefied natural gas or importing inexpensive US supplies.

“There is a competitive advantage for America that we cannot prevent, at least for some time,” Mr Teyssen told the Financial Times. He said it was “a dream” for politicians to suggest otherwise. “It will take years and long years of innovation before we can start to shrink it,” he added.

Mr Teyssen’s comments will add to growing concerns in Europe that high energy prices are encouraging manufacturers such as chemicals companies to shift investments across the Atlantic, where the shale bonanza has reduced natural gas costs to between a quarter and a third of those in the EU. (…)

“The price difference is unnerving some companies and deciding their investments,” Mr Teyssen said, adding that the US advantage was “getting so big we cannot allow it to continue”.

Even if Europe put aside its environmental concerns and decided to pursue natural gas fracking, it would take at least five years to develop such an industry, he predicted. Instead, he said, the continent was more likely to benefit if China and Australia pushed ahead with the technology because it would free up gas from Qatar and other world suppliers. (…)


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