NEW$ & VIEW$ (10 OCTOBER 2013)

U.S. Mortgage Applications Show Little Bounce

The Mortgage Bankers Association reported that the total mortgage market index improved by 1.3% (-54.7% y/y) last week following their slight down-tick during the prior week. Applications to refinance an existing loan led the gain with a 2.5% increase, but remained down by two-thirds versus last year. Homepurchase mortgage applications slipped 0.7% (-5.6% y/y) and were 14.7% below the early-May peak.

large image

German industrial production growth adds to signs of third quarter economic expansion

Looking at the three months to August, which avoids some of the volatility in the monthly data, industrial production increased 1.4% on the previous three month period, with manufacturing up 0.9% and
construction posting a healthy gain of 3.8% over the same period. While the gains in total industrial production and manufacturing output fell slightly short of the 1.5% and 1.2% respective increases seen in the
second quarter, the upturn in construction in the three months to August was the largest since May 2011.

The industrial production data follow factory orders numbers, which showed a 0.3% drop in orders in August following a 1.9% decline in July. However, orders were nevertheless still 2.1% higher in the latest three months compared with the prior three months,which is the second- strongest quarterly rate of expansion since early 2011.


  • France’s IP rose 0.2% MoM in August (+0.6% consensus). Manufacturing production +0.3%.
  • Italian IP decreased 0.3% in August following a 1.0% drop.

Lightning Greek Deflationary Pressures Push Nation Further Into Insolvency, Increased Funding Needs

Deflation in Greece is pushing the country further into a state of insolvency.

The embattled nation has slid into deflation. The headline consumer price
index declined 1 percent year over year in September. The core reading fell 2.7 percent year over year in August. The gross domestic product deflator dropped 2.3 percent year over year during the first quarter of 2013. (BloombergBriefs)

Li Sees China Growth Topping 7.5% in First Nine Months

(…) China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent. (…)

IMF fears $2.3tn bond losses from taper
Fund issues warning in global financial situation assessment

(…) If the Federal Reserve’s likely move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt raise long-term interest rates by 1 percentage point, the IMF’s Global Financial Stability Report (GFSR) estimates that the market losses on bond portfolios could reach $2.3tn.

Brazil raises rate for fifth time since April
Central bank move brings Selic rate close to double digits

(…) Brazil’s central bank raised its benchmark interest rate for the fifth time in a row on Wednesday night, bringing it close to double digits and raising questions about how much longer the tightening cycle has left to run.

The bank increased the Selic rate by 50 basis points to 9.5 per cent amid debate about whether it plans to continue the cycle at the next meeting in six weeks’ time, which would bring the rates to the politically sensitive 10 per cent level.

The monetary policy committee “evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year”, it said, repeating the brief statement issued at its last meeting in August.

The bank has been keen to underline the credibility of its inflation-targeting regime after perceptions of political interference earlier in the year.

(…) analysts said use of the same language in the terse statement that accompanies the monetary policy committee meeting decisions indicated that the bank would be likely to tighten by another 50 basis points in November. (…)

Inflation in September of items whose prices are freely determined by the market has been moderating but remained high at 7.4 per cent year on year, while inflation on items controlled by the government was declining and running at an “unsustainably” low 1.1 per cent.

Supply of copper set to outstrip demand Miners and traders expect lower prices

(…) The expectation of a shift into surplus in the copper market was echoed by many of the traders, analysts and hedge fund managers assembled in London for LME Week, the largest annual gathering of the metals and mining industry. For the first time since 2008, investors polled by Macquarie did not pick copper as their favourite metal for next year.

However, few expect a collapse in prices, as a recovering global economy lifts copper demand. “The surplus we are forecasting is very modest,” Mr Keller of Codelco said, predicting a “really marginal” oversupply of 300,000-400,000 tonnes, compared to annual consumption of more than 20m tonnes. (…)


James Y., a reader, asked if I have ever applied the Rule of 20 to other major indices. I don’t have data for other markets. Here’s how Société Générale, which does good work on valuation, looks at many world markets based on the P/BV vs ROE relationships (via Advisor Analyst).

The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.

This is a snapshot which provides little historical info. SoGen also shows this interesting chart on U.S. non-financial ROE since 1980 which suggest a cyclical peak is nearby.

Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.


Chinese Think Tank Puts Shadow Banking at 40% of GDP As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago.

(…) The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.

But the calculation is conservative compared with those done by international research houses. Fitch Ratings estimated earlier this year that China’s total credit including various forms of shadow-banking lending may have reached 198% of the country’s GDP, while J.P. Morgan estimates have put it at as much as 69% of GDP, or 36 trillion yuan. (…)

Based on available data from regulators, the academy’s report said shadow-banking activities involving wealth-management products and trusts stood at 14.6 trillion yuan by the end of last year, equivalent to 29% of the country’s GDP. (…)

The growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy, the think tank warned.

American Execs Say China is Getting Expensive, and Profitable Of all the challenges facing U.S. companies in China, costs top the list of concerns, with the majority saying they expect to give out hefty pay rises in the coming year

A survey of U.S. executives in China finds that, of all the challenges facing U.S. companies on the mainland, costs are at the top of their list of concerns

The cost of labor particularly has been rocketing in China, by double digits for many businesses the last few years. That’s prompted some U.S. manufacturing to leave China for other shores – including the U.S. and Mexico.

US-China Business Council

More than 90% of respondents said their China business is profitable, the highest level since the survey was started.

Overall, though, sentiment hasn’t changed much from the “tempered optimism” of recent years. Companies say that a range of longstanding problems – such as delays in licensing and other market barriers – generally have not improved.

Mobile Ad Spending Rises Sharply

Marketers are finally convinced that there’s money to be made advertising to the legions of consumers glued to their smartphones and tablets: Spending on mobile ads more than doubled in the first half of the year.

(…) Mobile-ad spending in the U.S. totaled $3 billion in the first half, up from $1.2 billion a year earlier, the Interactive Advertising Bureau estimates.

Adults in the U.S. are expected to spend an average of two hours and 21 minutes a day on smartphones and tablets this year, excluding time spent talking on phones, according to a recent study by eMarketer. In 2010, adults spent only 24 minutes on mobile devices, not counting talk time. (…)

Google is expected to capture 46.8% share of the U.S. mobile ad market this year, estimates eMarketer, thanks largely to Web searches conducted on mobile devices.

Facebook, too, is benefiting. After initially lagging behind in mobile, the Menlo Park, Calif., company has worked to bolster its mobile-ad products, an effort that is now bearing fruit.

Mobile accounted for 41% of its advertising sales in the second quarter, Facebook said. Facebook will have about 14.9% of the mobile ad market this year, eMarketer estimates.

Unilever said that 50% of its spending on Facebook goes to the social-network’s mobile products. (…)

Mobile’s share of total online ad spending in the U.S. more than doubled to 15% during the half, the IAB said. Overall U.S. online ad spending rose 18% to $20.1 billion during the period.

Spending on search and display ads continue to account for the bulk of the overall sector but their share of the total declined in favor of mobile advertising.

Spending on TV ads in the U.S. will increase 2.8% to $66.35 billion this year, eMarketer predicts. (…)

[image]Sad smile  Canadian Mogul Paul Desmarais Dead at 86 One of Canada’s wealthiest and most powerful businessmen, Paul Desmarais built a corporate empire by engineering a reverse takeover of Power Corp. of Canada and refocusing the company on financial services.


Leave a Reply

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