NEW$ & VIEW$ (11 OCTOBER 2013)

September Retail Sales Disappoint Retailers posted disappointing sales gains in September, even as they stepped up promotions. The back-to-school period ended on a sour note, raising some concerns about the key holiday season.

The nine retailers tracked by Thomson Reuters posted 1.6% growth in September same-store sales, or sales at stores open at least a year, versus the 3.1% consensus estimate and the 5.5% increase posted a year earlier.

The above is from the WSJ. Here’s Thomson Reuters actual release which reflects an even weaker picture:

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 0.4% comp for September, missing its 3.1% final estimate. The 0.4% result is the weakest showing since the recession, when the Index registered a -2.4% SSS result in August 2009. Including the Drug Store sector, SSS growth rises to 2.4%, below its final estimate of 4.5%. Retailers were hurt by weak mall traffic, decrease in store transactions, and weak consumer spending in the face of the government shutdown.

Weak traffic, low transactions, while inventories are rising:

Freight Hint for Retail Boost

(…) Container cargo volume rose 6% in August from a year earlier at the ports of Los Angeles and Long Beach, Calif., the main gateway for Asian imports. Container traffic at Long Beach alone surged 16% in August to 630,292 standard container boxes, marking the busiest month for the port since October 2007.

Shipping operators reported strong growth in cargo shipments between Asia and North America in the third quarter, while demand on Asia-to-Europe routes continued to reel from a slow economic recovery in Europe.

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The Transpacific Stabilization Agreement, an industry group of 15 major container-shipping lines that carry cargo from Asia to North American ports, said its members handled 4.8% more cargo from the beginning of July through the third week of September than a year earlier. The growth accelerated in September, the group said. (…)

However, the Shanghai Container Freight Index (tks Fred), which rose 6% sequentially for the 3 months to 13-Sep-13 declined 9% MoM during the last month and 6% WoW during the last week. Shipments to Europe were particularly weak but U.S.bound traffic was also negative during the 4 weeks to 13-Sep-13.

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Normally, a weak back-to-school leads a weak holiday season in retailing. Surprised? Maybe the resilient U.S. is near the end of its resiliency. Read on:

Storm cloud  U.S.: Consumer revolving credit contracts in Q3

According to data released earlier this week, consumer credit rose an annualized 5.4% in August. That was the third reading above 5% in four months. (…)

Pointing up Revolving credit (credit cards for the most part) actually contracted for the third time in as many months. As today’s Hot Chart shows, Q3 2013 is on track to deliver the first quarterly contraction in over two years.

So what’s driving the growth consumer credit? Student debt backed by the federal government has accounted for 70% of the overall increase in consumer credit in the past year. As shown, students accounted for 23.3% of total consumer credit outstanding in August, a new record high. (NBF)

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And this important stuff from BMO Capital, understanding that young adults are the driving force in GDP growth:

The Changing Face of the U.S. Workforce

It is hard to exaggerate how rapidly the U.S. working population is changing. Just to pick on one stark example, there are now more employees who are 55 or older than there are those with a job in the 25-34 year grouping (prime home-buying age). This is the first time we have seen this in the 65 years of data, and most likely the first time it has ever happened. Note how the run-up in the 55+ category almost precisely maps the surge in 25-34 group 30 years earlier, as the baby boom ages. This also suggests that the tally of 55+ may also peak in 2020, or soon after.image

China Car Sales Drive Onward

China’s passenger-car sales rose 21% from a year earlier in September—the fastest growth in eight months—thanks to increased demand ahead of a weeklong public holiday and a rebound in sales of Japanese cars.

Sales of passenger cars including sedans, sport-utility-vehicles and minivans totaled 1.59 million units last month—up from 1.31 million a year earlier, the China Association of Automobile Manufacturers, a semiofficial industry group, said on Friday.

Sales of motor-vehicles including both passenger and commercial vehicles grew 20% to 1.94 million units, the association said.

September is a good month for car sales because consumers tend to increase spending ahead of the weeklong National Day holiday. The government suspended highway tolls for passenger cars and motorcycles during the past holiday, leading to a sharp increase in the number of self-driving travelers, according to the China National Tourism Administration.

The September year-over-year sales gains also reflect weakness in the year-earlier month when China’s territorial spat with Japan took a toll on the world’s No. 1 motor-vehicle market.

In September 2012 the nationwide sales of passenger vehicles fell 0.3%.

Opec oil output at lowest in two years
Disruptions in Nigeria, Libya and Iraq put pressure on Saudi Arabia

(…) Opec said output fell by 400,000 barrels a day from August levels to 30.05m barrels a day in September, its lowest estimate for production since 2011.

As well as continued disruption in Nigeria and Libya – where the prime minister’s shortlived kidnapping on Thursday morning provided a reminder of insecurity in the country – Iraqi production fell below 3m b/d for the first time since June 2012. Maintenance work on southern ports has restricted exports from Opec’s second-largest producer.

Reduced supply from Africa’s Opec members, has been particularly hard felt in Europe, where many refineries rely on Libya’s high quality crude. European refineries have cut runs to their lowest levels in decades, according to estimates from JBC Energy and Energy Aspects, in the face of reduced crude supplies and competition from US refineries.

But refineries across the world are expected to return from seasonal maintenance periods by the end of the year, creating renewed demand for oil.

“In September and October high levels of refinery maintenance reduces pressure on the market, but as refineries return there is a question about where supply will come from,” said Richard Mallinson, an analyst at Energy Aspects in London.

Saudi Arabia, the de facto leader of Opec, has shown a willingness to meet any additional demand, however.

Saudi officials told the Vienna-based organisation the country had pumped crude at more than 10m b/d for a third consecutive month in September. Customers have turned to the world’s largest exporter to meet shortfalls elsewhere, and the country has a policy of raising production to meet its customers’ requests for more exports.

The fall in output from Libya, Nigeria and Iraq has brought Opec production in line with the cartel’s target of 30m b/d, which has been routinely exceeded in recent years.

But even at 30m b/d, the cartel is pumping more oil than the world needs, according to its own estimates. Surging supplies from North America will reduce the “call on Opec” to 29.7m b/d this year, a fall of 400,000 b/d from last year, it says.

As Credit Ratings Change, So Do Markets (Moody’s)

(…) For now, the latest trend of high yield credit rating revisions not only warns of a limited scope for any narrowing by credit spreads, it also menaces the outlook for equities. Ghost

Preliminary results show that US high yield companies were subject to 83 downgrades and 68 upgrades during 2013’s third quarter. During the six-months-ended September 2013, net high yield downgrades, or the numerical difference between downgrades less upgrades, averaged 2.1% of the number of US high yield issuers.

As derived from the relatively strong coincident correlation of 0.80 between the high yield bond spread and the moving two-quarter ratio of net high yield downgrades to the number of high yield issuers, the latest net high yield downgrade ratio favors a high yield bond spread that is closer to 500 bp, as opposed to 400 bp. (Figure 3.)

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Recently, the high yield spread approximated 449 bp. Setting aside a significant margin for forecasting errors, the high yield spread predicted by the net high yield downgrades exceeds the actual spread of 449 bp by 45 bp. Nevertheless, not only is the actual spread within the margin of error, but the current under-compensation for high yield credit risk is far less severe than the 239 bp average gap between the predicted and actual high yield bond spreads of 2007’s first half. (Figure 4)

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(…) Though net high yield downgrades do not yet alarm, they warn of a limited scope for a further narrowing by the high yield bond spread, unless profits accelerate convincingly. For the S&P 500’s non-financial company members, profits from continuing operations are expected to grow by 2.4% annually in Q3-2013 and then somehow accelerate to 7.9% by 2013’s final quarter. However, as recently as June 2013, Q3-2013’s operating profits were projected to grow by a much faster 7.4% annually compared to the latest call for 2.4% growth. (…)

The equity market is not immune to a prolonged deterioration of high yield credit rating revisions. In 2007, the market value of US common stock mistakenly set new highs as late as October despite what had become a long-lived and deepening shortfall of high yield upgrades relative to downgrades. (Figure 5.)

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The same phenomenon was even more evident when equities soared during 1999-2000 notwithstanding a high yield upgrade ratio that had sunk to a distressing 30% for yearlong 1999. Ultimately, share prices would plunge after cresting in March 2000. Prior to that, equities ignored 1989’s dreadfully low high yield upgrade ratio of 25% and climbed higher throughout much of 1989 before entering a slide that lasted until the final quarter of 1990. The longer share prices climb higher amid an especially weak distribution of high yield credit rating revisions, the more likely is a perilous overvaluation of equities.

Given the relationship between net high yield upgrades and the equity market, it’s not surprising that the high yield bond spread tends to bottom before the market value of common stock forms a major peak. For example, May 2007’s bottoming by the high yield spread was well before October 2007’s top for equities. And, though the high yield spread troughed in March 1998, equities did not crest until March 2000.(Figure 7.)

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SENTIMENT WATCH

The Yellen put
Markets dance to the tune of easy money

(…)  The markets have now accepted the circular logic of the Fed, which is that a whisper of the prospect of tapering leads to financial conditions tightening which the Fed then cites as the excuse not to taper. Indeed, this week Goldman Sachs put out a report reiterating its belief that the Fed won’t raise rates until 2016, suggesting well over two more years of liquidity and rising asset prices.

And of course, it isn’t just the Fed that is doing its bit for asset price rallies. There is talk of another round of easing in Europe, the BOJ continues on its aggressive easing and Australia has just cut rates.

(…) Who wants to fight the Fed under these circumstances?

“The Fed is always there,” says one Hong Kong-based hedge fund on the sidelines of the Goldman Sachs hedge fund conference in Singapore earlier this week. “It is clear that it will not tolerate a decline in asset values. If you sell in the face of QE, you look like an idiot.” (…)

Right on cue, not to be outdone:

Draghi Says ECB Guidance Allows Rate Cuts on Volatility

“The Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions, should the volatility in money market conditions return to the levels observed in early summer,” Draghi said at the Economic Club of New York yesterday. (…)

Draghi said at a press conference that the central bank is ready to use “all available” tools to contain market rates, a comment reiterated yesterday in its monthly bulletin.

So, with all this financial heroin:

In Latest IPOs, Profits Aren’t the Point

No profits? No problem. Investors are showing increasing hunger for initial public offerings of unprofitable technology companies and the potential for big gains that they bring.

Sixty-eight percent of U.S.-listed technology debuts this year, or 19 out of 28 deals, have been companies that lost money in the prior fiscal year or past 12 months, according to Jay Ritter , professor of finance at the University of Florida. That is the highest percentage since 2007, and 2001 before that. (…)

Unprofitable U.S.-listed technology companies that went public from 1990 to 2011 returned an average of 21.5% in their first three years, while profitable companies returned an average of 55.2% in that period, according to research by Mr. Ritter on companies with more than $50 million in revenues. (…)

In the dot-com boom years of 1999 and 2000, when many investors lost money after snapping up highflying shares, 86% of tech IPOs were of companies that lost money.

At the same time, when it comes to public offerings, some investors aren’t focused on averages. They are looking for home runs. Profitability even can be seen as a negative because it sometimes suggests maturity. (…)

 

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