NEW$ & VIEW$ (7 OCTOBER 2013)



Delayed Data Put Forecasters in a Bind

With a key monthly jobs report delayed by the government shutdown, Fed officials and investors were left unsure whether they would get enough reliable data in coming weeks to assess the recovery’s progress.

(…) If the shutdown ends soon, the jobs and government economic reports on income, spending, inflation and other activity could be released with only minor delay.

But a prolonged shutdown could muddy the figures. The employment report relies on surveys taken around the middle of each month. Labor’s household survey for October, which is used to determine the unemployment rate, would normally begin the week of Oct. 14 and ask about a worker’s employment status the prior week.

If the government remains closed through the next two weeks, the October report, scheduled to be released on the first Friday of November, also wouldn’t happen on time.

Keith Hall, a former Bureau of Labor Statistics commissioner, said a delayed survey would still likely ask about the same time period to maintain consistency, but that might result in less accurate responses because people might not remember details clearly from a few weeks earlier. Those who say they were furloughed would be counted as unemployed, even though they might have returned to their jobs and received back pay by the time of the survey. (…)

Fed officials hold their next policy meeting Oct. 29-30. Their next meeting after that, and their final one for the year, is Dec. 17-18. If they don’t decide to start winding down the bond program by then, the debate would continue into next year. The first meeting of 2014, and likely Mr. Bernanke’s last as Fed chairman, is at the end of January. (…)

US policy makers fear flying blind

Ripple effects of uncollected data could run for years

(…) A missing or degraded jobs report would mean a cascade of damage to other economic statistics. For example, it is taken into data on personal incomes, which in turn feed into gross domestic product. At worst, there could be a permanent hole in the record that every future study of the economy has to allow for.

Several other statistics will also degrade the longer the shutdown continues. For example, the consumer price index relies on researchers visiting shops, so it cannot be calculated in retrospect. Mr Hall said that in 2011 the estimate was a two week shutdown could cost 50 per cent of the data underlying CPI. (…)

Pig Sales Fly Blind as Data Cut by Shutdown Hampers Firms

This is not a trivial situation for investors. We are all driving blind on a treacherous narrow road filled with potholes and weak shoulders as these two charts from Doug Short illustrate:

Click to View

Click to View

And this chart on biz activity:


(As an aside, here’s what’s happening in Europe, from Michael Levitt’s Credit Strategist)


U.S. banks are also not keen on consumer loans:

The net percentage of financial institutions reporting increased willingness to make installment loans, which include credit cards, has averaged 15.4 percent in three surveys of senior loan officers released this year by the Federal Reserve. That compares with 18.9 percent during the same period last year and almost 25.4 percent in 2011.

This gauge of lending practices fell to 13 percent for responses collected between July 2 and July 16, the most recent available, from 22.2 percent in April. The net figure represents the percentage of banks more willing to lend minus the share less willing to lend. (Bloomberg)

Add that ISI’s company surveys remain weakish. So, the PMIs look good but the economic momentum is weak and fragile.

(…) hitting the ceiling would force the government to immediately balance the budget. The government would have to cut spending some 20% for the federal budget deficit is around 4% of N-GDP. The deficit is expected to reach $750 billion in 2013. This is scary for it would certainly push the US economy into a recession. Goldman Sachs estimates that a one week shutdown would reduce real economic growth at the annualized rate of 0.3% and Morgan Stanley is suggesting 0.15%. (Hubert Marleau, Palos Management)

Given all the above, political and/or policy mistakes can be very costly.

New American Economy Leaves Behind World Consumer

(…) As the U.S. looks set to accelerate, economists from Bank of America Corp. to Morgan Stanley predict it will provide less oomph abroad than it once did, partly because of changes wrought by the financial crisis and recession. The new-look America is focused on greater demand and production at home and taps more of its own energy, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999. (…)

A 1 percentage point pickup in U.S. GDP growth typically meant a 0.4 point spillover for the rest of the world, according to Reis. The pulse now may be moving toward 0.3 point, which if reached, would amount to a 25 percent drop in America’s overseas clout. (…)

A study of spillovers published by the IMF last week found that although economies aren’t correlated as much as they were during the crisis, the U.S. “still matters most from a global perspective.” A 1 percent positive surprise in its growth rate increases output elsewhere by 0.2 percent after two years, twice the effect of similar accelerations in China and Japan, it said. (…)

One explanation why the U.S. engine may be slowing overseas is that its share of worldwide GDP shrank to 22 percent this year from 31 percent in 2000, according to IMF data. In the meantime other sources of demand have emerged, including China, which now accounts for 12 percent of global output, up from 4 percent in the same period.

Bank of America’s Reis argues that the “quality” of U.S. growth is changing from the consumption-led boom of a decade ago that aided manufacturers abroad, especially in Asia. While consumption will edge up 2.5 percent next year compared with 2 percent in 2013, Reis says the driver this time will be an 18 percent jump in spending on homes — good for Canadian lumber producers but not for many other foreign businesses.

The U.S. also is now less in need of foreign energy thanks to increased domestic output amid the development of fracking, which draws on reserves in shale-rock formations. America churned out an average 7.2 million barrels a day of crude since the start of January, the highest since about 1991, and Credit Suisse Group AG estimates the inflation-adjusted petroleum trade deficit has fallen 54 percent since 2006. (…)

Another theme is that U.S. companies are increasingly repatriating production from China and other emerging markets, which lured it with cheaper labor costs.

Fifty-four percent of U.S. manufacturers with sales topping $1 billion are planning to or considering bringing back factory-lines from China, up from 37 percent in February, the Boston Consulting Group said Sept. 24, citing a survey of 200 executives. It projects that with Chinese wages and benefits rising 15 percent to 20 percent a year, the cost of operating in China will be the same as staying in the U.S. by 2015. (…)

World Bank Cuts Developing East Asia GDP Forecasts on China

Developing East Asia will probably expand 7.1 percent in 2013 and 7.2 percent in 2014, the Washington-based lender said in a report today, down from April predictions of 7.8 percent and 7.6 percent respectively. China may grow 7.5 percent in 2013, lower than an April forecast of 8.3 percent, it said.


(…) The relationship between corporate debt growth and profits growth has changed in a manner that is inimical to credit quality. During the year-ended June 2012, the 6.4% annual increase by debt trailed the 11.1% growth of profits. However, for the year-ended June 2013, the 8.6% annual growth of debt sped past the 3.6% rise by profits.


After bottoming at the 700% of Q2-2011 through Q2-2012, the ratio of corporate debt to profits recently rose to Q2-2013’s 735%. During the previous credit cycle upturn, the ratio of debt to profits troughed at the significantly lower 568% of Q3-2006 and did not reach 735% until Q3-2007, which coincided with the end of the previous upturn.


Though the now elevated ratio of debt to profits does not yet signal the nearness of a credit cycle downturn, it strongly suggests that the recent high yield bond spread of 460 bp is unlikely to approach its 341 bp leverage of the three-years-ended June 2007, or when debt approximated 647% of profits, on average. We hasten to add that investors were probably undercompensated for default risk during the three-years-ended June 2007, which makes it all the more unlikely that the high yield spread might break well under 400 bp absent an extended and substantial quickening of profits growth.


The outlook for credit actually worsens if the focus switches from “profits from current production” to “internal funds”. For starters, the ratio of internal funds to nonfinancial-corporate debt sank to 17.9% in the second quarter. The last two times this occurred in Q3-2007 and Q3-2000, recessions arrived within 12 months.


Moreover, after last bottoming at Q2-2011’s 490%, the ratio of corporate debt to internal funds has since jumped up to Q2-2013’s 559%. If this ratio extends its current climb, a widening by the high-yield bond spread may be unavoidable.


The containment of interest expense by very low borrowing costs mitigates only part of the latest rise by corporate leverage. However, though the ratio of net interest expense to internal funds merely edged up from a Q4-2011 bottom of 17.5% to Q2-2013’s 19.6%, the latter was significantly above its 14.8% average of the three-years-ended June 2007. Worse yet, it was in Q3-2007 that the ratio of net interest expense to internal funds last rose to 19.6%. Accordingly, a meaningful narrowing by the high-yield bond spread probably requires a lower ratio of net interest expense to internal funds.



As derived from Federal Reserve data, the ratio of debt to nonfinancial-corporate cash also has been rising. For Q2-2013, a still laudable 8.0% yearly increase by corporate cash was outpaced by the 9.5% growth of debt, which lifted debt up to 501% of cash. The latter was exceeded Q4-2010’s current cycle low of 446%. Moreover, even the current cycle low compared unfavorably with the 421% of debt to cash during the three-years-ended June 2007.


Also consider that a substantial portion of the large corporate cash is hoarded by only a few of the largest companies, which distort the overall picture:

U.S. nonfinancial companies held $1.48 trillion in cash as of June 30, according to Moody’s review of the more than 1,000 companies it rates. Cash stockpiles have grown by about 2% from $1.45 trillion at the end of last year, and up 81% from $820 billion at the end of 2006.

Corporate cash is still concentrated in just a few hands, with the top 50 holders accounting for 62% of the total.  The companies with the five largest cash holdings – Apple, Microsoft Corp., Google Inc. , Cisco Systems Inc. and Pfizer Inc. – held more than one quarter of the cash. (WSJ)

Ghost  How to Play the Halloween Indicator

There are zillions of equity market stats around, most of which i don’t care much about. This one I respect, however. I actually posted about that on October 31, 2009 (BUY HALLOWEEN? SEASONALITY OF EQUITY MARKETS) and updated this RBC Capital chart last spring:


(…) This “six-months-on, six-months-off” seasonal pattern, also called the “Halloween Indicator,” refers to the tendency for the stock market to deliver the bulk of its gains between Oct. 31 and the subsequent May 1.

Over the past 50 years, for example, the S&P 500 has gained an average of 6.6% during those months. Between May 1 and Oct. 31, by contrast, its average gain has been just 0.8%.


This stark difference isn’t a fluke, according to Ben Jacobsen, a finance professor at Massey University in New Zealand. He found strong evidence of the Halloween Indicator after analyzing the stock-market histories of 108 countries for as far back as data were available.

Prof. Jacobsen says that the Halloween Indicator also is quite strong in Europe, and in the United Kingdom and France in particular. (…)

It isn’t unprecedented for the stock market to fly in the face of the poor seasonal odds and rise during the summer months, of course. But it doesn’t happen very often: There have been 13 occasions over the past 50 years when the S&P 500 gained as much during the summer as it has this year.

Yet in those years when it has done so, that strength has tended to persist into the subsequent winter period—resulting in an average S&P 500 gain of 8.6% between Halloween and May Day six months later. That is higher than the winter gains following losing summers: Over the past 50 years, the S&P 500’s average gain in such periods was 5.3%. (…)

Investors who precisely follow the Halloween Indicator will, of course, wait until Oct. 31 to reinvest the cash they raised this past May Day. But several of the investment advisers monitored by the Hulbert Financial Digest believe you can improve on the indicator’s returns by searching for a different day during October or November on which to do so.

The adviser who has had the greatest success doing this is Sy Harding, who edits a service called Sy Harding’s Street Smart Report. He follows precise rules for when to get back into stocks using a short-term-momentum technical indicator known as the Moving Average Convergence Divergence, or MACD. It is based on a complicated formula relating the 12-day and 26-day moving averages of the market and is widely available at most financial websites, including The Wall Street Journal and MarketWatch.

According to Mr. Harding’s rules, in no event should investors get back into stocks before Oct. 16, since he has found through back-testing that, before mid-October, the unfavorable seasonal tendencies usually are so powerful that they outweigh even an MACD buy signal.

If the stock market is in the midst of a strong short-term rally on that date—and the MACD is therefore showing a buy signal—Mr. Harding will get back into stocks immediately. Otherwise, he waits until that indicator triggers a subsequent buy signal. He uses the inverse of this approach when getting out of stocks in the spring. (…)

I also use the MACD indicator to optimize timing:


Why such seasonality?

Though researchers aren’t sure why this pattern exists, Prof. Jacobsen suspects it can be traced to the summer vacations of traders and investors in the Northern hemisphere.

I don’t buy that. The only valid explanation I have is that October is Q3 earnings season which crucially resets the current year earnings estimates and, necessarily the following year’s. Given analysts’ tendency to overestimate earnings, October is often the month of reckoning that sparks readjustments in expectations and valuations.


Earnings season starts next week, but things don’t really pick up until the middle of October.  As shown in the chart below, just 32 companies are set to report third quarter numbers next week.  On October 24th alone, we’ll see nearly nine times that amount report in a single day. 


From Thomson Reuters:

  • Of the 21 companies in the S&P 500 that have reported earnings to date for Q3 2013, 62% have reported earnings above analyst expectations. This is lower than the long-term average of 63% and is below the average over the past four quarters of 66%.
  • 62% of companies have reported Q3 2013 revenue above analyst expectations. This is higher than the long-term average of 61% and higher than the average over the past four quarters of 49%.
  • For Q3 2013, there have been 94 negative EPS preannouncements issued by S&P 500 corporations compared to 18 positive EPS preannouncements.

Zacks Research adds:

(…) estimates have come down sharply as the quarter unfolded. The current expected Q3 total earnings growth for the S&P 500 of +1.1% is down from +5.1% in early July, with estimates for the Technology, Retail, Consumer Discretionary, and Basic Materials sectors revised down.

Excluding Finance, total earnings growth for the S&P 500 would be flat (up +0.0%) in Q3, which is better than Q2’s ex-Finance growth of -2.6%.

Unlike the downtrend in Q3 estimates over the recent past, expectations for Q4 and beyond have held up fairly well and represent a material acceleration in the growth pace. Total earnings growth is expected to ramp up to +8.9% from the roughly +2.6% growth in the first half of the year and the current expected +1.1% growth in Q3. More than half of this Q4 growth is expected to come from sectors outside of Finance. But given what we saw from these sectors in Q2 and in the run up to the current reporting cycle, it seems like a tall order to achieve this level of growth. My sense is that Q4 estimates need to come down materially.

Which I have been saying for a while. Happy Halloween!

IPOs: flotation devices
A queue of companies are coming to the stock market

(…) Funnily enough, 2013 has not been a vintage year for IPOs so far. The year-to-date global total of just over $100bn of new listings is a long way behind the peak of 2010 and 2011, according to Dealogic. But the proof of the importance of Fed largesse came in the middle of the year, when it indicated that it might ease up on QE. This led to some emerging-market listings being postponed. Now that this prospect has dimmed somewhat, the pick-up in activity has begun, and it coincides with renewed strength in the equity markets. The pipeline suggests that last year’s total of $124bn in IPOs may well be overtaken.

With the S&P 500 near its all-time high, it looks like a great time to sell. And look who has noticed! A swath of the deal volume this year represents good old-fashioned privatisations – the £3bn Royal Mail sell-off in the UK and Meridian Energy from New Zealand among them. Private equity is even more tempted. Friday’s announcement of a proposed listing of Tarkett, a French maker of floor coverings, by co-owner Kohlberg Kravis Roberts is the latest. Nearly a third of all IPOs this year are financial sponsor-related, Dealogic data show. (…)


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