NEW$ & VIEW$ (8 OCTOBER 2013)

Small Businesses Skeptical About Future; Optimism Dips

The Optimism Index was basically unchanged, giving up two-tenths of a
point, statistical noise. The only interesting change in the components was
an 8 point deterioration in expectations for business conditions over the
next six months.





U.S. Consumers Falling Behind on Bills after Years of Improvement

Consumer delinquency rates rose for the first time in two years in the second quarter, possibly showing that the broad household deleveraging seen since the recession concluded in 2009 may be coming to an end.

The American Bankers Association’s composite delinquency ratio, which tracks eight types of debt including auto and home-equity loans, increased to 1.76% in the second quarter from 1.70% the prior period. Similarly, the delinquency rate on credit cards issued by banks inched up 0.1 percentage point to 2.42%. (…)

Consumer delinquency rates peaked near the end of the recession when many Americans were out of work. The composite index reached 3.35% in the second quarter of 2009. (…)

Delinquency rates are now well below historic levels. Bank credit-card delinquency is 37% below its 15-year average, the association said. (…)

A Federal Reserve report Monday showed consumers’ credit-card balances declined for the third consecutive month in August but total debt increased thanks to increased auto lending and student loans. (…)



…EVENTUALLY, because it ain’t helping just yet


The back-to-school season has been weak throughout with chain store sales barely ahead of inflation. Does not bode well for Thanksgiving and Christmas. And now this:

Weekly Drop in U.S. Economic Confidence Largest Since ’08

Gallup Economic Confidence Index -- Weekly Averages, January 2008-October 6, 2013

German Factory Orders Unexpectedly Fall on Weak Recovery

Orders, adjusted for seasonal swings and inflation, dropped 0.3 percent from July, when they fell a revised 1.9 percent, the Economy Ministry said today in an e-mailed statement. Economists forecast an increase of 1.1 percent in August, according to the median of 40 estimates in a Bloomberg News survey. Orders climbed 3.1 percent from a year ago, when adjusted for the number of working days.

Domestic factory orders rose 2.2 percent in August from the previous month, while foreign demand fell 2.1 percent, today’s report showed. Basic-goods orders increased 0.5 percent from July, while demand for consumer goods dropped 0.4 percent. Investment-goods orders decreased 0.7 percent, with domestic demand rising 4.7 percent and orders from the euro area declining 9.2 percent.

German Exports Increased in August on Euro-Area Recovery

Exports, adjusted for working days and seasonal changes, increased 1 percent from July, when they decreased a revised 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 1.1 percent, according to the median of 16 estimates in a Bloomberg News survey. Imports rose 0.4 percent from July.


From Thomson Reuters:

A total of 21 companies have already reported Q3 earnings. Of these, 62% exceeded their consensus analyst earnings estimates. This is slightly below the 63% that beat estimates in a typical full earnings season and the 67% that beat in a typical earnings “preseason”.

Pointing up Historically, when a higher-than-average percentage of companies beat their estimates in the preseason, more companies than average beat their estimates throughout the full earnings season 70% of the time, and vice versa. This suggests that third-quarter earnings results are unlikely to exceed expectations at an abnormally high rate. However, the fact that the preseason beat rate is very close to the average suggests that results will probably not be much worse than average either.

Exhibit 2. S&P 500: Earnings Estimate Beat Rates, Preseason and Final
Source: Thomson Reuters I/B/E/S

36 Years Of Over-Optimistic Earnings Growth

Since 1976, Morgan Stanley shows the average consensus EPS growth rate trajectory among the consensus… doesn’t seem to be so “accurate”…

But it remains assured that this time will be different if we look ahead yet again…

Charts: Morgan Stanley (via ZeroHedge)

Hence the use of trailing earnings.



What Happened The Last 2 Times IPOs Were Outperforming The Market By This Much?

When the momentum chasing public greatly rotates to the IPO-du-jour, it would appear that bad things happen in the market. The last two times Bloomberg’s IPO index doubled the market’s performance (in 2007 and again in 2011) it seems it marked a euphoric top. Of course, based on 1998/99’s IPO performance there is plenty more room to run since this time is different. Nevertheless, the volume of coverage allotted to this IPO or that IPO (and not just Twitter) is awfully reminiscent of the go-go days of yore (and we all know how that ends) – though you’ll never be the bag-holder again right?

100% Interactive Brokers Margin Hike

The massive outperformance of the smallest and most trashy companies over the past year, month, week, day etc… stalled this afternoon. No news; no macro data; no change in the situation in DC. So what was it? We suspect the answer lies in the all-time record levels of margin that we recently discussed holding up the US equity market. Interactive Brokers, it would appear, have seen the light and over the next week or so will be increasing maintenance margin to 100% – effectively squeezing the leveraged momentum chasing muppets out of the market (or at the very least halving their risk-taking abilities).

As we warned previously,

Margin Debt still contrarian bearish

Using closing basis monthly data, peaks in NYSE margin debt preceded peaks in the S&P 500 in 2007 and 2000. The March 2000 peak in NYSE margin debt of $278.5m preceded the August 2000 monthly closing price peak in the S&P 500 at 1517.68. The July 2007 margin debt peak of $381.4m preceded the October 2007 monthly closing price peak of 1549.38 for the S&P 500. Margin debt reached a record high of $384.4m in April and the S&P 500 continued to rally into July, August, and September. This is a similar set up to 2007 and 2000.


Société Générale’s quant team screens equity markets with well-­known value investment filters.

Despite the weakness in the latter part of last month, equity markets enjoyed one of their best Septembers on record. Low quality companies led the market showing strong returns in all regions and with double-­digit returns in the Eurozone and Japan.

Companies with weak balance sheets, as defined using the Merton model, were up 10% on a global basis in September, outperforming the market by 3.5% and outperforming companies with good balance sheets by 5.3%. The performance was wider in the Eurozone and Japan where low quality companies outperformed high quality by 8.9% and 9.9% respectively. Our second quality factor, the Piotroski model, showed similar performance with low quality outperforming as much as 5% in the Eurozone and 18% in Japan!

Nerd smile As a result of the strong market performance, we see a further reduction in the number of names that pass our screens. We can now find only 21 deep value and 25 quality income names, so a total of 46 companies down from 53 last month and 200 names a year ago!




Credit Suisse: “Il Cavaliere’s Final Bow

Is Italy ready for life without Silvio Berlusconi? After dominating Italian politics for the past two decades, even as he faced scandals and corruption allegations that would have sunk most political careers, the former prime minister’s influence appears to be on the wane. His failed attempt to topple Prime Minister Enrico Letta’s government last week, after several key members of his own party threatened to revolt, was a serious blow to the billionaire media mogul’s image as a political force. (…)

So far, the reaction to the latest political upheaval on financial markets has been relatively subdued, suggesting investors have either grown accustomed to Italian political turmoil or that they’re focused on the glimmer of order emerging from the chaos of recent weeks. (…)

Still, the political uncertainty has become an unwanted distraction at a difficult point for Italy, as the country seems to be on the verge of recovery from the longest recession since World War II. Relentless bickering between the left- and right-wing coalition partners have hampered efforts to reverse eight consecutive quarters of economic contraction and tackle the country’s public debt of more than €2 trillion and record-high youth unemployment.

Credit Suisse analysts have said that though the Italian economy will contract about 1.7 percent in 2013, next year could see positive growth of 0.7 percent. That’s nothing to write home about, but after such a long period of negative numbers, it would be a welcome change. The analysts also noted that the government has started to pay €40 billion in long-outstanding bills to its own contractors, which should provide a boost to small and medium-sized businesses. But political uncertainty, they noted, is a definite risk to that relatively rosy forecast. (…)

Gavekal explains Italy’s paradox:

(…) One paradox is that the renewed political instability implies automatic fiscal tightening. If, for instance, new elections were called, the government would be on “automatic pilot”: meaning the multi-year fiscal consolidation program that the previous technocratic government put in place would continue.

This should be set against another interesting paradox. When Mario
Monti was chosen to form a technical government in November 2011,
everyone in Europe cheered the replacement of the buffoon by the
reformer—but rating agencies continued to downgrade Italy by several
notches as the economy slid into recession amid fiscal tightening. Italy’s
political uncertainties have risen dangerously since February’s elections,
but the economy has gotten stronger. Consumer and business confidence
has rebounded, and the latest consensus estimates show Italy should run a current account surplus of 0.7% of GDP this year, and a fiscal deficit of 3-3.5% of GDP.

This is much improved from the current account deficit of 3.5%, and fiscal deficit of 4-4.5% of GDP, when Monti came into power. In other words, Italy’s twin deficits are considerably lower today (below -3% of GDP) than they were in 2011 (almost -8% of GDP). Italy’s average
(or five-year) bond yield stood Friday at 3.25%, well below 6% at the end
of 2011. The main determinants of fiscal stability – growth, interest rates,
the primary surplus, etc – are thus incomparably improved. That is why
neither investors nor even the International Monetary Fund really want to see Italy commit to further belt-tightening.

Pointing up  Still, given the return of political chaos, the risks of a new rating
downgrade cannot be overlooked, as public debt is high (130% of GDP)
and still rising. Standard and Poor’s could downgrade Italy closer to junk
status. But the lesser known Canadian agency DBRS holds a more
important key. Among the four reference agencies used by the ECB in its
refinancing operations, DBRS has the highest rating of A– for Italy. Since
the ECB takes the best rating of the four, this allows Italian banks to pay the same rate as German banks on its collateral. If DBRS downgrades Italy, as it did just after the February elections, then the haircut on a 5-year Italian bond would rise from 1.5% to 9%, with a large impact on Italian banks, and thus on other parts of the euro financial markets.

With such uncertainties, we think that Italy will continue to
underperform on credit markets (vs. Spain in particular), as it has done
since the February elections. A contagion effect is also possible if markets
are too literal in their reading of the euro rhetoric that Berlusconi is likely
going to use in the coming weeks, infuriated as he is about the looming
decadenza vote.

OECD: Low Skills to Hamper Spain, Italy

In the most extensive report on skill levels across a wide range of countries to date, the OECD found that workers in Spain and Italy are the least skilled among 24 developed countries.

(…) Both economies have suffered from a loss of competitiveness over the last decade, resulting in large trade deficits and high levels of borrowing. In order to return to strong growth while generating trade surpluses and paying off their debts, their competitive position will have to improve.

But according to the OECD, Italy ranks bottom, and Spain second-to-last among the 24 countries in literacy skills. Over one in five adults in both countries can’t read as well as a 10-year-old child would be expected to in most education systems. In a ranking of numeracy skills, the positions are reversed, with Spain bottom, and Italy second-to-last. That means one in three adults have only the most basic numeracy skills, a fate shared by their U.S. counterparts. (…)

Italy faces an even greater challenge. Not only does it have fewer highly-skilled workers than most other economies, it also uses them badly—or in the case of many highly-skilled women, not at all. (…)

Young Americans Fare Poorly on Skills

U.S. baby boomers held their own against workers’ skills in other industrial nations but younger people fell behind their peers, according to a study, painting a gloomy picture of the nation’s competitiveness and education system.

The study, conducted by the Organization for Economic Cooperation and Development, tested 166,000 of people ages 16 to 65 and found that Americans ranked 16 out of 23 industrialized countries in literacy and 21 out of 23 in numeracy. Both those tests have been given periodically and while U.S. results have held steady for literacy, they have dropped for numeracy. In a new test of “problem solving in technology rich environments,” the U.S. ranked 17 out of 19. (…)

The results show a marked drop in competitiveness of U.S. workers of younger generations vis a vis their peers. U.S. workers aged 45 to 65 outperformed the international average on the literacy scale against others their age, but workers aged 16 to 34 trail the average of their global counterparts. On the numeracy exam, only the oldest cohort of baby boomers, ages 55 to 65, matched the international average, while everyone younger lagged behind their peers—in some cases by significant margins.

In most cases, younger American employees outperformed their older co-workers—but their skills were weaker compared with those of other young people in OECD countries. By contrast, some countries are improving with each generation. Koreans aged 55 to 65 ranked in the bottom three against their peers in other countries. But Koreans aged 16-24 were second only to the Japanese.

The results show that the U.S. has lost the edge it held over the rest of the industrial world over the course of baby boomers’ work lives, said Joseph Fuller, a senior lecturer at Harvard Business School who studies competitiveness. “We had a lead and we blew it,” he said, adding that the generation of workers who have fallen behind their peers would have a difficult time catching up. (…)

Americans with the most cerebral jobs—those that demanded high levels of literacy, numeracy and problem-solving skills—fared the best against the rest of the world. The potential problem lies in the growing complexity of traditional middle-class jobs in fields like manufacturing and health care. Workers unable to grow into those jobs will lose their positions or be stranded with stagnant wages. The result: an economy that continues to bifurcate. (…)

By contrast, Japanese workers are the most skilled in the 24-nation survey, but don’t fully employ many of those skills, particularly because they are denied the opportunity to use their problem solving abilities in what the OECD calls a “technology environment.” The OECD attributes that to the relative inflexibility of Japan’s jobs markets. It does suggest that if Japan were able to fully use its workers skills, it could generate higher rates of economic growth, having long stagnated.


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