NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

The U.S. job market showed surprising resilience in October, rekindling debate about whether the economy is strong enough for the Federal Reserve to rein in its signature easy-money program.

The Labor Department reported that U.S. employers added 204,000 jobs last month, defying expectations for weaker hiring amid the shutdown and a debt-ceiling fight that knocked down consumer and business confidence.

Among the most encouraging revelations in the jobs report were upward revisions to government estimates of job growth in August and September, before the government shutdown, easing worries about a renewed slowdown in the labor market.

The 204,000 jump in nonfarm payrolls came on top of upward revisions of 60,000 for the two previous months.

With the revisions, the trend in job creation looks notably better than it did just a few weeks ago. The latest report showed that payroll employment grew by an average of just less than 202,000 jobs per month in the past three months. The previous jobs report, released Oct. 22, showed job growth had averaged 143,000 per month over the prior three-month period.

See the impact before and after the revisions. The “summer lull” was shallower and employment growth could be turning up:

image  image

However,

The latest figures included a number of statistical quirks that will likely lead Fed officials to be even more cautious than usual about inferring too much from a single month’s jobs report. For example, the timing of the delayed monthly hiring survey might have skewed the data.

And these peculiar stats:

Retail boom coming to a store near you?

Pointing up CalculatedRisk writes that according to the BLS, retailers hired seasonal workers in October at the highest level since 1999. This may have to do with these announcements posted here on Oct. 1st.:

Amazon to Hire 70,000 Workers For Holiday Selling Season

Amazon plans to hire 70,000 seasonal workers for its U.S. warehouse network this year, a 40% increase that points to the company’s upbeat expectations about the holiday selling season. (…)

Wal-Mart, for instance, said this week it will add about 55,000 seasonal workers this year and Kohl’s Corp. is targeting 50,000. Target Corp.’s estimated 70,000 in seasonal hires is 20% lower than last year, the company said, reflecting the desire by employees to log more hours at work.

Punch But, out there, in Real-Land, this is what’s happening:

Personal spending, a broad measure of consumer outlays on items from refrigerators to health care, rose 0.2% in September from a month earlier, the Commerce Department said Friday. While that was in line with economists’ forecast of a 0.2% increase and matched the average rise over the July-through-September period, it is still a tepid reading when taken in broader context.

This is in nominal dollars. In real terms, growth is +0.1% for the month and +0.3% over 3 months. While the rolling 3-month real expenditures are still showing 1.8% YoY growth, the annualized growth rate over the last 3 and 6 months has been a tepid 1.2%.

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Here’s the trend in PDI and “department store type merchandise” sales. Hard to see any reason for retailers’ enthusiasm.image

Confused smile More quirks:

The weirdness was in the household survey, which showed a 735,000 plunge in employment, mainly 507,000 workers who were kept home by the federal government’s partial shutdown. But private employment was down 9,000, while the Bureau of Labor Statistics counted a massive exodus of 720,000 folks from the workforce.

Accordingly, the six-month average through October now comes to an increase of 174,000, basically the same as the six-month average through September of 173,000.

From the GDP report:

Consumer spending rose at an annualised rate of just 1.5%, down from 1.8% in the second quarter and 2.3% in the first three months of the year. The increase was the smallest for just over three years and considerably
below the 3.6% average seen in the 15 years prior to the financial crisis.

 

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In a nutshell, the BLS reports a surge in jobs thanks largely to accelerating retail employment that is not supported by actual trends in consumer expenditures nor by their ability to spend.

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

October Housing Traffic Weakest In Two Years On “Broad-Based” Housing Market Slowdown

In case the world needed any additional proof that the latest housing bubble (not our words, Fitch’s) was on its last legs, it came earlier today from Credit Suisse’ Dan Oppenheim who in his monthly survey of real estate agents observed that October was “another weak month” for traffic, with “pricing power fading as sluggish demand persists.” (…)

Oppenheim notes that the “weakness was again broad-based, and particularly acute in Seattle, Orlando, Baltimore and Sacramento…. Our buyer traffic index fell to 28 in October from 36 in September, indicating weaker levels below agents’ expectations (any reading below 50). This is the lowest level since September 2011.”

Other notable findings:

  • The Price appreciation is continuing to moderate: while many markets saw home prices rising if at a far slower pace, 7 of the 40 markets saw sequential declines (vs. no markets seeing declines in each of the past 8 months). Agents also noted increased use of incentives. Tight inventory levels remain supportive, but are being outweighed by lower demand.
  • Longer time needed to sell: it took longer to sell a home in October as our time to sell index dropped to 42 from 57 (below a neutral 50). This is  typically a negative indicator for near-term home price trends.

Nonetheless:

U.S. Stocks Rise as Jobs Data Offset Fed Stimulus Concern

U.S. stocks rose, pushing the Dow Jones Industrial Average to a record close, as a better-than-forecast jobs report added to signs growth is strong enough for the economy to withstand a stimulus reduction.

Nerd smile  Ray Dalio warns, echoing one of my points in Blind Thrust:

Ray Dalio’s Bridgewater On The Fed’s Dilemma: “We’re Worried That There’s No Gas Left In The QE Tank”

(…) As shown in the charts below, the marginal effects of wealth increases on economic activity have been declining significantly. The Fed’s dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing. If it were targeting asset prices, it would tighten monetary policy to curtail the emerging bubble, whereas if it were targeting economic conditions, it would have a slight easing bias. In other words, 1) the Fed is faced with a difficult choice, and 2) it is losing its effectiveness.

We expect this limit to worsen. As the Fed pushes asset prices higher and prospective asset returns lower, and cash yields can’t decline, the spread between the prospective returns of risky assets and those of safe assets (i.e. risk premia) will shrink at the same time as the riskiness of risky assets will not decline, changing the reward-to-risk ratio in a way that will make it more difficult to push asset prices higher and create a wealth effect.

Said differently, at higher prices and lower expected returns the compensation for taking risk will be too small to get investors to bid prices up and drive prospective returns down further. If that were to happen, it would become difficult for the Fed to produce much more of a wealth effect. If that were the case at the same time as the trickling down of the wealth effect to spending continues to diminish, which seems likely, the Fed’s power to affect the economy would be greatly reduced. (…)

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed.  So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation.  So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won’t matter that much.  What will matter much more is the efficacy of Fed stimulation going forward. 

In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.

Elsewhere:

S&P Cuts France’s Credit Rating

The firm cut France’s rating by one notch to double-A, sharply criticizing the president’s strategy for repairing the economy.

“We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects,” S&P said. “Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.”

S&P’s is the third downgrade of France by a major ratings firm since Mr. Hollande was elected. (…)

The political situation leaves the government with little room to raise taxes, S&P said. On the spending side, the agency said the government’s current steps and future plans to cut spending will have only a modest impact, leaving the country with limited levers to reduce its deficit.

Smile with tongue out  French Credit Swaps Fall as Investors Shun Debt Downgrade

The cost of insuring against a French default fell to the lowest in more than three years, as investors ignored a sovereign-credit rating downgrade by Standard & Poor’s.

Credit-default swaps on France fell for a sixth day, declining 1 basis point to about 51 basis points at 1:45 p.m. That would be the lowest closing price since April 20, 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012 when France lost its top rating at S&P.

“You need to ignore the S&P downgrade of France,” saidHarvinder Sian, fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It is behind the market.”

Surprise Jump in China Exports

Exports rebounded sharply in October from a September slump as demand improved in the U.S. and Europe, a potentially positive sign for the global economic outlook.

Exports in October were up 5.6% from a year earlier, after registering a 0.3% fall in September. The median forecast of economists surveyed by The Wall Street Journal was for an expansion of just 1.5%.

The news from China follows reports of a strong October performance from South Korea’s exports, up 7.3% from a year earlier, and suggests the recovery in the U.S. and elsewhere, though slow, is feeding through into increased demand for Asia’s export machine.

Shipments from China to the European Union were up 12.7% from a year earlier, while those to the U.S. were up 8.1%. But exports to Japan lagged behind, against a background of continued political tensions and a weakening of the Japanese yen.

China’s good export performance is even more striking given that last year’s figures were widely thought to have been overreported, so that growth looks weaker by comparison. Excluding that effect, real export growth could be as high as 7.6%, Mr. Kuijs estimated.

Imports to China also showed strength in October, up 7.6% from a year earlier, accelerating a bit from September’s 7.4% pace.

Surprised smile  China Auto Sales Climb at Fastest Pace in Nine Months

Wholesale deliveries of cars, multipurpose and sport utility vehicles rose 24 percent to 1.61 million units in October, according to the state-backed China Association of Automobile Manufacturers today. That compares with the median estimate of 1.5 million units by three analysts surveyed by Bloomberg News. (…)

Total sales of vehicles, including buses and trucks, rose 20 percent to 1.93 million units last month, the association said. In the first 10 months of the year, 17.8 million vehicles were delivered, with 14.5 million being automobiles.

Commercial vehicles sales increased 7.4 percent in the first 10 months of the year to 3.36 million units.

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

The consumer price index rose to 3.2% on a year-on-year basis in October, up from 3.1% in September. The rise was largely due to mounting food prices, which climbed 6.5%, and rising rents, according to government data released on Saturday. But it was still well within the government’s ceiling of 3.5% for the year.

Producer prices were down 1.5% year on year after moderating to a fall of 1.3% in September. This was the 20th month in a row of falling factory prices.

On a month-on-month basis, prices were even less of a concern, gaining only 0.1%.

CPI/non-food rose 1.6% YoY (same as September and vs. 1.7% a year ago), and was +0.3% MoM (+0.4% in September). Last 2 months annualized: +4.3%.

Data also showed China’s factory output rose 10.3% YoY in October. Fixed-asset investment, a key driver of economic growth, climbed 20.1% in the first 10 months. Real estate investment growth rose 19.2%, while property sales rose 32.3%.

Power production rode 8.4% YoY in October, compared to 8.2% in September and 6.4% a year earlier.

Retail sales were up 13.3%. Nominal retail sales growth has been stable at about 13% YoY for the past five months.

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

A day after the European Central Bank unexpectedly halved its benchmark interest rate to a record-low 0.25 percent and Peru cut its main rate for the first time in four years, the Czech central bank yesterday intervened in currency markets. The Reserve Bank of Australiayesterday left open the chance of cheaper borrowing costs by forecasting below-trend economic growth. (…)

Other central banks also held their fire this week. The Bank of England on Nov. 7 kept its benchmark at 0.5 percent and its bond purchase program at 375 billion pounds ($600 billion).

Malaysia held its main rate at 3 percent for a 15th straight meeting to support economic growth, rather than take on inflation that reached a 20-month high in September.

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The Economist agrees (tks Jean):

The perils of falling inflation In both America and Europe central bankers should be pushing prices upwards

(…) The most obvious danger of too-low inflation is the risk of slipping into outright deflation, when prices persistently fall. As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. There is a real danger that this may happen in southern Europe. Greece’s consumer prices are now falling, as are Spain’s if you exclude the effect of one-off tax increases. (…)

Race to Bottom Resumes as Central Bankers Ease Anew

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

Canada’s housing market teeters precariously
Analysts warn nation is on verge of ‘prolonged correction’

(…) Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce. (…)

Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says. (…)

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

Among 449 S&P 500 companies that have announced results during the earnings season, 75 percent beat analysts’ estimates for profits, data compiled by Bloomberg show. Growth in fourth-quarter earnings will accelerate to 6.2 percent from 4.7 percent in the previous three months, analysts’ projections show.

  • Thomson Reuters:
  • Third quarter earnings are expected to grow 5.5% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.2%.
  • Of the 447 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.
  • 53% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.
  • For Q4 2013, there have been 78 negative EPS preannouncements issued by S&P 500 corporations compared to 8 positive EPS preannouncements. By dividing 78 by 8, one arrives at an N/P ratio of 9.8 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.
  • Zacks:

Total earnings for the 440  S&P 500 companies that have reported results already, as of Thursday morning November 7th, are up +4.6% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 51.4% beating revenue expectations with a median surprise of +0.1%.

The charts below show how the results from these 440 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates, which looked materially weaker in the earlier phase of the Q3 reporting cycle, have improved.

The earnings beat ratio looks more normal now than was the case earlier in this reporting cycle. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.


The composite earnings growth rate for Q3, combining the results from the 440 that have come out with the 60 still to come, currently remains at +4.6% on +2.9% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.

We may not have had much growth in recent quarters, but the expectation is for material growth acceleration in Q4 and beyond. The chart below shows total earnings growth on a trailing 4-quarter basis. The +3.1% growth rate in the chart means that total earnings in the four quarters through 2013 2Q were up by that much from the four quarters through 2012 2Q. As you can see, the expectation is for strong uptrend in the growth momentum from Q4 onwards.

Guidance has been overwhelmingly negative over the last few quarters and is not much different in Q3 either, a few notable exceptions aside.

Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

Mom-and-pop investors are returning to stocks, but their renewed optimism is considered by many professionals to be a warning sign, thanks to a long history of Main Street arriving late to market rallies.

(…) “Frankly, from 2009 until recently, I wanted to stay very conservative,” said Chris Rouk, a technology sales manager in Irvine, Calif. Now, he said, “I want to get more aggressive.” (…)

More investors are saying they are bullish about the stock market, according to the latest poll from the American Association of Individual Investors, which found that 45% of individuals are bullish on stocks, above the long-term average of 39%. Last month, the same survey said the number of investors who said they were bearish on stocks fell to the lowest level since the first week of 2012. (…)

Flurry of Stock, Bond Issuance Is a Danger Sign for Markets

Just as financial markets were recovering from the Washington turmoil, a new danger signal has started blinking, in the form of a flood of stock and bond issues.

So far this year, U.S. companies have put out $51 billion in first-time stock issues, known as initial public offerings or IPOs, based on data from Dealogic. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped.

Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.

It isn’t just stock. U.S. corporate-bond issues have exceeded $911 billion, also the most in Dealogic’s database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever. (…)

Small stocks with weak finances are outperforming bigger, safer stocks. And the risky payment-in-kind bond, which can pay interest in new bonds rather than money, is popular again. (…)

 

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