NEW$ & VIEW$ (18 NOVEMBER 2013)

OECD Economic Growth Stalls

(…) The Organization for Economic Cooperation and Development Monday said the combined gross domestic product of its 34 developing-country members rose by 0.5% from the second quarter, the same rate of expansion recorded in the three months through June. (…)

The OECD will release new forecasts for economic growth in its 34 members and a number of large developing economies Tuesday. The International Monetary Fund last month cut its growth forecast for the world economy in 2013 to 2.9% from 3.2%, but expects output to rise 3.6% in 2014. (…)

OECD leading indicators released last week suggested growth is set to pick up in the euro zone, China and the U.K. in coming months, while remaining sluggish in India, Brazil and Russia.

Among the Group of Seven largest developed economies, the U.K. recorded the strongest growth in the third quarter, with an expansion of 0.8%, while France and Italy saw their economies contract by 0.1% each.

Euro zone rebound weaker than hoped: ECB’s Nowotny

The economic situation in the euro zone has started to improve but is still weaker than the European Central Bank had hoped, ECB Governing Council member Ewald Nowotny said on Monday. (…)

But “one has to say that this improvement is not as strong as we would have expected it perhaps some time ago, and at the same time inflation rates are clearly below the price stability level that we set at the ECB.” (…)

Spain’s bad loans ratio rises to 12.7 percent in Sept

Spanish banks’ bad loans as a percentage of total lending rose to 12.7 percent in September from 12.1 percent in August, marking a new high, Bank of Spain data showed on Monday.

The ratio has been steadily climbing as households and small companies struggle with debts and as banks, fighting to improve their own capital quality ahead of new stress tests, rein in lending. (…)

Bad debts rose by 6.9 billion euros ($9.3 billion) to 187.8 billion euros in September, while total credit fell by 8.9 billion euros to 1.5 trillion euros, the data showed.

Italian Tax Model Thwarts Recovery

(…) Italy’s tax model stands out in Europe for relying heavily on payroll taxes, which are paid by companies and employees, to fund the country’s state pension system. Payouts for old-age pensions alone are nearly 13% of GDP—a rate that is a third higher than in Germany and twice the U.S. percentage, according to the OECD.

(…)  “The absurdity is that an Italian worker costs more than a Spanish worker, but has a lower income,” said Riccardo Illy, owner of the eponymous coffee brand.

Economists say that the high mandatory contributions—33% of Italian salaries, compared with 13% in the U.S.—are particularly painful for younger workers in lower-income, entry-level jobs. (…)

Other European countries with even bigger welfare states have started to tackle the problem, at least in part. Germany puts more of the onus for pension contributions on the workers’ tab, which crimps income but not jobs.

French President François Hollande last year pushed through measures to reduce the country’s notoriously high labor costs, which help fund a broader array of social services. But he opted for tax breaks instead of direct payroll-tax cuts.

(…) the task facing Italy is daunting. Paolo Manasse, an economist at the University of Bologna, estimates that Italy would need to cut a further €30 billion in employment taxes to bring it in line with average employment taxes among OECD members.

Once pensions and interest on government debt are stripped out, Italy spends only 32% of gross domestic product on core services compared with 43% for Germany, meaning there is less budgetary fat to trim in other areas.

Some countries, such as Denmark, which has one of Europe’s highest overall tax rates, fund a bigger welfare state than Rome provides with a broader array of taxes covering income, investments and wealth.

Thus, Danish companies pay only a 10th of what their Italian peers do for social-security programs. Denmark’s total employment rate—the percentage of the working-age population with jobs—is 75% compared with Italy’s 61%. (…)

However, given the fragile nature of his two-party coalition, the prime minister has so far avoided bigger tax overhauls. He has criticized generational inequities in Italy but has been reluctant to trim current pension benefits.

Since future pensions in Italy will eventually be tied to actual contributions over a lifetime of working, the dearth of new jobs due to hefty payroll levies will have repercussions well into the future.

Younger generations are “at risk of being excluded from both work and, as a result, a main form of welfare,” said Marco Maniscalco, a partner at the Bonelli Erede Pappalardo law firm in Milan. (…)

Riskier loans hit record levels
‘Cov-lite’ proportion within CLOs surges in US markets

The amount of riskier loans offering fewer protections to lenders contained in packages of debt sold to investors have hit record levels, amid resurgent lending markets and a continued thirst for higher returns.

Managers of collateralised loan obligations, which buy up corporate loans then package and slice them into different pieces, have increased the proportion of riskier loans that their investment vehicles are allowed to buy to the highest levels on record. (…)

Already, 55 per cent of new leveraged loans come in “cov-lite” form, eclipsing the 29 per cent reached at the height of the leveraged buyout boom just before the financial crisis.

“The increased prevalence of cov-lite in the primary market has quickly translated into a similar market-wide increase,” Brad Rogoff, head of US credit strategy at Barclays, said in a recent note. (…)

While the majority of CLOs sold last year had a 40 per cent limit on the amount of cov-lite loans that could be bought by the vehicles, a 50 per cent cap has become the industry standard in 2013, according to data from S&P Capital IQ.

At least three deals have come to market this year with a 70 per cent limit.

In 2011 – the earliest data available from S&P – about 67 per cent of new CLOs came with a 30-40 per cent limit on the amount of cov-lite loans that were allowed to be placed into the deals. Limits of 70 per cent were completely unheard of. (…)

In addition to officially increasing the percentage of cov-lite loans allowed into their deals, some CLO managers have also been easing their definition of cov-lite in deal documentation, thereby allowing more of the loans into their products. (…)

Thai growth slips in third quarter Growth falls to 2.7% as investment and consumption dip

Thailand Cuts Economic Growth Forecast as Exports Falter

Gross domestic product rose 1.3 percent in the three months through September from the previous quarter, the National Economic & Social Development Board said in Bangkok today. It revised a contraction in the second quarter to no growth from the previous three months.

The state agency cut its full-year expansion forecast to 3 percent from a range of 3.8 percent to 4.3 percent projected in August, and said the economy may grow 4 percent to 5 percent in 2014. It said it expected no export growth this year, from an earlier estimate of 5 percent.

Household consumption fell 1.2 percent last quarter from a year earlier, the NESDB said. Public investment slumped 16.2 percent from a year ago as both government construction and investment in machinery and equipment declined, it said.

EARNINGS WATCH

Thomson Reuters:

Third quarter earnings are expected to grow 5.6% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.3%.

Of the 463 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%.

54% 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 83 negative EPS preannouncements issued by S&P 500 corporations compared to 9 positive EPS preannouncements. By dividing 83 by 9, one arrives at an N/P ratio of 9.2 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Factset

At this stage of Q3 2013 earnings season, 94 companies in the index have issued EPS guidance for the fourth quarter. Of these 94 companies, 82 have issued negative EPS guidance and 12 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 87%. This percentage is well above the 5-year average of 63%.

Since the start of the fourth quarter, analysts have reduced earnings growth expectations for Q4 2013 (to 6.9% from 9.6%). However, they still expect a significant improvement in earnings growth in the fourth quarter of 2013 relative to recent quarters.

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GOOD READS
 
Up and Down Wall Street  Flacks Are People, Too

By RANDALL W. FORSYTH 

Spare, if you will, a moment of pity for the PR people. That may sound surprising coming from these quarters, given journos’ near-universal disdain for public-relations folks, many of whom see their function as obstructing or obfuscating on behalf of their bosses. But after the terrible, horrible, no-good, very bad week the spinmeisters had, even we stone-hearted, ink-stained wretches must have some sympathy.

Consider the PR genius at JPMorgan Chase (ticker: JPM) who came up with the idea of a Twitter (TWTR) Q&A with the bank’s vice chairman, Jimmy Lee, a week after it helped underwrite Twitter’s much-ballyhooed initial public offering. The idea presumably was to connect with the younger, social media-hip crowd. But instead of seeking career advice from the legendary deal-maker, the exchanges at #AskJPM quickly became an outlet for the public’s ire about banks and JPM in particular.

Starting with mock questions about whales, an allusion to the infamous London Whale trading fiasco, the queries became more acerbic about the alleged misdeeds by the nation’s largest bank by assets. It descended into what one wag dubbed “snarkalypse,” but not before he tweeted: “I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending. AM I DIVERSIFIED?” Not surprisingly, JPM cut short the “conversation,” but nobody was sacked over what a spokesman e-mailed the New York Times’ Dealbook blog as “#Badidea!”

Peggy Noonan:

(…) More and more it seems obvious that the vast majority of the politicians who pushed the [ObamaCare] bill in the House and Senate never read it. They didn’t know what was in it. They had no idea. They don’t understand insurance—they’re in politics, a branch of showbiz. (…)

 

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