NEW$ & VIEW$ (19 NOVEMBER 2013)

EU Car Sales Maintain Growth

New car registrations in the European Union rose in October from a year earlier, the latest in a series of indications that Europe’s long auto-sales slump may be moderating.

The data, released Tuesday, marked the first time year-to-year demand for new cars has risen for two consecutive months since September 2011.

High five  But underscoring the still-daunting challenges faced by European auto makers, the October figures were lower than registrations a month earlier, and represented the second-lowest number of vehicles registered during October since 2003. During the first 10 months of the year, EU new car registrations fell 3.1% from the year-earlier period.

October new car registrations, a proxy for sales, rose 4.7% from a year earlier to 1.00 million vehicles, compared with 5.4% growth to 1.16 million in September.

Demand was supported by all major European markets, with registrations up 2.3% in Germany, 2.6% in France, 4.0% in the U.K. and 34% in Spain. The exception was Italy, where registrations fell 5.6% from a year earlier. (…)

Punch  The WSJ article failed to mention that Spain had its fourth cash-for-clunkers program last month.

Home Builders’ Confidence Eases a Bit

The National Association of Home Builders, an industry trade group, said Monday its monthly housing-market index stood at 54 in November, matching a downwardly revised figure for October. The figure measures builder confidence in the market for newly built, single-family homes.

Readings above 50 indicate that more builders view conditions as good than poor, and the index crossed that threshold in June for the first time since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s. (…)

The figure hit 58 in August and has been falling since. (…) In recent weeks, mortgage rates have started to rise, with the average rate for a 30-year fixed-rate mortgage at 4.35% as of Nov. 14, according to Freddie Mac. That is the highest rate in eight weeks, though rates remain near historic lows. (…) (Charts from CalculatedRisk and Bespoke Investment)




(…) With shoppers expected to visit fewer stores this holiday, sales are projected to advance 2.4 percent, the smallest increase since the year the recession ended, according to ShopperTrak, a Chicago-based researcher. Sales from Black Friday through Cyber Monday are projected to rise 2.2 percent year-over-year, researcher IBISWorld said yesterday. (…)

“The consumer is more deal-driven than ever,” Ken Perkins, president of researcher Retail Metrics LLC, wrote in a Nov. 14 note. “Discretionary dollars for holiday spending are limited for the large pool of lower- and moderate-income consumers due to lack of wage gains this year coupled with the increased payroll tax.” (…)

The six-fewer shopping days this year also could make the chains “push the promotional ‘panic button’ earlier than needed, putting their margins at risk,” they said. (…)

The National Retail Federation, a Washington-based trade group, is more upbeat than ShopperTrak. It has forecast that U.S. retail sales may increase 3.9 percent during the holiday season. That increase would be slightly higher than last year’s 3.5 percent gain. (…)

  • Best Buy warns promotions could hurt holiday quarter margins
  • Amazon’s Toys Cheaper Than Wal-Mart Online
  • Inc. (AMZN)’s toy prices were lower than those available online from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) last week as retailers seek to attract shoppers heading into the crucial holiday selling season.

    Amazon’s prices, excluding those from its third-party sellers, were 3 percent lower on average than Wal-Mart’s on a basket of 87 toys, according to a study conducted by Bloomberg Industries on Nov. 14. Including the Marketplace vendors, which use Amazon’s platform to sell their own products, the pool of comparable goods expanded to 115, and Wal-Mart was cheaper by 1.2 percent, on average.

    The pricing battle may help determine which retailers win consumers’ toy purchases during the holiday season. Sales in November and December account for 20 percent to 40 percent of U.S. retailers’ annual revenue, according to the National Retail Federation. (…)

    Wal-Mart’s prices were 2.4 percent lower than at Target, 5 percent less than Sears Holdings Corp. (SHLD)’s Kmart and 7.2 percent lower than Toys “R” Us Inc., according to the study.

  • Chain store sales rose 0.1% last week and the 4-week m.a. is up 2.3% YoY.


Worldwide business confidence lifts from post-crisis low

The 13th Markit global survey of business expectations for the year ahead, covering 11,000 companies, indicated that firms have become more upbeat about their business prospects since the post-crisis low seen mid-year, resulting in higher expectations about employment and investment. However, optimism remains well below the highs seen earlier in the recovery, indicating that global economic growth is likely to remain subdued in the coming year.

The number of companies expecting their business activity levels to rise in the next 12 months outnumbered those anticipating a decline by +33%, up from +30% in June but below the +39% reading seen in February.


Improving prospects for the developed world contrasted with still-low levels of confidence about the year ahead in the emerging markets.
Among the developed world, the upturn in confidence was led by the UK, where the outlook is the brightest seen since the survey began in early-2009. Optimism also improved in the eurozone, hitting its highest since mid-2011, notably improving in the ‘periphery’, with Spain and Italy reporting a higher degree of optimism than Germany and France, the latter seeing the weakest positive sentiment.

In the United States, business confidence about the year ahead was the second–lowest seen since the financial crisis, up only slightly on the low seen in June but above the global average. Optimism edged up slightly in both manufacturing and services but remained subdued. Companies again fretted about the impact of the ongoing uncertainty surrounding the government budget.

Worries about the outlook meant employment intentions were only marginally higher than the survey low seen in June, though capex plans recovered to a slightly greater extent.

In Japan, optimism remained weak, and slipped compared to mid-year, suggesting companies are unconvinced that the recent growth spurt is turning into a sustainable and robust upturn, in many cases harbouring concerns about growth prospects in other Asian countries, especially China. However, price pressures are set to improve, with input costs and output charges both rising at slightly faster rates.

Prospects among the four largest emerging markets remained unchanged on the post-crisis low seen in the mid-year survey. Both India and Russia saw optimism slide, while China’s outlook failed to improve on the low seen in the summer. Only Brazil saw business sentiment improve, reaching a new post-crisis high, buoyed by optimism about the positive impact of the soccer World Cup and Olympics.


High five  Corporate Results Expose Lack of Confidence

Investors sifting through third-quarter financial results should be a bit nervous about the future growth of the U.S. economy.

Though corporate profits were higher overall, companies slashed their spending on factories, equipment and other performance-enhancing investments by 16% from year-earlier levels, according to an analysis by REL Consultancy for The Wall Street Journal.

Instead of putting money to work in their operations, companies gave more of it back to shareholders in the form of buybacks and dividends.

Weakness in emerging markets and strong currency headwinds also were common themes in the quarterly results. (…)

Almost 90% of the companies that have given financial forecasts for the final quarter of the year have prompted Wall Street analysts to lower their numbers. Only a dozen companies have painted rosier pictures, according to data tracker FactSet.

“Companies are reluctant to raise the bar,” said John Butters, senior earnings analyst at FactSet. “We’re not really seeing a huge increase in companies turning negative, but the number of companies giving positive guidance is almost half of what we’ve seen lately.”

A broad range of companies scaled back capital spending plans during the quarter, including Honeywell Inc., Corning Inc., Yahoo Inc., Cliffs Natural Resources Inc. and McDonald’s Corp. (…)

To be sure, earnings continued to be strong in the third quarter. With more than 90% of companies in the S&P 500 index having posted results for the quarter, blended earnings were up 3.5% from a year earlier, and profit remained in record territory, according to FactSet. (…)

Profit margins, at 9.6%, were near records, thanks to cost cutting, automation and lower commodity prices. But revenue growth was a tepid 2.9% from a year earlier. (…)

The lack of confidence is part of the reason why U.S. companies were on pace to have more than $1.144 trillion in cash at the end of the quarter, making it the fourth quarterly record in a row, according to S&P Dow Jones Indices. (…)

Corporate buybacks totaled $103 billion in the quarter, an increase of 12% from the second quarter, excluding Apple’s record $16 billion buyback in the spring, according to FactSet. (…)

Companies also announced a combined 2.5% increase in dividend payments, which now total almost $75.5 billion for the quarter, according to FactSet. (…)

Another prominent trend in third-quarter results was the harm caused by the dollar’s strength against the currencies of several major U.S. trading partners, including Japan, Brazil and India.

The dollar has climbed between 11% and 20% against the currencies of those three countries, making U.S.-made goods more expensive there. (…)

OECD Warns of U.S. Threat to Global Recovery

The uncertain future of U.S. fiscal and central bank policies poses a growing risk to a global economic recovery that has already been weakened by a slowdown in growth in many developing economies, the Organization for Economic Co-operation and Development said Tuesday.

In its twice-yearly Economic Outlook report, the Paris-based research body said the U.S. debt ceiling should be abolished, and replaced by “a credible long-term budgetary consolidation plan with solid political support.”

The report marks a significant shift in the OECD’s focus of concern, which in recent years has been centered on the euro zone’s attempts to tackle its fiscal and banking crises. While the OECD remains worried about the euro zone’s frailties, the most immediate threats to the global recovery now appear to come from the U.S.

The OECD said a series of events has undermined confidence and stability in recent months, including the “surprisingly strong” reaction by investors to the possibility that the Federal Reserve will soon start to reduce its asset-purchase program. That led to related concerns about developing economies, and was followed by a “potentially catastrophic” crisis precipitated by negotiations over the U.S. debt ceiling.

“These events underline the prominence of negative scenarios and risks that the recovery could again be derailed,” OECD chief economist Pier Carlo Padoan said.

The heightened risks from the U.S. are in addition to continued ones from a fragile euro-zone banking sector and Japan’s fiscal situation, the OECD said.

The warnings came as the OECD forecast only a modest economic recovery through 2015. The combined economies of the 34 members of the OECD will grow 1.2% this year, before accelerating to 2.3% in 2014 and 2.7% in 2015, according to its forecasts.

Growth rates between developed economies will continue to differ markedly with the euro zone contracting 0.4% this year before growing 1% next year, while the U.S. will grow 1.7% and 2.9% over the same periods.

The twice-yearly economic outlook is slightly weaker than in May, mainly because of an expected slowdown in some large developing economies that partly reflects their vulnerability to capital outflows when the Federal Reserve does eventually start to reduce its stimulus program.

“The turmoil following the tapering discussions in mid-year has revealed how sensitive some emerging market economies are to U.S. monetary policy,” the OECD said.

The OECD cut its 2014 growth forecast for Brazil to 2.2% from 3.5% in May, its forecast for India to 4.7% from 6.7%, and its forecast for Indonesia to 5.6% from 6.2%. It cut its growth forecast for China more modestly to 8.2% from 8.4%, still leaving it above that of many other economies.

The research body said the weaker growth outlook for some developing economies was more deeply rooted in “long-standing structural impediments that had been hidden by abundant capital inflows.” Solutions to those problems vary from country to country, but generally developing economies need more formal and efficient labor markets and stronger, market-based financial systems, Mr. Padoan said.

Largely as a result of its more downbeat assessment of the outlook for large developing economies, the OECD cut its forecast for global gross domestic product growth by around 0.5 percentage points this year and next to 2.7% and 3.6%, respectively. (…)

But not to worry:

Mohamed El-Erian
Yellen shows Fed remains risk markets’ best friend

(…) and not by choice but by necessity.

This is music to the ears of investors conditioned to position their portfolios to gain from steadfast central bank liquidity support, especially in the US. But with Wall Street having already reflected this in asset prices, and with the benefits for Main Street continuing to disappoint, investors may well need an increasingly differentiated approach if they are to continue to benefit from the “central bank put”. (…)

Ms Yellen left no doubt that she is committed to maintaining the Fed’s current approach – one that places asset markets front and centre in the transmission mechanism linking Fed actions to policy objectives.

Positioning for the impact of Fed policy rather than fundamentals has been a winning strategy for investors – not only in the immediate aftermath of the 2008 global financial crisis, but also in the past three years during which the Fed has pivoted from normalising markets to pursuing much more ambitious macroeconomic objectives. But they now need to be increasingly mindful of the level of prices and the associated (and growing) number of disconnects that the Fed is underwriting.

This year’s impressive performance of risk assets (including the 21 per cent year-to-date increase in the MSCI world equity index as of Friday, powered in particular by US stocks) contrasts with a global economy still stuck in third gear. (…)

Fed policy fuels wealth-led growth
Still no sign of a real economic recovery

(…) Ms Yellen’s remarks, prepared for her confirmation hearings last week, contained no hint of tapering. That underscores the Fed’s obsessive fear of the negative wealth effect of any slowdown in asset purchases and a move towards higher interest rates. Five years after the meltdown, it is clear the Fed’s quantitative easing is not about a real economic recovery, it is only about generating the liquidity that gives rise to asset inflation and wealth-led growth. Or super wealthy people-led growth since wages and incomes for the rest of us are not rising at all. (…)


Stocks Are Way, Way Overvalued: GMO

As U.S. stocks sit in record territory, money managers at GMO – never a bunch to shy away from bold calls – are warning that the market is significantly overvalued.

As U.S. stocks sit in record territory, money managers at GMO – never a bunch to shy away from bold calls – are warning that the market is significantly overvalued.

In a report titled ”Breaking News! U.S. Equity Market Overvalued!“, Ben Inker, head of the asset allocation group at GMO, comes out with some eye-popping numbers. He argues that the S&P 500′s fair value is 1100, about 40% below Monday’s closing level, and the expected return is -1.3% a year, after inflation, for the next seven years.

Small-cap valuations, he writes, are even more elevated. (…)

Mr. Inker’s call came after comments by billionaire investor Carl Icahn, who told a conference sponsored by Reuters that he was “very cautious” on the stock market and could see a “big drop” because earnings at many companies have been goosed by low borrowing costs rather than strong management. (…)

GMO’s calls are widely watched in part because the firm’s money managers don’t have a reputation for being perma-bulls or perma-bears. Mr. Grantham was early in predicting the financial crisis and then reversed course before markets started rebounding in 2009. He has also advocated investing in timber and high-quality dividend-paying stocks. (…)

Here’s the conclusion to Mr. Inker’s rather downbeat analysis:

“We don’t consider non-U.S. equity markets a screaming buy. But as value managers listening for any assets, anywhere, that are screaming to be bought, the world currently sounds a deathly quiet place. The hoarse whisper of “buy me” coming from European and emerging equities (as well as the polite cough for attention coming from U.S. high quality stocks) comes through loud and clear. “

Hmmm… U.S. equities 40% overvalued and still willing to buy equities. I wouldn’t.

But others are also trumpeting Euro equities:

Europe Stocks Seem Cheap

As U.S. stocks push to record highs, more U.S. money managers are looking for better opportunities across the pond.

The big rally in U.S. stocks has pushed valuations higher than those of European shares. Meanwhile, sentiment is rising that Europe has gotten past the worst of its debt crisis, and some say the European Central Bank appears to be on a path for more easing of monetary policy, both of which augur for more room to run in European stocks.

Unlike the S&P 500, which is well into record territory, the Stoxx Europe 600 stock index hasn’t recovered to its precrisis peak. The S&P 500 has risen 26% this year while the Stoxx Europe 600 is up 16%.

Aren’t you convinced by this great analysis?

What about these mundane facts?

  • U.S. P/Es have exceeded Euro P/Es by an average of 10% over the last 25 years. In fact, the U.S. premium is at its low point of the past 14 years.
  • US trailing EPS are some 20% above their 2007 peak, whilst in Europe they are some 25% below.
  • U.S. profit margins are higher than Euro margins.
  • The U.S. economy keeps growing faster than that of the Eurozone.
  • U.S. inflation is higher than that of the Eurozone.
  • The U.S. government is more efficient than that of the Eurozone, which speaks volume about the latter.
  • The Fed is also more efficient than the ECB.


These reasons amply justify higher multiples for American companies.

This is not to deny the possibility that Eurozone profits could rise faster than U.S. profits in the next few years. In fact, this is a key argument for many strategists. The hurdles are significant, however. Slow domestic growth, a strong euro, low inflation and very liberal labour laws are big impediments to profit margins. Don’t simply extrapolate America’s margin expansion. Expectations for rising margins in Europe have remained elusive so far.

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A case in point: the following is especially true in Europe:

Just kidding  Business taxes fall more heavily on labor.

Companies around the world are paying more in employment taxes than in profit taxes, the FT reports. Labor taxes accounted for 32% of the average total tax rate paid by midsize businesses in 2004, but now account for almost 38% of the rate, compared with slightly more than 37% for profit taxes. Mary Monfries, tax partner of PwC, said the shift is a world-wide trend, “with governments lowering profit taxes to encourage investment and entrepreneurship. Getting the right tax mix is a hard call. Lower profit taxes can drive growth which brings employment, whilst lower employment taxes can ease the cost of hiring.”

Fed Official Says Big Banks Need Higher Capital Levels Very large banks that rely on broker-dealer operations need to hold higher levels of capital to reduce the risk to the broader financial system, Federal Reserve Bank of Boston President Eric Rosengren said.

European banks are also in a worse situation.

Now you know the essentials. All the best.  Winking smile


One thought on “NEW$ & VIEW$ (19 NOVEMBER 2013)

  1. Looking at the markets once more to see what is actually happening against what should happen we see a stock market that is just 5% from its bull market peak which implies a growing economy and the U.S. Dollar that has gone into reverse gear that implies a weaker economy and low interest rates with more money printing. Whilst not signaling a double dip recession, it is neither signaling a strong U.S. Economic recovery therefore continues to suggest a low growth outcome as the most probable outcome for the U.S. over the next few years which is similar in expectations for the U.K. economy i.e. well below trend growth for 2011 to 2013.

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