NEW$ & VIEW$ (4 DECEMBER 2013)

Smile Companies Boost U.S. Payrolls by Most in a Year

The 215,000 increase in employment exceeded the most optimistic forecast in a Bloomberg survey and followed a revised 184,000 gain in October that was larger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

(…) Overall, demand remained strong with 1.25 million light vehicles sold last month, up 9% from a year ago, lifting the annualized sales pace to 16.4 million vehicles, from 15.3 million a year ago and the strongest pace since February 2007, according to Autodata Corp.(…)

Haver Analytics: U.S. Vehicle Sales Surge to Seven-Year High

The latest level of sales was the highest since February 2007.

But sales had been quite weak in both September and October at 15.2M, the former due to fewer selling days and the latter presumably due to the government shutdown. Taking a 3-month moving average, the annualized selling rate has been flat at 15.6M since June 2013, even though manufacturers’ incentives have kept rising briskly. (Chart from CalculatedRisk)


Doug Waikem, owner of several new-car dealerships in Ohio, said discounts aren’t “out of control” but car makers are pushing retailers to buy more vehicles, a practice that boosts auto maker’s revenue.

“I think we’re slipping back into old habits,” Mr. Waiken said. “I’m seeing dealers with inventories going up. The banks are being very aggressive.”

On Nov. 20, I warned about a possible build up in car inventories if sales don’t accelerate rapidly. Monthly inventories of the Detroit Three were at a high 76 days in October.

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers. Company executives said the inventory levels are acceptable for this time of year.

Well, not really acceptable to Ford:

Ford announced its initial Q1/14 production schedule, with volumes expected to decline 2% year over year, which is slightly worse versus the most recent forecast from Ward’s Automotive for Ford’s production to increase by 2% year over year in Q1/14 and compares to our estimate for overall Detroit Three production to increase 4% year over year in Q1/14. (BMO Capital)

The risk remains that car sales, having bounced thanks to the wealth effect and pent up demand, have reached their cyclical peak.

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

Chains including Abercrombie & Fitch Co., Chico’s FAS Inc., Gap Inc. and Victoria’s Secret came into the fourth quarter with heavy inventory loads. The concern now is the retail industry’s weak showing over Thanksgiving weekend will force them to take bigger markdowns that could hurt their fourth-quarter profits.

Simeon Siegel, an analyst with Nomura Equity Research, looked at the inventory carried by those and other specialty-apparel retailers at the end of the third quarter and compared it with his projections for the chains’ fourth quarter sales. He found that in most cases inventory growth far outpaced sales growth. Normally, the two should be growing about the same.

“The ratios are the worst we have seen in quite a while,” Mr. Siegel said.

The companies each acknowledged that their inventories were rising and said the levels were appropriate.

Yet with holiday sales getting off to a slow start, positions that seemed appropriate several weeks ago may turn out to be too high. A survey commissioned by the National Retail Federation concluded that sales over Thanksgiving weekend fell to $57.4 billion from $59.1 billion a year ago—the first drop in at least seven years.

Fewer shoppers said they had bought clothing or visited apparel stores, according to the NRF survey, which polled nearly 4,500 consumers.

Marshal Cohen, the chief industry analyst for the NPD Group, said he spotted signs throughout the weekend that stores were overstocked, including goods stacked high up on shelves and ample merchandise in storerooms. (…)

Thanksgiving sales were generally weak, as were back-to-school sales. If Christmas sales are also weak, the inventory overhang will carry into Q1’14.

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HOUSING IS ALSO WEAK:

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The 4-week average of the purchase index is now down about 8% from a year ago. (CalculatedRisk)


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

(…) households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash. The White House and New York Mayor-elect Bill de Blasio aren’t the only ones calling for higher taxes (especially on the wealthy), as voices from the International Monetary Fund to billionaire investor Bill Gross increasingly make the case too. (…)

As for the IMF, its latest Fiscal Monitor report argues that taxing the wealthy offers “significant revenue potential at relatively low efficiency costs.” (…)

From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.

Could there now be a wealth tax anticipation effect that would incite the wealthiest to save right when they are about the only source of demand?

Trade Gap in U.S. Shrank in October on Record Exports

Exports climbed 1.8 percent to $192.7 billion on growing sales of food, petroleum products, drilling equipment and consumer goods, including jewelry.

Imports increased 0.4 percent to $233.3 billion in October, the most since March 2012. Gains in consumer goods such as toys and artwork, and fuel helped offset a slump in purchases of foreign automobiles.

Sales of goods to China, Canada and Mexico were the highest ever, pointing to improving global demand that will benefit American manufacturers. In addition, an expanding U.S. economy is helping boost growth abroad as purchases of products from the European Union also climbed to a record in October even as fiscal gridlock prompted a partial federal shutdown.

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

Core sales volume cratered 0.8% in October after declining 0.1% in September. German sales volume dropped 1.0% on the past 2 months. 

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European Stocks Suffer a Setback

European stocks fell sharply across the board today.  In Germany and France, markets have been very quiet over the last few months, steadily moving higher in small clips on a daily basis.  That came to an end today with big moves lower in both countries.  Germany is still well above its 50-day moving average and its uptrend remains intact, but the same can no longer be said for France.  As shown in the second chart below, the French CAC-40 broke hard through its 50-day today, which also represented the bottom of its multi-month uptrend channel.

Along with France, the UK (FTSE 100) and Italy (FTSE MIB) also saw significant breaks below their 50-days today.  For Italy’s major index, the 50-day had acted as key support going back to August, but that’s no longer the case after the wash out we saw today.

The fall in Europe sent US stocks lower this morning, and it was the stocks with heavy exposure to Europe that got hit the hardest.  Keep an eye on this trend in the days ahead.  

BANKING

Wall Street Sweats Out Volcker Rule With 18% of Revenue in Play

(…) The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks’ investment revenue could be reduced by the rule’s limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies’ revenue.

Goldman Sachs and Morgan Stanley may be the most affected by any additional restrictions since they generate about 30 percent of their revenue from principal trading. JPMorgan generated about 12 percent of its total revenue from principal transactions in the 12 months ended Sept. 30. The figure was less than 10 percent for Bank of America, based in Charlotte, North Carolina, and New York-based Citigroup Inc.

OIL
 
Iran threatens to trigger oil price war
Tehran warns Opec it will increase output even if prices tumble

(…) Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.” (…)

Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.

Detroit’s bankruptcy: pensions beware

(…) The news is a ruling by federal bankruptcy judge Steven Rhodes that, contrary to the arguments of public workers’ unions, pensions can be cut in the restructuring. Detroit is the largest city ever to go bust, so its bankruptcy will be widely watched regardless, but its treatment of pensions and other matters could set important precedents. (…)

Cities and unions around the US have received a wake-up call: they need to address unfunded pension obligations now, or face the ugly possibility of deep cuts later. Muni bond investors also face a new reality. The rules of the game may change and, if they do, the prices of general obligation munis will too.

Here’s the WSJ’s take on this: Detroit’s Bankruptcy Breakthrough

(…) More significant for the future of America’s cities, Judge Rhodes also dismissed the union conceit that the language of Michigan’s constitution protects public pensions as “contractual obligations” that cannot be “diminished or impaired.” The express purpose of bankruptcy is to impair contracts, and Judge Rhodes emphasized that pension benefits are “not entitled to any heightened protection in bankruptcy.”

If pension benefits are immune from bankruptcy, then unions would have even less incentive than they do now to consider the economic condition of a city when they press politicians for more benefits. They could drive cities toward bankruptcy knowing that bondholders would have to absorb nearly all the burden of restructuring. Cities would also have no recourse other than to raise taxes or cut more current services, neither of which helps urban renewal. (…)

Judge Rhodes’s wise ruling is a warning to unions and their political bodyguards that Chapter 9 is not a pension safe harbor. American public finance will be better as a result.

 

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