NEW$ & VIEW$ (20 JANUARY 2014)

China’s Economic Growth Slows to 7.7%

China’s economic growth slowed slightly in the fourth quarter, complicating the challenge for the country’s leaders as they seek to reshape the world’s No. 2 economy.

In the fourth quarter of 2013, China’s economy grew 7.7% from a year ago, slower than the 7.8% it posted in the third quarter, according to data released Monday by China’s National Bureau of Statistics. That translates into 7.4% growth on a quarter-to-quarter annualized basis, the way most major economies report growth. China doesn’t release a similar figure.

Investment, which accounts for about half of China’s economic output, was a major drag on growth in the fourth quarter, a result of monetary authorities making credit more expensive. Fixed-asset investment expanded 19.6% on-year in 2013, down from 19.9% from the first 11 months of the year, indicating slowing capital spending, according toANZ Bank. (…)

The economy was growing more slowly in December than at the beginning of the final quarter of the year.

Louis Kuijs, an economist at RBS in Hong Kong, points out that industrial production grew 9.7% on-year in December versus 10.3% in October. And export growth slowed in December after a strong showing in November. That could point to a slow start to 2014, unless other drivers like exports or local demand pick up above expectations.

One area of brightness in the fourth quarter was retail sales, which grew 13.6% on-year in December, almost the same pace of growth as November. (…)

Sarcastic smile  See anything strange in this CLSA chart? How about 7 straight quarters of stable growth.

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China’s Central Bank Providing Short-Term Cash to Lenders

In a rare accommodative measure, the state-run People’s Bank of China is providing short-term cash to the country’s biggest lenders, in a move seen as a bid to avoid a liquidity crisis near the Lunar New Year holiday.

The PBOC said it will inject further liquidity into the system via reverse purchase agreements, a form of short-term loans to banks, when it conducts its twice-a-week open market operation on Tuesday.

It said the moves are intended to maintain the stability of China’s money market ahead of the weeklong Spring Festival that kicks off on Jan. 31. (…)

The central bank’s apparent reassurance came after China’s financial system showed fresh signs of stress on Monday, with short-term borrowing costs for banks soaring on heavy holiday-induced demand for cash and rising worries over the vast shadow-banking sector.

The benchmark cost of short-term loans between banks, the weighted average of the seven-day repurchase agreement rate, rose to 6.59% on Monday, from 5.17% Friday and 4.35% Thursday. The current level marks the rate’s highest since Dec. 23, when it hit 8.94%.

The surging rates in the money markets also hammered stocks, with the benchmark Shanghai Composite falling below the key level of 2000 to 1991.25, its weakest in almost six months and down 5.9% this year, the worst performer in Asia. (…)

Housing Starts and Building Permits Decline

Housing Starts and Building Permits for the month of December both showed month/month declines but were still up compared to last year.  Relative to expectations, though, Housing Starts exceeded forecasts (999K vs. 985K), while Building Permits missed forecasts (986K vs. 1014K).

 

U.S. LABOR SUPPLY/DEMAND

The NFIB detailed report for December shows that employment was likely stronger than what the last NFP reported:

Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development (apparently undetected by BLS).

Note the recent  spike in the marginal increase in employment per firm, bumping against its historical highs.image

Coming wage pressures?

Two percent reported reduced worker compensation and 17 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (up 5 points), the best reading since 2007. A net seasonally adjusted 13 percent plan to raise compensation in the coming months, down 1 point from November. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery.

Margins pressures?

With a net 19 percent raising compensation but a net negative 1 percent raising selling prices, profits will continue to be under pressure. Higher compensation costs are not being passed on to customers, but there will be more pressure to do so as Obamacare begins to impact small businesses in 2014.

Pointing up Small firms capex is also brightening:

The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005.

Of those making expenditures, 43 percent reported spending on new equipment (up 5 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 6 points). The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy. 

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EARNINGS WATCH

We now have 52 S&P 500 companies’ Q4 results in, 19 of which are financials.

  • Of the 53 companies in the S&P 500 that have posted earnings for the latest quarter, 57% have topped analysts’ average earnings estimate, according to FactSet.
  • Out of the 52 companies in the gauge that have posted fourth-quarter results so far, 62 percent have exceeded analysts’ profit estimates, and 63 percent have topped revenue projections, according to data compiled by Bloomberg.

S&P’s own official tally shows a 52% beat rate and a 35% miss rate. Financials beat in 58% of cases while only 48% of non-financials beat (39% missed), so far.

Zacks has the best analysis:

The 2013 Q4 earnings season ramps up in the coming days, but we have results from 52 S&P 500 members already, as of Friday January 17th. And even though the early going has been Finance weighted, the overall picture emerging from the results thus far isn’t very inspiring.

The earnings reports thus far may not offer a representative sample for the S&P 500 as a whole. But we do have a good enough sample for the Finance sector as the 19 Finance sector companies that have reported already account for 47.5% of the sector’s total market capitalization and contribute more than 50% of the sector’s total Q4 earnings. (…)

Total earnings for the 19 Finance sector companies that have reported already are up +14.2% on -1% lower revenues. The earnings beat ratio is 63.2%, while only 36.8% of the companies have come out with positive top-line surprises.

Pointing up This looks good enough performance, but is actually weaker than what we had seen from these same banks in recent quarters. Not only are the earnings and revenue growth rates for the companies below what they achieved in Q3 and the 4-quarter average, but the beat ratios are weaker as well. The insurance industry, the sector’s largest industry behind the large banks, has still to report results and could potentially turnaround this growth and surprise picture for the sector.

We haven’t seen that many reports from companies outside of the Finance sector. But the few that we have seen don’t inspire much confidence. Hard to characterize any other way what we have seen from the likes of Intel (INTC), CSX Corp. (CSX), UPS (UPS) and even GE (GE). But it’s still relatively early and we will know more in the coming days.

The lack of positive surprises is ‘surprising’ following the sharp drop in Q4 estimates in the run up to the start of the reporting season.

The composite picture for Q4 – combining the results for the 52 companies that have reported already with the 448 still to come – is for earnings growth of +7.1% on +1.5% higher revenues and 50 basis points higher margins. The actual Q4 growth rally will most likely be higher than this, a function of management’s well refined expectations management skills.

Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +25.0%. Outside of Finance, total earnings growth drops to +3.4%.

Profits Show Banks Back From the Brink

Large U.S. banks are finally emerging from the wreckage of the financial crisis, on the back of rising profits, a recovering economy and drastic cost cutting.

(…) As a group, the six earned $76 billion in 2013. That is $6 billion shy of the collective all-time high achieved in 2006, a year U.S. housing prices peaked amid a torrid economic expansion. (…)

One way for banks to improve their standing with investors is to cut compensation, jobs and business lines. This past week, Goldman Sachs announced its 2013 payroll was 3% lower than 2012’s, while Bank of America disclosed it eliminated 25,000 positions during the year. J.P. Morgan and Morgan Stanley both are in the process of exiting from the business of storing physical commodities.

Banks still face numerous headwinds, including high legal costs as regulators and investigators work through a backlog of industry activity and scrutinize everything from overseas hiring to potential manipulation of currency and interest-rate benchmarks. Higher borrowing costs are reducing homeowners’ demand for mortgages, a major profit center for some banks during the early half of 2013, and several firms reported fourth-quarter trading declines in fixed-income, currencies and commodities trading.

Despite the many challenges, big banks are beginning to find ways to boost revenue. The six largest banks posted a 4% revenue gain during 2013.

Smaller banks are recovering, as well. Earnings reports are still being released, but, together, all 6,900 commercial banks in the U.S. are on pace to match or exceed the industry’s all-time earnings peak of $145.2 billion in 2006, according to an analysis by The Wall Street Journal of Federal Deposit Insurance Corp. data. (…)

Another factor fueling earnings growth is a dramatic reduction in the reserves banks have set aside for future loan losses, as fewer U.S. borrowers default. J.P. Morgan, Bank of America, Citigroup and Wells Fargo freed up $15 billion in loan-loss reserves during 2013, including $3.7 billion in the fourth quarter. That money goes directly to the bottom line, boosting profits. The releases made up 16% of these banks’ pretax income for that final quarter. (…)

A closely watched investment-performance ratio called return on equity is well below levels achieved a decade ago. What pushed ratios lower were hundreds of billions of dollars of additional capital raised to protect the institutions from future problems and comply with new regulatory guidelines.

Goldman’s return on equity, which hit a peak of 33% in 2006, fell to 11% in 2013. The ratio was even lower for J.P. Morgan and Bank of America.

Banks are scrambling to make changes as a way of improving returns. The six biggest banks have reduced their workforces by more than 44,000 positions in the past year, while J.P. Morgan told investors it was done with an aggressive branch expansion and would no longer add to its network of 5,600 locations. Goldman Sachs’s 2013 pay reduction brings compensation expenses down to 36.9% of total revenue, the lowest percentage since 2009.

Banks will have to show they can earn money from lending and other businesses, as opposed to releasing reserves, said Fitch Ratings analyst Justin Fuller. Lending for the biggest banks was up 2% on the year, but there were limited signs that slim margins on those loans had begun to widen or at least stabilize.

Light bulb But if capex strengthen, loan demand will rise. Higher volume with the current steep yield curve = higher profits…

SENTIMENT WATCH

VOX POPULI (Gallup)

Half of Americans say investing $1,000 in the stock market right now would be a bad idea, even though the Dow Jones Industrial Average and Standard & Poor’s 500 index have recently hit record highs. Forty-six percent of Americans say investing $1,000 in the stock market would be a good idea. Trend: Americans' Views on Investing in the Stock Market

In January 2000, when the Dow was at a then-record high of 11,500, Americans were much more likely to say investing in the stock market was a good idea than they are today. A record-high 67% of Americans that month said investing was a good idea.

After the onset of the 2008-2009 Great Recession, the percentage of Americans who believed investing in the markets was a bad idea swelled to 62%. While that percentage has dropped, Americans’ confidence in buying stocks has clearly not returned to levels seen during the heady days of the early 2000s.

Stock Ownership Among Americans Still Near Record Low

Fifty-four percent of Americans now say they own stock, little changed from the 52% who said so last April — which was the lowest in Gallup’s 16-year trend of asking this question in its current format. Stock ownership is far lower than it was during the dot-com boom of 2000, when 67% said they owned stock — a record high. While staying above 60% for much of the 2000s, the ownership percentage fell into the 50% range as the Great Recession took hold and has not yet rebounded. Despite economic booms and busts, however, a majority of Americans have maintained an investment in the markets in the past 15 years. Trend: Americans' Ownership of Stocks

Although fewer Americans now own stocks, those who do, not surprisingly, are much more likely than non-owners to believe investing in the market is a good idea, 59% to 30%.

Bottom Line: The Dow is 5,000 points higher today than it was in 2000, but confidence in the markets is much lower, as is participation.

VOX DEI: Bearish Bond Belief At 20-Year Extremes

Jeff Gundlach recently warned that the trade that could inflict the most pain to the most people is a significant move down in yields (and potential bull flattening to the yield curve). (…) despite this, investors remain entirely enamored with stocks and, as the following chart shows, Treasury Bond sentiment now stands at 20-year extremes of bearishness.

Citi: “Time For Yields To Correct Lower”

The end of 2013 saw bond yields at their highs and the US equity markets making higher highs. This came as the Federal Reserve started to finally slow down its asset purchases and, as Citi’s Tom Fitzpatrick suggest, has now seemingly turned a corner in its so called “emergency” policy. That now leaves room for the market/economy to determine the proper rate of interest; and, he notes, given the patchy economic recovery, the fragile level of confidence and the low levels of inflation, Citi questions whether asset prices belong where they are today. As the Fed’s stimulus program appears to have “peaked” Citi warned investors yesterday to be cautious with the Equity markets; and recent price action across the Treasury curve suggests lower yields can be seen and US 10 year yields are in danger of retesting the 2.40% area.

US economic surprise index

General economic surprises look like they are now approaching a peak again. Only twice over the past 7 years have we been above current levels and they were short lived.

We should note that this index is naturally mean reverting as expectations rise with better than expected data and vice versa. A fall back below zero if seen may be quite important. (…)

High five  There is a lot more to Citi’s technical analysis, all mostly pointing to lower rates ahead. But before you get too technical, go back up and re-read the piece on the NFIB report.

Just kidding Up and Down Wall Street

Another sign of froth in European sovereign debt is described by Peter Tchir, a credit-market veteran who heads TF Market Advisors: Spain’s bonds due 2023 yield 3.68%, just a hair above the 3.60% from Apple‘s (AAPL) bond due 2023 issued in its then-record $17 billion offering to fund its share buyback. He admits the comparison is well, apples to oranges.

“One is denominated in euros, the other in dollars. One is a sovereign nation with devoted citizens, the other is Spain. One has so much cash on hand that trying to convince them to do something with that cash hoard has become the ultimate hedge-fund pastime. The other would have trouble rubbing two pesetas together, even if it hadn’t moved to the euro. Fifty percent of the world’s population under the age of 25 already owns or wants to own a device made by Apple. That is still a little behind the 57% in Spain who want a job (assuming some of the unemployed youth actually want jobs).”

GOLD

Physical Gold Shortage Goes Mainstream

As BNN reports, veteran trader Tres Knippa, pointing to recent futures data, says “there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion.” As he goes on to explain to a disquieted anchor, “the underlying story here is that the people acquiring physical gold continue to do that. And that’s what is important,” noting large investors like hedge fund manager Kyle Bass are taking delivery of the gold they’re buying. Knippa’s parting advice, buy physical gold; avoid paper.

One of the problems…

That won’t end well…

BUT, WILL THIS END WELL?

IMF warns on threat of income inequality

Lagarde raises stability concerns

(…) “Business and political leaders at the World Economic Forum should remember that in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability,” she told the Financial Times. (…)

The message is hitting home. Shinzo Abe, Japan’s prime minister, is coming to Switzerland with the message that Japanese companies must raise wages, while the government of David Cameron, his UK counterpart who is also attending the forum, called for a large inflation-busting rise in the British minimum wage last week.

In U.S., 67% Dissatisfied With Income, Wealth Distribution

Two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S. This includes three-fourths of Democrats and 54% of Republicans.

Satisfaction With Income and Wealth Distribution in the U.S., January 2014

The same poll updated a long-time Gallup trend, finding that 54% of Americans are satisfied, and 45% dissatisfied, with the opportunity for an American “to get ahead by working hard.” This measure has remained roughly constant over the past three years, but Americans are much less optimistic about economic opportunity now than before the recession and financial crisis of 2008 unfolded. Prior to that, at least two in three Americans were satisfied, including a high of 77% in 2002.

Satisfaction With Americans' Opportunities to Get Ahead by Working Hard, 2001-2014 Trend

 

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