NEW$ & VIEW$ (21 JANUARY 2014)

Pointing up Pointing up Pointing up U.S. bankers voice new optimism as businesses line up for loans Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.

JPMorgan Chase & Co Chief Executive Jamie Dimon, who has long described himself as “cautiously optimistic” about the economy, recently dropped the modifier “cautiously,” he said on a conference call with investors last week.

“We’re using the word optimistic because we are actually optimistic,” he added.

“The sun and moon and stars are lined up for a very successful year” in the U.S., he said the next day at a conference in San Francisco.

Pointing upI don’t see any weak spots in America,” Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.

Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.

Bankers say that anecdotally, business customers are more hopeful than they had been.

“I am hearing more when I talk with customers about their interest in building something, adding something, investing in something,” Wells Fargo & Co (WFC.N) CEO John Stumpf said on a conference call with investors last week. “There is more activity going on.” (…)

“We have seen some moderate strength in the U.S.,” GE Chief Financial Officer Jeff Bornstein said in an interview, even if he cautioned that the company has not yet seen “the breakout broadly across the economy.” (…)

“We see solid demand for loans as we head into 2014” from businesses, particularly large corporations and healthcare companies, along with owners of commercial real estate, Bank of America (BAC.N) CFO Bruce Thompson said on a conference call with analysts on Wednesday. (…)

If you missed yesterday’s New$ & View$ you have missed this from the latest NFIB report which neatly complements the above:

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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And to confirm what bankers are saying, this chart of weekly loans up-to-date as of Jan. 8, 2014:

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So:

Fed on Track For Next Cut In Bond Buys

The Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year.

A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke.

Punch Read this next piece carefully, as it confirms that the U.S. industrial sector is perking up:

US oil demand growth outstrips China
Abundant energy supplies drive US resurgence, IEA report shows

US demand for oil grew by more than China’s last year for the first time since 1999 according to the International Energy Agency, in a startling indication of how abundant energy supplies are driving an economic resurgence in the US.

The IEA – the rich world’s energy club whose forecasts are the gold standard for the energy market – said US oil demand grew by 390,000 barrels a day or 2 per cent last year, reversing years of steady decline. Chinese demand grew by 295,000 b/d, the weakest in at least six years. (…)

“It is clear that the US economy is rebounding very strongly thanks to its energy supplies,” said Antoine Halff, head of oil market research at the IEA.

“Sometimes oil is a lagging indicator, but sometimes it is the opposite and shows that an economy is growing faster than thought,” he added.

Pointing up The IEA said that US demand growth was driven by fuels such as propane, which is used in petrochemical plants, and indicated a pick-up in industrial activity in the US. 

The rapid growth in US consumption has taken many analysts by surprise. As recently as last month the IEA was forecasting US demand would fall in 2014, but it is now forecasting a second consecutive year of growth. 

Pointing up US consumption also appears to be accelerating. The IEA said the latest estimate of 2013 consumption was based on “exceptionally strong US monthly data for October and robust weekly data since then”.

Surging US consumption may reduce pressure on US politicians to lift an effective ban on the export of US crude oil beyond Canada. 

The IEA has been among the most vocal advocates of allowing foreign sales of US oil, arguing that domestic US oil prices would fall sharply, discouraging production, if US producers were denied a foreign outlet for their crude.

But in its monthly report the IEA acknowledged that thanks to fast-growing domestic demand and exports of refined oil products such as diesel, “challenges to [US production] growth are not imminent”.

European oil demand is also showing signs of growth for the first time since the financial crisis and the IEA said that industrialised economies as a whole are likely seeing oil demand rise for the first time since 2010. 

As a result, oil inventories in OECD countries fell by 50m barrels in November, the most since December 2011, pushing stocks 100m barrels beneath their five-year average.

The IEA also raised its estimate for total oil demand in 2014, helping push Brent crude oil prices up almost 1 per cent to just over $107 per barrel.

EU energy costs widen over trade partners
Industry paying up to four times more than in US and Russia

The gap in energy costs between Europe and its leading trading partners is widening, according to an official paper to be released by Brussels that shows industrial electricity prices in the region are more than double those in the US and 20 per cent higher than China’s.

Industrial gas prices are three to four times higher in the EU than comparable US and Russian prices, and 12 per cent higher than in China, says the European Commission paper, based on the most comprehensive official analysis of EU energy prices and costs to date. (…)

“If we paid US energy prices at our EU facilities, our costs would drop by more than $1bn a year,” said Mr Mittal, noting the US shale gas boom and more industry-friendly policies had led to much lower costs for industrial energy users in that country.

Separately, Paolo Scaroni, chief executive of the Italian oil and gas company, Eni, said in a speech at the weekend that lower American energy costs had created a “massive competitive advantage for the US” that was driving investors and businesses to that country at a rapid pace. “This is a real emergency for Europe,” he said. (…)

California Declares Drought Emergency

Governor’s move frees state resources to cope with the growing economic and environmental threat from some of the driest conditions on record.

(…) The economic fallout is beginning to spread. The U.S. Agriculture Department on Wednesday declared parts of 11 mostly Western states to be natural-disaster areas, making farmers in places including California, Arizona and Nevada eligible for low-interest assistance loans.

In California, with its huge economy, the financial impacts are likely to ripple beyond the farmers. Growers in the Central Valley’s Westlands Water District, for instance, are expected to fallow 200,000 of their 600,000 acres this year, resulting in job losses in surrounding communities, according to a statement by the agency. Other businesses that stand to suffer include landscapers, nurseries and orchards. (…)

Euro-Zone House Prices Improve

House prices rose at the fastest quarterly pace in over two years in the third quarter of 2013, a sign that the slow economic recovery continued in the second half of last year.

Eurostat said house prices across the 17 country euro zone were 0.6% higher in the third quarter of 2013 compared with the second quarter, and fell 1.3% in annual terms.

The quarterly gain was the strongest since a 1.1% increase in the second quarter of 2011, while the annual drop was the smallest since the fourth quarter of 2011.

In the second quarter of 2013 house prices in the euro zone rose 0.2% from the previous quarter and declined 2.4% in annual terms. (…)

House prices in France also bolstered the gain, rising 1.2% in the third quarter from the second. Although Eurostat doesn’t chart official data for German house prices, the estimate they use is based on European Central Bank statistics that showed house prices in the largest euro-area economy grew around 1.0% over the same period.

In Spain Eurostat said house prices grew 0.8% on the quarter in the third quarter after a 0.8% decline in the second quarter while in the Netherlands house prices grew 0.6% after a 2.0% drop in the second quarter.

Just five of the 17 countries saw house prices fall between July and September last year, according to the data—Italy, Cyprus, Malta, Slovenia and Finland.

Thailand Seen Cutting Rates as Unrest Continues

Thailand’s central bank is expected to cut interest rates at its meeting Wednesday as political unrest continues to engulf the exporter of automobiles and electronics.

Almost daily antigovernment protests, many of them violent, have destabilized the country since late last year. Prime Minister Yingluck Shinawatra has called elections for Feb. 2 but the opposition says they will boycott the polls, meaning a likely protracted battle.

At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%. (…)

Even before the instability, the outlook for Thailand’s economy was shaky. Exports, which account for around two-thirds of the economy, have performed poorly, declining 4.1% on the year in November, the latest month for which data are available.

The automobile industry is suffering because of weak demand in other Asian markets. Exports from the nation’s electronics industry, which supplies parts for personal computers—but not the fast-growing smartphone market—also have been disappointing.

The turmoil is taking its toll on the economy. Tourism, which accounts for 7% of national output, has been hard hit as foreign travelers postpone journeys. Plans to build multibillion-dollar infrastructure, including high-speed rail lines, look likely to face delays amid the political gridlock.

The Finance Ministry last week slashed its growth forecast for 2014 to 3.1%, compared with an earlier projection of 3.5% to 4.0%. Failure to push ahead this year with the 2.2 trillion baht ($66.6 billion) infrastructure plan could push growth as low as 2%, the ministry estimated. (…)

Such monetary easing, though, might have little direct effect in the current environment. The previous rate cut failed to filter through into higher bank lending because Thai banks are currently trying to reduce debt exposure.

Thai household debt stands at 80% of gross domestic product, one of the highest ratios in Asia, reflecting years of aggressive lending to finance house purchases and auto loans. A government tax rebate two years ago for first-time car owners also helped boost debt levels. (…)

China’s Working Population Fell Again in 2013

China’s working-age population continued to shrink in 2013, suggesting that labor shortages would further drive up wages in the years to come.

The nation’s working-age population—those between the ages of 16 and 59—was 920 million in 2013, down 2.4 million from a year earlier and accounting for 67.6% of the total population, the National Bureau of Statistics said Monday. The country’s workforce dropped in 2012 for the first time in decades, raising concerns about a shrinking labor force and economic growth prospects.

Last year, the statistics bureau said the population between the ages of 15 and 59 was 937 million in 2012, down 3.45 million from a year earlier, accounting for 69.2% of the total population. The bureau didn’t explain why it began using a different starting age of 16 to measure the working-age population in 2013.

The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.

Labor shortages are still common in several regions throughout the country, and many employers reported an increase of between 10% and 15% in labor costs last year, Ma Jiantang, chief of the National Statistics Bureau, said at a news conference Monday. (…)

But what’s even more significant than the shrinking working-age population was a notable decrease in the labor-participation rate, or the share of the working-age population that is actually working, Professor Li Lilin at Renmin University of China said.

“The labor-participation rate has been dropping, especially among females in the cities,” Ms. Li said.

Rising household income amid decades-long market reforms has made it possible for some who previously would have needed to work to choose to stay at home, she added.

After adjusting for inflation, actual disposable income of Chinese in urban areas grew 7% last year, while the net income of those living in rural areas rose 9.3%, the statistics bureau said. The average monthly salary of the nation’s 268 million migrant workers was 2,609 yuan ($431), up 13.9%, it said. The rise in wages means workers are likely to benefit more from the nation’s economic growth, though rising labor costs are a growing challenge for manufacturers.

SENTIMENT WATCH

 

Stock Values Worry Analysts

(…) Ned Davis Research in Venice, Fla., has reached similar conclusions. Ned Davis, the firm’s founder, published two reports titled “Overweighted, Over-Believed and Overvalued.” He looked at an array of measures including the percentage of U.S. financial assets held in stocks, margin-debt levels and how much money managers and mutual funds have allocated to stocks.

His conclusion: Investors are overexposed to stocks, but they haven’t gone to bubblelike extremes.

Vincent Deluard, a Ned Davis investment strategist, agrees that the P/E based on forecast earnings is above average. Because forecasts are unreliable, he also tracks earnings for the past 12 months, adjusted for inflation, interest rates and economic growth. All these measures yield a similar conclusion.

“We have a market that is getting a little frothy,” Mr. Deluard says. His team expects a pullback of 10% to 20% in the next six months, but perhaps not right away. Then they expect stocks to rise, maybe for years.

“This is not 2008. This is not 2000. This is more like 1998, where you have some of the signs that you see at tops, but not at extremes,” he says. (…)

High five But some people disagree. James Paulsen, chief investment strategist at Wells Capital Management, which oversees $340 billion, notes that P/E ratios in the past have moved even higher than they are today before running into real trouble.

As long as inflation stays moderate and the Federal Reserve doesn’t raise interest rates sharply, he says, the P/E ratio on earnings for the past 12 months can hit the 20s from its current level of around 16 or 17.

High five Yet Mr. Paulsen, too, is worried that 2014 could be a volatile year and that stocks could finish with little or no gain. His concern isn’t valuation; It is that the economy could warm up. Inflation fears could spread, he says, even if actual inflation stays modest. The worries could limit stock gains.

These things are so hard to predict that he and many other money managers are urging clients not to change their holdings or try to time the market.

This is so beautiful. In just a few words, Paulsen says everything we should know, makes all possible forecasts and none at all. And the article concludes saying that things are so uncertain and unpredictable that investors just just freeze sitting on their hands. Disappointed smile

 

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