NEW$ & VIEW$ (22 JANUARY 2014)

COLD PATCH = SOFT PATCH COMING?

Chain store sales continue very weak, partly because of the weather. Whatever the reason, that may exacerbate the inventory problem at retail and lead to a soft patch in the spring as reorder rates are cut.

Frigid weather pulled chain-store sales steeply lower in the January 18 week, down 1.9 percent on ICSC-Goldman’s same-store sales index for a year-on-year rate of only plus 0.9 percent which is the lowest reading of the whole recovery. The report warns that cold weather in the ongoing week is likely to depress readings in this report for next week.

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IMF Raises Global Growth Outlook

The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October. (…)

The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid the fights in Congress over the federal balance sheet and spending. (…)

For Europe, however, officials warned that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said, “Southern Europe continues to be the more worrisome part of the world economy.”

Exports are strengthening in the Southern euro-zone countries. But demand is slack, with weakness among banks and businesses. More budget tightening is needed as well, the IMF said, and unemployment remains at dangerously high levels, especially among youth. (…)

For Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan’s government will continue to face the challenge of trimming its budget enough to reassure investors, while not slowing the recovery.

The fund also raised the growth forecast for the world’s No. 2 economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that China’s need to contain escalating risks in the financial sector without excessively slowing growth will be a major challenge “and a delicate balancing act.”

with weak economic policies are likely to be most affected, he said. (…)

INFLATION/DEFLATION

 

Late Tuesday, a panel created by Reserve Bank of India Governor Raghuram Rajan advised the central bank to make significantly lower consumer prices the central target of its monetary policy.

The Consumer-price index is currently hovering near 10%, compared with about 6% for wholesale prices. The panel suggested the central bank aim to reduce CPI to 8% by 2015 and 6% within two years before adopting a target range around a 4% anchor.

Surprised smile Inflation Jumps in Australia Australian consumer prices rose 0.8% in the December quarter and climbed 2.7% from a year earlier, numbers that were significantly higher than expected.

Core inflation, which attempts to strip out extraordinary events such as extreme weather or new taxes, rose by an average of 0.9% in the quarter from the preceding one, compared with the 0.6% expected by 15 economists surveyed by The Wall Street Journal. Core inflation climbed 2.6% in the fourth quarter from a year earlier.

Aussies Stunned By Inflation Surprise Australia’s central bank can no longer assume the country’s inflation outlook will remain pleasantly benign, a revelation that will dramatically complicate the setting of interest rates in 2014.

(…)So how is it that a weak economy like Australia, which is weighed by a severe slowdown in mining investment, low confidence and weak commodity prices, can have an inflation problem?

There are a few contributing factors.

The first is the fall in the Australian dollar. The Aussie was the worst-performing major currency over the last 12 months, falling around 17% against the U.S. dollar. Drops of that magnitude must be reflected in higher import prices at some point. Tradable, or imported inflation, rose 0.7% in the fourth quarter from the third, building on a 1.2% rise in the third quarter from the second. (…)

The second component of the inflation riddle in Australia is homegrown. So-called non-tradable inflation, or that generated by goods and services produced locally, has been running hot for years. Some economists call it a structural problem, fearing it will take a long time to be weeded out of the consumer price index.

Non-tradable inflation rose 0.8% in the fourth quarter, adding to a long string of elevated results that date back over years.

Adam Boyton, the chief economist at Deutsche Bank, based in Sydney, says rising government charges are at the heart of the domestic inflation problem. What he terms as “government inflation” is running at annual rate of 5.7%. Inflation elsewhere in the economy is running at just 1.8%.

The list of government price hikes is long and range from environmental taxes to electricity, water and sewerage costs, coupled with higher levies on alcohol and tobacco. (…)

Floating Notes Debut in U.S as More Cash Chases Fewer Securities

The U.S. Treasury Department’s floating-rate notes may generate strong investor demand given a scarcity of money-market securities and a looming debt limit that’s accelerating a decline in bill supply.

Floaters would be the Treasury’s first new security in 17 years. Details of the inaugural sale of the two-year notes Jan. 29 will be announced tomorrow even as legislation on the nation’s borrowing limit causes the Treasury to scale back on bill sales and as dealers reduce activity in the repurchase agreement market.

WHATEVER IT TAKES

Italian Bad Loans Hit Record High – Up 23% YoY

(…) Having risen at a stunning 23% year-over-year – its fastest in 2 years, Italian gross non-performing loans (EUR149.6 billion) as a proportion of total lending rose to 7.8% in November (up from 6.1% a year earlier). As the Italian Banking Association admits in a statement today, deposits are declining (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.

Italian bad loans continue to soar – entirely ignored by the nation’s bond market participants (why worry!?)

EARNINGS WATCH

While just eight companies have provided outlooks for their first-quarter profits so far, the six that had disappointing outlooks saw shares fall an average of 3.1%, according to FactSet, a steeper drop than usual. Over the past five years, companies’ stock prices have lost an average of 0.8% after providing disappointing forecasts. (WSJ)

Ed Yardeni:

It’s not over yet, but this is turning out to be a very unusual earnings season. During each of the previous three earnings seasons last year, analysts lowered their estimates as the season approached. That set up investors to be pleasantly surprised as actual earnings turned out to be a bit better than expected.

So far, there has been no similar curve ball. Instead, during the week of 1/16, the blended actual/estimate for Q4 fell to a new low for the weekly series. The current projected growth rate for the quarter is just 6.6% y/y.

Verizon Dials Up a Big Pension Boost

Verizon Communications Inc.’s earnings got a big lift Tuesday from a change it made in its pension accounting a few years ago, and some other companies could see similar gains in the days to come.

Verizon recorded a $6 billion pretax gain in its fourth-quarter earnings for “severance, pension and benefit” credits – largely due to a gain from “mark-to-market” accounting for its pension plan, the method to which Verizon switched in 2011. After taxes, that amounted to $3.7 billion, or $1.29 a share – the biggest contributor to Verizon’s fourth-quarter earnings of $1.76 a share under official accounting rules.

That was a major turnaround from the fourth quarter of 2012, when Verizon reported a severance, pension and benefit loss of $7.2 billion pretax, or $1.55 a share after taxes, that weighed down its earnings.

Verizon is one of a handful of big companies that have made an optional switch to mark-to-market accounting, to make the results of their pension plans easier for investors to understand. They follow market prices for their pension assets, and they no longer “smooth” the impact of pension gains and losses into their earnings over a period of years.

Those companies recognize the impact of their switch through a fourth-quarter adjustment to their earnings each year, to account for the difference between their expectations for their pension plans’ performance and the year’s actual results. For 2011 and 2012, that meant losses, largely because interest rates were falling – that increased the current value of pension obligations, which affected the plans’ expenses.

But with some rates rising in 2013, and the stock market turning in a particularly strong performance for the year, the value of pension obligations fell, benefitting Verizon and other mark-to-market companies. The Wall Street Journal reported earlier this month that accounting observers expected some of them to report significant fourth-quarter gains. (…)

Among the other companies that could see similar fourth-quarter gains in coming days: AT&T Inc., which reports earnings on Jan. 28, and Kellogg Co., which reports on Feb. 6. Both have made the mark-to-market switch; AT&T reported a $10 billion mark-to-market loss in the fourth quarter of 2012, while Kellogg reported a $401 million loss in that period. (…)

Poor Start to European Earnings

Europe’s first earnings season of the year is off to a rough start, with a number of typically reliable blue-chip companies surprising markets with profit warnings and other bad news.

In recent days, Royal Dutch Shell PLC, Deutsche Bank AG, SAP AG, Unilever PLC and Alstom SA all warned about slowing profit at the tail end of last year or lower expectations for the near future. Executives have cited an array of industry-specific reasons. (…)

German business-software supplier SAP said Tuesday that it would take longer than expected to get to its 35% operating-profit margin target. It forecast €5.8 billion to €6 billion ($7.8 billion to $8.1 billion) in operating profit this year, below analysts’ expectations.

Alstom, a French maker of natural-gas turbines and high-speed trains, said its operating profit margins will fall in this fiscal year and next, having previously said the margins would improve, as its cash flow turns negative. Chief Executive Patrick Kron has recommended the company pay no dividend this year.

Over the weekend, Deutsche Bank warned that it would set aside a bigger chunk of money to absorb loan losses and said revenue from trading bonds and currencies fell.

And on Friday, Shell stunned investors by saying profit for the fourth quarter would be sharply lower than in previous periods, partly because of higher costs and lower production.

While challenges are different for each company, one weak spot has been that European economic growth continues to be sluggish. (…)

That has lowered expectations among executives. Unilever Chief Executive Paul Polman said having merely a “stable business” in Europe these days “is pretty good.”

The Anglo-Dutch consumer-products group said Tuesday that competition in developed markets and uncertainty in emerging economies would hold back growth during the year ahead.

Emerging markets are another challenge for European companies, many of which have diversified aggressively into developing economies amid flagging sales during the economic crisis at home. Today, growth in the biggest emerging markets—Brazil, Russia, India and China—isn’t accelerating as it has in previous years. (…)

RISING INEQUALITIES…

Two-Track Future Imperils Global Growth

Will wealth and income disparities become defining issues for the coming decade?

Concentrated cash pile puts recovery in hands of the few
A third of non-financial companies sits on $2.8tn hoard
 

(…) About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.

This will have a big influence on whether 2014 will bring a revival in capital expenditure or dealmaking, warned Iain Macmillan, head of mergers and acquisitions at Deloitte. “Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many,” he said.

Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year.

Such concentration has increased since 2007 when companies that held more than $2.5bn in cash or “near cash” items – not including debt – accounted for 76 per cent of the aggregate cash pile in 2007.

The study focused on gross cash holdings rather than subtracting their debt in an effort to simplify comparisons over time and identify how much money companies have to hand.

The study comes amid increasing investor calls for companies to step up capital spending. An influential survey of fund managers conducted by Bank of America Merrill Lynch released on Tuesday showed a record 58 per cent of investors polled want companies’ cash piles spent on capex.

A record 67 per cent said companies were “underinvesting” and less than a third of asset managers surveyed want companies to return more money to shareholders – the usual complaint of investors. (…)

Deloitte’s study reveals though that hoarding cash has hit companies’ share prices and revenue growth in recent years, as companies with low cash balances have done better on both measures than companies with large cash reserves.

Mr Macmillan at Deloitte said: “Small cash holding companies which have been more aggressive in their pursuit of growth have seen their revenue growth and share price performance outperform their richer counterparts.” (…)

Corporate cash may not all flow back with recovery

(…) According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 – more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. (…)

Examining quarterly Duke University survey responses from some 550 chief financial officers over the past two years, the paper said companies are far less sensitive to interest rate changes than investment theory suggests and CFOs cite ample cash and historically low rates among the reasons for that.

Less than a third of firms said moves of up to 200 basis points in key borrowing rates up or down would affect their investment plans at all.

So what would get companies to hoard or invest these days? The two most commonly chosen drivers in the survey cited in the paper were “ability to maintain margins” and the “cost of health care.” (…)

And now there:

The rally against the Valley
Showdown between tech companies and protesters in San Francisco

(…) Ostensibly a dispute about the hundreds of commuter shuttles that transport tech workers down to Silicon Valley – and how little they pay to park – the battle of the buses actually centres on complaints that the community has not shared in the spoils of the tech boom.

Speaker after speaker declared the coaches a symbol of “filthy rich corporations that could afford to pay more”, “class warfare” and “manifest destiny”. Earlier in the day a bus for Facebook employees and one heading to Google were blockaded in the latest in a series of irate protests, one of which led to a bus window being smashed.

The committee room, complete with the flags and blonde wood panelling of a courtroom, was shaken by cheers for anyone who criticised “Big Tech” with an anger which has in the past been reserved for Wall Street.

As young technology workers prefer to live in San Francisco rather than the suburban sprawl of Silicon Valley, rents have risen more than 20 per cent and evictions are up almost 40 per cent since 2010.(…)

The transportation board voted in favour of the tech companies, legalising the ferrying of almost 35,000 workers in private buses to and from public bus stops. Google said it was “excited” to work with them on the pilot programme towards a “shared goal of efficient transportation”.

But the board said the buses – with their blacked-out windows and teched-up interiors – were the “physical manifestation of a lot of larger issues” that they were not able to solve.

And there:

Vatican’s “Monsignor 500” Re-Arrested Amid Money Laundering Allegations

Monsignor Nunzio Scarano – dubbed “Monsignor 500” after his favorite bank-notewho is already on trial for allegedly plotting to smuggle 20 million euros from Switzerland to Italy, was arrested Tuesday in a separate case for allegedly using his Vatican accounts to launder a further 7 million euros. As AP reports, police said they seized 6.5 million euros in real estate and bank accounts Tuesday, including Scarano’s luxurious Salerno apartment, filled with gilt-framed oil paintings, ceramic vases and other fancy antiques. A local priest was also placed under house arrest and a notary public was suspended for alleged involvement in the money-laundering plot. Police said in all, 52 people were under investigation. Have no fear though, for his lawyer, “has good faith that the money came from legitimate donations.”

Via AP,

Scarano’s lawyer, Silverio Sica, said his client merely took donations from people he thought were acting in good faith to fund a home for the terminally ill. He conceded, however, that Scarano used the money to pay off a mortgage. (…)

GOOD SHOT: (From FT)

The Davos World Economic Forum 2014

 

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