NEW$ & VIEW$ (31 JANUARY 2014)

U.S. Banks Loosen Loan Standards Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook.

(…) In both the U.S. and Europe, new reports released Thursday show banks are slowly starting to increase their appetite for risk. The U.S. Office of the Comptroller of the Currency said banks relaxed the criteria for businesses and consumers to obtain credit during the 18 months leading up to June 30, 2013, while the European Central Bank said fewer banks in the euro zone were reporting tightened lending standards to nonfinancial businesses in the fourth quarter of 2013.

(…)  The comptroller’s report said it would still classify most banks’ standards as “good or satisfactory” but did strike a cautionary tone. (…)

An upturn in bank lending, if taken too far, could also lead to inflation. The Fed has flooded banks with trillions of dollars in cash in its efforts to boost the economy. In theory, the printing of that money would cause consumer price inflation to take off, but it hasn’t, largely because banks haven’t aggressively lent out the money. (…)

John G. Stumpf, CEO of Wells Fargo & Co., said on a Jan. 14 conference call with analysts that he is “hearing more, when I talk with customers, about their interest in building something, adding something, investing in something.”

Kelly King, chief executive of BB&T Corp., told analysts two days later, “we really believe that we are at a pivotal point in the economy…admittedly that’s substantially intuitive.” (…)

The comptroller’s survey found more banks loosening standards than tightening. The regulator said that in the 18 months leading up to June 30, 2013, its examiners saw more banks offering more attractive loans.

The trend extended to credit-card, auto and large corporate loans but not to residential mortgages and home-equity loans. (…)

The OCC’s findings are consistent with more recent surveys: The Fed’s October survey of senior U.S. loan officers found a growing number loosening standards for commercial and industrial loans, often by narrowing the spread between the interest rate on the loan and the cost of funds to the bank.

The ECB’s quarterly survey, which covered 133 banks, showed that the net percentage of euro-zone banks reporting higher lending standards to nonfinancial businesses was 2% in the fourth quarter, compared with 5% in the third quarter. (…)

 

U.S. Starts to Hit Growth Stride

A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.

Gross domestic product, the broadest measure of goods and services churned out by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department said. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving.

Growth Story

A big driver of growth in the fourth quarter was a rise in consumer spending, which grew 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity.

The spike in Q4 consumer spending is very surprising, and suspicious. Let’s se how it gets revised.

Consider these nest 2 items:

(…) For the 14-week period ending Jan. 31, Wal-Mart expects both Wal-Mart U.S. and Sam’s Club same-store sales, without fuel, to be slightly negative, compared with prior guidance. It previously estimated Wal-Mart U.S. guidance for same-store sales to be relatively flat, and Sam’s expected same-store sales to be between flat and 2%.

A number of U.S. retail and restaurant companies have lamented poor winter weather and aggressive discounts, resulting in fewer store visits and lower sales. Many of those companies either lowered their full-year expectations or offered preliminary fourth-quarter targets that missed Wall Street’s expectations.

Wal-Mart warned the sales impact from the reduction in the U.S. government Supplemental Nutrition Assistance Program benefits that went into effect Nov. 1 was greater than expected. The retailer also said that eight named winter storms resulted in store closures that hurt traffic throughout the quarter.

Wal-Mart Stores Inc. warned that it expects fourth-quarter earnings to meet or fall below the low end of its prior forecast, citing government cuts to assistance programs and the harsh winter weather.

Amazon earned $239 million, or 51 cents a share, on sales that were up 20% at $25.59 billion. The 51 cents a share were far below Street consensus of 74 cents, and the $239 million profit on $25 billion in sales illustrates just how thin the company’s margins are.

A year ago, Amazon earned $97 million, or 21 cents a share, on sales of $21.29 billion.

The company also forecast first-quarter sales of $18.2-$19.9 billion; Street consensus was for $19.67 billion. In other words, most of that projection is below Street consensus.

It projected its net in a range of an operating loss of $200 million to an operating profit of $200 million.

Surprised smile AMZN earned $239M in 2013 and projects 2014 between –$200M and +$200M. You can drive a truck in that range. But how about the revenue range for Q1’14:

Net sales grew 20 percent to $25.6 billion in the fourth quarter, versus expectations for just above $26 billion and slowing from the 24 percent of the previous three months.

North American net sales in particular grew 26 percent to $15.3 billion, from 30 percent or more in the past two quarters.

Amazon also forecast revenue growth of between 13 and 24 per cent in the next quarter, compared to the first quarter 2013.

Notwithstanding what that means for AMZN investors, one must be concerned for what that means for U.S. consumer spending. Brick-and-mortar store sales have been pretty weak in Q4 and many thought that online sales would save the day for the economy. Amazon is the largest online retailer, by far, and its growth is slowing fast and its sales visibility is disappearing just as fast.

image

Back to AMZN itself, our own experience at Christmas revealed that Amazon prices were no longer systematically the lowest. We bought many items elsewhere last year, sometimes with a pretty large price gap with Amazon. Also, Amazon customers are now paying sales taxes in just about every states, closing the price gap further. And now this:

To cover rising fuel and transport costs, the company is considering a $20 to $40 increase in the annual $79 fee it charges users of its “Prime” two-day shipping and online media service, considered instrumental to driving online purchases of both goods and digital media.

“Customers like the service, they’re using it a lot more, and so that’s the reason why we’re looking at the increase.” Confused smile

U.S. Pending Home Sales Hit By Winter Storms

The National Association of Realtors (NAR) reported that December pending sales of single-family homes plunged 8.7% m/m following a 0.3% slip in November, revised from a 0.2 rise. It was the seventh consecutive month of decline.

Home sales fell hard across the country last month. In the Northeast a 10.3% decline (-5.5% y/y) was logged but strength earlier in the year lifted the full year average by 6.2%. Sales out West declined 9.8% (-16.0% y/y) and for the full year fell 4.1%. Sales down South posted an 8.8% (-6.9 y/y) falloff but for all of 2013 were up 5.4%. In the Midwest, December sales were off 6.8% (6.9% y/y) yet surged 10.4% for the year.

Punch Haver’s headline suggests that weather was the main factor but sales were weak across the U.S. and have been weak for since the May taper announcement.

Mortgage Volumes Hit Five Year Low The volume of home mortgages originated during the fourth quarter fell to its lowest level in five years, according to an analysis published Thursday by Inside Mortgage Finance, an industry newsletter.

(…) Volumes tumbled by 19% in the third quarter, fell by another 34% in the fourth quarter, according to the tally. (…)

Overall originations in 2013 stood at nearly $1.9 trillion, down nearly 11% from 2012 but still the second best year for the industry since the mortgage bust deepened in 2008. The Mortgage Bankers Association forecasts originations will fall to $1.1 trillion, the lowest level in 14 years.

The report also showed that the nation’s largest lenders continued to account for a shrinking share of mortgage originations, at around 65.3% of all loans, down from over 90% in 2008.

Euro-Zone Inflation Returns to Record Low

Annual inflation rate falls to a record low in January, a development that will increase pressure on the ECB to act more decisively to head off the threat of falling prices.

The European Union’s statistics agency said Friday consumer prices rose by just 0.7% in the 12 months to January, down from an 0.8% annual rate of inflation in December, and further below the ECB’s target of just under 2.0%.

Excluding energy, prices rose 1.0%, while prices of food, alcohol and tobacco increased 1.7% and prices of services were 1.1% higher.

image

Pointing up Figures also released Friday showed retail sales fell 2.5% in Germany during December. The result was far worse than the unchanged reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales fell 2.4%, the data showed. It was the first annual decline in German sales since June.

Consumer spending also fell in France as households cut purchases of clothes and accessories, although by a more modest 0.1%.

Benchmark Japan inflation rate hits 1.3%
December figure brings Bank of Japan closer to 2% goal

Average core inflation for all of 2013, a measure that excludes the volatile price of fresh food, was 0.4 per cent, according to the interior ministry. (…)

Much of the inflation so far has been the result of the precipitous fall in the yen that took hold in late 2012, making imports more expensive. Energy prices, in particular, have risen sharply: Japan buys virtually all of its oil and gas abroad, and the post-Fukushima shutdown of the country’s nuclear industry has further increased the need for fossil fuels.

So-called “core-core” consumer prices, which strip out the cost of both food and energy, rose by 0.7 per cent in December.

SENTIMENT WATCH

Individual Investors Head For the Hills

(…) In this week’s poll, bullish sentiment declined from 38.12% down to 32.18%.  This represents the fourth weekly decline in the five weeks since bullish sentiment peaked on 12/26/13 at 55.06%.  While bullish sentiment declined, the bearish camp became more crowded rising from 23.76% to 32.76%.  

With this week’s increase, bearish sentiment is now greater than bullish sentiment for the first time since mid-August.  The most interesting aspect about these two periods is what provoked the increase in cautiousness.  Back then it was concerns over Syria that were weighing on investor sentiment.  Fast forwarding to today, the big issue weighing on investors’ minds is now centered on Syria’s neighbor to the North (Turkey).  For such a small area of the world, this region continues to garners a lot of attention.

THE JANUARY BAROMETER (Contn’d) Sleepy smile

January Slump Is Nothing to Fret Over

The old Wall Street adage — as January goes, so goes the rest of the year – needs to be put to rest.

Since 1950, there have been 24 years in which the S&P 500 fell in January, according to Jonathan Krinsky, chief market technician at MKM Partners. While the S&P 500 finished 14 of those years in the red, a look at the performance from February through the end of the year provides evidence to buoy investors. In 13 of those 24 years, stocks rose over the final 11 months.

“All else being equal, a down January is less than 50% predictive that the rest of the year will close lower than where it closed in January,” Mr. Krinsky said. (…)

Long time reader Don M. sent me even better stuff on the January Barometer. Hanlon Investment Management must have had many clients asking about that since they made a thorough analysis of the “phenomenon”. Here it is for your Super Bowl conversation:

(…) What was found is that from 1950 until 1984, years where the month of January saw a positive return were predictive of a positive return for the entire year with approximately 90% probability.  The years with a negative return in January were predictive of a negative return for the year approximately 70% of the time. 

In the intervening time since 1984, market action has caused the predictive power of negative returns in January to fall to around 50%, which is nothing more than chance.  However, positive returns in January have still retained their predictive power for positive returns for the year.

Yet still, there is another group of people who advocate that just the first five trading days of January are predictive of the rest of the year.  We took data from 1950 through 2013 for the S&P 500 Index and then calculated both positive and negative results on a weekly and monthly basis.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time.  A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time.  A negative return in January was predictive of a negative return for the year 54.2% of the time-basically not predictive at all.  A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

But what if we filter the results by requiring both a positive return during the first five trading days of January and a positive return in January for a positive signal?  Conversely, we may require a negative return during the first five trading days of January and a negative return for January to generate a negative signal.   When the first week and the month of January both have positive returns, then the signal is predictive 93.5% of the time for a positive year: a slight improvement over 92.5%.

Even more interesting is that when you require both a negative return in the first week and a negative return in January to give a signal.  Though the number of signals is reduced from 24 to 15, the success ratio improves from 54.2% to 73.3%.  The median and average returns for predicted years are listed in the summary statistics table, along with their respective success percentages, on the following page.  This will give you a something to ponder as we begin 2014.

How about negative first week and positive month? And what’s wrong with the last five days of January? Then insert the result of the Super Bowl. There you go!

Thanks Don.

Investors pull billions from EM stocks Dedicated EM funds hit as equity outflows reach highest since 2011 (Via FT Alphaville)

SocGen’s cross-asset research team believes that when it comes to EM outflows they may have only just begun:

As the team notes on Friday, this is especially so given the Fed doesn’t appear to care about the EM sell-off:

Since cumulative inflows into EM equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere. Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity (see chart below). EM bond funds face a similar fate. For reasons discussed in our latest Multi Asset Snapshot (EM assets still at risk – don’t catch the falling knife), we see no early end to EM asset de-rating. Furthermore, the Fed remains assertive on execution of tapering despite recent turmoil within the EM world, which spells more turbulence ahead.

And if it keeps going, balance of payments issues could emerge as a result:

A close look at Global EM funds indicates that all EM markets are suffering outflows Mutual fund and ETF investors in EMs both favour global EM funds. Regional or country specialisation is less common (less than 47% of global EM assets). The implication is that all EM markets face outflows currently, with little discrimination between the countries that are most exposed and those which are more defensive. We think Balance of Payment issues may emerge as an important factor going forward.

Though, what is EM’s loss seems to be Europe’s gain at the moment:

Europe reaps the benefits While current EM volatility is impacting developed markets as well, some of the flows are being redirected toward Europe, notably into Italy, Spain and the UK.

The notable difference with taper tantrum V.2, of course, is that US yields are compressing:

Which might suggest that what the market got really wrong during taper tantrum V.1, was that a reduction in QE would cause a US bond apocalypse. This was a major misreading of the underlying fundamentals and tantamount to some in the market giving away top-quality yield to those who knew better.

Taper at its heart is disinflationary for the US economy, and any yield sell-off makes the relative real returns associated with US bonds more appealing.

That taper V.2 incentivises capital back into the US, at the cost of riskier EM yields, consequently makes a lot of sense.

Though, this will become a problem for the US if the disinflationary pressure gets too big.

 

Leave a Reply

Your email address will not be published. Required fields are marked *