NEW$ & VIEW$ (11 FEBRUARY 2014)

Note: BEARNOBULL.COM also published: Emerging Market Growth Weakest In Four Months

Small business optimism up slightly in January 2014The Small Business Optimism Index increased by 0.2 points to 94.1. Only three of the Index components improved, two were unchanged, and five were lower indicating that the small business half of the economy was still adding little to growth beyond that needed to support population growth.. Technically, January marks the third monthly increases in a row, but unfortunately, each monthly increase is lower than the last. But while improvements are losing steam, the increase still beats a decline.

NFIB owners increased employment by an average of 0.12 workers per firm in January (seasonally adjusted), half the December reading, but a solid number. While these numbers look historically good, the problem is that there are many fewer firms. Seasonally adjusted, 13 percent of the owners (down 1 point) reported adding an average of 3.7 workers per firm over the past few months. Offsetting that, 11 percent reduced employment (up 1 point) an average of 3.3 workers, producing the seasonally adjusted net gain of 0.12 workers per firm overall. Forty-six percent of the owners hired or tried to hire in the last three months and 38 percent (83 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Job creation plans surprised on the upside, rising 4 points to a net 12 percent. This is the best reading since September 2007.

Twenty-two percent of all owners reported job openings they could not fill in the current period (down 1 point). This suggests that the unemployment rate did not change much in January. Fourteen percent reported using temporary workers, unchanged from December.

 Small business jobs data through January 2014 Small business job creation plans through January 2014 Small business unfilled job openings through January 2014

Small biz create a lot of jobs. Hence we need more small biz, which is not happening as much as before as this chart from John Mauldin’s friend Philippa Dunne at The Liscio Report shows:

This is a chart of new businesses being created. New businesses are the true engine of economic growth and job creation. Policy makers need to think about this chart with every decision they make. They need to determine why the trend is clearly down and how to reverse it.

Obamacare’s impact on job creation is now well established. Even before the CBO said so last week, the National Small Business Association had detailed business owners’ problems:

As the Affordable Care Act (ACA) continues to make headlines for problems with the online enrollment and ongoing delays to various aspects of the law, small businesses continue to struggle with the cost and complexity of providing health care benefits for their employees. To offer insight into how America’s small businesses are dealing with rising health care costs, what kind of benefits they offer and how ACA is impacting their business, NSBA recently surveyed more than 780 small-business owners and is pleased to provide the results of that survey this document, the NSBA 2014 Small Business Health Care Survey. (…)

imageToday the average monthly per-employee cost of health insurance premiums for a small firm is $1,121. When asked in 2009 for the estimated monthly cost of their health benefits package, per employee, small firms reported $590 per month. Beyond health insurance premiums, employers report additional health-care related spending to the tune of $458 per month, per employee. Furthermore, a whopping 91 percent reported increases in their health plan at their most recent renewal, and the majority expect to continue seeing cost increases in the coming year.

Three-fourths of small firms report they plan to purchase insurance through their existing broker in the coming year and less than one-in-ten plan to purchase health insurance through the Small Employer Health Options Program (SHOP exchange)—even before the administration announced the one-year delay to SHOPs.

To deal with these rising costs, 34 percent of small businesses report holding off on hiring a new employee while 12 percent report they had to lay off an employee. Fifteen percent report they plan to drop coverage in the coming year—up from just two percent who reported dropping coverage in the last year.

Despite increased reporting on ACA, the majority of small firms still have a limited to no understanding of how they will be impacted by the law. When asked about the real-world costs of understanding ACA, small businesses report spending on average 13 hours and $1,274 per month—and that’s just on the administrative side of understanding the law itself.

Today, we learn that President Obama reads Mauldin:

Health-Law Mandate Put Off Again Most employers won’t face a fine next year if they fail to offer workers health insurance, the Obama administration said, in the latest big delay of the health-law rollout.

The Treasury Department, in regulations outlining the Affordable Care Act, said employers with 50 to 99 full-time workers won’t have to comply with the law’s requirement to provide insurance or pay a fee until 2016. Companies with more workers could avoid some penalties in 2015 if they showed they were offering coverage to at least 70% of full-time workers.

The move came after employers pressured the Obama administration to peel back the law’s insurance requirements. Some firms had trimmed workers’ hours to below 30 hours a week to avoid paying a penalty if they didn’t offer insurance. (…)

The new rules for companies with 50 to 99 workers would cover about 2% of all U.S. businesses, which include 7% of workers, or 7.9 million people, according to 2011 Census figures compiled by the Small Business Administration. The rules for companies with 100 or more workers affect another 2% of businesses, which employ more than 74 million people. (…)

Under the final rule released Monday, companies would be allowed to offer coverage to a subset of employees, such as those working 35 hours or more a week, during the phasing-in year. (…)

The Treasury also set new rules for how the requirement would apply to workers such as volunteers and seasonal employees, saying that employers wouldn’t be penalized for failing to offer those people coverage, regardless of the number of hours they were working. (…)


The CLIs continue to point to economic growth firming in the United States and the United Kingdom and to growth above trend in Japan. The CLI for Canada indicates a positive change in momentum. In the Euro Area as a whole, and in France and Italy, the CLIs continue to indicate a positive change in momentum. In Germany, the CLI shows signs of firming growth. In the emerging economies, the CLIs point to growth around trend in China, Brazil and Russia, and to growth below trend in India.image


Ed Yardeni provides his own analysis of the CLI’s:

(…) Then again, they may be less relevant given the emerging markets crisis that emerged during January. Over the past couple of weeks, we’ve analyzed the magnitude of the problem and concluded that the crisis is likely to be contained to the Fragile Five, and shouldn’t morph into a global contagion. If so, then the solid forward momentum signaled by the latest OECD leading indicators suggests that the global economy should absorb the latest shock relatively well. Let’s review the latest data:

(1) Advanced economies advancing. Most encouraging is that the composite leading indicator for all of the 34 members of the OECD rose to 100.9, the highest level since February 2011. That confirms the upbeat readings of the more volatile JP Morgan Global Composite Output PMI, which remained upbeat during January at 53.9. Over the past year, there have been steady monthly gains in the indexes for the US, Europe, and Japan. The same can be said about all the major economies of Europe and the peripheral ones too.

(2) Emerging economies submerging. The OECD also compiles leading indicators for the BRICs. They remained depressed during December, with India falling to a record low. 

Importantly from the JP Morgan Global PMI is that forward indicators remain strong:

The level of incoming new business also expanded for a sixteenth month running in January. Despite easing to its weakest since last October, the rate of new order
growth remained above the average for the current sequence of increase.

Emerging Markets are in a different zone:

New business growth in global emerging markets was little-changed from December, but slower than the average for the final quarter of 2013.

OECD Jobless Rate Falls to 7.6% Unemployment across the 34-nation Organization for Economic Cooperation and Development fell for the third straight month in December, driven by falling jobless rates among young people and men

The OECD said Tuesday the unemployment rate for its members—mostly countries with developed economies—fell to 7.6% from 7.7% in November and 7.8% in October, having been steady at 7.9% for much of 2013.

The sustained decline suggests the labor market has started to benefit from the modest economic recovery that took root across developed economies last year.

In another encouraging development, the rate of youth unemployment fell to 15.5% from 15.6% in November. (…) The number of people without jobs fell to 46.2 million from 46.9 million in November, but remained 11.5 million higher than in July 2008, before the global financial crisis and ensuing economic slowdown.

The U.S. and Japan led the decline in unemployment, while Spain and Ireland also recorded significantly lower rates in December. However, jobless rates increased in Canada, Israel and Mexico. (…)

Sad smile Barclays to Slash Up to 12,000 Jobs The bank will cut up to 9% of its 139,600-strong workforce this year, with 7,000 jobs to go in Britain and the rest spread across its global operations.
Borrowing Costs Pose Risks in China

(…) Driven by a surge in borrowing in recent years, Chinese companies amassed an estimated $12.1 trillion of debt at the end of last year, according to Standard & Poor’s. That compares with an estimated $12.9 trillion for U.S. businesses, now the world’s most indebted. The ratings company estimates that debt at Chinese companies is poised to exceed the U.S. total this year or next. (…)

According to J.P. Morgan Chase, China’s corporate debt was 124% of gross domestic product in 2012, up from 111% in 2010 and 92% in 2008. J.P. Morgan economist Haibin Zhu said the number likely rose further in 2013.

Corporate debt in comparable emerging economies is 40% to 70% of GDP, while in the U.S. the figure is 81%, according to J.P. Morgan. (…)

The increase in borrowing costs was driven in part by a rise in rates on government bonds. The yield on China’s benchmark 10-year government bond reached 4.75% in late November, the highest since January 2005 and up from 3.68% at the end of 2012, according to WIND Info and Thomson Reuters. The yield has since fallen to 4.51%. For short-term bonds like the ones sold by Evergreen, the average interest rate on new issues now stands at about 6.26%, up from 4.38% at the beginning of this year and 2.77% in 2005. (…)

Rising money-market rates and bond yields have also translated into higher rates on bank loans, which account for the bulk of corporate lending in China. Smaller, private firms have been hit the hardest. According to Lily Li, financial director of a medium-size, privately owned pharmaceutical firm in Shanghai, banks are now charging at least 8% for a one-year loan, compared with a little over 6% a year ago.(…)

Want to know more about China’s shadow banks: Meet China’s Biggest Shadow Bank by the Peterson Institute for International Economics

imageCEBM Research thinks that rising rates will not negatively impact property market.

Current tightening-biased monetary policy has restrained total social financing growth and has put upward pressure on borrowing costs. However, aggregate demand has remained stable, largely supported by property sector demand. While rising borrowing costs has put sectors with meager profits in a tough spot, the property sector has been able to cope with elevated financing costs; Property developers should be able to cope with further increases in the cost of financing.

So far…Fingers crossed

Indeed, the above mentioned Peterson Institute’s article links rising interest rates, shadow banks and the property market:

It comes as no surprise that real estate developers have been the primary recipient of this emergency funding. Squeezed by central government efforts to dampen the housing boom, real estate developers are frequently cut off from formal bank loans.  As is the case with the growth of shadow banking in other parts of the financial system, Cinda has found a way to circumvent these restrictions by offering credit to property developers through the NFE channel. The Cinda IPO prospectus states that 60 percent of distressed receivables are attributable to the real estate sector.

What makes the whole situation a bit dubious is that Cinda has financed these purchases through a massive borrowing spree at below market rates. Over the last 3.5 years, the size of CINDA’s borrowings increased 13x, while the interest on these borrowings has fallen dramatically (paid interest was less than three percent). Despite the claim from the IPO prospectus that the borrowing was primarily from “market-oriented sources,” it seems unlikely that any market-oriented actor would loan out funds at a rate significantly below inflation and less than half of the benchmark lending rate.

The cost of funding issue is important because while Cinda’s distressed asset business is profitable, its profitability is dependent on low borrowing costs. In 2012 total interest expense is equal to 50 percent of its net income. A large increase in borrowing costs could wipe out the company’s profitability.

And don’t think this has no consequences for your non-EM investments: Currency crisis at Chinese banks ‘could trigger global meltdown’

(…) The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.

Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks. (…)

Ms Chu has been warning since 2009 about the growth of a shadow banking system in China that has helped fuel the credit expansion seen in the country in the wake of the Western financial crisis.

However, fears are growing that the build-up of foreign borrowing by the Chinese, particularly in US dollars, is creating an even greater build-up of risk than that seen before the crisis of 2008.

Figures published by the Bank for International Settlements (BIS) in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached $880bn (£535bn) as of March 2013, from $270bn in 2009.

Analysts say this figure is now likely to exceed $1 trillion and is continuing to grow, raising the prospect of the potentially dangerous vulnerability of the Chinese financial system to a rising dollar. (…)

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Mr Magnus. (…)

The yuan has continued to rise against the dollar since the beginning of the year, even as virtually every other developing country’s currency, from the rand to the ruble, has fallen victim to a bout of market jitters.

But the question of just what one yuan should be worth, and whether the wall of money trying to get out of China outweighs the wall of money trying to get in, is among the most important facing the global economy.

If Lombard Street is right and the yuan stumbles, China’s growing importance as a market for everything from copper to Cabernet Sauvignon will be badly curtailed.

Kazakhstan Devalues Amid Outflows From Emerging Markets
France Set to Miss Deficit Targets

(…) The auditor—the Cour des Comptes—said the government is overoptimistic about the impact of some cost-cutting measures and its tax revenue forecasts appear too high.

“There is a significant risk that the public deficit exceeds the latest government forecast for 2013,” the president of the auditor, Didier Migaud, said at a press conference in Paris. “Given numerous uncertainties and significant risks, meeting the 2014 target is not assured.” (…)

“Almost 40 years of deficits are not without consequence: they have led the France into a dangerous zone,” Mr. Migaud said.(…)

Zero Hedge Bears no Bull…Gartman Does It Again… Again

It is becoming more uncomfortable to make fun of Dennis Gartman’s always incorrect calls (see here and here and here and here) than to watch Richard Simmons’ Obamacare commercials, but… well – it’s just too funny.

Just days after confidently explaining to the CNBC audience and all his newsletter-followers that the S&P 500 could see a 15% correction: “I just think you’re going to have a very severe, very substantive and really quite ugly correction that will probably make a lot of people wail and gnash their teeth before it’s done,” (February 3rd (Ugly Correction coming – S&P 500 at 1,742)

…the world-renowned Dennis Gartman has done it again: “vociferously, I’d say I was wrong

adding in his usual authoritative manner – prideless to the end: “The one thing I will tell you is: You can’t be short. It’s still a bull market. That’s what’s really important. It’s one thing to lose money. It’s another thing not to make money. And if you’re short, you’re losing money.” (February 10th (I’d say I was wrong… you can’t be short – S&P 500 at 1,799.5)

But wait, there’s more… despite thinking stocks could drop 15% and now that stocks are in a bull market, Gartman notes, “I’m still neutral on equities…”

The above may explain the below:

(Bespoke Investment)


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