NEW$ & VIEW$ (17 FEBRUARY 2014)

Note: Today, BEARNOBULL.COM also published: HARD PATCH COMING?



You have to admit that Disney’s marketing department is amazingly powerful.


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Many will also need to change some of their usual expressions…Including many economists who, like the U.S. economy, find themselves frozen in their tracks.

And tonight I realized
I really have no sense of myself
No way to take it back
I am frozen in my tracks
I’m frozen in my tracks, frozen in my tracks (Tragically Hip)

Worried about softer economic data? Don’t. This is all you need to know: Severe winter masks US economic recovery

Industrial Output Slid in Cold January

Unusually cold weather in January chilled factories’ output and froze up some mining operations but boosted utility consumption as Americans huddled for warmth. Total industrial production fell a seasonally adjusted 0.3% in January, the Federal Reserve said Friday. It was the first decline for the reading since July.

The unexpected drop was “partly because of the severe weather that curtailed production in some regions of the country,” the central bank said. Manufacturing output, the largest component of industrial production, fell 0.8% in January. (…)

Mining production, which tends to be volatile from month to month, fell 0.9% in January. But the category that includes oil and gas extraction was still up 6.7% from a year ago. Again, weather may have contributed to the January drop.

Read that last paragraph again. Feel like I do? Confused smile

But here’s the nugget that explains it all: “Fracking is quite hard when the ground is frozen,” said Mr. Dales of Capital Economics.

Obviously, economics courses don’t dig deep below ground level! ‘Cause a little digging reveals that even though the Fed’s release also blamed the “severe weather” for the weak U.S. January manufacturing numbers, the facts are that:

  • Manufacturing output has been revised downward for each of October through December. The revisions are not insignificant and result in an annualized gain between October and January of only 0.6%. From an other angle, manufacturing output grew by 0.47% monthly on average between August and October 2013, 0.3% in each of November and December, before the 0.8% drop in January. Part of January’s decline is weather-related but the basic trend is clearly not good.
  • Production of Business Equipment fell for the third consecutive month (-4.9% a.r.)
  • Production of construction supplies dropped 1.0% after a 0.6% drop in December. These require lead time and must be related to the housing slowdown.
  • The production of automotive products fell 5.1% in January. Weather-related or due to excess inventories?
Wells Fargo to Ease Mortgage Standards

Franklin Codel, a top mortgage executive at the bank, announced at a real-estate industry conference last week that the bank would begin originating purchase loans backed by the Federal Housing Administration with credit scores as low as 600, down from its previous limit of 640, through its retail channel. (…)

The policy change could lead other lenders to gradually relax standards that were sharply tightened after the housing bust in 2008, said industry executives. Wells Fargo is the nation’s largest mortgage lender and funded more than $356 billion in originations last year, or around 19% of all mortgages, according to Inside Mortgage Finance, an industry newsletter. (…)

Average credit scores on FHA loans for home purchases stood at around 690 in December, down from 700 in 2012, according to Ellie Mae, a mortgage-software firm.


Import Prices Inched Up in January

Overall import prices were up 0.1% last month from an upwardly revised increase of 0.2% in December, the Labor Department said Friday. Despite their recent uptick, import prices in January were down 1.5% from a year earlier.

High five Under the tame headline numbers, here’s the rub: A 1.2% decline in petroleum prices last month offset a 0.4% rise in nonpetroleum prices, the largest increase since May 2011. Last month’s strength in nonpetroleum prices reflected a 0.8% rise (4.9% y/y) in foods, feeds & beverages costs as well as a 0.7% gain in nonauto consumer goods prices.

Pointing up Maverick Sees Inflation After Calling Housing Bust in Recession

Prices in the U.S. may increase more than many expect this year, says David Rosenberg. That’s a 180-degree turn for the economist who not long ago correctly predicted a declining inflation rate, a view now prevalent among his peers.

“This deflation, disinflation, benign inflation story which seems to be everybody’s mindset is really yesterday’s story,” said Rosenberg, 53, chief economist and strategist at Gluskin Sheff & Associates in Toronto. The Federal Reserve, through efforts to spur growth, “is carrying out the mother of all reflationary policies,” he said in an interview. “My bet is the Fed will ultimately get what it wants, and then some.” (…)

Complacency over prices is reminiscent of 2003, when few economists and policy makers foresaw the bout of inflation that caused the Fed to begin raising interest rates in June 2004 and continue for two years, Rosenberg said. He predicts a spurt in prices this year will prompt investors, who now expect interest rates to hold close to zero until the second half of 2015, to change tack. (…)

“You have to expect that as the economy does better inflationary pressures follow suit,” Rosenberg said. “The Fed will purposely lag the cycle, which is why the yield curve has been steepening and will continue to steepen. But at some point the bond market will call the Fed’s bluff and the Fed will have to start raising interest rates.” (…)

“I see all the signs ahead of cost-push inflation — which will become more readily apparent once commodity prices find a bottom,” he wrote. “The next decade is going to look more like the 70s than many think.” (…)

Allan Meltzer, a professor of political economy at Carnegie Mellon University’s Tepper School of Business in Pittsburgh and the author of a history of the Fed, said it’s possible inflation could heat up, but not for the reasons Rosenberg offers.

“Cost-push inflation is bad economics,” Meltzer said, arguing inflation is mainly a monetary phenomenon driven by money and credit growth, not by rising labor and raw materials expenses. Still, he said, “inflation seems likely to rise” because the Fed has in the past been slow to respond.

Rising wage pressures and a drop in the rental vacancy rate signal core inflation is about to turn the corner, said Torsten Slok, the New York-based chief international economist for Deutsche Bank AG. Average hourly earnings for private workers show that once wage inflation takes hold, it continues for several years, he said, citing a four-year surge that began in March 2004 and a five-year spurt from early 1994. (…)

Chinese Capital Markets Frozen As Bad Loans Soar To Highest Since Crisis

Chinese capital markets are quietly turmoiling as debt issues are delayed and demand for “Trust” products – the shadow-banking-system’s wealth management ‘investments’ – is tumbling. As Nikkei reports, since January, 9 companies have postponed or canceled issuance plans (around $1 billion) and is most pronounced in privately-owned companies (who lack an implicit government guarantee). This, of course, is exactly what the PBOC wanted (to instill some fear into these high-yield investors – demand – and thus slow the supply of credit to the riskiest over-capacity compenies) but as non-performing loans in China surge to post-crisis highs, fear remains prescient that they will be unable to “contain” the problem once real defaults begin (as opposed to ‘delays of payment’ that we have seen so far).

Via Bloomberg,

Chinese banks’ bad loans increased for the ninth straight quarter to the highest level since the 2008 financial crisis, highlighting pressures on asset quality and profit growth as the world’s second-largest economy slows.

Non-performing loans rose by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013 to 592.1 billion yuan, the highest since September 2008, the China Banking Regulatory Commission said in a statement on its website yesterday.

Chinese banks are struggling to keep soured loans in check and extend earnings growth as the slowing economy and government efforts to curb shadow financing make it harder for borrowers to repay debt.

“China’s economic growth turned downward with the new leadership switching policy focus to reform and risk management from emphasizing stable expansion,” said Wang Yichuan, a Wuhan-based analyst at Changjiang Securities Co. “Naturally the bad loans will increase along with the change. We expect the deterioration to continue for two more years.”

Chinese banks added 89 trillion yuan of assets, mostly through loans, in the past five years, equivalent to the entire U.S. banking industry’s, CBRC data show. By comparison, U.S. commercial banks held $14.6 trillion of assets at the end of September, according to the Federal Deposit Insurance Corp.

Investors are increasingly concerned that China’s investment through borrowing since 2008 may trigger a financial crisis

Via Nikkei,

Concerns over potential defaults on high-yield financial products are making Chinese companies put some debt issues on hold due to wary investors, as well as posing a potential new risk to the global economy.

Since January, nine companies have postponed or canceled issuance plans for a total of 5.75 billion yuan ($948.24 million) in bonds and commercial paper, equivalent to about 2% of the debt issued over the period.

This is most pronounced among privately operated companies, whose lack of government backing has meant less interest from potential investors than hoped.

Demand has been dulled by worries over defaults on so-called wealth management products, a feature of China’s shadow banking system.

Broader credit risks have driven interest rates up, and the gap between corporate debt and more-creditworthy government bonds is widening. Average yields on AA-rated seven-year corporate bonds reached 8.44% in mid-January.

So even if companies offer bonds, they will be unable to raise money if they cannot pay these higher rates.

“There’s a possibility that the Chinese government will step in to keep the negative impact from spreading,” says Hiromichi Tamura, chief strategist at Nomura Securities, “but if these types of repayment delays continue, they could trigger a global stock market downturn.”

Japan Growth Figures Disappoint

The country’s gross domestic product expanded at an annualized pace of 1% in the October to December period. Economists surveyed by The Wall Street Journal predicted a 2.8% rise.

The figures will likely strengthen concern among Japan watchers already worried about how the country’s domestic-driven recovery will fare once the nation’s sales tax is raised to 8% from 5% in April. They expect at least a temporary chill in demand when the new rate goes into effect.

Though consumers and firms spent less in the quarter than forecast, economists say the number was weighed down mostly by weak demand for Japanese goods abroad. (…) The central bank has forecast firm exports and business investment will propel the economy in 2014 despite the sales tax increase. (…)

Exports grew just 1.7% in the fourth quarter of 2013 after a 2.7% annualized fall in the third quarter, gross domestic product data released Monday showed. (…) A 7% fall in auto exports to the U.S. in December is likely to be a harbinger for what’s to come, industry officials say.


U.S. Margins Call:

Goldman’s research found a range of companies in different sectors making the same points, that cost increases and competition would put a squeeze on profit margins. Companies such as McDonald’s and Nike complained of cost increases – names from Ford Motor through Johnson & Johnson to Schlumberger alerted on competitive pricing. (FT)

Eurozone Profits:

Europe’s earnings season is revealing a continent that is still sickly and at risk of deflation. Revenues of the 122 Stoxx 600 companies to have reported so far were slightly lower – by 0.8 per cent – in the fourth quarter of 2013 than they were a year earlier, according to Thomson Reuters.

From these weak revenues, Corporate Europe extracted far lower profit margins, which for non-financial companies have now dropped back almost to their low levels of 2009. Put poor revenues together with poor margins, and Société Générale’s Andrew Lapthorne shows that Europe’s share of the earnings generated by the MSCI World index (which covers the developed world) has dropped to its lowest level since 1985. (FT)

Brazil’s Economy Seen in a Major Downturn

The central bank’s economic activity index fell 1.35% in December from November, dented by a drop in industrial production and weak retail sales. Economists say the data mean the government is likely to declare that economic growth declined in the year’s last quarter after contracting 0.5% in the third period, suggesting the country had entered a technical recession. (…)

Economists now expect Brazil’s economy to grow as little as 1.5% this year, less than the 2.3% estimated growth for 2013. (…)

But persistently high inflation continues to squeeze Brazilian consumers. Last week, Brazil said annual inflation in January was 5.59%, above the central bank’s target of 4.5. As a result, the central bank has gradually raise interest rates, a move that could slow growth even more. The central bank has raised its base interest rate to 10.5% from 7.25% in the past year. (…)


The Case for 4% Growth Demand for new homes — and the outlook for economic growth — are understated, say these economists. How to play the new boom.

(…) Applied Global Macro Research, an unusually rigorous and prescient group that expects 4% growth in economic output this year and next. The firm’s three economists — Jason Benderly of Vail, Colo., and Carsten Valgreen and Niels-Henrik Bjørn of Copenhagen — cite the ongoing housing recovery for their bullish outlook, arguing that future demand for housing is understated. (…)

Pent-up demand for housing should therefore boost this sector’s contribution to economic growth. The contribution will come directly, via the increase in residential investment, and indirectly, through channels that include the greater purchase of consumer items for the home and a general increase in consumer spending from rising housing wealth. (…)

To these powerful ingredients, add a few others: the feedback effect on consumer spending from rising labor income; the diminished “fiscal drag” from higher taxes and spending cuts; and the likelihood that investment in equipment, another key component of gross domestic product, will heat up in response to strength in these other sectors.


UAW Suffers Big Loss at VW Plant The United Auto Workers union suffered a crushing defeat Friday, falling short in an election in which it seemed to have a clear path to organizing workers at Volkswagen’s plant in Chattanooga, Tenn.

The setback is a bitter defeat because the union had the cooperation of Volkswagen management and the aid of Germany’s powerful IG Metall union, yet it failed to win a majority among the plants 1,550 hourly workers.

Volkswagen workers rejected the union by a vote of 712 to 626. The defeat raises questions about the future of a union that for years has suffered from declining membership and influence, and almost certainly leaves its president, Bob King, who had vowed to organize at least one foreign auto maker by the time he retires in June, with a tarnished legacy.

“If the union can’t win [in Chattanooga], it can’t win anywhere,” said Steve Silvia, a economics and trade professor at American University who has studied labor unions. (…)

The election was also extraordinary because Volkswagen choose to cooperate closely with the UAW. Volkswagen allowed UAW organizers to campaign inside the factory—a step rarely seen in this or other industries. (…)

In addition to letting union representatives into the plant, Volkswagen kept members of management from expressing any views on the vote, and agreed to coordinate its public statements with the union during the election campaign. (…)

The union’s loss adds to a long list of defeats for organized labor in recent years. States like Wisconsin enacted laws that cut the power of public-employee unions, and other states, including Michigan, home of the UAW, adopted right-to-work laws that allow workers to opt out of union membership if they choose. (…)

workers were persuaded to vote against the union by the UAW’s past of bitter battles with management, costly labor contracts and complex work rules. “If the union comes in, we’ll have a divided work force,” said Cheryl Hawkins, 44, an assembly line worker with three sons. “It will ruin what we have.”

Other UAW opponents said they dislike the union’s support of politicians who back causes like abortion rights and gun control that rub against the conservative bent of Southern states like Tennessee. Still others objected to paying dues to a union from Detroit that is aligned with Volkswagen competitors like GM and Ford. (…)

The UAW’s loss in Chattanooga also seems likely to complicate contract talks it will have with the Detroit auto makers in 2015. Right now, GM, Ford and Chrysler pay veteran workers about $28 an hour, and new hires about $15 an hour, and the UAW wants to narrow that gap.

But without the ability to push wages higher at foreign-owned car plants, the UAW is likely to have little leverage in Detroit, said Kristin Dziczek, director of the Labor & Industry Group at the Center for Automotive Research in Ann Arbor, Mich.

“They have to organize at least one of the international auto makers in order to attempt to regain bargaining power with the Detroit Three,” she added.


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