NEW$ & VIEW$ (4 FEBRUARY 2014)

THE BLAME GAME IS ON

The media and analysts are tripping over themselves to explain the recent setback:

  • Growth Fears Hit Stocks European and Asian stocks fell Tuesday, following a sharp selloff the previous day in the U.S., as jitters about global growth continued to weigh on investors.

European and Asian stocks fell Tuesday, following a sharp selloff the previous day in the U.S., as jitters about global growth continued to weigh on investors.

Signs of a sharp slowdown in U.S. manufacturing on Monday reignited concerns about the health of the world’s largest economy, a further worry for investors who have already been spooked by the turmoil in emerging markets over the past two weeks.

Sentiment worsened markedly in Asia, where the Nikkei Stock Average fell 4.2%, leaving it 14% lower in the year to date—currently the worst performer among major global markets. A strengthening of the yen against the dollar after the poor factory data weighed heavily on Japan’s exporters. (…)

Goldman’s Global Leading Indicator’s January reading and the latest revisions to previous months paint a significantly softer picture of global growth placing the global industrial cycle clearly in the ‘Slowdown’ phase. They add, rather ominously, While the initial shift into ‘Slowdown’ (which we first noted in October) had a fairly idiosyncratic flavor, the recent growth deceleration now looks more serious than in previous months. Of course, as we noted yesterday, Jan Hatzius is rapidly bringing his optimistic forecasts back to this slowdown reality.

Swirlogram solidly in “slowdown” phase…

Yesterday’s U.S. ISM shook edgy investors even though Friday’s Markit U.S. PMI was not bad at all. Ed Yardini agrees with me and shows some evidence:

Perplexing PMI

Yesterday’s report was unexpectedly weak, with the overall index plunging from 56.5 during December to 51.3 last month, led by even bigger dives in the production index (from 61.7 to 54.8) and the new orders index (from 64.4 to 51.2).

The chairman of the Institute for Supply Management, which conducts the survey, blamed the weather for some of the weakness in the results. The eastern half of the US is experiencing one of its 10 coldest winters on record, with thousands of local records for cold already tied or broken. So the M-PMI hit an ice patch rather than a soft patch.

I’m not sure that makes sense. Why would orders be down so much just because the weather was bad? More perplexing is that the average of six regional business surveys showed solid gains last month, although they too were mostly hit by the bad weather. Furthermore, Markit reported yesterday that its final M-PMI for the US dipped from 55.0 during December to 53.7 last month. No big deal.

ISI’s Ed Hyman keeps the faith:

We still remain constructive and think US GDP is on 3% trajectory, AND despite EM pass through fears, globally the synchronized expansion remains in place.

The soft patch theme remains quite possible, however. Housing is weaker, retail is slowing and car sales may have seen their best time this cycle.

U.S. Vehicle Sales Continue to Decline as Weather Turns Frigid

Temperatures below zero in some parts of the U.S., and just unseasonably cold elsewhere in the country, took their toll on light vehicle sales last month. Unit motor vehicle sales slipped 1.0% to 15.24 million (SAAR, +0.1% y/y) during January, according to the Autodata Corporation. Sales have fallen 7.1% from the recovery high of 16.41 million in November.

The decline in overall sales was a function of fewer auto purchases, off 4.6% to a 7.30 million annual rate (-6.0% y/y). Sales of imported autos declined 12.3% to 2.17 million (-2.8% y/y). Sales of domestics fell 2.4% to 5.12 million (-7.4% y/y).image

CalculatedRisk quotes WardsAuto’s slighly lower estimate:

Based on an estimate from WardsAuto, light vehicle sales were at a 15.14 million SAAR in January. That is down slightly from January 2013, and down 2.5% from the sales rate last month.

I have been warning that auto sales could well have reached a cyclical peak as we should not expect a repeat of the excesses of the early 2000s.

large imageU.S. Construction Spending Growth Moderates

The value of construction put-in-place ticked 0.1% higher in December (5.3% y/y) following a revised 0.8% November increase, initially reported as 1.0%. For all of last year, growth in construction activity moderated to 5.5% from 8.1% in 2012.

Private sector construction activity jumped 1.0% (8.0% y/y) in December following 1.7% growth in November. Residential building surged another 2.6% (18.3% y/y) as single-family home building activity jumped 3.4% (21.6% y/y). Spending on improvements gained 2.0% (12.0% y/y) while multi-family building rose 0.5%, up by roughly one-quarter y/y. Nonresidential building activity declined 0.7% (-1.7% y/y) following its 2.4% November jump.

Offsetting the private sector gains was a 2.3% decline (-0.7% y/y) in the value of public sector building activity. The shortfall reflected outsized declines in many components but spending on highways & streets surged 1.8% (11.3% y/y). Spending here accounts for 30% of total public sector construction activity.

The U.S. government’s spending on construction tumbled 14.2% to $23.49 billion in 2013, the Commerce Department said Monday. That was the sharpest decline in records dating back to 1993, enough to return spending to 2007 levels.

Washington’s clash over government spending took a bite out of federal expenditures last year. A series of cuts known as the sequester slashed spending by tens of billions of dollars early in the year, until a deal to restore some of the reductions this year.

Spending by state and local governments, which account for a much larger portion of total construction expenditures, fell by 1.6% to $247.69 billion last year. That was more than the 1.2% decline for the category in 2012, but less than the 6.6% drop in 2011.

 
Falling Prices Hurt Firms American companies are struggling with falling prices for some key products amid intense competition and pressure from cost-conscious customers.

Executives from companies as varied as General Electric Co. GE -3.10% , Kimberly-Clark Corp. KMB -3.55% and Royal Caribbean Cruises Ltd.RCL -3.23% said some prices slipped in the last three months of the year—sometimes significantly.

Falling prices for adhesives weighed on Eastman Chemical Co. EMN -2.37% , cheaper packaged coffee dragged on Starbucks Corp. SBUX -3.02%, and “value and discounts” hit McDonald’s Corp. in the fourth quarter in what the fast food chain called a “street fight” for market share. XeroxCorp. XRX -4.06% is eyeing acquisitions that can “help us be more competitive on price pressure. (…)

Not every company reported price drops. 3M Co. said prices increased 1.4% in the fourth quarter, attributing the gain to research gains and adjustments made in emerging markets designed to offset currency devaluation. Harley-Davidson Inc. HOG -0.75% said price increases helped boost motorcycle revenues by 1.4% in the quarter even as shipments fell 1%. Altria Group Inc. MO -3.15% said a 13.2% rise in income for cigarettes and cigars in 2013 came “primarily through higher pricing.”

But the trend is evident in government data. While economic growth in the fourth quarter came in strong, helped by expanding consumer spending, firms aren’t raising prices. For the last two years, the consumer-price index has increased less than 2%, the first time in 15 years it has been that low in consecutive years. And in the year since December 2012, the consumer-price index for goods, excluding food and energy, declined 0.1%. (…)

That said: Chief Executives in U.S. More Confident on Economy, Survey Shows

The Young Presidents’ Organization sentiment index climbed to 63.5 from 60.5 in the previous three months. Readings greater than 50 show the outlook was more positive than negative. (…)

Fifty-two percent of executives surveyed said the economy has improved from six months ago, up from 38 percent who said so in October. Nine percent said the economy will worsen, down from 20 percent last quarter. (…)

Fifty-eight percent of chief executives in the YPO survey expect conditions to improve in the next six months, up from 42 percent in the previous period.

The Dallas-based group’s outlooks for demand, hiring and capital investment also advanced. The gauge of sales expectations for the coming year rose by 2.9 points to 68.7. The employment index climbed to 59.9 from 58.9.

Globally, business confidence grew in most regions. The YPO’s Global Confidence Index also rose to the highest level since April 2012.

The nonprofit service organization’s findings for the U.S. are based on responses from 2,088 global chief executives, including 940 in the U.S., to an electronic survey conducted during the first two weeks of January.

G-20 Inflation Rate Falls The rise in consumer prices slowed across the world’s largest economies in December, fueling concerns that too little inflation, rather than too much, could threaten the global economy’s fragile recovery.

The Organization for Economic Cooperation and Development Tuesday said the annual rate of inflation in its 34 developed-country members rose to 1.6% from 1.5% in November, while in the Group of 20 leading industrial and developing nations it fell to 2.9% from 3.0%.(…)

The European Union’s statistics agency Tuesday said producer prices rose 0.2% from November, but were 0.8% lower than in December 2012. Prices had fallen in both October and November, by 0.5% and 0.1%, respectively. Excluding energy, producer prices were flat on the month and fell 0.3% when compared with December 2012. (…)

In addition to the euro zone, inflation rates fell sharply in two of the largest developing economies during December, to 2.5% from 3.0% in China, and to 9.1% from 11.5% in India.

However, inflation rates rose in the U.S., Japan and Brazil.

HOW ABOUT THE BAROMETER BAROMETER?

Winter Weather Worries

Winter weather can negatively impact economic activity and the labor markets as freezing temperatures and mounds of snow keep consumers at home and workers off the job.  But what sort of impact does the weather have on the markets?  Generally speaking, less economic activity and a softer labor market should hurt stocks.  But using data from the National Oceanographic and Atmospheric Administration’s National Temperature Index (NTI), we found that cold weather during the winter months (December, January and February) does not have a meaningful implication for stock market returns.  (…) As shown, that correlation isn’t very robust. 

In months that are abnormally cold, there is a small correlation between the NTI and the S&P 500, but it peaks in December…and December still has positive average returns in chilly months!  The second chart shows that cold weather is also a bad predictor of the next month’s returns.  The correlation between the NTI in a given winter month with cold weather and the month following is actually negative, but still very low.

Devil  I.BERNOBUL, a good friend and an all-star croquignole player, sees verbal inflation and self-serving complacency in this comment from John Mauldin in his Jan. 26 comment:

My friend, all-star analyst, and Business Insider Editor-In-Chief Henry Blodget makes a compelling point: Anyone who thinks we need a ‘catalyst’ for a market crash should brush up on their history… There was no ‘catalyst’ in 1929. Or 1966. Or 1987. Or 2000. Or 2008…”

Blodget’s point is as compelling as his investment recommendations as head of the global Internet research team at Merrill Lynch during the dot-com bubble. The reality is that when equity valuations get on the high side, nervous investors tend to hold on as long as they can, waiting for reasons to sell to show up. These reasons are often not what one would expect at the time but they are enough to shake investors confidence. Once markets begin to waver and the media amplify the fears, the negative momentum feeds on itself. This time, it was the EM problems that started the turn.

 

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