NEW$ & VIEW$ (7 FEBRUARY 2014)

U.S. Worker Productivity Growth Is Steady and Firm

Nonfarm business sector productivity grew 3.2% last quarter (1.7% y/y) following its 3.6% Q3 rise. For all of last year productivity rose 0.6%, down from the 1.5% rise in 2012. Output gained 4.9% last quarter (3.3% y/y) and hours worked increased 1.7% (1.6% y/y). Compensation rose a steady 1.5% (0.4% y/y) but when adjusted for inflation it increased 0.6% in Q4 (-0.9% y/y). Unit labor costs fell 1.6% and were down 1.3% y/y. For all of last year costs rose a fairly steady 1.0%.

In the factory sector, worker productivity rebounded at a 2.0% annual rate last quarter (2.1% y/y). For the year productivity rose 2.0%. Output surged at a 6.6% rate (3.3% y/y) while hours worked gained 4.4% (1.2% y/y). Worker compensation increased at a 1.0% rate (1.2% y/y). Adjusted for price inflation, compensation edged 0.2% higher (-0.0% y/y. Unit labor costs fell 1.0% (-0.9% y/y) in Q4 and for all of last year costs declined 0.8%.


U.S. exports fell overall in December

Exports fell 1.8% from a month earlier to a seasonally adjusted $191.29 billion in December while imports rose 0.3% to $229.99 billion, widening the U.S. trade gap to $38.70 billion, the Commerce Department said Thursday.

In December, U.S. merchandise exports to the European Union tumbled 8.9%. Sales to other major trading partners—including Canada, Mexico, Japan and China—also fell. (Chart from Haver Analytics)


The terrible retail sales data for Europe in December should be enough to scare people. Absolute Return Partners’ Neils Jensen has this other worry:

imageThe problems in mainland Europe are well advertised and I see no need to repeat them all here. Suffice to say that the Eurozone banking system continues to be seriously under-capitalised. The ECB recognises this and has published a preliminary list of 124 Eurozone banks that it will subject to an Asset Quality Review (AQR) later this year. The market seems to expect a shortfall of tier one capital of around €500 billion; however, a recent study conducted by two academics on behalf of CEPS (see here) suggests that the actual number will be much higher – at the order of €750-800 billion (chart 6). (…)

A more likely consequence of the 2014 AQR is sustained pressure on lending activities across the Eurozone, a trend which is already underway. Most banks in the Eurozone have seen the writing on the wall and are already preparing for higher capital standards. Of the larger countries, only in France does the penny not seem to have dropped yet.

imageThe Eurozone is probably only one shock away from outright deflation. Consumer price inflation is running at 0.7% year-on-year, and that number is inflated by austerity driven tax hikes. According to Ambrose Evans-Pritchard, if those tax rises are stripped out, then (and I quote) “Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May […]. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August.” Not good. The inflation trend is unequivocally down and there is nothing to suggest that it is about to change (chart 8).

Actual deflation may well be the explanation for the dismal retail sales of the past 4 months. Sorry to repeat myself, but the numbers are terrifying:

Total retail volume dropped 1.6% MoM in December in the EA17. Over the last 4 months, retail volume is down 1.8%, that is a 5.4% annualized rate! Core sales volume dropped 1.8% in December and is down 1.5% since September (-4.6% annualized). Real sales dropped 2.5% in Germany (-2.4% in last 4 months), 3.6% in Spain (-6.0%), 1.0% in France (-1.2%).

Japan Earnings High, But Risks Loom After years of being pummeled by a strong domestic currency and a global economic downturn, Japanese corporate profits are near where they were in 2008.

The combined operating profit outlooks for the fiscal year ending March 31 by companies listed on the first section of the Tokyo Stock Exchange totals ¥31 trillion ($305 billion), on expected revenue of ¥621 trillion. That is within striking distance of the record ¥36 trillion profit and ¥639 trillion revenue logged in the year ending March 2008, according to SMBC Nikko Securities Inc. (…)

A total of 896 listed Japanese companies expect a 36% rise in operating profit to ¥23.99 trillion for this fiscal year through March on a 9.4% rise in revenue to ¥472.87 trillion, according to SMBC Nikko. The data cover 66% of companies listed on the first section of the Tokyo Stock Exchange with business years ending in March that had released earnings as of Thursday.

Including the companies still to release earnings this month, the combined outlooks for operating profit and revenue figures are ¥31 trillion and ¥621 trillion, respectively, according to SMBC Nikko.

The combined full-year operating profit outlook is down 0.1% from their previous outlooks, weighed down by the big downward revisions of a few companies. (…)

In the third quarter between October and December, companies’ operating profits jumped 55% from the same period a year earlier, with a 14% rise in revenue.(…)

For the full business year ending March, 124, or about 9%, of Japanese companies raised their previous outlook, while 64 lowered them. The rest kept their outlooks unchanged.

Investors Bolt From Stock Funds to Bonds

Traditional U.S. stock mutual funds and exchange-traded funds together saw withdrawals of $18.8 billion in the week ended Feb. 5, their biggest weekly withdrawals on record. The abrupt reversal, led by ETFs, comes after U.S. stock funds attracted $172 billion in 2013, the biggest inflow since the financial crisis.

Meanwhile, taxable bond mutual funds and ETFs soaked up $10.7 billion, their biggest intake on record, Lipper’s data showed. (…)

Investors also continued to yank cash out of emerging-market stocks for the fourth week in a row. Emerging-market stock funds shed $2.7 billion in the most-recent week, the biggest outflow since February 2011, compared with $2.6 billion a week earlier.

Virtually all of the shift came from money sloshing out of U.S. stock ETFs and into bond ETFs, funds that can often see big weekly swings in assets. Just $386 million flowed out of traditional U.S. stock mutual funds in the most recent week. Traditional bond mutual funds attracted $1.2 billion. (…) (Charts from ZeroHedge)



I consider myself a contrarian investor. Not a contrarian for the sake of being a contrarian but a contrarian nevertheless. My inclination to go against the prevailing view is based on one very simple piece of knowledge acquired through 30 years of trial and error. When an investor states that he is bullish, he is more often than not close to being fully invested, hence he has used most, if not all, of his dry powder. Obviously, the more people who find themselves in this situation, the less purchasing power there is on an aggregate basis. At this point the market is at or near its peak. Precisely the opposite is the case when most investors are bearish. They have sold most if not all of their holdings, at which point the market is more likely to go up than down. (Niels C. Jensen, Absolute Return Partners)

Going back all the way to 1928 on the S&P 500 shows an average of three 5%+ corrections each year. Outside of last year, since 1961 there have been only three years when the market didn’t have more than one 5%+ correction. Suffice to say, volatility is the norm, not the exception, with this current one clearly overdue.


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