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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NEW$ & VIEW$ (29 JANUARY 2014)

SOFT PATCH WATCH

U.S. Durable Orders Tumble 4.3%, Suggesting Business Caution

Demand for big-ticket manufactured goods tumbled last month, a sign of caution among businesses despite sturdier economic growth

New orders for durable goods fell 4.3% in December from a month earlier, the Commerce Department said Tuesday. Economists surveyed by Dow Jones Newswires had a median forecast that durable-goods orders would rise by 1.5% in December.

The decline, the biggest since July, was driven by a sharp drop in demand for civilian aircraft. Excluding the volatile transportation sector, durable-goods orders fell 1.6%—itself the biggest decline since March. (…)

The overall drop in orders was broad-based, with most major categories posting declines. Orders for autos fell by the most since August 2011, and demand for computers and electronic also declined sharply.

Orders for nondefense capital goods excluding aircraft—a proxy for business spending on equipment—declined 1.3% in December, reversing some of November’s 2.6% increase. (…)

Pointing up Nondefense capital goods ex-aircraft are up 0.7% in Q4, a 2.8% annualized rate. They rose 5.1% for all of 2013, but that was really because of a poor second half in 2012. As this chart from Doug Short reveals, core durables have displayed very little momentum in 2013.

Click to View

SPEAKING OF CARS

In reporting its results, Ford said that in the current quarter it would produce 14,000 fewer vehicles in North America than in the same period a year ago.

A Cooling of Americans’ Love Affair With Cars

An aging population and a shift away from car ownership will make it difficult for the U.S. auto industry to sell as many cars as it once did.

(…) The challenge, though, will be maintaining that level with a confluence of demographic headwinds hitting.

The population is significantly older, and growing much more slowly, than it did during the auto industry’s heyday. In 1970, the U.S. median age was 28 and the population aged 16 and over—broadly, those of driving age—had grown at 1.7% annually over the prior five years. Today, the median age is 38, with the driving-age population growing 1% annually.

At the same time, young people’s interest in cars seems to be waning. In 1995, 87% of the population aged 20 to 24 had a driver’s license, according to the Federal Highway Administration. By 2011 that had fallen to 80%.

A recent analysis by industry watcher IHS and French think tank Futuribles suggests a likely culprit: a trend toward more urban living. Cities offer alternatives to driving for getting around and owning a car there can be an outright, and expensive, nuisance. (…)

There has been a marked decline in the time Americans spend behind the wheel. And the further the recession slips into the past, the more this change looks driven by demographics rather than just economic distress.

In 2012, according to an analysis of census data by the University of Michigan’s Transportation Research Institute, 9.2% of U.S. households didn’t have a car, compared with 8.7% in 2007. In the 12-month period ended in November, vehicles logged 2.97 trillion miles on American roads, according to the Federal Highway Administration. That comes to 12,045 miles per person aged 16 and over—nearly a 20-year low. (…)

December Shipment Volumes

imageFreight volumes in North America plummeted 6.2 percent from November to December, making this the largest monthly drop in 2013 and the third straight monthly decline. December shipment levels were 3.2 percent lower than in December 2012 and 1.8 percent lower than 2011. Despite the fact that there were fewer shipments in 2013, other indicators, such as the American Trucking Association’s Truck Tonnage Index, have shown that loads have been getting heavier. This matches well with anecdotal evidence from LTL carriers that they are carrying fuller loads. And since the Cass Freight Index does not capture a representative picture of the small parcel sector of the industry, the steep downward freight movement in December was somewhat offset by the increase in small package shipping for the holidays.

TRUCKIN’ & TRAININ’: Interesting to see how trucking rates have gone up while rail container rates have been flat for 3 years.

Truckload pricing trend data

Intermodal price trends

CHINA: CEBM’s review of January industrial activity shows that economic activity remains weak, but that further MoM weakening was not observed.

U.S. Home Prices Rise U.S. home prices continued to rise solidly in November, according to according to the S&P/Case-Shiller home price report.

The home price index covering 10 major U.S. cities increased 13.8% in the year ended in November, according to the S&P/Case-Shiller home price report. The 20-city price index increased 13.7%, close to the 13.8% advance expected by economists.

The two indexes indicate home prices are back to levels seen in mid-2004. (Chart from Haver Analytics)

Turkey Gets Aggressive on Rates

Turkey’s central bank unveiled emergency interest-rate increases in a move that outstripped market expectations and sent the lira roaring back, in a test case for other emerging markets battling plunging currencies.

The central bank more than doubled its benchmark one-week lending rate for banks to 10% from 4.5%. At the same time, in an apparent effort to quell volatility and get banks to hold money longer, it shifted its primary lending to the weekly rate from its overnight rate of 7.75%, which it raised even higher.

The effective difference for most lending—2.25%—is a major move for any central bank, though not as large as it initially appeared. (…)

The Turkish rate hike, which pushed the overnight rate to 12%, followed a surprising increase in India on Tuesday, as Delhi moved to dampen rising prices even as the South Asian giant faces its slowest growth in a decade.

Argentina’s central bank has also pushed up rates in recent days, and in South Africa, which faces a similar mix of weakening growth and high inflation, rate setters were under pressure to follow suit at their meeting Wednesday.

On Monday, the Bank of Russia shifted the ruble’s trading band higher, in response to selling pressure on the Russian currency. (…)

High five “The reality is that Turkey needs capital flows every day. The rate hike makes more difficult for people to go short the lira, but this doesn’t mean necessarily people are coming in,” said Francesc Balcells, an emerging-market portfolio manager with Pacific Investment Management Co., which manages a total of $1.97 trillion.

Europe Banks Show Signs of Healing

Italy’s second-largest bank by assets, Intesa Sanpaolo ISP.MI +0.86% SpA, said that it has fully repaid a €36 billion ($49 billion) loan it took from the European Central Bank during the heat of the Continent’s financial crisis. The bank moved faster than expected to pay back loans that don’t come due until the end of the year.

Elsewhere, Europe’s banks have recently entered a stepped-up cleanup phase. (…)

In Italy, Banco Popolare BP.MI -1.21% SC on Friday joined several other banks there that plan to sell more shares this year. The lender said Friday that it would raise €1.5 billion by giving its investors the right to buy shares at a discount. (…)

European banks have raised about €25 billion of new capital in recent months in advance of the ECB exams, according to Morgan Stanley MS +0.53% analyst Huw van Steenis. (…)

Some bank executives privately said they are worried that the stress-test process itself could reignite the Continent’s financial crisis if unexpected problems are uncovered. The chairman of one of Europe’s largest banks said his company is refusing to make unsecured loans to other European banks because of concerns about the industry’s health. (…)

Big Oil’s Costs Soar

Chevron, Exxon and Shell spent more than $120 billion in 2013 to boost their oil and gas output. But the three oil giants have little to show for all their big spending.

Oil and gas production are down despite combined capital expenses of a half-trillion dollars in the past five years. (…)

Plans under way to pump oil using man-made islands in the Caspian Sea could cost a consortium that includes Exxon and Shell $40 billion, up from the original budget of $10 billion. The price tag for a natural-gas project in Australia, called Gorgon and jointly owned by the three companies, has ballooned 45% to $54 billion. Shell is spending at least $10 billion on untested technology to build a natural-gas plant on a large boat so the company can tap a remote field, according to people who have worked on the project.

(…) Chevron, Exxon and Shell are digging even deeper into their pockets, putting their usually reliable profit margins in jeopardy. Exxon is borrowing more, dipping into its cash pile and buying back fewer shares to help the Irving, Texas, company cover capital costs.

Exxon has said such costs would hit about $41 billion last year, up 51% from $27.1 billion in 2009. (…)

Costly Quest

Oil-industry experts say it will be difficult for the oil giants to spend less because they need to replenish the oil and gas they are pumping—and must keep up with rivals in the world-wide exploration race.

“If you don’t spend, you’re going to shrink,” says Dan Pickering, co-president of Tudor, Pickering Holt & Co., an investment bank in Houston that specializes in the energy industry. Unfortunately for the oil giants, though, “I don’t think there’s any way these projects are more profitable than their legacy production,” he adds. (…)

EARNINGS WATCH

 

Earnings Beat Rate Strong Early, But A Long Way To Go

With few companies reporting early, the beat rate jumped as high as 70% before falling back down to 58% on January 15th.  Since then we’ve seen it stabilize and solid beat rates late in the week of the 17th have taken us to a range around 65% since the Martin Luther King Day long weekend.

As of this morning, 66% of firms reporting have beaten their consensus EPS estimates, which is better than the last two fourth quarter reporting periods (61% in 2012 and 60% in 2011).  Since the start of the current bull market in early 2009, the average quarter has had a beat rate of 62%.  If the current quarter continues at this pace, we will log the highest EPS beat rate since this reporting period in 2010.  But keep in mind that less than 300 names have reported.  With over 80% of the market waiting in the wings, this earnings season is far from over.

Thumbs down Thumbs up DOW THEORY SELL SIGNAL? (From Jeffrey Saut, Chief Investment Strategist, Raymond James)

(…) All of those Bear Boos were reflected in this email from one of our financial advisors:

Hey Jeff, I know you have heard of the Dow Theory buy and sell signals. We are now in a Dow Theory sell signal, meaning the D-J Transport Average (TRAN/7258.72) made a new high unconfirmed by the D-J Industrials. We’ve been in a Dow Theory buy signal environment for the past two years and now that has reversed. These signals are not short term and only happen at major stock market turns. For instance, we had Dow Theory sell signals 4 times between October of 2007 and February of 2008, which was a precursor to the 2008 carnage. What happened on Thursday/Friday of this week also confirms the bearish Elliott wave pattern.

“Nonsense,” was my response. First, all we have seen is what’s termed an “upside non-confirmation” with the Trannies making a new high while the Industrials did not. That is NOT a Dow Theory “sell signal,” it is as stated an upside non-confirmation. To get a Dow Theory “sell signal” would require the INDU to close below its June 2012 low of 14659.56 with a close by the Trannies below their respective June 2012 low of 6173.86, at least by my method of interpreting Dow Theory.

Second, there were not four Dow Theory “sell signals” between October 2007 and February 2008. There was, however, a Dow Theory “sell signal” occurring in November 2007 that I wrote about at the time. Third, there have been numerous Dow Theory “buy signals” since 2009, not just over the last two years. Fourth, Dow Theory also has a lot to do with valuations, and valuations are not expensive with the S&P 500 trading at 14.7x the S&P’s bottom up earnings estimate for 2014. And fifth, I studied Elliott wave theory decades ago and found it to be pretty worthless.

Canon to Return Some Production to Japan

Canon is stepping up efforts to take advantage of a weak yen by moving some of its production back home, in a move that could signal a shift in momentum of the Japanese manufacturing sector.

First, “Abenomics is working well … thus leading us to believe the foreign currency rate won’t fluctuate widely from the current levels at least for next several years,” Mr. Tanaka said.

Second, Mr. Tanaka said, a gap between labor costs in Japan and other Asian nations, where Canon has production bases, has narrowed. Rising wages outside Japan, as well as advanced factory automation technology the company has introduced at home, have contributed to the narrowing of those costs.

Canon said it expects to increase domestic output to 50% by 2015, from 43% in the latest business year ended December. About 60% of Canon’s production came from domestic factories between 2005 and 2009 but has fallen to below 50% since 2011.

 
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NEW$ & VIEW$ (16 JANUARY 2014)

INFLATION WATCH

U.S. Consumer Prices Rise 0.3% in December

The consumer-price index rose a seasonally adjusted 0.3% in December from the prior month, the Labor Department said Thursday. Core prices, which strip out volatile food and energy costs, were up a mild 0.1%.

Compared with a year earlier, overall consumer prices increased 1.5% and core prices were up 1.7%. Energy prices led the monthly gain, with gasoline prices rising 3.1%. (…)

Pointing up A separate report Thursday showed inflation-adjusted average weekly earnings fell 0.5% in December from the prior month.

Real average weekly earnings are unchanged from a year earlier, giving many consumers little additional spending power.

U.S. Producer Prices Rise 0.4%

U.S. wholesale prices climbed in December after falling for most of the fall, but broader trends suggest inflation pressures remain subdued.

The producer-price index, reflecting how much firms pay for everything from paper to trucks, rose a seasonally adjusted 0.4% from November, led by a jump in energy costs, the Labor Department said Wednesday. That followed two consecutive months of declines and marked the biggest increase since June.

Core producer prices, which strip out volatile food and energy costs, increased 0.3%. But almost half of that rise was due to a surge in tobacco prices, which a Labor Department economist attributed to a routine price adjustment by manufacturers that occurs several times a year.

Fed’s Beige Book: Job Market Firming Up

Some regions of the U.S. are confronting labor shortages in construction and other high-skill fields, according to the Federal Reserve’s ‘beige book’ survey of economic conditions.

(…) The Dallas Fed district reported “acute labor shortages” for auditors, engineers, truck drivers and construction workers in late November and December.

The Cleveland Fed said hiring was “sluggish” for most industries, but construction firms were hiring. “Builders reported a scarcity of high-skilled trade workers,” according to the report. “As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.” (…)

“The labor markets showed signs of tightening,” the Minneapolis district reported, with 30% of businesses saying they expect to hire more full-time workers in 2014 versus 18% who expect to have fewer full-time employees.

In the Richmond district, there were “numerous reports of strong labor demand,” though the report also said few businesses offered permanent jobs to seasonal workers and there was high turnover among low-skill workers.

In all, two-thirds of districts reported “small to moderate” increases in hiring, according to the report, and many companies were optimistic as 2014 began. In the New York district, most companies said they kept staffing flat as 2013 came to a close, but “substantially more businesses plan to expand than reduce their workforces in 2014.” (…)

Most areas reported improving real-estate markets, with residential sales, prices and construction on the rise. Two-thirds of districts said commercial property sales and leasing were up, too.

Prices were described as “stable” in about half the districts and most of the rest reported “small increases,” with a couple exceptions. (…)

Eight of the 12 districts reported “small to moderate” increases in wages.

While spending on tourism and leisure was reportedly “mixed” across the country, the manufacturing sector saw “steady growth” and steady employment.

“A manufacturer in the Dallas district said that for the first time since before the recession, his firm had too many jobs to bid on,” according to the report.

No major changes in bank lending volume were reported, though six districts reported “slight to moderate growth,” three saw no change and one— New York—saw a “moderate decline in loan volume.” (…)

Robots vs humans (BAML)

Euro-Zone Inflation Weakens

Eurostat said consumer prices rose 0.3% from November, and were up 0.8% from December 2012. That marks a decline in the annual rate of inflation from 0.9% in November, and brings it further below the rate of close to 2.0% targeted by the ECB.

Eurostat also confirmed that the “core” rate of inflation—which strips out volatile items such as food and energy—fell to 0.7%, its lowest level since records began in 2001.

Lagarde warns of deflation danger IMF chief says ‘ogre’ of falling prices must be fought decisively

No reason for ‘irrational inflationary fears’ – ECB’s Weidmann

 

Europe Car Sales Fell in 2013

European car sales fell for the sixth straight year in 2013, despite a pickup in registrations in the final months of the year that sparked hope of a broader recovery in the region.

The European Automobile Manufacturers’ Association, known as ACEA, said Thursday that 11.9 million new cars were registered in the European Union last year, a decline of 1.7% compared with the previous year.

A moderate recovery of car sales in the second half of the year gathered pace in December, according to the ACEA data, but wasn’t strong enough to pull the industry into positive territory for the year. In December, new car registrations rose 13% to 906,294 vehicles—the strongest rate in the month of December since 2009 but still one of the lowest showings to date, ACEA said. Registrations also grew in the fourth quarter. (…)

Russia Faces Stagflation, Central Banker Warns

The emerging-market economy ‘can speak of stagflation,’ the Bank of Russia’s first deputy head tells an economic conference.

(…) Russia’s economic growth has been slowing amid dwindling investment, hefty capital outflows, and weak demand and low prices for its commodities exports. Officials repeatedly downgraded forecasts for economic growth last year to 1.4%, a far cry from the average annual pace of about 7% during the early 2000s and well below the medium-term target of 5% set by President Vladimir Putin. Consumer prices grew 6.5% last year, above the 5%-to-6% range the central bank was targeting.

The government acknowledged last year that the slowdown was a result of domestic economic vulnerabilities, such as low labor productivity, and not just a weak global economy, as it had earlier asserted. The economy ministry slashed its growth forecasts for the next two decades. It also warned that the oil-fueled growth that has been a foundation of Mr. Putin’s rule is over and that there is nothing ready to take its place, given the country’s poor investment climate and aging infrastructure.

In a sign of Russia’s waning appeal to foreign investors, the European Bank for Reconstruction and Development said Wednesday that its investments in Russia fell sharply last year to €1.8 billion ($2.5 billion) from €2.6 billion in 2012. (…)

Japan machinery orders hit five-year high
Data hint at greater corporate capital investment plans

(…) Orders of new machinery by businesses, considered a leading indicator of overall capital investment, surged to a five-year high in November, rising 9.3 per cent to Y882.6bn. The year-on-year increase, which handily beat analysts’ expectations, was the second in two months and the fifth biggest on record. (…)

Brazil raises benchmark rate to 10.5%
World’s most aggressive tightening cycle continues

The central bank raised the Selic rate by 50 basis points to 10.5 per cent on Wednesday, extending the world’s most aggressive tightening cycle. It has raised interest rates by 325 basis points over the past nine months. (…)

At Brazil’s previous interest rate meeting, the central bank changed its statement for the first time in months, signalling the tightening cycle would soon be over.

However, a surge in prices in December took the central bank by surprise, likely forcing a revision to the country’s monetary policy strategy, economists say.

Data from the national statistics agency last week showed consumer prices jumped 0.92 per cent in December, the most since April 2003.

The annual inflation rate for the month – 5.91 per cent – also came in above estimates from all analysts in a Bloomberg survey and far above the country’s official 4.5 per cent target. (…)

ITALY IN 3 CHARTS (From FT)

SENTIMENT WATCH 

Actually, the appropriate headline should be “The Bulls…ers Are Back” Crying face

Bulls Are Back

The stock market’s slow start to the year lasted all of two weeks, as back-to-back rallies pushed the S&P 500 back up to a record high.

(…) In a note to clients, Craig Johnson, Piper Jaffray’s technical strategist, said the market’s primary trend will remain higher in the coming months. He predicts the S&P 500 will jump another 8% and hit 2000 before suffering through a nasty correction around the middle of the year that could take the index back to the 1600-to-1650 range.

Such a drop from his projected peak would take the S&P 500 down as much as 20%, a drop that hasn’t occurred since the summer of 2011.

But have no fear, stock-market bulls. He then sees stocks staging a sharp rally through the end of the year, lifting the S&P 500 to 2100 and capping a 14% gain for the year. “A hop, a drop and a pop in 2014” is how Mr. Johnson predicts it will play out, as rising bond yields will prompt more cash to flow out of bonds and into stocks throughout the year.

“We believe that 2014 will be a good year, but not a great year like 2013,” he said. (…)

Choppy equities require investor focus
End of loose money spells change in market’s inner workings

(…) Whether 2014 is a profitable year will come down to investors relying less on endless liquidity from the Federal Reserve that, like a high tide, has floated all equity boats. Instead they must focus on specific sectors and opportunities such as likely merger and acquisition targets in the coming months. Sarcastic smile (…)

Yeah! Sure! Let’s all do that. Thank you FT.

 
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NEW$ & VIEW$ (15 JANUARY 2014)

Consumers Spent Solidly in December

Just kidding This is the WSJ’s headline today. Below is the reality:

U.S. Retail Sales Post Moderate Year-End Increase

Retail spending increased 0.2% (4.1% y/y) during December after a 0.4% November gain, revised down from 0.7%. For all of last year retail sales increased 4.3%, the weakest increase of the economic recovery.

A 1.8% reduction (+5.9% y/y) in sales of motor vehicles & parts held back the increase in overall December sales. Nonauto retail sales rose 0.7% (3.7% y/y) after a 0.1% November uptick. Nonauto sales rose 3.4% during all of 2013, also the weakest gain of the recovery.

Higher sales of food & beverages led last month’s sales with a 2.0% gain (4.2% y/y) following two months of slippage. Clothing & accessory sales increased 1.8% (5.2% y/y) after a 0.5% November dip and gasoline service station sales rose 1.6% (0.6% y/y), after two months of decline. Sales of nonstore retailers showed continued strength with a 1.4% jump (9.9% y/y) following a 1.6% November gain. Furniture store sales dropped 0.4% (+4.5% y/y) after a 0.2% decline and building materials & garden equipment store sales slipped 0.4% (+2.1% y/y), down for the third month in the last five.

Not easy to get a clear measure of retail sales given the calendar quirks and bad weather. It is best to look at average sales growth for November and December.

  • Total retail sales: +0.3% (Nov.-Dec. avg) vs +0.5% in October.
  • Autos and Parts:  +0.1% vs +1.0%.
  • Non Autos ex Gas and Building Supplies: +0.5% vs +0.6%

Surprised smile Total sales for the October through December 2013 period were up 1.0% YoY.

Note that these figures are subject to big revisions. November’s surprising 0.7% original gain was revised down to 0.4%.

Pointing up U.S. Business Inventories Increase Slows

Total business inventories increased 0.4% in November (4.0% y/y), the slowest increase in three months. This inventory rise accompanied a 0.8% jump (4.0% y/y) in business sales after October’s 0.5% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

Pointing up In the retail sector, inventories advanced 0.8% (7.3% y/y) in November, including a 1.3% jump (13.7% y/y) in motor vehicles. Inventories excluding autos rose 0.6% (4.4% y/y).

Sad smile Taking the 3 months to November, retail inventories rose 2.9% sequentially while sales advanced only 0.7%. Ex-Autos: +1.3% vs +0.5%.

As I have been warning, there is clearly an inventory problem entering Q114. If you don’t believe me, read this:

Auto AutoNation CEO Calls U.S. Vehicle Inventories Too High

AutoNation Chief Executive Mike Jackson says new-car supplies in the U.S. are rising rapidly, putting pressure on auto companies as they try to avoid a profit-sapping price war.

(…) U.S. dealers have about $100 billion worth of unsold cars and trucks sitting on their lots, Mr. Jackson said. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run-up to the financial crisis and the auto-sales collapse of 2008-2009, Mr. Jackson said. Auto makers book revenue when a car is shipped, not when it is sold at the dealership.

At the end of 2013, auto dealers had 3.45 million cars and trucks in stock, enough to last 63 days at the current selling rate, according to research firm Autodata Corp. A 60-day supply of cars is typically considered as healthy by the industry.

High five But Mr. Jackson said the inventory levels are much higher than that—closer to 90 to 120 days of supply—if cars sold to fleets are excluded from the selling rate. (…)

AutoNation’s Mr. Jackson said discounts are starting to rise across the industry already, even if they aren’t as obvious to consumers.

Among them are “stair-step programs” where car companies give money directly to dealers in exchange for hitting monthly sales targets.

“What worries me is if the industry was as disciplined as it says it is we would have stopped before 3.5 million” vehicles at dealerships, Mr. Jackson said. He sees about a 50-50 chance the industry will resort to an all-out discount war.

“What I’m saying is you’re on the edge of a slippery slope and even sliding down it a bit,” he said. “It’s a risk.”

Auto Makers Dare to Boost Output

A string of new factories in the region will start cranking out a million or more cars over the next several years.

A large increase in production capacity poses a serious risk for auto makers. They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%. (…)

Some auto makers are already concerned about overcapacity.

“The last thing we need is to get bricks-and-mortar capacity increased,” Sergio Marchionne, chief executive of Chrysler Group LLC and Fiat SpA, said this week. Building new plants isn’t the only trend to watch, he added, because increasing the use of automated production lines can boost output at existing factories. (…)

Magna warns 2014 sales likely below analysts’ estimates

Canadian auto-parts giant Magna International Inc. is forecasting 2014 sales that are below analysts’ estimates.

Aurora, Ont.-based Magna said on Wednesday in its financial outlook that it anticipates total sales of between $33.8-billion (U.S.) and $35.5-billion in 2014, lower than the consensus analysts’ estimate of $35.8-billion.

Jobs Deal Collapses in Senate

(…) After more than a week of talks, lawmakers failed to reach agreement to revive benefits for the roughly 1.4 million people who have lost aid since last month. Senate Democrats rejected the latest proposal from a group of eight Republicans, while GOP lawmakers dismissed an overture from Senate Majority Leader Harry Reid (D., Nev.) to allow votes on a handful of Republican amendments.

The law that expired in December dates from the financial crisis and provided federal aid to supplement the 26 weeks of unemployment benefits provided by most states, giving up to 47 weeks of additional payments. The latest proposals from both Democrats and Republicans would scale that back to a maximum of 31 weeks. (…)

Several lawmakers said they hope to continue negotiations, but the Senate isn’t expected to return to the issue until late January after next week’s congressional recess. The Senate is shifting its focus on Wednesday to consider the short-term stopgap spending bill to prevent a partial government shutdown and the $1.012 trillion bill to fund the federal government through Sept. 30, the end of the current fiscal year. (…)

HOUSING WATCH

From Raymond James:

  • California’s November existing single-family home sales fell 3.4%, on a seasonally-adjusted basis relative to October as rising home prices and higher mortgage rates reduced affordability. Closed sales stood at the lowest level since July 2010, falling to an annual run rate of 387,520 units (down 12.0% y/y). We note on a sequential basis, sales fell for the fourth consecutive month in November and have now declined on a year-over-year basis in ten of the last eleven months. California’s non-seasonally-adjusted pending home sales index (PHSI) fell 9.4% y/y (versus -10.4% y/y in October), and declined 13.6% m/m as Golden State buyers’ sensitivity to interest rate swings becomes increasingly apparent.
  • Florida existing home sales fell 1.2% y/y in November, the first negative y/y comp since March 2012 and down from a +6.5% y/y comp in October. Sequentially, sales decreased 11.3% from October, fueled by the combined increase in prices and mortgage rates outpacing household income growth. According to November data from RealtyTrac, 62.7% of Florida homes sold were all-cash transactions, the highest level of any state and well ahead of the next closest state (Georgia, 51.3%).

German GDP Disappoints

German economic growth failed to gain momentum in the fourth quarter of 2013, but economists predict stronger growth this year

Germany’s gross domestic product expanded 0.4% in 2013, following growth of 0.7% in 2012, the Federal Statistics Office said on Wednesday. The economy grew 0.5% when taking account of the number of working days each year.

Based on the full-year figures, GDP increased around 0.25% in the three months through December—about the same rate as the third quarter—according to the statistics office, which is due to publish fourth-quarter national accounts in mid-February.

Productivity crisis haunts global economy
Report shows most countries failed to improve overall efficiency

A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades.

In a sign that innovation might be stalling in the face of weak demand, the Conference Board, a think-tank, said a “dramatic” result of the 2013 figures was a decline in the world’s ability to turn labour and capital resources into goods and services.

Productivity growth is the most important ingredient for raising prosperity in rich and poor countries alike. If overall productivity growth disappears in the years ahead, it will dash hopes that rich countries can improve their population’s living standards and that emerging economies can catch up with the advanced world.

The Conference Board said: “This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation.”

The failure of overall efficiency – known to economists as total factor productivity – to grow in 2013 results from slower economic growth in emerging economies alongside continued rapid increases in capital used and labour inputs. Labour productivity growth also slowed for the third consecutive year.

The decline in total factor productivity continues a trend of recent years in which the remarkable rise in the efficiency of emerging markets has slowed and in advanced economies it has declined. (…)

The Conference Board’s annual analysis of productivity uses the latest data to estimate economic growth in all countries, the increase in hours worked and the deployment of additional capital to estimate the efficiency of individual economies.

Globally, it found that labour productivity growth declined from 1.8 per cent in 2012 to 1.7 per cent in 2013, having been as high as 3.9 per cent in 2010. Total factor productivity dipped 0.1 per cent.

For the US it found that productivity gains of the early years of the crisis continued to be elusive in 2013, with labour productivity growth stable at 0.9 per cent in 2013.

The US trends were, however, better than those in Europe, which has seen extremely weak productivity growth alongside relatively muted unemployment in most large economies with the exception of Spain, where joblessness soared. Labour productivity grew 0.4 per cent in 2013, having fallen 0.1 per cent in 2012.

Mr van Ark said Europe’s problem in achieving more efficiency from its labour force stemmed from structural rigidities.(…)

Emerging economies saw rates of growth of productivity fall from extraordinarily rapid rates, even though the rate of growth at 3.3 per cent was still much higher than in advanced economies.

For China, the Conference Board said that, while “the statistical information for the latest years is sketchy, the indications are that sustained investment growth in China has not been accompanied by the efficiency gains (measured by total factor productivity growth) similar to those of the previous decade”. (…)

World Bank warns of emerging market risk
Capital flows could fall 80% if central banks move too abruptly

An abrupt unwinding of central bank support for advanced world economies could cause capital flows to emerging markets to contract by as much as 80 per cent, inflicting significant economic damage and throwing some countries into crises, the World Bank has warned.

Capital flows into emerging markets are influenced more by global than domestic forces, leaving them vulnerable to disorderly changes in policy by the US Federal Reserve, concludes a study by World Bank economists.

SENTIMENT WATCH

 

The Year-Two Curse

In a world full of January barometers, Super Bowl indicators and sell-in-May-and-go mantras, Jeffrey Kleintop, chief market strategist at LPL Financial, thinks he’s found an indicator that actually works: the “year-two curse.”

“Year two” refers to the second year of a presidential cycle, which is what we’re in right now. Per the chart below, courtesy of LPL, the middle of the year tends to be fairly volatile for investors.

“The start of the second quarter to the end of the third quarter of year two has consistently marked the biggest peak-to-trough decline of any year of the four-year presidential term,” Mr. Kleintop wrote in a note to clients.Since 1960, nine of the 13 presidential terms have suffered from the dreaded curse, as the S&P 500 fell in the second and third quarters of those years, he says. (…)

Still, Mr. Kleintop maintains a relatively bullish stance about the rest of the year. “We may again see some seasonal weakness, but there is no need to fear the curse,” he says. “In fact, the curse may be a blessing for some, allowing those who have been awaiting a long-overdue pullback a chance to buy. It is important to keep in mind that history shows that, on average, year two posts a solid gain for stocks, and the year-two curse is reversed by the end of the year.”

 
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NEW$ & VIEW$ (9 JANUARY 2014)

Yellen Eyes Turnover as U.S. Workers Leave Jobs

More Americans are voluntarily quitting their jobs as they become increasingly confident about business conditions — a trend that Janet Yellen, the next Federal Reserve chairman, is monitoring.

Almost 2.4 million U.S. workers resigned in October, a 15 percent increase from a year earlier, based on seasonally adjusted data from the Department of Labor. These employees represent 56 percent of total separations, the 13th consecutive month above 50 percent and highest since April 2008. November figures are scheduled to be released Jan. 17. (…)

The quits ratio is highly correlated with how Americans feel about the job market and is especially helpful because it separates behavior from intentions, showing “what people are doing, not what they say they’ll do,” Colas said. “Voluntarily leaving one’s position requires a fundamental level of confidence in the economy and in one’s own personal financial story.” The ratio in November 2006, about a year before the recession began, was 58 percent.

The share of Americans who say business conditions are “good” minus the share who say they are “bad” rose in December to the highest in almost six years: minus 3 percentage points, up from minus 4.2 points the prior month, based on data from the Conference Board, a New York research group.

Job seekers also are more optimistic about the hiring environment. Sixty-three percent of callers to a job-search-advice help line Dec. 26-27 said they believed they could find new employment in less than six months, up from 55 percent a year ago, according to Challenger, Gray & Christmas Inc., a human-resources consulting company. (…)

U.S. December planned layoffs plunge to lowest since 2000: Challenger

The number of planned layoffs at U.S. firms plunged by 32 percent in December to the lowest monthly total in more than 13 years, a report on Thursday showed.

Employers announced 30,623 layoffs last month, down from 45,314 in November, according to the report from consultants Challenger, Gray & Christmas, Inc.

The last time employers announced fewer job cuts was June of 2000, when 17,241 planned layoffs were recorded.

The figures come a day ahead of the closely-watched U.S. non-farm payrolls report, which is forecast to show the economy added 196,000 jobs in December. (…)

The December figure fell 6 percent from a year earlier, when planned layoffs totaled 32,556, and marked the third straight month that announced workforce reductions dropped year over year. (…)

U.S. Consumer Credit Growth Eases

The Federal Reserve Board reported that consumer credit outstanding increased by $12.3 billion (6.1% y/y) during November following an unrevised $18.2 billion October gain. The latest monthly gain was the weakest since April.

Usage of non-revolving credit increased $11.9 billion (8.2% y/y) in November. Revolving credit outstanding gained $4.3 billion (1.0% y/y) in November.

Auto Markit Eurozone Sector PMI: Automobiles & auto parts posts its best quarterly performance since Q1 2011

Despite recent growth being high in the context of historical survey data, automobiles & auto parts still maintains some forward momentum heading into the New Year. New orders increased sharply and to the greatest degree in three years in December, leading to a substantial build-up of outstanding business. Job creation, which has until now been muted relative to the trends in output and new business, therefore looks set to pick up.

image

 

German Industrial Output Rises First Time in Three Months

Output, adjusted for seasonal swings, increased 1.9 percent from October, when it fell 1.2 percent, the Economy Ministry in Berlin said today. Economists predicted a gain of 1.5 percent, according to the median of 32 estimates in a Bloomberg News survey. Production climbed 3.5 percent from a year earlier when adjusted for working days.

German Orders Surge Back But Domestic Orders Lag

German orders rose by 2.1% in November, rebounding from a 2.1% drop in October. The headline trend shows solid growth with three-month growth at a 12.7% annual rate, up from a 6.2% annual rate over six-months and a 6.8% annual rate over 12-months. The strength is led by foreign demand.

Foreign orders rose by 2.2% in November from a 2.2% drop in October but also logged a 6.3% increase in September. As a result, foreign orders are rising at a 27.1% annual rate over three-months, up from a 12.8% annual rate over six-months, and a 9% annual rate over 12-months.

In contrast, domestic orders rose by 1.9% in November, unwinding a 1.9% drop in October. However, domestic orders also fell by 0.9% in September. As a result, the trend for domestic orders is poor. It is not just weaker than foreign orders – it is poor. Domestic orders are falling at a 3.8% annual rate over three-months following a 1.9% annual rate drop over six-months and a 3.9% annual rate gain over 12-months. The domestic sector is in a clear deceleration and contraction.

China’s 2013 Vehicle Sales Rose 14%

The CAAM said sales of both passenger and commercial vehicles totaled a record 21.98 million units, up 14% from a year earlier, the fastest pace since 2010. Passenger vehicles led the way, with sales up 16% to 17.93 million units.

Sales gain in December quickened due in part to local consumers’ habit of spending ahead of the Lunar New Year, which falls in the end of January this year. Auto makers shipped 2.13 million vehicles to dealers, up 18% from a year earlier. Among the total, sales of passenger vehicles were 1.78 million units, up 22% on year.

Even as China’s economy displayed clear signs of a slowdown, consumers bought new vehicles, motivated by some cities’ pending restrictions on car purchases to alleviate traffic congestion and air pollution. Within hours after the northern city of Tianjin announced a cutback on new license plates last month, thousands of residents rushed to buy cars. Some used gold necklaces as collateral, said local media.

CAAM said it expects gains to continue this year, though at a slower pace. The association projected a rise of 8%-10% for the overall auto market, to about 24 million units, and as much as an 11% gain for passenger vehicles, to nearly 20 million units.

“China’s auto market is still at the period of rapid expansion and growth has gradually shifted to small-sized cities where demand is significant,” said Shi Jianhua, deputy secretary-general at the CAAM.

China Consumer Inflation Eases

The consumer-price index rose 2.5% in December from a year earlier, slower than the 3.0% year-over-year rise in November, the National Bureau of Statistics said Thursday.

In the December price data, food remained the key contributor to higher prices, rising 4.1% year on year in December. But that was down from the 5.9% rise the previous month. Nonfood prices were up 1.7% in December, compared with November’s 1.6% gain.

But in a continued sign of weak domestic demand, prices at the factory level fell once again, declining for the 22nd consecutive month. They were down 1.4% in December, falling at the same rate as in November.

Stripped of food prices, inflation edged up to 1.7% YoY from 1.6% in November.

OECD Inflation Rate Rises

The Organization for Economic Cooperation and Development said Thursday the annual rate of inflation in its 34 developed-country members rose to 1.5% from 1.3% in October, while in the Group of 20 leading industrial and developing nations it increased to 2.9% from 2.8%.

The November pickup followed three months of falling inflation rates, but there are indications that it will prove temporary. Figures already released for December showed a renewed drop in inflation in two of the world’s largest economies, with the euro zone recording a decline to 0.8% from 0.9%, and China recording a fall to 2.5% from 3.0%.

Key Passages in Fed Minutes: Consensus on QE, Focus on Bubbles

Federal Reserve officials were largely in agreement on the decision to begin winding down an $85 billion-per-month bond-buying program. As they looked to 2014, they began to focus more on the risk of bubbles and financial excess.

    • Some … expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.
    • Several [Fed officials] commented on the rise in forward price-to-earnings ratios for some small cap stocks, the increased level of equity repurchases, or the rise in margin credit.

Pointing up Something the Fed might be facing sooner than later:

Bank dilemma Time for Carney to consider raising rates

When your predictions are confounded, do you carry on regardless? Or do you stop, think and consider changing course? Such is the remarkable recovery in the UK economy since the first quarter of last year that the Bank of England is now facing this acute dilemma.

Just five months ago, the bank’s new governor pledged that the BoE would not consider tightening monetary policy until unemployment fell to 7 per cent so long as inflationary pressures remained in check. (…)

The question is what the BoE should now do. Worst would be to show guidance was entirely a sham by redefining the unemployment threshold, reducing it to 6.5 per cent. Carrying on regardless of the data is no way to run monetary policy. Instead, the BoE should be true to its word and undertake a thorough consideration of a rate rise alongside its quarterly forecasts in its February inflation report. (…)

EARNINGS WATCH

I have been posting about swinging pension charges in recent months. Most companies determine their full year charge at year-end which impacts their Q4 results.

Pendulum Swings for Pension Charges

Rising interest rates and a banner year for stocks could lift reported earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Rising rates and a banner year for stocks could lift earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Companies including AT&T Inc. and Verizon Communications Inc. could show stronger results than some expect when they report fourth-quarter earnings in coming weeks. They and about 30 other companies in the past few years switched to “mark-to-market” pension accounting to make it easier for investors to gauge plan performance.

With the switch, pension gains and losses flow into earnings sooner than under the old rules, which are still in effect and allow companies to smooth out the impact over several years. Companies that switch to valuing assets at up-to-date market prices may incur more volatility in their earnings, but it offers a more current picture of a pension plan’s health and its contribution to the bottom line.

In 2011 and 2012, that change hurt the companies’ earnings, largely because interest rates were falling at the time. But for 2013, it may be a big help to them, accounting experts said, a factor of the year’s surge in interest rates and strong stock-market performance.

“It’s going to account for a huge rise in operating earnings” at the affected companies, said Dan Mahoney, director of research at accounting-research firm CFRA.

Wall Street analysts tend not to include pension results in their earnings estimates, focusing instead on a company’s underlying businesses. That makes it hard for investors to know what the impact of the change will be. Some companies may not see a big impact at all, because of variations from company to company in how they’ve applied mark-to-market changes. (…)

Some mark-to-market companies with fiscal years ended in September have reported pension gains. Chemical maker Ashland Inc. had a $498 million pretax mark-to-market pension gain in its September-end fourth quarter, versus a $493 million pension loss in its fiscal 2012 fourth quarter. That made up about 40% of the Covington, Ky., company’s $1.24 billion in operating income for fiscal 2013. (…)

Not all mark-to-market companies will see gains. Some such companies record adjustments only if their pension gains or losses exceed a minimum “corridor.” As a result, Honeywell International Inc. says it doesn’t foresee a significant mark-to-market adjustment for 2013, and United Parcel Service Inc. has made similar comments in the past.

Moody’s adds: US Corporate Pension Funded Ratios Post Massive Increase in 2013

At year-end 2013, we estimate pension funding levels for our 50 largest rated US corporate issuers increased by 19 percentage points to 94% of pension obligations, compared with a year earlier. In dollar terms, this equates to $250 billion of decreased underfundings for these same issuers. We expect this reduction to be replicated across our entire rated universe. These improved funding levels will result in lower calls on cash, a credit positive.

Big Six U.S. Banks’ 2013 Profit Thwarted by Legal Costs

Combined profit at the six largest U.S. banks jumped last year to the highest level since 2006, even as the firms allocated more than $18 billion to deal with claims they broke laws or cheated investors.

A stock-market rally, cost cuts and a decline in bad loans boosted the group’s net income 21 percent to $74.1 billion, according to analysts’ estimates compiled by Bloomberg. That’s second only to 2006, when the firms reaped $84.6 billion at the peak of the U.S. housing bubble. The record would have been topped were it not for litigation and other legal expenses. (…)

The six banks’ combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7 billion, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413 million, and Morgan Stanley (MS), which reported a 14 percent decline to $211 million. (…)

Legal costs that averaged $500 million a quarter could be $1 billion to $2 billion for a few years, Dimon told analysts in an Oct. 11 conference call. The firm is spending also $2 billion to improve compliance by the end of 2014, he said last month. (…)

VALUATION EXPANSION?

This is one of the main narratives at present, now that earnings multiples have expanded so much. The other popular narrative is the acceleration of the U.S. economy which would result in accelerating earnings, etc., etc… Here’s Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

It’s also possible valuations could continue to expand even if earnings growth doesn’t meet expectations. There is a direct link between valuation and the yield curve. A steep curve (long rates much higher than short rates); which we have at present and are likely to maintain; suggests better growth and easy monetary policy. This environment typically co-exists with rising valuation.

Low inflation is also supportive of higher multiples. Why? Earnings are simply more valuable when inflation is low; just like our earnings as workers are worth more when inflation is taking less of a bite out of them.

Lastly, as noted in BCA’s 2014 outlook report: In a liquidity trap, where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero short rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking. Over time, higher asset values begin to stimulate stronger consumption and investment demand—the so-called “wealth effect.” We could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Global capital spending has begun to show signs of a rebound; while US consumers are beginning to borrow and spend again.

A few remarks on the above arguments:

imageThe yield curve can steepen if short-term rates decline or if long-term rates rise. The impact on equities can be very different. My sense is that the curve, which by the way is presently very steep by historical norms (chart from RBC Capital), could steepen some more for a short while but only through rising long-term yields. This is not conducive to much positive valuation expansion, especially if accompanied by rising inflation expectations which, normally, follow economic acceleration.

The next chart plots 10Y Treasury yields against the S&P 500 Index earnings yield (1/P/E). The relationship between the two is pretty obvious unless you only look at the last Fed-manipulated 5 years. Rising rates are not positive for P/E ratios.

image

Low inflation is indeed supportive of higher multiples as the Rule of 20 clearly shows. What is important for market dynamics is not the actual static level of inflation but the trend. Nirvana is when the economy (i.e. profits) accelerate while inflation remains stable or even declines. Can we reasonable expect nirvana in 2014?

The wealth effect was in fact Bernanke’s gambit all along. And it worked. But only for the top 20% of the U.S. population. What is needed now is employment growth. Can we get that without triggering higher inflation?

Miss Sonders reminds us that

This bull market is now the sixth longest in S&P 500 history (of 26 total bull markets). As of year end 2013, it’s run for 1,758 days, with the longest ending in 2000 at 4,494 days. It is the fourth strongest in history; up over 173% cumulatively as of year-end 2013.

Emerging Market Currencies Suffer as Dollar Rises

The South African rand sank to a fresh five-year low Thursday, as a rise in the dollar, fueled by strong U.S. jobs data, kept emerging market currencies under pressure.

The Turkish lira also suffered, closing in on its all-time low against the dollar reached earlier in the week. The rand and the lira are widely considered to be among the most vulnerable emerging market currencies, as both South Africa and Turkey are reliant on foreign investment flows to fund their wide current account deficits.

 
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NEW$ & VIEW$ (8 JANUARY 2014)

Companies in U.S. Added 238,000 Jobs in December, ADP Says

The 238,000 increase in employment was the biggest since November 2012 and followed a revised 229,000 gain in November that was stronger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The December tally exceeded the most optimistic forecast in a Bloomberg survey in which the median projection called for a 200,000 advance.

Discounts drive U.S. holiday retail growth: ShopperTrak

Promotions and discounts offered by U.S. retailers drove a 2.7 percent rise in holiday season sales despite six fewer days and a cold snap that kept shoppers from stores, retail industry tracker ShopperTrak said. (…)

U.S. online retail spending rose 10 percent to $46.5 billion in the November-December 2013 holiday season, according to comScore (SCOR.O). This was below the 14 percent growth that the data firm had forecast.

ShopperTrak said shoppers spent $265.9 billion during the latest holiday period. The increase was slightly ahead of the 2.4 percent jump it had forecast in September.

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

Both retail sales and foot traffic rose 2.5 percent in the 2012 holiday season. (…)

ShopperTrak estimated on Wednesday that U.S. retail sales would rise 2.8 percent in the first quarter of 2014, while shopper traffic would fall 9 percent.

Growth Picture Brightens as Exports Hit Record

A booming U.S. energy sector and rising overseas demand brightened the nation’s trade picture in November, sharply boosting estimates for economic growth in late 2013 and raising hopes for a stronger expansion this year.

U.S. exports rose to their highest level on record in November, a seasonally adjusted $194.86 billion, the Commerce Department said Tuesday. A drop in imports narrowed the trade gap to $34.25 billion, the smallest since late 2009.

Pointing up The trade figures led many economists to sharply raise their forecasts for economic growth in the final quarter. Morgan Stanley economists raised their estimate to an annualized 3.3% from an earlier forecast of a 2.4% pace. Macroeconomic Advisers boosted its fourth-quarter projection to a 3.5% rate from 2.6%.

Fourth-quarter growth at that pace, following a 4.1% annualized increase in the third quarter, would mark the fastest half-year growth stretch since the fourth quarter of 2011 and the first quarter of 2012.

The falling U.S. trade deficit in large part reflects rising domestic energy production. U.S. crude output has increased about 64% from five years ago, according to the U.S. Energy Information Administration.

At the same time, the U.S.’s thirst for petroleum fuels has stalled as vehicles become more efficient. As a result, refiners are shipping increasing quantities of diesel, gasoline and jet fuel to Europe and Latin America.

Petroleum exports, not adjusted for inflation, rose to the highest level on record in November while imports fell to the lowest level since November 2010.

If recent trade trends continue, Mr. Bryson said net exports could add one percentage point to the pace of GDP growth in the fourth quarter. That would be the biggest contribution since the final quarter of 2010.

Rising domestic energy production also helps in other ways, by creating jobs, keeping a lid on gasoline costs and lowering production costs for energy-intensive firms. As a result, consumers have more to spend elsewhere and businesses are more competitive internationally. (…)

U.S. exports are up 5.2% from a year earlier, led by rising sales to China, Mexico and Canada. U.S. exports to China from January through November rose 8.7% compared with the same period a year earlier. Exports to Canada, the nation’s largest trading partner, were up 2.5% in the same period. (…)

US inflation expectations hit 4-month high
Sales of Treasury inflation protected securities rise

Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.25 per cent from a low of around 2.10 a month ago.

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

(…) As the boomers get older, many will move out of the houses where they raised families and move into cozier apartments, condominiums and townhouses (known as multifamily units in industry argot). A normal transition for individuals, but a huge shift in the country’s housing demand.

Based on demographic trends, the country should see a stronger rebound in multifamily construction than in single-family construction, Kansas City Fed senior economist Jordan Rappaport wrote in the most recent issue of the bank’s Economic Review. (Though he also notes slowing U.S. population growth “will put significant downward pressure on both single-family and multifamily construction.”)

Construction of multifamily buildings is expected to pick up strongly by early 2014, and single-family-home construction should regain strength by early 2015. “The longer term outlook is especially positive for multifamily construction, reflecting the aging of the baby boomers and an associated shift in demand from single-family to multifamily housing. By the end of the decade, multifamily construction is likely to peak at a level nearly two-thirds higher than its highest annual level during the 1990s and 2000s,” Mr. Rappaport wrote.

In contrast, when construction of single-family homes peaks at the end of the decade or beginning of the 2020s, he wrote, it’ll be “at a level comparable to what prevailed just prior to the housing boom.” (…)

“More generally,” Mr. Rappaport wrote, “the projected shift from single-family to multifamily living will likely have many large, long-lasting effects on the U.S. economy. It will put downward pressure on single-family relative to multifamily house prices. It will shift consumer demand away from goods and services that complement large indoor space and a backyard toward goods and services more oriented toward living in an apartment. Similarly, the possible shift toward city living may dampen demand for automobiles, highways, and gasoline but increase demand for restaurants, city parks, and high-quality public transit. Households, firms, and governments that correctly anticipate these changes are likely to especially benefit.”

Euro-Zone Retail Sales Surge

A surprise jump in retail sales across the euro zone boosts hopes that consumers may aid the hoped-for recovery.

The European Union’s statistics agency Wednesday said retail sales rose by 1.4% from October and were 1.6% higher than in November 2012. That was the largest rise in a single month since November 2001, and a major surprise. Nine economists surveyed by The Wall Street Journal last week had expected sales to rise by just 0.1%.

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The pickup was spread across the currency area, with sales up 1.5% in low-unemployment Germany, but up an even stronger 2.1% in France, where the unemployment rate is much higher and the economy weaker.

The rise in sales was also broadly based across different products, with sales of food and drink up 1.1% from October, while sales of other items were up 1.9%.

The surge in sales during November follows a long period of weakness, with sales having fallen in September and October. Consumer spending rose by just 0.1% on the quarter in the three months to September, having increased by a slightly less feeble 0.2% in the three months to June.

High five Let’s not get carried away. Sales often rebound after two weak months. Taking the last 3 months to November, totals sales rose only 0.4% or 1.6% annualized, only slightly better than the 0.8% annualized gain in the previous 3 months. Core sales did a little better with  annualized gains of 3.6% and 0.4% for the same respective periods. The most recent numbers can be revised, however.image

Markit’s Retail PMI for December was not conducive to much hoopla!

Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

Record-Low Core Inflation May Soon Push ECB to Ease Policy (Bloomberg Briefs)image

Meanwhile:

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Auto U.K. Car Sales Top Pre-Crisis Levels

U.K. registrations of new cars rose 11% in 2013 to their highest level since before the 2008 financial crisis, reflecting the country’s relatively strong economic recovery in contrast with the rest of Europe, where car demand has revived only recently from a prolonged slump.

The outlook is nonetheless for more sedate growth in the U.K. this year and next as the impact of pent-up demand for new cars fades, the U.K. Society of Motor Manufacturers and Traders, or SMMT, said on Tuesday.

Much of the increase in sales last year stemmed from the generous provision of cheap financing from the car manufacturers.

The SMMT said registrations, which mirror sales, rose to 2.26 million vehicles from 2.04 million in 2012, with registrations in December jumping 24% to 152,918, a 22nd consecutive monthly rise.

As a result, the U.K. has entrenched its position as Europe’s biggest car market after Germany and ahead of France. Germany registrations of new cars fell 4.2% to 2.95 million in 2013, despite a 5.4% gain in December. French registrations fell 5.7% last year to 1.79 million cars, although they rose 9.4% in December. The German and French data were released by the countries’ auto-making associations last week. (…)

Eurozone periphery borrowing costs fall
Yields in Spain, Portugal and Greece down after Irish bond sale

(…) The strength of demand for eurozone “periphery” debt reflected increased investor appetite for higher-yielding government bonds as well as rising confidence in the creditworthiness of eurozone economies. It improved significantly the chances of Portugal following Ireland’s example and exiting its bailout programme later this year – and of Greece also soon being able to tap international debt markets. (…)

EARNINGS WATCH

Currency Swings Hit Earnings Currency swings are still taking a toll on corporate earnings despite efforts to manage the risk. Large U.S. multinational companies reported about $4.2 billion in hits to earnings and revenue in Q3, driven mostly by swings in the Brazilian real, Japanese yen, Indian rupee and Australian dollar, CFOJ’s Emily Chasan reports. The real declined 10% against the U.S. dollar during the quarter, while the rupee hit a record low.

A total of 205 companies said currency moves had negatively affected their results in the third quarter of 2013, according to FiREapps, a foreign exchange risk-management company. “More companies are trying to manage risk…but companies are still seeing highly uncorrelated moves [against the dollar] based on swings in one currency,” said FiREapps CEO Wolfgang Koester. Companies have spent much of the year insulating themselves against big moves in the euro or the yen, but swings in the Australian dollar, rupee and real dominated discussions because they were often surprises, Mr. Koester said.

Only 78 companies quantified the impact of currencies, which translated to about 3 cents a share on average. The total was up slightly from the second quarter when 95 companies reported a total impact of $4.1 billion.

On an industry basis, car makers suddenly started disclosing more currency moves during the quarter, with 16 companies mentioning their results had been affected. Ford, for example, warned last month of the potential impact from an expected Venezuelan currency devaluation in 2014.

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

Wall Street analysts have gotten back to work in the new year with a flurry of ratings changes, and they have been more bearish than bullish.  As shown in the first chart below, there have been 226 total ratings changes over the first four trading days of 2014, which is the highest reading seen since the bull market began in 2009.  We have seen 134 analyst downgrades since the start of the year, which is also the highest level seen over the first four trading days since 2009.  

In percentage terms, 2014 is starting with fewer downgrades than in 2011 or 2012 (62.7% and 60.0% respectively vs. 59.2% in 2014), but these years both had very quiet starts in terms of the total number of ratings changes.  

Record-Setting Cold Hits Eastern U.S.

A record-setting cold snap in the Midwest enveloped the eastern half of the country Tuesday, with brutally cold temperatures recorded from the deep South up to New England.

Pointing up Is China About to Let the Yuan Rise? Don’t Bank on It  China’s central bankers are beginning to think the country’s huge pile of reserves – which is still growing as authorities intervene to keep the yuan from rising too fast — is excessive. Curbing its growth could even help the economy’s transition from an export-led model to one based on domestic consumption. But the top leadership’s fear of social unrest means things are unlikely to change soon.

(…) In an effort to hold down the value of its currency and keep Chinese exports competitive, the PBOC wades into markets, buying up foreign exchange and pumping out yuan on a massive scale. The PBOC probably bought $73 billion dollars of foreign exchange in October, the most in three years, and a similar amount in November, according to Capital Economics.

Even before that, official figures showed China’s reserves had hit a record $3.66 trillion by the end of the third quarter, the bulk of it invested in U.S. dollar securities like Treasury bonds. Policymakers are beginning to wonder if that hoard is too big.

Sitting on $4 trillion might not seem like a bad position to be in, but it can make a mess of domestic monetary policy if those reserves result from the central bank’s attempts to deal with capital inflows.

To prevent the yuan from appreciating, the PBOC buys up foreign exchange using newly created domestic currency. But that can fuel domestic inflation, so the central bank “sterilizes” the new money by selling central bank bills to domestic financial institutions. That leaves these institutions with less cash for lending, pushing up domestic interest rates (and ultimately leaving the central bank with a loss on its balance sheet).

Interest rates in China already are significantly higher than in many other countries, making it a tempting target for speculative “hot money” flows, which tend to find a way in despite the country’s capital controls.

“Monetary policy gets into a conundrum,” said Louis Kuijs, an economist at RBS. “If the central bank is intervening because there are huge capital inflows, the domestic interest rate in the market will go up. The more that interest rate goes up, the more capital will be attracted. It becomes difficult for the central bank to manage.”

Yi Gang, head of the State Administration of Foreign Exchange and guardian of the treasure trove, thinks the reserves are so large they’re becoming more of a burden than an asset. In an interview last month, he told financial magazine Caixin that a further build-up would bring “fewer and fewer benefits coupled with higher and higher costs.”

Those costs include not just losses on sterilization operations but also the impact of a huge export sector on the environment, he said.

But Mr. Yi does not make the decisions, any more than his boss, PBOC Gov. Zhou Xiaochuan, has the final say on interest rates. Monetary policy in China is too big a deal to be left to the central bank; the State Council, headed by Premier Li Keqiang, has to sign off on its decisions.

The technocrats at the PBOC, financial professionals who have as much faith in markets as anyone in China’s government, might want to dial back foreign-exchange intervention. But the top leaders are leery of any move that could pose a risk to employment. If factories go out of business and jobless migrants flood the streets of Guangdong, a market-determined exchange rate will be little comfort.

To be sure, China is allowing the yuan to appreciate — just not by much. The yuan has risen nearly 13% against the U.S. dollar since authorities relaxed the currency peg in June 2010, including 3% appreciation last year. But that’s far less than it would likely rise if the market were allowed to operate freely.

Never mind that a cheap currency makes it more expensive for Chinese households and businesses to buy things from the outside world, depressing standards of living and hampering the transition to a consumer society that China’s leaders ostensibly want. The policy amounts to forced saving on a huge scale — even as the officials who manage those savings say they already have more than enough for any contingency.

Some experts think the pace of China’s FX accumulation will even increase. Capital Economics says the PBOC could amass another $500 billion over the next year. That’s what they think it will take to keep the yuan from rising to more than 5.90 to the dollar, compared with 6.10 now.

“The PBOC will have to choose between allowing significant currency appreciation and continuing to accumulate foreign assets,” Mark Williams, the firm’s chief Asia economist, wrote in a research note Monday. “We expect policymakers to opt primarily for the latter.”

Emerging Markets See Selloff

The declines come amid concerns about faltering economies and political unrest.

Investors are bailing out of emerging markets from Turkey and Brazil to Thailand and Indonesia, extending a selloff that began last year, amid concerns about faltering economies and political unrest.

The MSCI Emerging Markets Index, a gauge of stocks in 21 developing markets, slipped 3.1% in the first four trading days of 2014, building on a 5% loss in 2013. This compares with double-digit-percentage rallies in stock markets in the U.S., Japan and Europe last year.

Indonesia’s currency on Tuesday hit its lowest level against the dollar since the financial crisis in Asia trading. Meanwhile, the Turkish lira plumbed record lows against the greenback this week. (…)

In the first three trading days of the year, investors yanked $1.2 billion from the Vanguard FTSE Emerging Markets ETF, VFEM.LN +0.07% the biggest emerging-markets exchange-traded fund listed in the U.S., according to data provider IndexUniverse. That is among the biggest year-to-date outflows among all ETFs. Shares of the ETF itself are down 4.2% in 2014.

Last year, money managers pulled $6 billion from emerging-market stocks, the most since 2011, according to data tracker EPFR Global. Outflows from bond markets totaled $13.1 billion, the biggest since the financial crisis of 2008. (…)

The stocks in the MSCI Emerging Markets Index on average are trading at 10.2 times next year’s earnings, compared with a P/E of 15.2 for the S&P 500, FactSet noted. (…)

In the Philippines, an inflation reading on Tuesday reached a two-year high and provided another sell signal to currency traders given officials and economists had expected the impact from the typhoon in November to be mild on inflation. The Philippine peso has weakened 1% against the dollar since the start of the year. (…)

Mohamed El-Erian
Do not bet on a broad emerging market recovery

(…) To shed more light on what happened in 2013 and what is likely to occur in 2014, we need to look at three factors that many had assumed were relics of the “old EM”.

First, and after several years of large inflows, emerging markets suffered a dramatic dislocation in technical conditions in the second quarter of 2013.

The trigger was Fed talk of “tapering” the unconventional support the US central bank provides to markets. The resulting price and liquidity disruptions were amplified by structural weaknesses associated with a narrow EM dedicated investor base and skittish cross-over investors. Simply put, “tourist dollars” fleeing emerging markets could not be compensated for quickly enough by “locals”.

Second, 2013 saw stumbles on the part of EM corporate leaders and policy makers. Perhaps overconfident due to all the talk of an emerging market age – itself encouraged by the extent to which the emerging world had economically and financially outperformed advanced countries after the 2008 global financial crisis – they underestimated exogenous technical shocks, overestimated their resilience, and under-delivered on the needed responses at both corporate and sovereign levels. Pending elections also damped enthusiasm for policy changes.

Finally, the extent of internal policy incoherence was accentuated by the currency depreciations caused by the sudden midyear reversal in cross-border capital flows. Companies scrambled to deal with their foreign exchange mismatches while central bank interest rate policies were torn between battling currency-induced inflation and countering declining economic growth.

Absent a major hiccup in the global economy – due, for example, to a policy mistake on the part of G3 central banks and/or a market accident as some asset prices are quite disconnected from fundamentals – the influence of these three factors is likely to diminish in 2014. This would alleviate pressure on emerging market assets at a time when their valuations have become more attractive on both a relative and absolute basis.

Yet the answer is not for investors to rush and position their portfolios for an emerging market recovery that is broad in scope and large in scale. Instead, they should differentiate by favouring companies commanding premium profitability and benefiting from healthy long-run consumer growth dynamics, residing in countries with strong balance sheets and a high degree of policy flexibility, and benefiting from a rising dedicated investor base.

 
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NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:

 

  • Auto Makers Rebound as Buyers Go Big 

    Five years after skyrocketing fuel prices and turmoil in financial markets knocked auto makers into a tailspin, the U.S. market has recovered to its former size and character.

(…) U.S. car and light truck sales rose less than 1% in December, reflecting in part a hangover from a surge the month before. But overall, the U.S. auto industry in 2013 had its best sales year since 2007, and industry executives said on Friday they expect gains to continue in 2014, though at a slower pace.

For the year, U.S. consumers bought 15.6 million vehicles, up 7.6% from 2012, according to market researcher Autodata Corp., the strongest volume since 2007. Purchases of light trucks including sport-utility vehicles exceeded cars, a reversal from the year earlier. (…)

But as gas prices drifted lower last year, U.S. consumers trading old vehicles for new favored pricey pickup trucks, SUVs and luxury cars. Ford, for example, boosted sales of its F-150 pickup by 8.4% in December over a year ago, while sales of its subcompact Fiesta and compact Focus cars plunged by 20% and 31% respectively. (…)

Consumers also are springing for more luxurious models, driving average new-car selling price to $32,077 in 2013, up 1.4% from a year earlier and up 10% from 2005, according to auto-price researcher KBB.com. (…)

High five December points to slower growth ahead as auto makers found gains harder to achieve against year-earlier results.

GM said its December sales fell 6.3% compared with the same month last year because of what executives said were aggressive pickup truck promotions by Ford and tougher competition from Asian auto makers.

December also marked the first monthly year-over-year decline in car sales at GM, Ford and Chrysler for 2013. Gains in pickups and SUVs offset weaker car sales at Ford and Chrysler. (…)

  • Here’s the monthly sales pattern (WardsAuto):

An expected post-Christmas surge in LV sales failed to materialize, as U.S. automakers reported 1.35 million monthly sales – an increase in daily sales of 4%. December devliveries equated to a 15.3 million-unit SAAR for the month.

ZeroHedge zeroes in on domestic car sales:

 

Via SMRA,

Nearly every automaker has reported lower-than-expected sales for the month of December relative to our forecast and the consensus. At this time, domestic light vehicle sales are running at a disappointing low 11.3 million annualized pace, which compares with 12.6 million for November.

If taken into context, we can say that the strong selling pace in November pulled sales away from December. In September and October, domestic light vehicle sales fell under 12.0 million due to the impact of the federal government shutdown, slipping to 11.7 million for both months, as it negatively impacted on buying confidence.

In November 2013, sales recovered strongly to 12.6 million, perhaps too strongly to the detriment of December’s sales. Therefore, if we average November and December together, we get 12.0 million, which is a respectable, though not spectacular, selling pace.

The times, they are a-changing:

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Hmmm…

Total car sales using a 3-month m.a. to smooth out monthly fluctuations.

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Girl “Daddy, is this a cyclical peak?”

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Just kidding “May well be, but let’s hope not…”

 

From my Nov. 20 post:

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers.

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

Demand for cars has been helped by the aging of America’s vehicles.

(…) during the 2007-2009 downturn and after, financial problems and tight credit standards prevented many consumers from replacing their old vehicles. As a result, estimate analysts at IHS Automotive, the average age of a vehicle stands at a record 11.3 years. The average age increased faster in the five years ended in 2013, than in the five years before that. The trend is true for cars and for light trucks.

(…) IHS projects vehicle sales will total just over 16 million in 2014, and the new cars will help to slow the aging of America’s car fleet.

Truth is that cars do last longer.

And seems that people want, need or can only afford fewer cars (chart from ZeroHedge)

Cases in point:

Office-Rental Market Is Gaining Strength

(…) Businesses occupied an additional 8.5 million square feet of office space in the quarter. That was only a 0.25% increase from the third quarter, but Reis said it was the largest gain since the third quarter of 2007.

The expansion of tenants was offset by the completion of 9.1 million square feet of new office space during the quarter, the most since the fourth quarter of 2009, according to Reis, which tracks 79 major U.S. office markets. That left the market’s vacancy rate at 16.9%, unchanged from the previous quarter.

The vacancy rate had been steadily falling from the recent high of 17.6% in early 2011, but it still is well above the low of 12.5% in the third quarter of 2007, Reis said.

The amount of occupied office space now stands at slightly more than 3.4 billion square feet, which falls short of the market’s peak in late 2007 by 79 million square feet.

At the current rate that companies are leasing new offices—known as “positive absorption”—it would take more than two years to reach that peak level again.

(…)  Average asking rents increased in the fourth quarter to $29.07 per square foot a year, up 0.7% from the third quarter but still short of the recent high of $29.37 hit in 2008. (…)

Economic research firm Moody’s Analytics projects office-using jobs will increase 2.1% this year to nearly 33.9 million. That growth rate, along with a 2.1% gain in 2012, are the largest since last decade’s boom. “I would expect 2014 to be the best year since 2006 for office-using jobs,” says Mark Zandi, chief economist at Moody’s Analytics.

Reis’ preliminary forecast for 2014 calls for office-vacancy rates to decline by roughly half a percentage point by year’s end and asking rents to increase 2.8%, the largest gain since 2007. (…)

Alien ‘Polar Pig’ Threatens Coldest U.S. Weather in Two Decades

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida. Mike Musher, a meteorologist with the U.S. Weather Prediction Center in College Park,Maryland, said 90 percent of the contiguous U.S. will be at or below the freezing mark today.

Freezing temperatures spur energy demand as people turn up thermostats to heat homes and businesses. Power generation accounts for 32 percent of U.S. natural-gas use, according to the Energy Information Administration. About 49 percent of all homes use the fuel for heating.

China Shows Signs of Slowdown

Four purchasing managers’ indexes—two compiled by the government and two by HSBC Holdings PLC all dropped last month, the first time that has happened since April. The HSBC Services PMI, released Monday, fell to 50.9 for December, compared with 52.5 the month before. (…)

All four PMIs remained in narrowly positive territory for December, indicating that expansion continues, albeit at a slow pace. But that masks difficulties for individual companies in some sectors. Conditions are worsening for small and medium-size businesses, according to the official manufacturing PMI. The subindex for large companies, which has performed best in recent months, also fell in December, though it remains above the 50 mark that separates growth from contraction.

The data show manufacturers cut back stocks of both raw materials and finished goods, suggesting they are expecting weaker sales ahead. (…)

GUIDANCE ON GUIDANCE

This is what the media have been posting from Factset in recent weeks:

For Q4 2013, 94 companies in the S&P 500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.

The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).

These following info from the same Factset release have generally been omitted by the media:

Although the number of companies that have issued negative EPS guidance is high, the amount by which these have companies have lowered expectations has been below average. For the 107 companies in
the S&P 500 that have issued EPS guidance for the third quarter, the EPS guidance has been 5.7% below the mean estimate on average. This percentage decline is smaller than the trailing 5-year average of -11.1% and trailing 5-year median of -7.8% for the index. If -5.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q2 2012 (-0.4%).

That could mean that companies are more prone to reduce guidance than before. Here’s what has happened following Q3 guidance:

At this point in time, all 114 of the companies that issued EPS guidance for Q3 2013 have reported actual results for the quarter. Of these 114 companies, 84% reported actual EPS above guidance, 9% reported
actual EPS below guidance, and 7% reported actual EPS in line with guidance. This percentage (84%) is well above the trailing 5-year average for companies issuing EPS guidance, and above the overall performance of the S&P 500 for Q2 2013.

Under-promise to over-deliver!

Companies that issued quarterly EPS guidance for Q3 reported an actual EPS number that was 9.5% above the guidance, on average. Over the past five years, companies that issued quarterly EPS guidance reported an actual EPS number that was 12.8% above the EPS guidance on average.

Now this:

For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 56% (149 out of 265), which is below the percentage recorded at the end of September (61%).

Since the end of September, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by eight, while the
number of companies issuing positive EPS guidance has increased by 15.

Pointing up There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

As a result:

Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q4 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

So, do you really want to use forward earnings in your valuation work?

Bernanke Kicks Off Farewell Tour In Philly. Some of his comments:

  • I have done my job:

At the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.

  • Politicians have not:

Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.

  • So get to it now:

But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.

  • That’s for you bankers as well:

The Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates;

  • Get ready for higher rates:

in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the (Fed) will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates.

Need more warning?

 

Fed’s Plosser: May Need to Employ Aggressive Tightening Campaign

(…) Mr. Plosser, who spoke as part of a panel discussion held in Philadelphia at the annual American Economic Association, will be a voting member of the monetary policy setting Federal Open Market Committee this year. (…)

Currently, the Fed expects to keep short-term rates very low until some time in 2015. The veteran central banker is uneasy with that, and warns the Fed should prepare for a faster and more aggressive campaign of rate hikes given the inflation risks presented by all the liquidity it has provided markets.

Mr. Plosser said the Fed would like to raise rates “gradually” but added “it doesn’t always work that way.”

“How fast will we have to move interest rates up…we don’t know the answer to that,” Mr. Plosser said. He warned that the Fed may have to be “aggressive,” and he added “people like to think the Fed has all this great control over interest rates, but the market does its own thing.”

JPMorgan Shows The US Is The Most Expensive Developed Market In The World

JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

Foreign direct investment in the U.S. appears to have dropped 11% last year, to about $148 billion, according to preliminary Commerce Department data, as analyzed by the Congressional Research Service.

This follows a decline in 2012 to about $166 billion from 2011′s estimated $230 billion. Foreign direct investment, or FDI, had peaked in the U.S. at $310 billion in 2008 and sank to about $150 billion in 2009, before rebounding in 2010 to $206 billion.

The steep fall in 2012-2013 has many possible causes, including the heated presidential elections and the knockdown, drag-out budget battles that culminated in last year’s government shutdown. Our politics frighten foreigners. We also saw tougher air-quality regulations from the Environmental Protection Agency and the new Dodd-Frank rules. Nevertheless, the U.S. last year emerged for the first time since 2001 as the most promising destination for FDI, thanks to our productivity gains, according to a survey of 302 companies from 28 countries by A.T. Kearney, a New York international consulting firm.

Obama seems to be in the mean-reverting biz now with many priorities aimed at reversing trends…(see below)

Stock Buybacks’ Allure Likely to Fade

(…) In the fourth quarter, S&P 500 companies may have bought back nearly $138 billion worth of stock, says Howard Silverblatt, Standard & Poor’s senior analyst. If that estimate proves correct as companies file their quarterly disclosures, it’ll be the biggest quarter for buybacks since 2007 and a 40% jump from the level a year ago.

Companies have already repurchased a staggering $445 billion worth of shares in the 12 months ended on Sept. 30. (…)

The S&P 500 Buyback Index, which covers the 100 companies that are the busiest buying back shares, rose 48.3% in 2013, trumping a 33.3% return for even the S&P Dividend Aristocrat Index brimming with companies that have hiked dividends every year for a quarter-century.

Conventional wisdom now expects 2014 to be an even bigger year for buybacks. After all, global growth is improving at only a drowsy pace, and receding crises heap pressure on management to spend their cash stash. Goldman Sachs, for one, sees repurchases increasing 35% this year.

(…) Rising interest rates will make it dearer for companies looking to borrow to finance buybacks or replenish their cash hoards. (…)

Besides, buybacks work better as an interim measure for returning cash to shareholders when the outlook is iffy. Today, a broadening recovery nudges management to rely less on financial engineering and to begin the riskier, tougher task of finding growth, investing in research and development, or inventing the next big thing—whether it’s ocean-driven hydropower or a cure for male-pattern baldness. Reflexively buying back shares was the easy, momentarily crowd-pleasing part. Figuring out where future growth lies and how to secure it is the real challenge that lies ahead.

BANKS

 

Biggest Lenders Keep On Growing

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial.

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial. That expansion has been reshaping banking since at least 1990, when the top five institutions held 9.67% of bank assets. (…)

At the same time, the number of U.S. banks fell last year to the lowest level since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

There were 6,891 banks as of the third quarter, down from a peak of 18,000. Between 1984 and 2011, more than 10,000 banks disappeared through mergers or failures, according to FDIC data.

The banking units of J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo and U.S. Bancorp held $6.46 trillion in assets as of the third quarter, the report, released Thursday by SNL, found. The total for the rest of the banking industry, comprised of thousands of midsize, regional and smaller players, was $8.15 trillion.

Meanwhile.

Sarcastic smile Barack Obama has played 160 rounds of golf since taking office. (Time). That’s 32 per year over the past 5 years.

 
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NEW$ & VIEW$ (3 JANUARY 2014)

Global Manufacturing Improves At Fastest Pace Since February 2011

The end of 2013 saw growth of the global manufacturing sector accelerate to a 32-month high. The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by JPMorgan and Markit in association with ISM and IFPSM – rose to 53.3 in December, up from 53.1 in November, to signal expansion for the twelfth month in a row.

imageThe average reading of the headline PMI through 2013 as a whole (51.5) was better than the stagnation signalled over 2012 (PMI: 50.0). The rate
of expansion registered for the final quarter of 2013 was the best since Q2 2011.

Global manufacturing production expanded for the fourteenth straight month in December. Moreover, the pace of increase was the fastest since February 2011, as the growth rate of new orders held broadly steady at November’s 33-month record. New export orders rose for the sixth month running.

Output growth was again led by the G7 developed nations in December, as robust expansions in the US, Japan, Germany, the UK (which registered the highest Output PMI reading of all countries) and Italy
offset the ongoing contraction in France and a sharp growth slowdown in Canada.

Among the larger emerging nations covered by the survey, already muted rates of increase for production eased in China, India and Russia, and remained similarly modest in Brazil and South Korea despite slight  accelerations. Taiwan was a brighter spot, with output growth hitting a 32-month high.

December PMI data signalled an increase in global manufacturing employment for the sixth consecutive month. Although the rate of jobs growth was again only moderate, it was nonetheless the fastest for
almost two-and-a-half years. Payroll numbers were raised in the majority of the nations covered, including the US, Japan, Germany,
the UK, India, Taiwan and South Korea. Job losses were recorded in China, France, Spain, Brazil, Russia, Austria and Greece.

Input price inflation accelerated to a 20-month peak in December, and was slightly above the survey average. Part of the increase in costs was passed on to clients, reflected in the pace of output price inflation reaching a near two-and-a-half year peak.

U.S. Construction Spending Advances Further

The value of construction put-in-place gained 1.0% in November (5.9% y/y) following a little-revised 0.9% October rise. The September increase of 1.4% was revised up substantially from the initially-estimated 0.3% slip.

Private sector construction activity jumped 2.2% (8.6% y/y) in November after no change in October. Residential building surged 1.9% (16.6% y/y) as spending on improvements recovered 2.2% (10.2% y/y). Single-family home building activity gained 1.8% (18.4% y/y) while multi-family building rose 0.9%, up by more than one-third y/y. Nonresidential building activity surged 2.7% (1.0% y/y) paced by an 8.8% gain (37.7% y/y) in multi-retail and a 4.6% rise (11.5% y/y) in office building.

Offsetting these November gains was a 1.8% decline (-0.2% y/y) in the value of public sector building activity. (…)

Surprised smile Euro-Zone Private Lending Plunges

Lending to the private sector in the euro zone plunged in November at the sharpest annual rate since records began over 20 years ago, data from the European Central Bank showed Friday, suggesting that the region will struggle to get its anticipated economic recovery in full gear.

Private sector lending in the euro zone declined by 2.3% on the year, after a 2.2% decline in October, the ECB said. (…)

On the month, lending to households declined by 3 billion euros ($4.1 billion) reversing the €3 billion increase in October, while lending to firms fell by €13 billion, following a €15 billion drop in the previous month. Loans to firms were down by 3.9% on the year. (…)

The ECB’s broad gauge of money supply, or M3, grew by only 1.5% in November in annual terms, above the 1.4% rise in October, while the three-month average grew by 1.7%, after 1.9% in the previous month. The monetary growth data remain well below the ECB’s “reference value” of 4.5%, which it considers consistent with its price stability mandate.

Auto Decline in German car sales accelerated in 2013: KBA

The decline in German car sales accelerated last year, falling below 3 million vehicles for the first time since 2010, reflecting troubles in Europe that have sent auto demand close to a two-decade low.

New car registrations in Germany fell 4.2 percent to 2.95 million last year, the German Federal Motor Transport Authority (KBA) said, after a decline of 2.9 percent in 2012.

Germany’s premium carmakers BMW (BMWG.DE), Mercedes-Benz (DAIGn.DE) and Audi (NSUG.DE) each lost market share, suffering sales declines of 5.8 percent, 1.4 percent and 5.5 percent respectively. (…)

German mass market brand Opel, owned by General Motors (GM.N), lost 2.9 percent market share last year while Volkswagen (VOWG_p.DE) sales fell by 4.6 percent in its home market. (…)

Imported volume brands fared worse than their German rivals, with Citroen (PEUP.PA) registrations down 20.6 percent, Chevrolet dropping 17.7 percent and Peugeot down 23.4 percent.

The gainers were South Korean value brands such as Hyundai (005380.KS), which achieved a 0.7 percent increase, and Kia (000270.KS), which boosted sales by 1.6 percent. (…)

Fingers crossed The blow of the overall annual decline was softened by December’s sales figures, with registrations up 5.4 percent on the same month last year, in line with a trend seen in other European countries.

EARNINGS WATCH

 

The Morning Ledger: Rising Rates Buoy Pension Plans

Pension-funding levels surged last year and we could see more gains in 2014. Towers Watson estimates levels last year rose by 16 percentage points to an aggregate 93% for 418 Fortune 1000 companies. That’s still below the 106% reached in 2007, but companies could see triple digits this year if long-term interest rates continue to rise and the stock market remains strong, Alan Glickstein, senior retirement consultant for Towers Watson, tells CFOJ’s Vipal Monga. (…)

Towers Watson said that the discount rate rose to an estimated 4.8% in 2013 from 3.96% in 2012. Meanwhile, the S&P 500 index rose 26% last year, the biggest gain since 1997, which boosted the asset values of the pension funds and helped to further shrink the funding gap. Towers Watson said that pension-plan assets rose an estimated 9% in 2013 to $1.41 trillion, from $1.29 trillion at the end of 2012, while companies cut the amount they contributed to the plans last year by 23% to $48.8 billion.

Heard on the Street’s David Reilly says that the discount rate should keep rising in 2014, even if not briskly as last year. The U.S. economic recovery is gaining strength, and the Fed is tapering its bond purchases. Higher rates should chip away at pensions’ overall liabilities.  “Improvement on both the asset and liability fronts means many companies may be able to begin lowering their pension expense, supporting earnings,” Reilly writes.

Pointing up The report noted that the higher funding levels caused many companies to reduce the amounts they contributed to the plans last year to $48.8 billion. That was 23% less than in 2012.

For example, Ford Motor Co. said in December that the improved environment could help the automaker halve its expected pension contributions to an average annual range between $1 billion to $2 billion over the next three years. That’s down from an earlier outlook of $2 billion to $3 billion.

SENTIMENT WATCH

We are seeing more and more of these thesis “explaining” that markets are expensive but they can carry on. For almost 5 years, most of the “bull” was produced by the bears. Funny how things just never change Crying face. This FT piece tells us all the “uneasy truths”. Well, some of it is not really truth, which is perhaps what makes it uneasy. Sounds like capitulation is very near.

Running with the bulls
Uneasy truths about the US market rally

US stocks may be overpriced and profit margins at a high but even bears say the rally has room to run

(…) Why is there such belief in a long-lived bull market? First, bond yields remain historically low, with 10-year Treasury bills yielding barely 3 per cent. When yields are low it is justifiable to pay a higher multiple for stocks because cheaper credit makes it easier for companies to make profits. Paying more for stocks also seems more palatable when bond yields are low.

Further, there is no evidence that investors are growing overexcited, as they usually do towards the end of a bubble. The American Association of Individual Investors’ weekly poll of its members has long been a reliable contrarian indicator. When large numbers say they are bullish it is generally a good time to sell. When the majority are bearish (the record for this indicator came in the second week of March 2009 when despair was total and the current bull market began) it is a good time to buy. Today, 47 per cent consider themselves bulls and 25 per cent bears, numbers a long way from an extreme of optimism.

However, stocks are unquestionably overpriced. Robert Shiller’s cyclically adjusted price/earnings multiple (Cape), long regarded as a reliable indicator of long-term value, is now at a level at which the market peaked before bear markets several times in the past. However, it remains below the levels it reached during true “bubbles” such as the dotcom mania. The same is true of “Tobin’s q”, which compares share prices with the total replacement value of corporate assets.

Further, profit margins are at a historic high and over time have shown a strong tendency to revert to the historic mean. The combination of high valuations being put on profits benefiting from cyclically high margins suggests markets are overvalued.

Why, then, are brokers calling for rising prices in 2014 or even a melt-up?

First, markets have their own momentum. On all previous occasions when earnings multiples have expanded this far this quickly, research by Morgan Stanley’s Adam Parker shows that they have carried on expanding for at least another year. And while the extent of US stocks’ rise since March 2009 is impressive, the duration of this rally is not unusual. Typically, bull markets carry on for longer. Also, this market has low levels of volatility and has not had a correction in a while. The approaching end of a bull market is generally marked by corrections and rising volatility.

Another reason to believe the bull market could eventually become a bubble lies in the record amounts of cash resting in money market funds, even though these funds pay negligible interest. The bull run is unlikely to peak until some of this money has found its way into stocks.

Finally, and most importantly, there is the role of monetary policy. The Federal Reserve’s programme of “quantitative easing” , in which it has bought mortgage-backed and government bonds in an attempt to force up asset values and push down yields, has had a huge impact on market sentiment.

Although the Fed said in December it would start tapering off its monthly bond purchases, it also says interest rates will stay at virtually zero until well into 2015. The S&P hit a record after the taper announcement. (…)

How can a “melt-up” be averted? Mr Parker of Morgan Stanley suggests that a significant correction would require fear that earnings will come in well below current projections – so the season when companies announce their earnings for the full year, which starts late in January, could be important. But with the US economy exceeding recent forecasts for growth, a serious earnings disappointment seems unlikely without a catalyst from outside the US – such as a big slowdown in China or a renewed crisis in Europe.

Failing these things, it could be left to the Fed itself to do the job by raising rates or removing stimulus faster than the market had expected.

Chris Watling of Longview Economics in London says US equity valuations are undoubtedly “full” – but are no more expensive than when Alan Greenspan, then Fed chairman, tried to talk down the stock market by warning of “irrational exuberance” in December 1996. On that occasion the bull market carried on for three more years and turned into an epic bubble before finally going into reverse.

“They’ll become more expensive,” says Mr Watling. “It’s not until we see tight money that we talk about the end of this valuation uplift in the US.”

This last comment comes from a fellow working at Longview Economics…Winking smile

Ritholtz Chart: Why ‘Wildly Overvalued’ Stocks May Keep Rising

(…) somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding.

Further P/E inflation is what BCA (Bank Credit Analyst) is expecting. They point out “a clear link between equity multiples and the yield curve [with] a steeper yield curve indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity  multiples.”

If we are entering a rising rate environment, a steeper yield curve is a likely stay. BCA notes that “the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed.”

image
 
High five Return of inflation is inevitable
Fund manager Michael Aronstein bets on the lessons of history

Markets are underestimating a coming rout in bond prices, and missing early signs of the return of inflation, according to the US mutual fund manager who has raised more money than any other in the past year. (…)

He and his team pore over price data from hundreds upon hundreds of commodities and manufactured goods, and he highlights proteins – shrimp, beef, chicken – and US lumber among the areas where price spikes are already developing. It is outwards from these pressure points, he says, that the world will finally move from asset price inflation to real consumer price rises.

And as that happens, bonds will tumble and investors will reassess the safety of emerging markets that till now have been fuelled by unprecedentedly cheap money. There are profits to be made buying the companies with pricing power and betting against those without, he says, and from concentrating investment in developed economies and staying cautious beyond.

Party smile Hey! Who invited this Aronstein guy to the party?

OIL AND SHALE OIL

TheTradersWire.com posted this from hedge fund manager Andy Hall earlier this week with the following intro:

Phibro’s (currently Astenback Capital Management) Andy Hall knows a thing or two about the oil market – and even if he doesn’t (and it was all luck), his views are sufficiently respected to influence the industrial groupthink. Which is why for anyone interested in where one of the foremost oil market movers sees oil supply over the next decade, here are his full thoughts from his latest letter to Astenback investors. Of particular note: Hall’s warning to all the shale oil optimists: “According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month… Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.”

Here’s Hall’s very interesting note but FYI, Reuters’ had this piece on Dec. 6: Andy Hall’s fund losses deepen after wrong bet on U.S.-Brent crude

From Astenback Capital Management

The speed with which an interim agreement was reached with Iran was unexpected. Equally unexpected was the immediate relaxation of sanctions relating to access to banking and insurance coverage. This will potentially result in an increase in Iranian exports of perhaps 400,000 bpd. Beyond that it is hard to predict what might happen. The next set of negotiations will certainly be much more difficult. The fundamental differences of view that were papered over in the recent talks need to be fully resolved and that will be extremely difficult to do. Also, Iran’s physical capacity to export much more additional oil is in doubt because its aging oil fields have been starved of investment.

As to Libya, it seems unlikely that things will get better there anytime soon. The unrest and political discontent seems to be worsening. Whilst some oil exports are likely to resume – particularly from the western part of the country (Tripolitania), overall levels of oil exports from Libya in 2014 will be well below those of 2013.

Iraqi exports should rise by about 300,000 bpd in 2014 as new export facilities come into operation. But there is a meaningful risk of interruptions due to the sectarian strife in Iraq that increasingly borders on civil war. Saudi Arabia’s displeasure at the West’s quasi rapprochement with Iran is likely to add fuel to the fire in the Sunni-Shia fight for supremacy throughout the region.

If gains in 2014 of exports from Iran are assumed to offset losses from Libya, potential net additional exports from OPEC would amount to whatever increment materializes from Iraq. Saudi Arabia has been pumping oil at close to its practical (if not hypothetical) maximum capacity of 10.5 million bpd for much of 2013. It could therefore easily accommodate any additional output from Iraq in order to maintain a Brent price of $ 100 – assuming it wants to do so and that it becomes necessary to do so. Still, $ 100 is meaningfully lower than $ 110+ which is where the benchmark grade has on average been trading for the past three years.

So much for OPEC, what about non-OPEC supply? Most forecasters predict this to grow by about 1.4 million bpd with the largest contribution – about 1.1 million bpd – coming from the U.S. and Canada and the balance primarily from Brazil and Kazakhstan. Brazil’s oil production has been forecast to grow every year for the past four or five years and each time it has disappointed. Indeed Petrobras has struggled to prevent output declining. Perhaps 2014 is the year they finally turn things around but also, perhaps not. The Kashagan field in Kazakhstan briefly came on stream last September – almost a decade behind schedule. It was shut down again almost immediately because of technical problems. The assumption is that the consortium of companies operating the field will finally achieve full production in 2014.

Canada’s contribution to supply growth is perhaps the most predictable as it comes from additions to tar sands capacity whose technology is tried and tested. Provided planned production additions come on stream according to schedule in 2014, these should amount to about 200,000 bpd.

Most forecasters expect the U.S. to add 900,000 bpd to oil supplies in 2014, largely driven by the continuing boom in shale oil. That would be lower than the increment seen this year or in 2012 but market sentiment seems to be discounting a surprise to the upside. As mentioned above, many companies have been creating a stir with talk of exciting new prospects beyond Bakken and Eagle Ford which so far have accounted for nearly all the growth in shale oil production. Indeed at first blush there seem to be so many potential prospects it is hard to keep track of them all. Even within the Bakken and Eagle Ford, talk of down-spacing, faster well completions through pad drilling and “super wells” with very high initial rates of production resulting from the use of new completion techniques have created an impression of a cornucopia of unending growth and that impression weighs on forward WTI prices.

But part of what is going on here is the industry’s desire to maintain a level of buzz consistent with rising equity valuations and capital inflows to the sector.

The hot play now is one of the oldest in America; the Permian basin. A handful of companies with large acreage in the region are making very optimistic assessments of their prospects there. These are based on making long term projections based on a few months’ production data from a handful of wells. We wonder whether data gets cherry picked for investor presentations. We hear about the great wells but not about the disappointing ones. Furthermore, many companies are pointing to higher initial rates of production without taking into account the higher depletion rates which go hand in hand with these higher start-up rates. EOG, the biggest and the best of the shale oil players recently asserted that the Permian – a play in which it is actively investing – will be much more difficult to develop than were either the Bakken or Eagle Ford. EOG figures horizontal oil wells in the Permian have productivity little more than a third of those in Eagle Ford. EOG has further stated on various occasions that the rapid growth in shale oil production is already behind us.

In part this is simple math. The DOE recently started publishing short term production forecasts for each of the major shale plays. They project monthly production increments based on rig counts and observed rig productivity (new wells per rig per month multiplied by production per rig) and subtracting from it the decline in production from legacy wells. According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.

Others have made the same analysis. A couple of weeks ago the IEA expressed concern that shale oil euphoria was discouraging investment in longer term projects elsewhere in the world that will be needed to sustain supply when U.S. shale oil production starts to decline.

Decelerating shale oil production growth is also reflected in the forecasts of independent analysts ITG. They have undertaken the most thorough analysis of U.S. shale plays and use a rigorous and granular approach in forecasting future shale and non-shale oil production in the U.S. Of course their forecast like any other is dependent on the underlying assumptions. But ITG can hardly be branded shale oil skeptics – to the contrary. Yet their forecast for U.S. production growth also calls for a dramatic slowing in the rate of growth. Their most recent forecast is for U.S. production excluding Alaska to grow by about 700,000 bpd in 2014. With Alaskan production continuing to decline, that implies growth of under 700,000 bpd in overall U.S. oil production, or 200,000 bpd less than consensus.

The final element of supply is represented by the change in inventory levels. The major OECD countries will end 2013 with oil inventories some 100 million barrels lower than they were at the beginning of the year. That stock drawdown is equivalent to nearly 300,000 bpd of supply that will not be available in 2014. Data outside the OECD countries is notoriously sparse but the evidence strongly suggests there was also massive destocking in China during 2013.

U.S. Warns on Bakken Shale Oil

The federal government issued a rare safety alert on Thursday, warning that crude oil from the Bakken Shale in North Dakota may be more flammable than other types of crude.

The warning comes after two federal agencies spent months inspecting Bakken crude, including oil carried in recent train accidents that resulted in explosions. The latest blast occurred earlier this week in Casselton, N.D., 25 miles west of Fargo. (…)

North Dakota statistics shows about three-quarters of Bakken crude produced in the state is shipped out by rail.

Manhattan apartment sales hit record high
Figures boosted as overseas buyers compete with New Yorkers

(…) The number of purchases rose 27 per cent compared with the same period the year before to 3,297, according to new data released on Friday. Although down from 3,837 in the third quarter, this was the highest fourth-quarter tally since records began 25 years ago, according to appraiser Miller Samuel and brokerage Douglas Elliman Real Estate.

Limited supply has led to buyers often making immediate all-cash offers, participating in bidding wars and making decisions based on floor plans alone, in an echo of the previous property boom. The number of days a property was on the market in the fourth quarter almost halved from the previous year to 95 days.

“Demand from foreign buyers has never been stronger. Those from the Middle East, Russia, South America, China have been on an incredible buying spree and it is these sales that are driving prices,” said Pamela Liebman, chief executive of property broker The Corcoran Group.

The median price of a luxury apartment – usually above $3m – jumped 10 per cent from a year ago to $4.9m. (…)

The pool of homes for sale is shrinking as many owners wait for prices to rise further before they list. The number of homes on the market at the end of December fell 12.3 per cent from a year earlier to 4,164, near all-time lows.

And new supply is limited – developers hit by the financial crisis have only recently revived projects, which are often luxury residences sought by deep-pocketed local and foreign buyers.

The overall median sales price in the fourth quarter rose 2.1 per cent from the previous year to $855,000. The increase was led by condominiums – largely accounting for the new developments that are the preferred choice of international buyers – which had a record median price of $1.3m.

MILLENNIALS SHUN CREDIT

(…) the 80 million Americans between the ages of 18 and 30 spend around $600 billion annually, but the proportion of that cohort that doesn’t even own a credit card rose from 9 percent in 2005 to 16 percent in 2012. According to credit-reporting firm Experian, Millennials own an average of 1.6 credit cards, while the 30- to 46-year-olds of Generation X own 2.1, and Baby Boomers 2.7. And they don’t even overload those cards they do carry: the average card balance for 19- to 29-year-olds is $2,682, around half that of older age groups. (…)

Most consumers dialed back on credit during the recession. But consumer credit has been rebounding since—except among Millennials. Student loans are one reason for that divergence. In the past 20 years, the cost of tuition and room and board at both private and public colleges has skyrocketed (60 percent and 83 percent, respectively) to $40,917 and $18,391, according to the College Board.  Outstanding student loan balances were more than $1 trillion in September—up 327 percent in just a single decade–according to the New York Federal Reserve Board. The result: Education loans now account for the second largest chunk of outstanding consumer debt after mortgages. Students who graduated from private colleges in 2012 carried $29,900 in debt, up 24 percent in ten years, and public school graduates weren’t far behind, with $25,000 (up 22 percent). With that kind of luggage to carry around, it’s understandable that young people aren’t crazy about adding to their burdens.

There’s also the fact that it’s simply more difficult for young people to get credit cards than it used to be.  (…) (Credit Suisse)

 
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