NEW$ & VIEW$ (2 JANUARY 2014)

U.S. Home Prices Continued to Rise in October Housing prices remained on an upward trend in October, but growth may not be as strong in 2014, according to S&P/Case-Shiller.

The home price index covering 10 major U.S. cities increased 13.6% in the year ended in October, according to the S&P/Case-Shiller home price report. The 20-city price index also increased 13.6%, close to the 13.7% advance expected by economists.

Both increases are the highest since February 2006, the report said. (…)

“Monthly numbers show we are living on borrowed time and the boom is fading,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

Both the 10-city and 20-city indexes increased 0.2% in October from September on an unadjusted basis, slower than the 0.7% increase in the previous month.

The seasonally adjusted gain for both composites was 1.0% in October from September, in line with the gains seen in the previous month.

Auto French Car Sales Rose 9.4% in December

French car sales rose 9.4% in December following a 5.7% increase in November, underlining a return to health after the market’s protracted slide to its lowest level in two decades.

French car sales rose 9.4% in December following a 5.7% increase in November, underlining a return to health after the market’s protracted slide to its lowest level in two decades, according to registrations data released Thursday by the French car manufacturers’ association.

French manufacturers Renault and PSA Peugeot-Citroën managed to regain market share from foreign brands, together accounting for 50.6% of the overall market in December, compared with 45.4% a year earlier. Sales in the latter part of last year were given a slight lift by the approach of an increase in value-added tax that became effective Jan. 1, prompting buyers to place orders before the deadline.

Over the full year, car sales in France were down 5.7% compared with 2012, reflecting gloomy consumer sentiment amid a tougher government fiscal policy and worries over unemployment.

SENTIMENT WATCH
 
2014 outlook: Sugar high. ‘Credit Cassandras’ say demand for risky bonds is a sign of frothy markets

(…) To the sceptics, the market is experiencing the kind of frothiness seen before the 2008 financial crisis. This, too, will end in tears, they warn. (…)

Issuance of syndicated leveraged loans – those made to companies that already carry high debt loads – reached $535.2bn in 2013. That is just shy of the $604.2bn sold in 2007, at the height of the last credit bubble. Meanwhile, loans that come with fewer protections for lenders, known as “covenant-lite”, accounted for almost 60 per cent of loans sold in 2013, compared with a 25 per cent share in 2007.

Sales of “payment-in-kind” notes, which give borrowers an option to repay lenders with more debt reached $11.5bn in 2012 – a post-crisis high. (…)

Sales of “junk”, or high-yield, bonds surged to a record in 2013 as companies rushed to refinance and investors snapped up the resulting assets. Issuance of junk bonds rated “triple C” – the lowest designation – jumped to $15.3bn, surpassing the pre-crisis peak. (…)

Others cite reasons for optimism. They note that credit “spreads”, or the additional returns investors demand to hold riskier credit assets, are not yet near the historic lows experienced in the run-up to the 2008 crisis. That suggests investors are differentiating between riskier assets and relatively safe securities, such as US government debt.

In contrast to 2007, the current average junk bond yield of 5.6 per cent is far higher than the yield on offer from the five-year Treasury note, at a difference of about 423 basis points. In June 2007, this spread had narrowed to a record low of 238 bps.

The argument against a bubble forming in the market at the moment is that overall credit remains abundant, enabling companies to roll over their funding, notes Mr Koesterich. “Companies can still raise money, so there is no financing risk.”

But investors who are concerned about the warning signs simmering in the credit markets may not be able to avoid investing in risky asset classes. For many, the pressure of reaching their “bogeys” – the benchmarks used to evaluate returns – is enough to justify the acquisition of riskier credit assets, particularly given the lack of yield on safer investments. (…)

Despite continued strong sales of corporate and government bonds, the central banks’ big purchases mean annual net issuance of financial assets is hovering around $1tn – far lower than the $3tn-$4tn sold in the years before the crisis, according to data compiled by Citigroup.

Pointing up “We are removing a significant number of high-quality bonds from the system and that requires replacement, and that replacement can only be found at a higher spread and that requires higher risk,” says Jason Shoup, a Citi analyst.

Wall Street’s securitisation machine is shifting into gear to help make up for some of the lack of supply. The kind of subprime mortgage-backed securities that played a starring role in the mid-2000s housing boom have largely disappeared. But other “sliced and diced” securities have come back. (…)

De Blasio sets liberal agenda for New York
Mayor warns that city faces crisis of inequality

(…) Mr de Blasio, an underdog when he began his quest to become mayor, was voted in on a promise to pursue more progressive policies such as universal pre-kindergarten education, raising taxes on the wealthy and reducing the income disparities which have swelled under his predecessor. He becomes the first Democrat to lead the city in nearly a quarter of a century. (…)

One of Mr de Blasio’s first challenges will be the high expectations of unions who are pressing to renegotiate contracts that would boost their pay, by up to $7bn, retroactively. Mr de Blasio has also supported higher wages for more workers on city-funded projects.

Much of this is beyond the new mayor’s ability to deliver unilaterally. For example, his proposal to raise taxes on residents making more than $500,000 a year relies on the support both of Democratic governor Andrew Cuomo and the state legislature in far more conservative Albany.

Moreover, Mr de Blasio has to be careful not to erode the city’s tax base by giving more companies and wealthy residents the incentive to move to the suburbs or lower tax domiciles.

A New Way to Make Rational Resolutions

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NEW$ & VIEW$ (19 DECEMBER 2013)

Fed Slows Bond Buying 

Ben Bernanke gave the U.S. economy a nod of approval just a month before he leaves the Federal Reserve, moving the central bank to begin winding down a bond-buying program meant to boost growth with the recovery on firmer footing.

“Today’s policy actions reflect the [Fed’s] assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal,” Mr. Bernanke said.

After months of wringing their hands about the implications of less Fed stimulus, investors resoundingly approved of the latest action to begin paring the $85 billion-a-month program. They were cheered in part because the move came with new Fed assurances that short-term interest rates would stay low long after the bond-buying program ends. (…)

The Fed, which launched the latest round of bond buying in September 2012 in a bid to fire up the tepid recovery, will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. That will include $35 billion monthly of mortgage securities and $40 billion of Treasurys, $5 billion less of each. It will look to cut the monthly amount of its purchases in $10 billion increments at subsequent meetings, Mr. Bernanke said.

Although the Fed expects to keep reducing the program “in measured steps” next year, the timing and the course isn’t preset. “Continued progress [in the economy] is by no means certain,” Mr. Bernanke said. “The steps that we take will be data-dependent.”

If the Fed proceeds at the pace he set out, it would complete the bond-buying program toward the end of 2014 with holdings of nearly $4.5 trillion in bonds, loans and other assets, nearly six times as large as the Fed’s total holdings when the financial crisis started in 2008. (…)

The Fed has said it wouldn’t raise short-term rates, which are now near zero, until the jobless rate gets to 6.5% or lower. (…)

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials who participated in the policy meeting said they expected their benchmark short-term rate to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016. (…)

But What About Inflation

Barry Eichengreen Taper in a teapot (The writer is professor of economics and political science at the University of California, Berkeley)

(…) But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this month’s $10bn reduction is the first in a series of successive monthly steps in the same direction, it will take many months before the change has discernible impact on the Fed’s financial statement.

Wall Street may have had some trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the markets into a tizzy. But given a night’s sleep, stock traders should be able to recognise the Fed’s announcement for the non-event that it is. (…)

The value of this week’s FOMC decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates would have said, it has at least done no harm.

The Fed’s Shifting Unemployment Guideposts

Dec. 12, 2012. In an effort to bolster confidence, the Fed pledged to keep its interest-rate target low “at least as long as the unemployment rate remains above 6.5%” and inflation remained under control.

June 19, 2013. In a press conference, Fed Chairman Ben Bernanke qualified the 6.5% target, calling it a “threshold, not a trigger,” at which point the Fed would begin to “look at whether an increase in rates is appropriate.” But then the chairman offered a new guidepost, this one for the central bank’s bond-buying program. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%,” Mr. Bernanke said. (Unemployment reached that point last month.)

Sep. 18, 2013. A surprise decline in the unemployment rate despite relatively weak economic growth forced Mr. Bernanke to back away from the new 7% target at his very next press conference. “The unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall,” Mr. Bernanke said, noting the recent decline was primarily the result of people leaving the workforce, not finding jobs. “There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.”

Dec. 18, 2013. As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely. “It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” the Fed said in its statement following its latest meeting. In his press conference, Mr. Bernanke said the Fed will be looking at other gauges of labor-market health. “So I expect there will be some time past the 6.5% level before all of the other variables we’ll be looking at will line up in a way that will” give the central bank the confidence to raise rates.

Firm, but flexible…

But with the Fed projecting that the output gap will narrow, inflation will edge up, and unemployment will fall in the years ahead, even these more liberal Taylor rules suggest the Fed should be ratcheting up rates faster than it says it will. Indeed, Fed officials’ median projection is for the target rate to have risen to just 1.75% by the end of 2016; typical Taylor rules would prescribe over 3%. (WSJ)

For the record, here are the FOMC projections and how they have “evolved” since June 2013, courtesy of CalculatedRisk:

  • On the projections, GDP was mostly unrevised, the unemployment rate was revised down slightly, and inflation was revised down.

imageProjections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

  • The unemployment rate was at 7.0% in November.

imageProjections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

  • The FOMC believes inflation will stay significantly below target.

image

  • Here is core inflation:

image

Nerd smile  The only “significant changes since June are in the unemployment rate projections. Everything else is somewhat weaker. So much for an “economy that is continuing to make progress”.

Fingers crossed  WARNING: Another Soft Patch Ahead? (Ed Yardeni)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

I have been warning about this possible inventory cycle. See Ford’s warning below.

U.S. Home Building Hits Highest Level in Nearly 6 Years

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the highest level in nearly six years, in the latest sign of renewed momentum in the sector’s recovery.

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the Commerce Department said Wednesday. That was higher than the 952,000 forecast by economists and brought the average pace of starts for the past three months to 951,000.

Details of the report showed broad strength for housing. Starts for single-family homes, a bigger and more stable segment of the market, also rose to their highest level in nearly six years.

November building permits, an indicator of future construction, fell slightly to the still-elevated level of 1,007,000. Permits had jumped 6.7% in October.

The report showed home building returning to the brisk pace seen early this year, before the sector’s recovery took a hit from rising interest rates. Builders broke ground on an average 869,000 homes between June and August.

 

 

Mobile homes are also moving:

 

RV Sales Rebound as U.S. Economy Improves

(…) More Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. The total for all new units sold this year is projected to rise about 11 percent from last year to 316,300, Walworth said. Meanwhile, 2014 looks like “another good year,” as sales could top 335,000, the most in six years. (…)

More than four years since the 18-month recession ended in June 2009, sales of these units — with an entry-level price of about $80,000 — are up more than 30 percent from last year, he said, citing data from the Recreation Vehicle Industry Association, a trade group. Meanwhile, towable units — retailing for as little as $4,000 — have risen 8.5 percent. (…)

It’s useful for investors to monitor this industry because it’s proven to be “fantastic as a leading indicator of overall economic trends,” said Kathryn Thompson, a founder and analyst at Thompson Research Group in Nashville, Tennessee. Sales began to drop as interest rates climbed into 2006; the yield on 10-year Treasuries reached 5.24 percent in June of that year. By December, “the consumer was completely falling apart in the RV industry.”

That slump came one year before the U.S. entered the worst recession in more than 70 years. Now traffic at dealerships nationwide probably will be even better in 2014, Thompson said, adding that “very strong” sales have helped drive towable units near the pre-recession peak. (…)

EARNINGS WATCH

 

FedEx Bolsters Full-Year Forecast

FedEx Corp. said a shorter holiday shipping season stunted growth in its ground division, but the package-delivery company bolstered its full-year guidance and said it expects an improved financial performance next quarter.

Profit rose 14% to $500 million for the company’s fiscal second quarter ended Nov. 30, up from $438 million in the same period a year earlier. Per-share profit totalled $1.57 for the most recent quarter, less than the $1.64 that analysts surveyed by Thomson Reuters had expected.

Cyber Monday, one of the year’s busiest online-shopping days, fell on Dec. 2 this holiday season instead of in November, damping expected growth and keeping ground-business profits from reaching as high as analysts had predicted, FedEx said. The company added that its results were affected by costs associated with the expansion of its ground network. (…)

It seems that just about everybody was surprised that Cyber Monday occurred Dec. 2nd this year…But no worry, buybacks will save the year.

FedEx, based in Memphis, Tenn., indicated that it is poised for strong growth in the current quarter. Chief Executive Frederick W. Smith said FedEx’s 22 million shipments on Dec. 16 marked its third-straight record Monday this month.

The company increased its outlook for full-year earnings-per-share growth to a range of 8% to 14% above last year’s adjusted results, up from 7% to 13% previously, in part because of the effects from its share-buyback program announced in October.

Auto  Ford Warns on Earnings Growth

Ford Motor Co. warned on Wednesday its 2014 profits won’t match this year’s results because of higher costs and a currency devaluation. And it said it likely won’t meet operating profit projections of between 8% and 9% of sales by 2015 or 2016. That goal is “at risk” because of the recession in Europe and weaker results in South America. (…)

In the U.S., it blamed competition from Japanese rivals for a decision earlier this month to temporarily idle U.S. factories that build the midsize Fusion and the compact Focus to reduce inventories. The shutdowns came less than four months after Ford expanded Fusion output, citing a shortage of the cars. It also was hurt by warranty costs for Escape engine repairs. (…)

Sounds more like poor production planning leading to excess inventory, just as the Japs are benefitting from their weak Yen. What about GM and Chrysler?

GM executives also say ambitious new product programs will be vital to sustaining profitability in the next few years. “You’ve got to protect your product and you got to protect your cash flow and you have got to invest in the future,” GM CEO Akerson said earlier this week. “That may mean short-term disruptions in other priorities.”

Hmmm…”You’ve got to protect…” Sounds like a warning to me.

(…) However, the recent decline in the value of the Japanese yen against the dollar gives Toyota, Honda and Nissan more latitude to cut prices. All three have aggressive holiday promotions, a sign they want to regain market share lost after the 2011 tsunami and a period of yen strength. (…)

Which leads to

Surprised smile McDonald’s Japan slashes profit forecast by nearly 60%
Battered yen raises costs for the Japanese affiliate of the US fast-food giant

(…) It’s now forecasting net profit of Y5bn, down from Y11.7bn, according to a statement to the Tokyo Stock Exchange. Analysts had been looking for Y9.5bn in profit, according a Bloomberg poll.

The profit warning follows a Nov 7 earnings report that revealed net income had dropped 36 per cent from a year earlier in the third quarter.

Even after the Nov. 7 release, estimates remained 60% too high! Sleepy smile

McDonald’s Corp, which owns 50 per cent of the Japanese fast-food chain, doesn’t break out Japan in its earnings results but calls it is one of six “major markets” alongside the UK, France, China, Australia and the US, which together accounted for 70 per cent of revenues last fiscal year.

Jabil Circuit Warns, Stock Sinks

Shares of Apple Inc. AAPL -0.76% supplier Jabil Circuit Inc. JBL -20.54% fell more than 20% Wednesday after the components maker said an unanticipated drop in demand from a big customer would hurt revenue and profit in the current quarter.

Jabil’s warning raised concerns about sales of Apple’s iPhone 5C, a less-expensive model that Apple released in September. Apple is Jabil’s biggest customer, accounting for 19% of its revenue in the fiscal year ended Aug. 31. Analysts said Jabil produces the plastic cases for the iPhone 5C and the metal exteriors for the iPhone 5S.

THE AMERICAN ENERGY REVOLUTION (Cnt’d)

Cheap Natural Gas Could Put More Money in Americans’ Pockets

A surge in natural-gas production has driven prices down 50% in the last eight years, a stunning development that is reducing Americans’ energy costs, according to a study by the Boston Consulting Group. By 2020, these savings from low-cost energy could amount to nearly 10% of the average U.S. household’s spending after taxes and paying for necessities, or about $1,200 a year, the report said.

Economists say lower natural-gas prices will help U.S. businesses reduce costs, but there’s an important impact on consumers, too: The average U.S. household devoted about 20% of its total spending last year to energy, both directly (things like electricity and heating) and indirectly (higher costs for goods and services), BCG says. If Americans save more on energy and see lower prices when they buy goods, they might ramp up discretionary spending and propel the sluggish recovery. (…)

Consumer spending, which accounts for roughly two-thirds of the nation’s economic activity, has been resilient this year despite higher taxes and stagnant wages. One possible explanation is lower energy costs. Indeed, BCG says the average American household is already saving more than $700 a year. On Tuesday, the Labor Department said energy prices fell in November, helping muffle overall inflation. Prices at the gasoline pump have also fallen on average from nearly $3.70 in mid-July to below $3.25 as of Monday, according to the Energy Information Administration. (…)

 

NEW$ & VIEW$ (17 DECEMBER 2013)

Industrial Output Hits a Milestone

Industrial production, which measures the output of U.S. manufacturers, utilities and mines, surged a seasonally adjusted 1.1% from the prior month, the Federal Reserve said Monday. That was the biggest jump in a year.

The ascent in part reflects big gains for volatile mining and utilities components, though underlying figures point to steadily rising demand for an array of industrial goods.

Manufacturing, the largest component of industrial production, remains below its prerecession peak. But the sector expanded 0.6% in November, the fourth straight month of gains. Overall factory output is up 2.9% from a year earlier.

Rising auto output led the increase, with motor-vehicle assemblies at the highest level in eight years. (Chart from Haver Analytics)

Strong report overall, indicating a rising momentum in most sectors. Capacity utilization keeps rising, a positive for profit margins.

 image_thumb_thumb_thumb

Here’s the LT Cap. Ute. chart from CalculatedRisk:

image

Meanwhile, other costs are rising faster (Charts from Haver Analytics):

But not in manufacturing:

Auto  European Car Sales Rise for Third Month of Increased Demand

European new-car sales rose a third consecutive month in November, the longest period of gains in four years, as demand for autos from Volkswagen AG and Renault SA contributed to signs that an industrywide decline is ending.

Registrations in November increased 0.9 percent from a year earlier to 975,281 vehicles, the Brussels-based European Automobile Manufacturers Association, or ACEA, said today in a statement. The growth followed gains of 4.6 percent in October and 5.5 percent in September.

Among Europe’s five biggest car markets, demand increased 15 percent last month in Spain, which ranks fifth in the region, and 7 percent in the U.K., which places second. The Spanish government revived a cash-for-clunkers incentive program in October to boost car sales. Registrations dropped in Germany, France and Italy.

Asian, German Car Makers Seen Boosting Capacity in North America

Asian auto makers are expected to add the capability to build nearly one million more vehicles in North America over the next six years, and German auto makers could boost capacity by 700,000 in a challenge to the market stability that has helped boost profits for Detroit’s three big auto makers.

The new plants are aimed at supplying a projected growth in demand in the North American market, and could be used to ramp up exports, particularly to Europe and the Middle East and Africa, according to a new report by IHS Automotive—a division of business information firm IHS Inc.

Mike Jackson, a production forecaster with IHS Automotive, said that despite the two-million-unit increase forecast, overcapacity shouldn’t be a serious concern.

“We still anticipate a 90% to 95% utilization rate,” he said.

Mr. Jackson estimates that by 2020, two million vehicles will be exported from North America, a 60% increase over today. By then, 35% of exports will be going to Europe, 25% to South America and 22% to the Middle East and Africa, which is forecast to have strong growth. (…)

Global Car Sales Seen Rising to 85 Million in 2014

The global auto industry is expected to produce 85 million sales in 2014, up from an estimated 82 million this year, IHS Automotive said in a forecast Monday.

By 2018 sales are forecast to break 100 million, according to the unit of business-information provider IHS Inc.

This global growth is driven by rising wealth in emerging markets as well as relatively moderate gasoline prices. (…)

The U.S. market may rise 2.4% to 16.03 million from 15.65 million this year and to peak in 2017 at nearly 17 million before leveling off. (…)

Production in North America also is forecast to rise by 2.1 million vehicles between now and 2020, driven by new plants in the U.S. and Mexico. Asian auto makers are expected to add more than one million units of that capacity.

In a separate report, Deutsche Bank estimates global automobile sales will rise 4% in 2014, to 87.4 million light vehicles. That would be slightly ahead of the 3.5% growth the industry is on track to hit for this year, when global auto sales are expected to total 84 million vehicles. Total auto sales estimates can vary because of inconsistencies in reporting by different countries and whether heavier duty vehicles are included in the total.

The key drivers will be a return to growth in Europe and continued strong demand in the U.S. and China.

After six years of declines in new-car sales, Europe should see a rise of 3% in 2014, to about 14 million light vehicles, according to Deutsche Bank’s forecast. While that total would be an improvement from 2013, it would still be well below the 18 million new cars and light commercial vehicles that were sold in 2007. The bank says an aging fleet of cars on European roads, and a shortage of used cars, will prod more buyers to showrooms next year. (…)

The U.S. should also get a lift as consumers who signed three-year leases on new cars in 2011 look to trade in for new vehicles. Leasing plunged between 2008 and 2010, and the rebound in leasing since them should provide a steady stream of ready customers for 2014, 2015 and 2016, Deutsche Bank wrote.

The Chinese market for cars should grow 10% next year, to 23.8 million cars and light trucks. That is still a robust rate but down from the 13% increase the market will see for 2013. For this year auto sales are seen reaching 21.7 million vehicles.

Euro-Zone Prices Fall

Despite the decline in euro-zone prices during November, the European Union’s statistics agency said the annual rate of inflation rose to 0.9% from 0.7%, in line with its preliminary estimate. But even after that pickup, the rate of inflation was well below the European Central Bank’s target of just below 2.0%, and slowing labor costs suggest a significant increase is unlikely in the months to come.

According to Eurostat’s figures, energy prices fell by 0.8% during November, and were down 1.1% from the same month of 2012. But services prices also fell during the month, while prices of manufactured goods and food rose slightly.

Pointing up In a separate release, Eurostat said total labor costs in the three months to September were 1.0% higher than in the same period of 2012, while wages were 1.3% higher. In both cases, the rate of increase was the smallest since the third quarter of 2010. (…)

Wages fell in Ireland, Portugal, Cyprus and Slovenia, and were flat in Spain. That indicates that some rebalancing of the euro zone’s economy is under way.

But that relabancing would be aided by a more rapid rise in wages in stronger economies such as Germany. While the rate of wage growth there was higher than in the euro zone as a whole, it slowed significantly from the second quarter, to 1.7% from 2.2%.

OIL

US oil production to test record high
Shale boom sends output soaring

(…) The EIA said on Monday that it had revised sharply higher its estimates of future US crude output to about 9.5m barrels a day in 2016. That is very close to the previous peak in US production of 9.6m b/d in 1970 and almost double its low point of 5m b/d in 2008. (…)

A year ago, the EIA was predicting US crude production of about 7.5m b/d in the second half of this decade, a level that has already been surpassed this year. It has now revised sharply higher its estimates of future output in its central “reference case”, which assumes that current laws and regulations remain generally unchanged. (…)

The EIA now predicts that US crude output will begin to tail off slowly after 2020, but says there is still great uncertainty over the outlook. Adam Sieminski, the administrator of the EIA, said factors influencing the outlook for production would include future discoveries about the geology of US shale oilfields, regulatory requirements imposed on producers and investment in new pipelines.

Sustaining the surge in US oil production will require prices that are high by the standards of a decade ago. Mr Sieminski said US shale production would be profitable at prices above $90 a barrel, and possible at above $80-$85 a barrel. (…)

For natural gas, meanwhile, the EIA is predicting continued indefinite growth in production. Gas is easier to produce than oil from shale and other “tight” rocks, and by 2040 the EIA expects US production to be 56 per cent higher than in 2012. (…)

Oil Supply Surge Brings Calls to Ease U.S. Export Ban

The U.S. is meeting 86 percent of its own energy needs, the most since 1986, Energy Department data show.

A surplus of crude could overwhelm Gulf Coast and Canadian refineries that weren’t built for the type of oil now in abundance from new fields in North Dakota and Texas, forcing the issue, McKenna said.

U.S. refineries invested more than $100 billion in the past two decades on upgrades to handle heavy crudes from Mexico, Venezuela and the Middle East, according to Michael Wojciechowski, a Houston-based refining analyst at Wood Mackenzie, an industry research and consulting company.

“We’re going to have two choices, really — export production or shut-in production,” McKenna said. “That’s an ugly choice.”

Or build new refineries.

Once refined, oil may be exported as fuels, which aren’t restricted. The U.S. became a net exporter of petroleum products in June 2011 and shipped a record 3.37 million barrels a day for three weeks in October, Energy Department data show.

Profit Growth Outpaces Dividends at S&P 500 Firms

(…) Members of the S&P 500 index paid out just 33% of their reported earnings per share in the form of dividends during the third quarter. That’s down from the quarterly average of almost 45% since 1988 and an average of nearly 52% since 1936, according to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. (…)

Companies also are expected to pay out about 33% of profit in the fourth quarter, Mr. Silverblatt says, as profit growth outpaces dividend increases. (…)

Airplane  Boeing boosts dividend and buybacks
Jet maker voices confidence as it returns cash to shareholders

Boeing intends to increase its dividend by 50 per cent and ask investors to approve up to $10bn of share buybacks, the commercial jet maker said on Monday, calling the move a mark of confidence in its own future.

The quarterly dividend would increase from 48.5 cents to 73 cents, Boeing said. The new $10bn buyback programme would allow repurchases to continue once the company has exhausted the remaining $800m of an outstanding buyback authorisation granted in 2007.

Easy Money Delays Retail Shakeout

Investors are eagerly lending to risky retail borrowers like RadioShack, Sears Holdings and J.C. Penney, buying the chains time to try to turn around their businesses but delaying the overbuilt industry’s day of reckoning.

Thumbs down Loehmann’s Files for Bankruptcy

The discount retailer files for bankruptcy Sunday under the weight of more than $100 million of debt. The company employs 1,600 people at some 39 stores.

image

 

NEW$ & VIEW$ (11 DECEMBER 2013)

Pointing up Pointing up Pointing up The Fed Plan to Revive High-Powered Money

By Alan Blinder
Don’t only drop the interest paid rate paid on banks’ excess reserves, charge them.

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before. (…)

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. (…)

At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. (…)

Deal Brings Stability to U.S. Budget

House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs.

Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term jobless benefits, sought by Democrats, wasn’t included.

The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a “grand bargain” to restructure the tax code and federal entitlement programs. But in a year and an institution characterized by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement. (…)

The Murray-Ryan deal will likely need considerable Democratic support to pass the GOP-controlled House. Many Republicans, as well as a large number of conservative activists off Capitol Hill, argue that the sequester cuts have brought fiscal austerity to the federal budget and that they should not be eased. (…)

The depth of conservative opposition will become apparent as lawmakers absorb the details, which were released to the public Tuesday night. To draw support from the GOP’s fiscal conservatives, the deal includes additional deficit-reduction measures: While the agreement calls for a $63 billion increase in spending in 2014 and 2015, it is coupled with $85 billion in deficit reductions over the next 10 years, for a net deficit reduction of $22.5 billion.

The deal achieves some of those savings by extending an element of the 2011 budget law that was due to expire in 2021. The sequester currently cuts 2% from Medicare payments to health-care providers from 2013 through 2021. The new deal extends those cuts to 2022 and 2023. (…)

A Least Bad Budget Deal

The best that can be said about the House-Senate budget deal announced late Tuesday is that it includes no tax increases, no new incentives for not working, and some modest entitlement reforms. Oh, and it will avoid another shutdown fiasco, assuming enough Republicans refuse to attempt suicide a second time.

The worst part of the two-year deal is that it breaks the 2011 Budget Control Act’s discretionary spending caps for fiscal years 2014 and 2015. The deal breaks the caps by some $63 billion over the two years and then re-establishes the caps starting in 2016 where they are in current law at $1.016 trillion. Half of the increase will go to defense and half to the domestic accounts prized by Democrats. (…)

The deal means overall federal spending will not decline in 2014 as it has the last two years. (…)

All of this doesn’t begin to match the magnitude of America’s fiscal challenges, but it is probably the best that the GOP could get considering Washington’s current array of political forces. (…)

Four Signs the Job Market Is Getting Better 

Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels.

Quits are rising: (…)  2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier. Quits are still below normal levels, but they’re finally showing a clear upward trend.

And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. (…) There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.

Hiring is finally rebounding: (…) Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.(…)

But don’t get too excited: (…)The three-to-one ratio of jobseekers to openings is nearly double its prerecession level, and would be higher if so many unemployed workers hadn’t abandoned their job searches. Companies remain reluctant to hire, and many of the jobs that are getting created are in low-wage sectors — nearly a third of October’s hiring came in the low-paying hospitality and retail sectors. The epidemic of long-term unemployment has shown little sign of easing. Despite signs of healing, in other words, a healthy job market remains a long way off.

Wells Fargo Chief Sees Healing Economy

Wells Fargo& Co. Chief Executive John Stumpf said Tuesday the economy is healing, five years after the bank purchased Wachovia Corp. in the midst of a global financial meltdown.

He said government progress on a budget deal, lower unemployment and signs businesses are looking to expand give him reason to be optimistic. “As I’m talking with our customers, especially our small business and middle-market customers, I’m starting to hear a little more about expanding businesses,” he said.

Now, go back to Alan Blinder’s op-ed above.

European carmakers: speeding up

(…) Consultants at LMC Automotive reckon that November saw a 0.7 per cent rise year on year. That follows increases of over 4 per cent and almost 5.5 per cent in October and September respectively – so, at long last, a sustained upward trend for Europe’s crisis-hit sector. 

High five In three of the big markets – Germany, France and Italy – the November sales pace was lacklustre at best and down by over 4 per cent at worst. Spain, which saw a strong advance, benefited from a very easy year-on-year comparison and scrappage incentives. Pricing, too, remains weak across the sector. Last week, Fiat detailed transaction (as opposed to listed) price trends, in segments ranging from economy to basic luxury models for both the German and Italian markets. As of September, these were barely above 2007 levels and, after allowing for inflation in the intervening period, well down in real terms.

Above all, given the small number of plant closures since 2008, Europe still has massive overcapacity on the production side. If 2013 ends with under 12m cars sold in western Europe and 4.5m in eastern Europe, the total will be down by a fifth on 2007 levels. Europe’s light vehicle production, meanwhile, will probably top 19m units – just two-thirds of estimated plant capacity. Sales rises of 2-3 per cent, say, in 2014 will make only modest inroads on that gap so pricing pressures may persist.

China New Yuan Loans Higher Than Expected

Chinese financial institutions issued 624.6 billion yuan ($103 billion) worth of new yuan loans in November, up from 506.1 billion yuan in October and above economists’ expectations.

Total social financing, a broader measurement of credit in the economy, came to 1.23 trillion yuan in November, up from 856.4 billion yuan in October.

China’s broadest measure of money supply, M2, was up 14.2% at the end of November compared with a year earlier, slightly lower than the 14.3% rise at the end of October, data from the People’s Bank of China showed Wednesday.

IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery

The IEA estimated today in its monthly oil market report that demand will increase by 1.2 million barrels a day, or 1.3 percent, to 92.4 million a day next year, raising its projection from last month by 240,000 a day. U.S. fuel use rose above 20 million barrels a day in November for the first time since 2008, according to preliminary data. While the agency boosted its forecast for the crude volume OPEC will need to supply, “making room” for the potential return of Iranian exports “could be a challenge for other producers” in the group, it said.

“The geopoliticals are now bearish, while the fundamentals are bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said before the IEA published its report. “This is quite a change from just recently. People are anticipating tighter supplies as we go into next year. Demand will be higher.”

The agency raised estimates for supplies required next year from the Organization of Petroleum Exporting Countries by about 200,000 barrels a day, to 29.3 million a day. That’s still about 400,000 a day less than the group’s 12 members pumped in November, according to the report.

OPEC’s output fell for a fourth month, by 160,000 barrels a day, to 29.7 million a day in November, as a result of disruptions in Libya and smaller declines in Nigeria, Kuwait, the United Arab Emirates and Venezuela. The group decided to maintain its production target of 30 million barrels a day when it met on Dec. 4 in Vienna.

Saudi Arabia, the organization’s biggest member and de facto leader, kept production unchanged last month at 9.75 million barrels a day, the report showed.

This chart via FT Alphaville reveals how OPEC is effectively managing supply.

SENTIMENT WATCH

Can We Finally All Agree That This Is Not a Bubble?  All the bubble chatter over the past few months is increasingly looking like just a bunch of hot air.

A look at the IPO and M&A markets also point to caution rather than exuberance. “A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses,” said Jeffrey Kleintop, chief market strategist at Boston-based brokerage firm LPL Financial. While M&A activity is trending higher, it remains far below the peak 2007 levels, and 2000 for that matter, he pointed out.

RBC Capital has the chart:

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Media bubble?

It seems to me that most media have been giving a positive spin to the not so great economic news of the past few months. This RBC Capital chart carries no emotion:

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High Yield Spreads Hit a Six Year Low

(…) At a current reading of 411 basis points (bps) over treasuries, spreads are at their lowest level in more than six years (October 2007)!

With high yield spreads at their lowest levels since October 2007, skeptics will argue that the last time spreads were at these levels marked the peak of the bull market.  There’s no denying that, but we would note that in October 2007, spreads had already been at comparably low levels for more than three and a half years before the bear market started.  Additionally, back in the late 1990s we also saw a prolonged period where spreads were at comparably low levels before the market began to falter.

Another reason why the low level of spreads is of little concern is because default rates are also at historically low levels.  According to Moody’s, the default rate for junk rated American companies dropped to 2.4% in November, which according to Barron’s, “is barely more than half its long-term historic average and down from 3.1% a year ago.”

Not really bubbly, but getting closer…

Here’s an interesting chart:

Performance of Stocks vs Bonds

(…)  With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  (…)

While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon.  In the chart below, anything above the green line indicates a performance spread of more than 30 percentage points.  As you can see, the only other periods where we saw the spread exceed 30 were in 1999, 2003, 2009, and 2011.

What makes the current period somewhat different, though, is the period of time that the spread has been at elevated levels.  With the spread first exceeding 30 percentage points back in March, we are now going on nine months that the spread has been at elevated levels.  At some point you would expect the two to revert back to their long-term historical average.

Hedge funds attract billions in new money
Investor inflows jump sharply even as performance lags stocks

Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to figures from the data provider Preqin.(…)

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.”

With the same humongous fees…

Yesterday, I posted on this:

 

Fatter Wallets May Rev Up Recovery

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, according to the Fed.

Which deserves two more dots to explain the feeble transmission pattern of the past several years:

The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Click to View

  • And these charts from RBC Capital:

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NEW$ & VIEW$ (10 DECEMBER 2013)

Small Businesses Optimism Up Slightly

Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has
been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.

Small business optimism report data through November 2013

The net percent of all owners (seasonally adjusted) reporting higher
nominal sales in the past 3 months compared to the prior 3 months was
unchanged at a negative 8 percent. Fifteen percent still cite weak sales as
their top business problem, but is the lowest reading since June 2008. The
net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.

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The pace of inventory reduction continued with a seasonally adjusted net
negative 7 percent of all owners reporting growth in inventories, 1 point
worse than in October. The negative outlook for the economy and real
sales prospects adversely impacted inventory satisfaction. The net percent
of owners viewing current stocks as too low improved only 1 point, to
negative 4 percent in November. Inventories are too large, especially given the poor outlook for sales improvements. The net percent of owners
planning to add to inventory stocks was a net 0 percent (up 1 point), no
new orders for inventory when stocks are excessive compared to expected
sales.

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WEEKLY CHAIN STORE SALES SHOW NO HOLIDAY CHEERS

Sales dropped 1.6% last week after the 2.8% decline the previous week. The growth in the 4-week m.a. is 2.2% YoY. It was 3.0% at the same time last year when the Christmas season sales finished up 3.3% by this measure.

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Smile Americans Regain Some Wealth

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, the highest on record, according to the Federal Reserve.

cat

The value of stocks and mutual funds owned by households jumped $917 billion last quarter, while the value of residential real estate grew about $428 billion, according to the Fed. (…)

Sad smile Wealthy Go Frugal This Holiday Amid Uneven U.S. Recovery

(…) Coach Inc. has said customers plan to spend less on gifts and that mall traffic fell sharply last month. Analysts predict Nordstrom Inc.’s fourth-quarter sales may grow less than half the year-ago pace of 6.1 percent. Tiffany & Co.’s third-quarter comparable sales in the Americas were barely higher. Even before Black Friday, Saks Inc., Neiman Marcus Group Inc. and Nordstrom offered 40 percent off on many brands. (…)

In early October, Unity Marketing conducted an online survey of 1,200 affluent shoppers. Twenty five percent said they’ll spend less on holiday gifts this year than they did in 2012, while 60 percent said they plan to spend the same. Just 13 percent said they would spend more.

Half the respondents said the financial health of the country is worse now than it was three months ago. (…)

First rise in US mortgage debt since 2008
Consumer spending may support economic growth next year

The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008.

After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. (…)

Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. (…)

Canada’s top 1% take home 10.6% of its income

A first glimpse of how top earners fared in 2011 shows their share of income peaked in 2006 at 12.1 per cent, before the recession walloped the wealthy as investment income and bonuses dried up. However, the share is still higher than when Statistics Canada began tracking incomes in 1982, when it stood at 7.1 per cent. (…)

In the U.S., the income share of the top 1 per cent of earners was 19.7 per cent in 2011, according to economists Emmanuel Saez and Thomas Piketty. By last year, it had grown to about 22.5 per cent – a similar level to both before the recession and the Great Depression. The economists found that incomes for the top 1 per cent grew by nearly a third between 2009 and 2012, compared with 0.4-per-cent growth for the bottom 99 per cent.

In Canada, the threshold to be in the top percentile of earners rose to $209,600 in 2011, up from $207,300 a year earlier in constant dollars. It requires $108,300 to be part of the top 5 per cent, while it takes $84,100 to be in the top decile of earners.

The rich typically pay a higher share of taxes in Canada, although that share has declined in recent years. The top 1 per cent of earners paid 20.8 per cent of the total share of federal and provincial or territorial income taxes, down from 23.3 per cent five years earlier. (…)

The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent. The report is based on 2011 tax-file data, which includes incomes from earnings and investments, but is not a measure of total wealth, which includes assets such as housing.

Signs Investment Slowing in China

(…) retail sales beat expectations, while investment lost momentum, a sign of progress toward the consumption-led growth policy makers have sought. Retail sales posted 13.7% annual growth in November, up from 13.3% in October, and auto sales hit a record high. (…)

Overall investment showed signs of slowing in November, though real-estate sales and construction starts were strong. Fixed-asset investment was up 19.9% in the first 11 months of the year, compared with the same period of 2012, just below expectations and lower than the figure for the January-to-October period. (…)

Growth in industrial production, the most closely watched monthly indicator of economic performance, slipped back to 10% on a year-to-year basis in November from 10.3% the previous month. (…)

Auto  China Auto Sales Gain 16% as Japan Automakers Extend Recovery

China’s passenger-vehicle sales rose 16 percent in November as Japanese automakers extended their recovery in the world’s largest auto market.

Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed to 1.7 million units last month, the state-backed China Association of Automobile Manufacturers said today. (…)

Industrywide, total sales of vehicles — including buses and trucks — reached 19.9 million units this year through November, putting China on course to be the first country to ever see 20 million units in annual vehicle sales. (…)

By contrast, Indian passenger-vehicle sales fell 10 percent last month, the third-straight decline, according to data released by the Society of Indian Automobile Manufacturers today.

Ghost  France’s Industrial Production fell 0.3% in October, following a 0.3% decline in September.

SENTIMENT WATCH

over the past 3 weeks a cumulative ~15B flowed into equity mutual funds while-$17B flowed out of Bond Mutual funds. (ISI)

 

NEW$ & VIEW$ (4 DECEMBER 2013)

Smile Companies Boost U.S. Payrolls by Most in a Year

The 215,000 increase in employment exceeded the most optimistic forecast in a Bloomberg survey and followed a revised 184,000 gain in October that was larger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

(…) Overall, demand remained strong with 1.25 million light vehicles sold last month, up 9% from a year ago, lifting the annualized sales pace to 16.4 million vehicles, from 15.3 million a year ago and the strongest pace since February 2007, according to Autodata Corp.(…)

Haver Analytics: U.S. Vehicle Sales Surge to Seven-Year High

The latest level of sales was the highest since February 2007.

But sales had been quite weak in both September and October at 15.2M, the former due to fewer selling days and the latter presumably due to the government shutdown. Taking a 3-month moving average, the annualized selling rate has been flat at 15.6M since June 2013, even though manufacturers’ incentives have kept rising briskly. (Chart from CalculatedRisk)


Doug Waikem, owner of several new-car dealerships in Ohio, said discounts aren’t “out of control” but car makers are pushing retailers to buy more vehicles, a practice that boosts auto maker’s revenue.

“I think we’re slipping back into old habits,” Mr. Waiken said. “I’m seeing dealers with inventories going up. The banks are being very aggressive.”

On Nov. 20, I warned about a possible build up in car inventories if sales don’t accelerate rapidly. Monthly inventories of the Detroit Three were at a high 76 days in October.

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. Company executives said the inventory levels are acceptable for this time of year.

Well, not really acceptable to Ford:

Ford announced its initial Q1/14 production schedule, with volumes expected to decline 2% year over year, which is slightly worse versus the most recent forecast from Ward’s Automotive for Ford’s production to increase by 2% year over year in Q1/14 and compares to our estimate for overall Detroit Three production to increase 4% year over year in Q1/14. (BMO Capital)

The risk remains that car sales, having bounced thanks to the wealth effect and pent up demand, have reached their cyclical peak.

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

Chains including Abercrombie & Fitch Co., Chico’s FAS Inc., Gap Inc. and Victoria’s Secret came into the fourth quarter with heavy inventory loads. The concern now is the retail industry’s weak showing over Thanksgiving weekend will force them to take bigger markdowns that could hurt their fourth-quarter profits.

Simeon Siegel, an analyst with Nomura Equity Research, looked at the inventory carried by those and other specialty-apparel retailers at the end of the third quarter and compared it with his projections for the chains’ fourth quarter sales. He found that in most cases inventory growth far outpaced sales growth. Normally, the two should be growing about the same.

“The ratios are the worst we have seen in quite a while,” Mr. Siegel said.

The companies each acknowledged that their inventories were rising and said the levels were appropriate.

Yet with holiday sales getting off to a slow start, positions that seemed appropriate several weeks ago may turn out to be too high. A survey commissioned by the National Retail Federation concluded that sales over Thanksgiving weekend fell to $57.4 billion from $59.1 billion a year ago—the first drop in at least seven years.

Fewer shoppers said they had bought clothing or visited apparel stores, according to the NRF survey, which polled nearly 4,500 consumers.

Marshal Cohen, the chief industry analyst for the NPD Group, said he spotted signs throughout the weekend that stores were overstocked, including goods stacked high up on shelves and ample merchandise in storerooms. (…)

Thanksgiving sales were generally weak, as were back-to-school sales. If Christmas sales are also weak, the inventory overhang will carry into Q1’14.

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HOUSING IS ALSO WEAK:

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The 4-week average of the purchase index is now down about 8% from a year ago. (CalculatedRisk)


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

(…) households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash. The White House and New York Mayor-elect Bill de Blasio aren’t the only ones calling for higher taxes (especially on the wealthy), as voices from the International Monetary Fund to billionaire investor Bill Gross increasingly make the case too. (…)

As for the IMF, its latest Fiscal Monitor report argues that taxing the wealthy offers “significant revenue potential at relatively low efficiency costs.” (…)

From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.

Could there now be a wealth tax anticipation effect that would incite the wealthiest to save right when they are about the only source of demand?

Trade Gap in U.S. Shrank in October on Record Exports

Exports climbed 1.8 percent to $192.7 billion on growing sales of food, petroleum products, drilling equipment and consumer goods, including jewelry.

Imports increased 0.4 percent to $233.3 billion in October, the most since March 2012. Gains in consumer goods such as toys and artwork, and fuel helped offset a slump in purchases of foreign automobiles.

Sales of goods to China, Canada and Mexico were the highest ever, pointing to improving global demand that will benefit American manufacturers. In addition, an expanding U.S. economy is helping boost growth abroad as purchases of products from the European Union also climbed to a record in October even as fiscal gridlock prompted a partial federal shutdown.

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

Core sales volume cratered 0.8% in October after declining 0.1% in September. German sales volume dropped 1.0% on the past 2 months. 

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European Stocks Suffer a Setback

European stocks fell sharply across the board today.  In Germany and France, markets have been very quiet over the last few months, steadily moving higher in small clips on a daily basis.  That came to an end today with big moves lower in both countries.  Germany is still well above its 50-day moving average and its uptrend remains intact, but the same can no longer be said for France.  As shown in the second chart below, the French CAC-40 broke hard through its 50-day today, which also represented the bottom of its multi-month uptrend channel.

Along with France, the UK (FTSE 100) and Italy (FTSE MIB) also saw significant breaks below their 50-days today.  For Italy’s major index, the 50-day had acted as key support going back to August, but that’s no longer the case after the wash out we saw today.

The fall in Europe sent US stocks lower this morning, and it was the stocks with heavy exposure to Europe that got hit the hardest.  Keep an eye on this trend in the days ahead.  

BANKING

Wall Street Sweats Out Volcker Rule With 18% of Revenue in Play

(…) The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks’ investment revenue could be reduced by the rule’s limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies’ revenue.

Goldman Sachs and Morgan Stanley may be the most affected by any additional restrictions since they generate about 30 percent of their revenue from principal trading. JPMorgan generated about 12 percent of its total revenue from principal transactions in the 12 months ended Sept. 30. The figure was less than 10 percent for Bank of America, based in Charlotte, North Carolina, and New York-based Citigroup Inc.

OIL
 
Iran threatens to trigger oil price war
Tehran warns Opec it will increase output even if prices tumble

(…) Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.” (…)

Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.

Detroit’s bankruptcy: pensions beware

(…) The news is a ruling by federal bankruptcy judge Steven Rhodes that, contrary to the arguments of public workers’ unions, pensions can be cut in the restructuring. Detroit is the largest city ever to go bust, so its bankruptcy will be widely watched regardless, but its treatment of pensions and other matters could set important precedents. (…)

Cities and unions around the US have received a wake-up call: they need to address unfunded pension obligations now, or face the ugly possibility of deep cuts later. Muni bond investors also face a new reality. The rules of the game may change and, if they do, the prices of general obligation munis will too.

Here’s the WSJ’s take on this: Detroit’s Bankruptcy Breakthrough

(…) More significant for the future of America’s cities, Judge Rhodes also dismissed the union conceit that the language of Michigan’s constitution protects public pensions as “contractual obligations” that cannot be “diminished or impaired.” The express purpose of bankruptcy is to impair contracts, and Judge Rhodes emphasized that pension benefits are “not entitled to any heightened protection in bankruptcy.”

If pension benefits are immune from bankruptcy, then unions would have even less incentive than they do now to consider the economic condition of a city when they press politicians for more benefits. They could drive cities toward bankruptcy knowing that bondholders would have to absorb nearly all the burden of restructuring. Cities would also have no recourse other than to raise taxes or cut more current services, neither of which helps urban renewal. (…)

Judge Rhodes’s wise ruling is a warning to unions and their political bodyguards that Chapter 9 is not a pension safe harbor. American public finance will be better as a result.

 

NEW$ & VIEW$ (26 NOVEMBER 2013)

U.S. Pending Home Sales Continue to Erode

Pending home sales continue to show weakness. The number of homes on the market for sales has dropped for five straight months. The number of homes for sale has contracted by 1.2% over the past year. There are still year-over-year increases in homes for sale in the Northeast and the Midwest. But in the South and the West, the numbers have shrunk.

In all regions, sales are lower over six months. Sales are lower over three months in the Midwest, the South and the West with only the tiny Northeast showing a gain.

Pointing up Pending home sales are usually stronger than actual existing home sales. When the gap between the growth rates of the two series is squeezed, as it is now, that is usually a sign of more weakness to come. (Haver Analytics)

Auto Vehicle Sales Forecasts: Stronger Sales Expected in November
From CalculatedRisk:

The automakers will report November vehicle sales on December 3rd.
Here are a few forecasts:
From WardsAuto: Forecast Calls for Post-Shutdown Bounce

U.S. automakers should sell 1.21 million light vehicles in November, according to a new WardsAuto forecast.

The forecast sales volume (over 26 days) would represent … equate to a 15.9 million-unit SAAR.

From JD Power: Consumer Demand for New Vehicles Picks Up in November

In November, U.S. new-vehicle sales are likely to reach 1.2 million units … based on an auto sales forecast update from J.D. Power and strategic partner LMC Automotive.
The average sales pace in November is expected to translate to a 16.1 million-unit seasonally adjusted annual rate, or SAAR, which would … outpace the 15.2 million-unit SAAR in October, 2013.

From Edmunds.com: November Auto Sales Set the Tone for Final Stretch of 2013, Forecasts Edmunds.com

Edmunds.com … forecasts that 1,196,663 new cars and trucks will be sold in the U.S. in November for an estimated Seasonally Adjusted Annual Rate (SAAR) of 15.7 million.

It appears sales in November will be significantly above the government slowdown pace of 15.154 million in October 2013.

High five  …but within the monthly range of 2013 and at previous cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis):
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Thinking smile  While inventories are pretty high…

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New PMI-based indicators for non-farm payroll

Markit Flash US PMI™ surveys are signalling non-farm payroll growth of 163k in November, down slightly on the 219k rise signalled in October (which compared with a 204k rise in the official data for October). The latest increase in employment is being led by the service sector, while
manufacturing payrolls remained broadly stagnant.

Markit has extended its US PMI survey coverage to encompass private services as well as manufacturing. The data for services, as well as combined indices covering both manufacturing and services, are published for the first time for November, including the back histories extending to late-2009.

imageThe Flash Composite PMI Employment Index fell from 54.6 in October to 53.3 in November, signalling a modest easing in the pace of job creation. However, comparisons of the survey indicator against actual non-farm payrolls shows that the survey remains consistent with buoyant payroll growth of 163k in November, fuelled by a 176k rise in private sector payrolls (implying a small fall in government payroll numbers).

Over the latest three months, the PMI has averaged 54.2, signalling an average 202k monthly increase, identical to the change signalled by the official data.

The PMI showed services driving the increase, with private sector services employment up by 163k in November (as signalled by a Flash Services PMI Employment Index reading of 53.6). However, the manufacturing PMI data were consistent of a mere 1k rise in November (as signalled by a Flash Manufacturing PMI Employment Index reading of 52.2).

The PMI survey comparisons against the official data reveal that, while small variations in the monthly numbers are to be expected (a standard error of 49k for total non-farm payrolls), the PMI acts as a valuable advance guide to the trend in the data, helping not only in the prediction of official data but also providing additional information on the degree of confidence with which official data should be considered.

Fears Rise as China’s Yields Soar

Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.

The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

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The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China’s debt markets were rattled by a cash crunch. (…)

Last week, China Development Bank, one of the nation’s largest issuers and regarded as one of the most creditworthy, delayed a planned bond sale by two days and cut the size of the offering from 24 billion yuan ($3.9 billion) to 8 billion yuan. China Development Bank supports funding for China’s major infrastructure projects.

Also cutting the size of a debt offering last week was another regular issuer, Export-Import Bank of China, according to people familiar with the deal. The Agricultural Development Bank of China, which helps fund the development of China’s vast rural areas, has postponed its borrowing plans indefinitely, according to bankers familiar with that deal. Export-Import Bank and Agricultural Development Bank weren’t available to comment on their plans to issue bonds.

According to the latest data from Financial China Information & Technology Co., bond issuance in China totaled 687.36 billion yuan last month, down from 785.88 billion yuan in September and 822.14 billion yuan in August. It also represents a 24% drop from April’s 908.13 billion yuan, which was the most of any month this year. (…)

Even the Chinese government is having a tough time selling debt. In October, China’s Ministry of Finance sold 28.25 billion yuan of one-year debt offering an interest payment of 4.01%. (…)  Offers to buy the bonds roughly matched the number of bonds available, according to the Finance Ministry. Analysts said that typically demand for such bonds has been about double the supply.

 

NEW$ & VIEW$ (20 NOVEMBER 2013)

Bernanke: Rates to Stay Low ‘Well After’ Jobless Rate Hits 6.5%

Fed Chairman Ben Bernanke said that short-term interest rates may stay low “well after” the jobless rate falls below 6.5%, the latest effort by the central bank to assure markets that rates will remain low.

(…) Officials hope that the pledge will hold down longer-term interest rates and encourage borrowing, investing and spending in the near term. A research paper by senior Fed staff suggested the Fed might even strengthen that assurance by lowering the 6.5% threshold.

Mr. Bernanke didn’t broach such a move, but he did try to provide other reassurances rates would stay low. For instance, he said that once the jobless rate crossed the 6.5% threshold, officials would begin to look at a broader set of indicators of labor-market health such as measures of payroll employment, labor-force participation and rates of hiring and separation. (…)

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation,” he said.

The Fed has been trying to shift its emphasis from bond buying to low-rate assurances. Mr. Bernanke underscored a number of drawbacks and uncertainties associated with continuing the central bank’s bond-buying programs, expressing a preference for relying on the Fed’s other main policy tool of the moment—the “forward guidance” for when it will raise short-term interest rates.

The Fed “does not view these two tools as entirely equivalent,” Mr. Bernanke said. Fed officials have less experience with bond purchases and a less clear understanding of how they work, he said.

And while many Fed officials believe rate guidance and the bond-buying program are both helping the economy, “we are somewhat less certain about the magnitudes of the effects on financial conditions and the economy of changes in the pace of purchases or in the accumulated stock of assets on the Fed’s balance sheet,” Mr. Bernanke said.

Mr. Bernanke emphasized other drawbacks to bond purchases that aren’t associated with rate guidance, such as the risk the Fed’s purchases could impair the functioning of securities markets, though he added that he believes this risk is manageable.

He didn’t, however, give a clear indication of when the Fed might begin to pull back on the program. He said, as he has before, that the decision to pull back on the program depends on future economic data.

So, there’s your forward guidance with words such as likely, perhaps and preponderance of the data from the blind driver who now admits to “less clear understanding” and being “somewhat less certain”.

In case you wonder if the next pilot will be clearer (from Bloomberg):

In a separate letter to Senator Elizabeth Warren, Yellen said “monetary policy is likely to remain highly accommodative for a long time,” even after the Fed reaches thresholds for considering an increase in the main interest rate.

Yellen said that the Federal Open Market Committee’s pledge to keep the main interest rate exceptionally low as long as the unemployment rate exceeds 6.5 percent should be considered a threshold, not a trigger for action.

“Once a threshold has been crossed, the committee will not necessarily raise the federal funds rate target immediately,” Yellen wrote in her response to Warren, a Democrat from Massachusetts. “Instead, crossing a threshold will lead the committee to consider whether an increase in rates would be appropriate.”

ECB Official Calls Asset Purchases an Option

A top European Central Bank official said the ECB could make asset purchases if needed, as euro-zone policy makers increasingly float the prospect of deploying a tool that is commonly used by other major central banks but stirs deep divisions in Europe. (…)

Recent ECB references to the idea of asset purchases, known as quantitative easing, are “only as a possibility and nothing else. Everything is possible. That was what Peter Praet said,” Mr. Constâncio told reporters on the sidelines of the 16th annual Euro Finance Week in Frankfurt.

He was referring to comments made last week by fellow ECB executive board member Peter Praet with The Wall Street Journal.

“If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate,” Mr. Praet, who also heads the ECB’s powerful economics division, said in the interview last week. “The balance-sheet capacity of the central bank can also be used,” he added. “This includes outright purchases that any central bank can do.”

The officials gave no indication that such a policy is under serious consideration now. (…)

Still, simply raising the idea of quantitative easing marks a significant shift in rhetoric from the central bank. ECB President Mario Draghi sidestepped a question about the policy at his monthly news conference on Nov. 7, saying only that the ECB had “a whole range of instruments” that could be activated before hitting the floor on interest rates. (…)

But the policy is met with deep skepticism in Germany, where easy-money policies from the central bank have stirred long-standing fears of inflation. (…)

BOE Sees Case for Keeping Rate Low Beyond 7% Jobless

Bank of England officials voted unanimously to keep policy unchanged this month and said a record-low interest rate may be needed even after unemployment falls to the threshold set under forward guidance.

“There were uncertainties over the durability of the recovery,” the Monetary Policy Committee said in the minutes of its Nov. 6-7 meeting, published in London today. “With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth under constant bank rate underlined there could be a case for not raising bank rate immediately when the 7 percent unemployment threshold was reached.”

The only clear thing is that central banks are coordinated in their “forward guidance”.

Auto  Fingers crossed  Speaking of driving, car sales and production have been strong lately. Let’s hope sales remain buoyant because inventories are getting high as BMO Capital reveals:

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However, the October selling rates that are the basis for these inventory figures were arguably depressed as a result of the U.S. government shutdown in early October, and a potential recovery in vehicle selling rates in November could bring inventory levels more in line, without the
necessity of production cuts.

BUBBLE WATCH

GOOD READ: Jeremy Grantham:

(…) My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market. Look at the market’s continued  advance despite almost universal disappointment in economic growth. (…)

There have been few such occasions when such broad disappointment with economic growth still allowed the U.S. and most other major economies to make material upward moves in their stock markets.
It is yet another testimonial to the global reach of the Fed’s stimulus of equities (as was the very substantial decline in emerging market equities on just talk of tapering!).

In equities there are few signs yet of a traditional bubble. In the U.S. individuals are not yet consistent buyers of mutual funds. Over lunch I am still looking at Patriots’ highlights and not the CNBC talking heads recommending Pumatech or whatever they were in 1999. There are no wonderful and influential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or in the U.S. in 2000, with Greenspan’s theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es. (There is
only Jeremy Siegel doing his usual, apparently inexhaustible thing of explaining why the market is actually cheap: in 2000 we tangled over the market’s P/E of 30 to 35, which, with arcane and ingenious adjustments, for him did not portend disaster. This time it is unprecedented margins, usually the most dependably mean reverting of all financial series, which are apparently now normal.)

(…) We have also had a sharp and unexpected uptick in parts of the IPO market in the U.S., so I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions.

My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.

And then we will have the third in the series of serious market busts
since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.

Steaming mad We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy.

At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure. Deregulation was eventually a disappointment even to Greenspan, shocked at the bad behavior of financial leaders who, incomprehensibly to him, were not even attempting to maximize long-term risk-adjusted profits.

Indeed, instead of the “price discovery” so central to modern economic theory we had “greed discovery.” (Memo: “price discovery” is the process that happens in an open and competitive and unregulated market, where the interplay of supply, demand, and cost structures determines the efficient price. “Greed discovery” is the process by which a vastly and unnecessarily complicated financial system is exploited by expert insiders. These insiders have far more knowledge than the lambs – formerly known as clients – and without adequate regulations the lambs are defleeced in a surge of “rent seeking.”)

In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so.

In our view, prudent investors should already be reducing their equity bets and their risk level in general. One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets.

This market is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life. And with a Fed like ours it’s probably what we deserve.

Inconvenient Conclusion
Be prudent and you’ll probably forego gains. Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin. Your call. We of course are making our call.

Postscript 1
What can go wrong for the market? There is a slow and for me rather sinister slowing down of economic growth, most obviously in Europe but also globally, that could at worst overwhelm even the Fed. The general lack of fiscal stimulus globally and the almost precipitous decline in the U.S. Federal deficit in particular do not help. What are the odds in the next two years? Perhaps one in four.