NEW$ & VIEW$ (13 MAY 2013)

Posted on May 13, 2013 by Denis Ouellet

Europe Tries to Boost Economy After Pressure From U.S.

The bloc’s finance ministers and central bankers left weekend talks of the Group of Seven signaling that they’re poised to scale back austerity, are open to increased monetary aid and looking to unfreeze bank lending. European officials will meet in Brussels today to discuss the economy and review aid payments for crisis-struck nations from Greece to Spain. (…)

Authorities are keen to rally lending at banks, which account for about 80 percent of corporate financing in the euro area, compared with less than 20 percent in the U.S. Small companies in the periphery are especially starved of cash, hurting a traditional engine for hiring.

But there’s this problem as FT Alphaville explains:

(…) Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs [...]
It is not surprising that the periphery is exhibiting a rising pattern in terms of NPL ratios. What is worrying is the speed of increase, at 2.5% per year. Within the periphery, Greece is the outlier with a NPL ratio of 25%, and no signs of that abating yet. Ireland follows with a NPL ratio of 19%. Italy (at 13.4%) is above Spain and Portugal (at close to 10%) but this reflects the reporting biases mentioned above. (…)
The German divergence is making the task of the ECB very difficult both in terms of setting monetary policy for the whole region, but also in terms of dealing with an impaired transmission outside Germany. Draghi clarified in its latest press conference that it is not the ECB’s role to clean up banks’ balance sheets, meaning that the ECB is unlikely to deal itself with the €500bn large non-performing loan problem in periphery. (…)
However, the problem of NPLs may require more targeted solutions. This leaves the onus on sovereigns, or the ESM or other supranational bodies to deal with the more important problem of cleaning up bank balance sheets from non-performing loans and bad debts. (…)

G-7 Intensifies Japan Focus Signaling Acceptance of Yen Drop

While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus.
“Everybody watches exchange rate developments,” German Finance Minister Wolfgang Schaeuble said after the meeting. “We had a very intense discussion about Japan with our Japanese colleagues.”
The yen weakened past 102 per dollar for the first time since October 2008 today. (…)
Canadian Finance Minister Jim Flaherty said that there were “expressions of concern” about exchange rates, although “all the countries in the G-7 consider themselves to be free-trading.”
A U.S. official said there had been an in-depth discussion on Japan, a day after Treasury Secretary Jacob J. Lew told CNBC Television that he had “made it clear that we’ll keep an eye on” ensuring countries aren’t trying to devalue exchange rates.
While ministers discussed recent stimulus efforts by central banks, “there is close attention that there are no unintended consequences on other countries both via capital flows or exchange rate movements,” Italian Finance Minister Fabrizio Saccomanni said in a Bloomberg Television interview with Francine Lacqua after the talks.
Schaeuble said finance ministers told the central bankers that they’re “increasingly concerned” about “relative high liquidity.”

Yen at Four-Year Low Prompts Fujitsu to Raise PC Prices

Fujitsu Ltd., a Japanese maker of personal computers, plans to raise domestic prices as the yen’s drop to a four-year low boosts the cost of importing components.
The price increases will take effect by July and apply to models released in the summer, Chief Financial Officer Kazuhiko Kato said in an interview at Fujitsu’s Tokyo headquarters. The company may also curb discounts on existing lines, he said.

China Makes Gains, But Doubts Persist

China recorded a modest improvement in its industrial output and retail sales in April but the slight gains were not enough to erase concerns over a weak recovery for the world’s second-largest economy.

Data released on Monday showed that industrial output in April came in at 9.3% over a year ago—a tally that was better than the weak 8.9% reading in March but below expectations of 9.5%, according to economists polled by The Wall Street Journal. Nomura analyst Zhiwei Zhang noted that April 2013 had two more working days than 2012; accounting for the difference, he figures that industrial production “likely slowed.”
The property sector showed continued signs of strength, despite the government’s crackdown on speculators. Investment in real estate development in the first four months of the year was up 21.1% to 1.92 trillion yuan ($312.3 billion), an acceleration from a low of 15.4% in the first 10 months of last year, the data released Monday showed.
Retail sales were 12.8% higher than a year ago in April, accelerating from a 12.6% increase in March, data from the National Bureau of Statistics showed Monday. But consumer reluctance to spend kept sales increases below the 15.2% mark recorded in December. Economists say that reflects in part the government’s campaign against corruption, which has hurt the restaurant and tourism industries among others.

CHINA’S MYSTERIES

China’s recent trade data surprised most observers but nevertheless cheered equity markets. Trade data are possibly the worst set of stats coming out of China (fake invoicing is a national sport there). Considering that most other data are pretty bad…A reader (tks Frank) sent me Eric Sprott’s view on Chinese imports and exports data. In the same vein, here is CLSA’s Andy Rothman’s analysis of the recent data related to Chinese consumers:

Consumption growth disappointed during 1Q, largely because nominal urban wage growth slowed to 8.3% YoY compared to 13.8% a year ago, according to the National Bureau of Statistics. This is, however, a bit of a mystery, given that firms we have spoken to reported that wages for both unskilled and skilled workers rose faster in 1Q than in the previous quarter, and that labor markets were tighter in 1Q than in the previous quarter.

As a result of slower wage growth, NBS reported that in 1Q, urban household disposable income rose by 6.7% YoY in real terms, down from 9.8% in 1Q12 and the slowest pace since 2001. To put the 1Q13 rate of 6.7% in context, the average annual growth rate for the last decade was 9.3%.

Real per capital rural cash income also rose at a slower pace in 1Q, 9.3% YoY compared to 12.7% a year ago, due in part to slower growth in food prices.

One positive sign is that despite slower income growth, real retail sales growth was 10.8% YoY in 1Q13, down only 0.1ppt from the first quarter of last year.

More troubling is that real household consumption growth was 7.3% YoY in 1Q, down from 10.6% a year ago and 7.8% in 4Q12.

Among all these peculiarities, Andy does not explain why retail sales growth was stable while consumption growth decelerated so significantly. To me, the important things to consider are:

Domestic demand cannot be very strong when income growth is slowing so significantly and the party is so vigorously attacking corruption.
Exports cannot be much stronger when most of China’s important trade partners are showing few, if any, signs of reacceleration.
Most important, growth in electricity consumption, a more trustworthy stat, remains pretty weak.

Zerohedge adds this:

EARNINGS WATCH

Factset:

Of the 451 S&P 500 companies that have reported earnings to date for the quarter, 70% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 48% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 48% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.
The blended earnings growth rate for Q1 2013 is 3.2% this week, unchanged from last week’s growth rate of 3.2%. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date, led by the Financials and Telecom Services sectors.
Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 69 companies have issued negative EPS guidance for Q2 2013, while 18 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.6% today from an expectation of 4.5% on March 31.

We should get the official S&P data pretty soon.

Lufthansa says April passenger traffic stagnant

German airline Lufthansa said on Monday that April passenger traffic in terms of revenue seat kilometers was flat from a year earlier.

Food-Stamp Use Rises From Year Ago

Food-stamp use rose 2.7% in the U.S. in February from a year earlier, with 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.) (…)
Food stamp rolls increased on a year-over-year basis, but were 0.4% lower from the prior month, the U.S. Department of Agriculture reported. (…)
The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), reached 47.6 million, or nearly one in seven Americans.

Alan Abelson: 1925 to 2013

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Financial journalism lost one of its leading lights today when Alan Abelson died at the age of 87. Alan had served Barron’s as a writer, editor, and chief columnist the past 57 years.

(…) During his career, Alan trained dozens of journalists to be skeptical, to be exacting, to help average investors, and to be on the lookout for Wall Street’s crooks. About 10 of these fine journalists still work at Barron’s, I’m happy to say. Others have gone on to do ground breaking work at The New York Times, Bloomberg BusinessWeek, and numerous financial newsletters.
One of the unique things about Alan was that his keen knowledge of Wall Street was matched by his love of artful writing. Before Alan began his newspaper career in 1947, he earned a bachelor’s degree in English and Chemistry from The City College of New York and a master’s degree from the prestigious Writers’ Workshop at the University of Iowa, which counts among its alumni Flannery O’Connor, Jane Smiley, and John Irving. In our view, Alan ranks among them. (…)
Alan’s quest for truth and justice greatly enriched the traditions begun by Clarence Barron, who bought Dow Jones & Co. in 1902 and founded this magazine in 1921. A year earlier, Clarence Barron’s stories had exposed Charles Ponzi, the Boston swindler who gave rise to the phrase “Ponzi scheme.”
In 2001, thanks in large part to editors who trained under Alan, Barron’s published the first major story that questioned the investment claims of Bernie Madoff. Seven years later, Madoff was charged by the government and proved to be the Ponzi of our era.

NEW$ & VIEW$ (26 APRIL 2013)

Posted on April 26, 2013 by Denis Ouellet

Jobless Claims Near Five-Year Low

Initial jobless claims, a proxy for layoffs, declined by 16,000 to a seasonally adjusted 339,000 in the week ended April 20, the Labor Department said. The four-week average of claims, which smooths weekly volatility in the figures, fell by 4,500 to 357,500.

Click to View (Chart from Doug Short)

SLOWER SALES AHEAD?

As derived from the Conference Board’s consumer confidence surveys of the 12-months-ended March 2013, the 15.2% of surveyed Americans expecting a higher income six-months hence was less than the 16.7% anticipating a reduction income. (Moody’s)

ATA Trucking Index increases in March

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index gained 0.9% in March after decreasing 0.7% in February. (The 0.7% loss in February was revised down from a 0.6% increase ATA reported on March 19, 2013.) Tonnage has now increased in four of the last five months. Specifically, since November 2012, the index is up 7.6%. (…)

“Expect freight tonnage will slow in the months ahead as the federal government sequester continues and households finish spending their tax returns,” he said. “The good news for tonnage is housing starts are growing and energy production is good – both of which generates heavy freight. However, these two sectors alone won’t be enough to keep the overall index growing at a 3.9% clip in the second quarter.”

Drop in Borrowing Squeezes U.S. Banks U.S. companies are pulling back on borrowing, which could put a drag on the limping U.S. economy and make it even harder for banks to break out of their long slump.

Outstanding loans by the biggest banks to U.S. companies declined 9% in the first two weeks of April compared with the end of March, according to Federal Reserve data. The slip followed a 2.7% rise in the first quarter, the smallest quarterly gain in two years. (…)
Business owners “feel very, very hesitant to invest,” and the economy is “struggling to get solid footing,” but “we didn’t expect the wall we hit,” BB&T Corp. Chairman and Chief Executive Kelly King said last week. Outstanding business loans by the Winston-Salem, N.C., bank, the nation’s 12th-largest by assets, were flat in the first quarter. “I think all of us are trying to figure out what happened.” (…)
The recent slowdown is especially disconcerting because demand for other types of loans is cooling, too. Consumer lending dipped in the first quarter as the recent surge in mortgage borrowing ebbed. As a result, total loans fell 0.6% in the first quarter at the biggest U.S. banks and 0.2% at the smaller banks, according to Federal Reserve data compiled by Barclays PLC analysts.

MEANWHILE IN EUROPE

Worryingly, the key credit and lending aggregates show continued deterioration. Lending to the private sector contracted for an eleventh straight month, with the rate of annual decline (-0.8% y/y) similar to February’s reading. Overall, the data underscore the ECB’s concerns that its loose monetary policy stance is not fanning out to the more vulnerable sectors of the euro area economy, and will increase pressure on them to respond, particularly in support of SMEs as they have been hinting at in recent weeks. The data also follows Wednesday’s Bank Lending Survey from the ECB, which revealed that weak underlying credit growth continued to reflect both constraints in supply, as well as limited demand for credit among businesses and households. (RBC capital)

BoJ raises economic forecasts

Data show deflation remains a major problem

On Friday, as the BoJ released its semi-annual report on prices and economic activity, it said that its policy board members expected inflation to average 1.4 per cent in the next fiscal year, rising to 1.9 per cent the year after. The current fiscal year began this month.
(…) it represents a dramatic shift from the BoJ’s expectations in January, when board members said they expected prices to rise at an annual rate of 0.9 per cent in the 2014 fiscal year.
In its report, the BoJ said the economy would start picking up by the middle of this year and lifted its forecast for real GDP growth to 2.9 per cent from 2.3 per cent. Thereafter, prices would be pushed up by a combination of increasing demand, a weaker yen and rising expectations of inflation, the BoJ said.

EARNINGS WATCH

Moody’s update:

The revenues and operating income of S&P 500 member companies have been growing at a very slow rate, according to data supplied by Bloomberg News. For the 34% of the S&P 500’s constituents that have released Q1-2013 results, a meager 1.5% annual rise by sales yielded a mediocre 3.5% yearly increase by operating income. For the subset of nonfinancial company members that have released first-quarter results, the annual growth rates were 1.9% for revenues and 1.1% for operating profits.

Slovenia struggles to quell bailout talk

Conflicts of interest dog efforts to overhaul economy

(…) But Andrej Šircelj, president of the board of BAMC, the bad bank, and an opposition SDS parliamentarian, says action is needed soon.

“Slovenia does not have much time,” he says. “The government has no programme, no strategy, no policy . . . Most financial investors would like to see what is going on with the banking system and privatisation.”

NEW$ & VIEW$ (15 MARCH 2013)

Posted on March 15, 2013 by Denis Ouellet

Employment. Deleveraging. Beware the retail sales numbers. Housing watch. Europe turning pro-growth. China labor costs. Sentiment watch.

Layoffs Drop, but Hiring Still Languishes Pushing businesses to add new staff positions may be a bigger challenge for the Fed than creating financial conditions that stop layoffs.

The Labor Department said Thursday that new filings for jobless benefits last week unexpectedly dropped 10,000 to 332,000, the fourth drop in five weeks. The four-week moving average, which smooths out volatility, is at its lowest level in five years.
The claims drop follows other layoff news in this week’s job openings and labor turnover summary. The Jolts report showed layoffs and other discharges in January were at their lowest readings since Labor started tracking the data in 2000.

Americans’ Debt Payments Hit Three-Decade Low

U.S. households spent 10.4% of their after-tax income on debt payments in the final three months of 2012 compared with 10.6% a quarter earlier, the 15th straight decrease and the lowest level since government tracking started in 1980, according to recently released Federal Reserve figures. Families’ debt obligations are well below their average since 1980 of 11.9%. If you include other payments that aren’t classified as debt — like rent and auto leases — the figure rises to 15.5%, but that’s still the lowest since 1981.

MORE ON RETAIL SALES

Last Tuesday, posting on the weekly chain store data, I warned that even though sales were hanging in sequentially, the Y/Y trend was very weak due to the strong 2012 base:

Weekly chain store sales have increased in each of the last 4 weeks after their 6-week collapse early this year. The Y/Y growth rate keeps falling, however, due to the strong 2012 base. Retailers are likely to report pretty weak results for Q1 but the weekly trends are suggesting that American consumption is not collapsing.

The monthly retail sales data released Wednesday have a similar complexion as Moody’s explains:

The meaning of February’s 1.1% monthly jump by seasonally-adjusted retail sales was brought into question by unadjusted retail sales’ meager 1.2% increase rise from February 2012. For January-February 2013, seasonally-adjusted retail sales grew by a very lively 6.1% annualized from November-December 2012, but rose by a lackluster 3.6% from January-February 2012 before seasonal adjustment.

The oft-cited leaked e-mail from an executive at a leading discount chain that warned of especially weak February sales was hardly baseless. February’s nasty -4.7% yearly drop by general merchandise store sales included sales setbacks of an excruciatingly deep -7.8% for department stores and of -3.5% for general merchandise stores excluding department stores, where the latter includes the major discount chains.

Remember that public companies report Y/Y. Mmmm…Good thing we’re having an early Easter.

HOUSING WATCH

Spring Home Buying Season Starts Early According to realtor.com®’s February Trend Data

(…) The median age of inventory was down by 9.26 percent month over month and total listings are up 1.15 percent month over month, suggesting that many reluctant home sellers are starting to take an early advantage of the recent improvements in housing prices. Annual inventory decreases of -15.97 percent are consistent with a gradual, yet persistent downward trend that has been occurring over the last two years. (…)
There continue to be pronounced regional differences in the strength of the housing market. Several areas in California are experiencing the highest increases in list prices coupled with the largest inventory declines. Phoenix, Seattle and Denver are also among the top performers across the U.S. However, many smaller industrialized markets in the Midwest and the Northeast registered year-over-year price declines, as did Philadelphia, Chicago and New York City. While the number of markets experiencing year-over-year list price declines had been increasing, this pattern appears to be turning around as home list prices increased in 78 markets last month on a year-over-year basis and declined in 39. (…)

EUROZONE: THE NEW PRO-GROWTH DANCE

European Union leaders endorsed “structural” budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits. (…)

European leaders are cloaking the easing up on the fiscal reins in language designed to reassure investors who have driven bond yields lower since mid-2012. They labelled the policy “differentiated growth-friendly fiscal consolidation,” with deficit targets set on a country-by-country basis.

“I can offer no solutions. I can say that this question is a part of our discussions, and we are conscious about this problem,” he said. (…)
“There should be a certain intellectual and practical flexibility.” (…)
German officials have backed the commission’s approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far. A “pro-growth” bias may even play to Merkel’s advantage, enabling her to siphon votes away from the opposition Social Democrats– and potentially forge a coalition with them if dictated by the election outcome in September.

ECB Holds Back on Stimulus Possibility

While the extra liquidity offered by the ECB in the past year has eased banks’ funding constraints, many small and medium-size companies still face funding difficulties, especially in the countries hit hardest by the debt crisis, Bank of Finland Governor and ECB Governing Council member Erkki Liikanen said in a press briefing in Helsinki.

Remember this chart in the Feb. 28 New$ & View$?

My comments then:

Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!

And this from ZeroHedge:

The Chart That Draghi Should Be Worried About

Given the increasingly tight coupling between European financials and their domestic sovereign credit – thanks to OMT promises and LTRO funding – one could be forgiven for thinking that the most important thing to watch in Europe is the financials. Indeed, year-to-date, European financial stocks have surged over 7% (driven mostly by a global pump in the first few days of January) while at the same time, European senior financial credits (the other ‘safer’ end of the spectrum in terms of capital structure support from stocks) are 1bps wider on the year… we suggest Mr. Draghi quickly come up with another solution to save the banks (cough Commerzbank cough) before stock markets catch on.
2013 has been a year of concern for European financials among credit traders – but the central bank spice must flow and equities ignored such silliness (for now)…

Prodi Says Europe Hurt by Too Much Austerity Amid Very High Euro

“The euro has a very high rate of exchange,” Prodi, a former European Commission president, said in an interview with Sara Eisen airing on Bloomberg Television today. “I do think that it’s stronger than needed.”

China Labors On China’s job markets are heating up. Strong demand for labor show factories are humming, but rising wages are a reminder that China can no longer count on a growing workforce to buoy growth.

(…) Online recruitment firm 51job.com reports that 62.4% of the 24,254 firms it surveyed in the first quarter planned to increase recruitment compared with a year earlier. Human-resources consultancy Manpower’s survey of 4,200 firms also found that hiring intentions had strengthened.
Strong demand for workers is pushing wages up. A survey of more than 300 factories in the Pearl River Delta by Standard Chartered found an average increase of 9.2% in 2013, after 7.6% in 2012. The head of the recruitment website at 58.com, an online advertising portal, says the going rate for a waitress in Beijing has risen to 3,000 yuan ($482) a month in 2013, up from 2,000 yuan in 2012. (…)
The World Bank estimates China’s labor productivity growth at about 8.3% a year – broadly in line with wage increases. Standard Chartered’s survey found that for the majority of factories, productivity gains were outpacing increases in wages. (…)

SENTIMENT WATCH

JPMorgan Sees Home Prices Up 14% as BofA Touts Party

JPMorgan Chase & Co. more than doubled its forecast for U.S. home price gains in 2013 to 7 percent this week, and predicts a more than 14 percent increase through 2015. Bank of America Corp. said last week property values will jump 8 percent this year, up from a prior estimate of 4.7 percent in a report titled “Someone say house party?” (…)

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

NEW$ & VIEW$ (8 MARCH 2013)

Posted on March 8, 2013 by Denis Ouellet

U.S. employment explodes. Consumer deleveraging done. Government deleveraging, none. Unit labor cost rises. Transport biz ok. China economy remains slow. Cash flows. U.S. bank unstressed. Eurozone economy stressful, leading to instability. Sentiment watch.

February Nonfarm Payrolls: +236K vs. consensus +160K, 119K previous (revised from +157K). Unemployment rate 7.7% vs. consensus 7.9%, 7.9% previous.

Weekly Unemployment Claims: 4-Week Moving Average at a Five Year Low

Click to View

Freshly Flush, the Consumer Is Back Fresh data suggest a growing number of Americans are becoming more comfortable borrowing—a development that could fuel more spending and give the sluggish recovery a lift.

U.S. households ramped up their borrowing at an annualized rate of 2.4% in the final three months of 2012, the biggest jump since the beginning of 2008, according to a Federal Reserve report released Thursday. Mortgage borrowings outstanding dropped only 0.8%—the lowest percentage drop since early 2009. Meantime, other kinds of consumer borrowing expanded at the fastest pace since the third quarter of 2007. (…)

The net worth of U.S. households—the value of homes, stocks and other investments minus debts and other liabilities—rose 1.8% in the fourth quarter of 2012 to $66.07 trillion, the highest level since the final quarter of 2007, when the recession began, the Fed said. Americans continued to borrow in January, mostly for education and cars, another Fed report Thursday showed. And a separate report by the Federal Reserve Bank of New York last week showed Americans late last year took on more debt for the first time since the throes of the recession as households took out more mortgages and far fewer fell into foreclosure. (…)

The nascent recovery of the housing market is playing a key role in making Americans more confident about the economy by raising the value of their homes, often their most valuable asset. The value of real estate owned by households climbed nearly $450 billion in the fourth quarter of 2012, the Fed said. Americans also have much more equity in their homes: a measure of owners’ equity as a percentage of household real estate hit 46.6%, the highest since the first quarter of 2008.
Meanwhile, the stock-market recovery is also making some Americans feel more flush. The value of stocks owned by households rose over $150 billion in the fourth quarter, even as the Dow Jones Industrial Average dropped 2.5% during the period—reflecting rising prices of foreign stocks and more investors moving into stocks in general after shying away. The stock market has seen substantial gains since then—the Dow is up over 9% this year, at a record high—suggesting household balance sheets have improved further.

Moody’s

U.S. Deleveraging? Not So Fast

In the private sector (nonfinancial businesses and households) deleveraging has been substantial. In the financial sector, it has been even more substantial and continues.
In the public sector, most notably federal, there has been a substantial buildup in debt. Taken altogether, total U.S. debt today is higher as a percentage of gross domestic product than ever before, due to federal borrowing.

Slower Productivity Creates Risk for Stock Bulls

(…) After depending on productivity to fuel growth, however, companies have nearing the end of doing more with less.

Businesses are recognizing their existing staff are hitting their limits. According to a survey of manufacturers done by the New York Fed, 40% of respondents who plan in hire this year said the first or second most important reason was that their current employees are overworked. (…)

Charts from Haver Analytics

CASS FREIGHT INDEX: MUDDLING THROUGH

An increase in shipment volumes in February reversed a four‐month downward slide, putting levels back on pace with 2012. (…) All modes have been experiencing up and down shifts in volume for the last eight months, with no signs of change in the coming months. Although there are some strong indicators of improvements in the economy, many of them do not translate to improvements in the freight logistics market. Others signal weak demand for freight.

The 5.6% increase in shipments in February reversed last month’s 4.8 percent sequential drop. (…) The turn‐around followed four consecutive months of declines, and still puts 2013 only 0.6 percent of December 2012. February’s sharp increase is partially due to the strong showing for rail over the last four weeks – carloadings are up 3.7 percent and intermodal units are up 6.9 percent over the preceding four weeks.

Breaking it down week by week, however, demonstrates the uneven performance of the transportation sector; both carloadings and intermodal loadings were up two weeks and down two weeks. The most significant drop was 5.2 percent in intermodal loadings for the week ending February 28th.

The ATA’s truck tonnage index has shown growth during the last two periods (December and January), which would seem contrary to the trend in this index. The Cass shipments index is not a reflection of tonnage carried, so the two could vary for a variety of reasons. The most likely reason for the difference in the last few months is that the average weight of a shipment rose during the period. In addition, the trucking industry remains at near capacity and there was no indication of capacity pressure or truck shortages, suggesting that the same number of trucks were handling more tonnage per shipment. Anecdotal evidence also supports fuller loads for LTL carriers.

Rail Traffic Continues to Point to Economic Strength

“Rail intermodal traffic continues to grow. In February, year-over-year intermodal volume on U.S. railroads rose for the 39^th straight week, and February saw the first double-digit year-over-year increase in two years,” said AAR Senior Vice President John T. Gray. “Shippers find intermodal appealing for a lot of reasons, including fuel savings, higher trucking costs, and service that has become much better in recent years.” (Via PragCap)

China Exports Beat Expectations

China posted a surprise trade surplus in February thanks to stronger-than-expected exports as the global economy recovered, and a drop in imports.

Exports were up 21.8% from a year earlier—slower than January’s 25% pace but well above economists’ expectations of 5%, and a positive sign for the world’s second-largest economy. (…)

Exports to the U.S. were up 15.7% from a year earlier, and exports to the European Union were up 16.5%. But exports to Japan were down 6.5% and imports from Japan were down 36%, reflecting heightened political tensions between the two countries as a territorial dispute lingers.

High five The FT has this important info:

Because the Chinese New Year holiday fell in January last year and in February this year, analysts said it was better to look at aggregate trade data for the two months to make sensible year-on-year comparisons.
On that basis, Chinese export and import growth both held up reasonably well. Exports were up 23.6 per cent in the first two months of 2013 from a year earlier, while imports were up 5 per cent.
But even this two-month comparison might be misleading since the slowdown in factory activity has carried through into March because the New Year celebration fell later than usual in February.
“This can mean even the January and February combined data are distorted on the upside and the unwinding of the Chinese New Year distortions would happen in March,” said Song Yu, an economist with Goldman Sachs.

So, read on:

CHINA ECONOMY SOFT AFTER HOLIDAYS

Our (CEBM Group) survey basically reflects the weakness of both spot and futures markets for steel after Spring Festival. Over 45% of respondents stated that actual sales were lower than their expectations, much worse than the previous survey.

Construction projects and cement production restarted after the Lantern Festival (Feb. 24) (…) However, actual demand had not been confirmed in the short term; only 23% producers were optimistic about sales in March.

The survey suggests that around 90% of copper merchants surveyed indicated that orders have declined slightly M/M due to the holiday break. Copper merchants did not see a strong recovery after the Chinese New Year due to soft downstream demand.

In the March survey, real estate developer respondents reported strong sales before Chinese New Year (CNY), in-line with developers’ expectations. Sales decreased slightly after CNY, but developers can still sell 70%-80% (75%-85% in January) of their supply in Tier-1 cities and 60%-70% (60%-80% in January) in Tier-2 cities. None of surveyed developers have introduced new supply in February, but they observed strong low-end demand and high-end property sales.

As March is the beginning of the peak season in property sales, respondents showed strong motivation to raise prices in March even when they knew a rapid rise in property prices would have a negative impact on their own sales. According to the survey, average prices in March for new properties will increase by 5%-10% M/M in Tier-1 cities, and by 3%-5% M/M in Tier-2 cities.

Few surveyed developers said they would launch new sales campaigns in March due to low inventory. As most developers stopped purchasing land in 1H12, respondents agreed that a shortage of new supply is a real problem for them until late April.

The CEBM machinery manufacturer survey shows that the demand recovery after the holiday has not been observed. (…) New orders of machinery tools in January and February were still weak.

The result from the survey shows that uncertainty of auto sales conditions has increased.

Exports recovered weakly after the festival; total exports in January and February remained flat Y/Y, barely changed from 4Q12. (…) Export volume surged in March 2012 due to the significant increase in shipping fees. A high Y/Y base will likely weigh on March exports Y/Y.

China warns over fresh currency tensions

Competitive devaluations will hurt emerging nations, says Beijing

Beijing has issued a new warning against competitive devaluations by rich countries, saying that emerging markets will pay the price for so-called currency wars.
“For the global economy this year, I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,” commerce minister Chen Deming said on Friday.

Chinese parliament holds 83 billionaires

Report identifies 17% rise in super-wealthy delegates

Not quite what Lincoln thought of a “government of the people, by the people, for the people…”

Brazil’s central bank adopts hawkish tone

Benchmark Selic rate left unchanged at low of 7.25 per cent

(…) But in the accompanying statement, for the first time since August 2011, it left open the possibility of an increase to tackle rising inflation.
This represented a sharp turnround from previous statements that rates would remain low for a “prolonged period”, leading economists to predict central bank president Alexandre Tombini could increase them as early as next month. (…)

Profit squeeze hammering emerging equities

(…) Godet’s calculations show a steep decline in return-on-equity (ROE) in emerging markets to around 12 percent, a fall of 3 percentage points in the last 18 months and well below pre-crisis levels of 16-17 percent.
That lags developed markets’ 13.5 percent. But U.S. firms – “the ultimate quality and growth markets” in Godet’s words – have usurped EMs’ ROE supremacy with a 15 percent average. ROE shows how well a company is using shareholders’ equity investment to generate profits. (…)

Firms Return Record Cash To Investors

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.

(…)American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. (…)

The Federal Reserve on Thursday paved the way for more activity. In its “stress tests” of banks’ financial health, the Fed said 17 of the largest U.S. financial groups have enough capital to keep lending even if the economy were to take a sharp downturn. Several banks are now expected to boost dividends and share buybacks.

(See on that NORTH AMERICAN BANKS RANKING (March 2013))

‘Stress Tests’ Show Banks on the Mend

The Fed in its latest “stress tests” said the largest U.S. banks have enough capital to keep lending in a hypothetical sharp economic downturn, potentially clearing the way for the return of billions of dollars to investors.

[image]

German Industrial Production Unexpectedly Stagnates German industrial production unexpectedly stagnated in January as Europe’s debt crisis weighed on company spending and investment.

Production was unchanged from December, when it rose 0.6 percent, the Economy Ministry in Berlin said today. December output was revised up from an initially reported 0.3 percent increase. From a year earlier, production fell 1.3 percent when adjusted for working days. (…)

Spanish industrial output shrank 5 percent in January from a year earlier. In Finland, production slumped 3.6 percent in January from December, while in Turkey output rose 2.3 percent. (…)

ECB should cut rates, allow higher inflation: Lagarde

The European Central Bank should cut interest rates further and strong economies such as Germany should allow higher inflation and wage growth, the head of the International Monetary Fund said on Friday.

ECB Chief Plays Down Italy Fears

European Central Bank President Mario Draghi played down fears that Italy’s indecisive election could reignite Europe’s debt crisis, saying that financial markets have taken the election results in stride and that Italy’s current political mess doesn’t threaten its budget discipline. (…)

A majority of Italian voters supported political parties, especially those led by comedian Beppe Grillo and former Premier Silvio Berlusconi, that have pledged to soften or reverse fiscal austerity measures that Italy has already enacted.

Italian Banks’ Bad Loans Seen Rising as Gridlock Hampers Growth

(…) Italian corporate and household non-performing loans rose to a record in December, reaching 125 billion euros, according to data from the Italian Banking Association. Banks’ gross non- performing loans as a proportion of total lending increased to 6.3 percent from 5.4 percent a year earlier. (…)

Italian banks tied their fortunes more closely to the financial strength of the state in 2012, increasing holdings of the country’s sovereign debt by 58 percent to 331 billion euros. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. (…)

Hollande faces pressure over jobs pledge

Unemployment hits highest level since 1999 as police and protesters clash

Figures published on Thursday by Insee, the statistics office, put the country’s jobless rate at 10.6 per cent in the final three months of 2012, up from 10.2 per cent in the previous quarter. Excluding France’s overseas territories the rate was 10.2 per cent, which compared with 5.7 per cent in Germany and an 11.7 per cent eurozone average.

Stratfor: Europe, Unemployment and Instability

Excerpts from a good Statfor piece via Economic Intersection.

(…) Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.
Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.
This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.
History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.
It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.
It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.
The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has not encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.

SENTIMENT WATCH

World shares hit highest since June 2008

World shares hit their highest level since June 2008 and the dollar touched a fresh 3-1/2-year high against the yen on Friday, ahead of U.S. jobs data expected to point to a continuing pick up in the world’s biggest economy.

AAII Bullish Sentiment Posts Small Increase

NORTH AMERICAN BANKS RANKING (March 2013)

Posted on March 4, 2013 by Denis Ouellet

(Prices are as of March 1, 2013.)

North American banks market caps rose 9.7% since my last ranking on September 13, 2012, outpacing the S&P 500 Index (+5.3%) during the same period. U.S. banks gained 11.7% while Canadian banks advanced only 4.9%. Over the last 12 months, U.S. banks are up 20% while Canadian banks edged up only 7%. Meanwhile, the S&P 500 Index rose 10.5%.

U.S. money center banks did particularly well since September 2012 as MS, GS, C, BAC and JPM all gained more than 20%. Regional banks, including WFC (+2.0%), barely rose during the same period. Among regionals, only KEY (+7.0%) beat the S&P 500 since last September.

As a result, WFC lost its top rank on market cap to JPM.

Canadian banks continue to dominate on Price to Book Values but U.S. money centers closed some of the huge gap during the last 6 months. Six of the 11 U.S. banks ranked here still trade below book value. BAC continues to trade at nearly half its BV (0.55x) which stayed essentially flat during the past year at just above $20.

Canadian banks also dominate on Price to Tangible BV. Four U.S. banks still trade below TBV.

Price to Book valuation must always be analyzed against return on book to have some meaning. Five of the six Canadian banks earn a ROE (2013e) of more than 15% with an average of 17.6% (17.3% last September). The U.S. banks’ average expected ROE is 9.4%, down from 9.9% last September. Excluding USB, the remaining 10 U.S. banks are expected to earn a ROE of 8.8%, down from 9.3% six months ago.

One of the better ways to evaluate bank stocks is to correlate ROE with P/BV. The chart below plots the 17 North American banks surveyed on that score. For example, even though BAC looks cheap on its P/BV, its low current ROE justifies its low valuation. Relative to its peers, BAC is not undervalued on the basis of expected 2013 ROEs.

In fact, investors are currently pretty efficient in their relative valuation of North American banks, particularly U.S. banks.

Here’s the September 2012 chart:

And that of December 2011:

The chart below helps assess the P/BV vs ROE relationship. Dividing the expected ROE into the P/BV ratio, we get “the price of growth” in the form of the number of units of BV for each 1% of ROE.

For Canadian banks, investors are paying 0.111 units of BV for each 1% of ROE. For the U.S. banks, that ratio is now 0.105. This 5% discount has shrunk spectacularly from 14% in September 2012 and 16% in December 2011. In March 2010, U.S. banks were trading at a 27% premium.

Obviously, the recent re-pricing of U.S. money center banks reflects investors belief that the worst is over on the housing front. As mentioned, U.S. bank ROEs have really not improved much during the past year.

A major change, however, is that U.S. banks have started buying back their shares. Total shares outstanding rose 6% between December 2010 and September 2012. They declined 2.7% in the past 6 months. Share buybacks at substantial discount to BV can do wonders on ROEs.

With the housing market recovery and interest rates and the yield curve at their low points, U.S. bank earnings and ROEs could stage a pretty nice recovery during the next several years.

Given their apparent relative mis-pricing, their better management, balance sheet and ROEs, JPM and WFC seem to be the better safe buys at this time.

(Disclosure: I own JPM, TD, BMO and CM)

All previous rankings going back to May 2009 can be seen here.

NEW$ & VIEW$ (28 FEBRUARY 2013)

Posted on February 28, 2013 by Denis Ouellet

U.S. durable goods orders jump. Pending home sales rise. Eurozone slump to continue. Is the sell-off in materials overdone? Global IP. A new bull market for the dollar? The U.S. energy revolution.

U.S. DURABLE GOODS ORDERS JUMP

Forget the 5.2% decline in total new orders. The important stats are:

New orders ex-transportation (-19.8% in January) rose 1.9% in January after rising 1.0% and 1.2% in the previous 2 months respectively. That’s almost 18% annualized for the last 3 months.
Orders for non-defense capital goods ex-aircrafts jumped 6.3% in January after -0.3% in December and +3.3% in November. That’s 44% annualized! This series is now +4.7% Y/Y after edging down 0.5% in 2012. (Chart from IBD, table from Haver Analytics)

U.S. Pending Home Sales Recover To Highest Since 2010

Pending sales of single-family homes jumped 4.5% (9.5% y/y) last month after a revised 1.9% December decline, according to the National Association of Realtors (NAR).

Euro-Zone Slump Set to Continue

The euro-zone economy appears unlikely to emerge this quarter from a contraction that has already lasted for nine months, despite a low rate of unemployment in Germany, its largest member.

The Centre for Economic Policy Research and the Bank of Italy Thursday said their Eurocoin indicator—which is intended to estimate quarter-on-quarter growth in gross domestic product—showed the euro-zone economy shrank again in February, although at a slower pace than in recent months.

Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!

U.S. BANK LOANS

FRED Graph

Record year-on-year fall in Eurozone retail sales in February (Markit)

Markit’s Eurozone retail PMI® data for February signalled a record year-on-year fall in retail sales revenues in the single currency area. Sales were also down sharply compared with January, as signalled by a PMI reading of 44.5, down from 45.9.

Retail PMI data by country signalled a broad-based downturn in sales revenues in February. Germany registered a fourth decline in sales in the past seven months, while French retail sales fell for a survey-record eleventh consecutive month and at the fastest pace since last August. Italy continued to show the strongest overall decline, albeit the weakest since last September.

All three countries registered stronger year-on-year falls in retail sales in February. The annual rates of decline in Germany, France and Italy were the sharpest in 34, nine and two months respectively.

Faced with declining sales, retailers made further cuts to purchases of new stock in February. The value of new purchases fell for the nineteenth
successive month, and at the fastest rate since last June. Consequently, the value of goods held in stock at retailers declined for the sixth month running, and at the strongest pace in over three years.

European Recovery Path in Danger as Politics Menace Growth The euro region’s path to recovery is facing a new challenge from Italy’s political stalemate.
German Jobless Unexpectedly Declines on Growth Revival: Economy German unemployment unexpectedly fell in February amid signs that Europe’s biggest economy is returning to growth after a contraction at the end of last year.

The number of people out of work fell a seasonally adjusted 3,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said today. The adjusted jobless rate held at 6.9 percent this month after the January rate was revised up from an initially reported 6.8 percent.

IS THE SELL-OFF IN MATERIALS OVERDONE?

Materials are down 5% in the past month. Myles Zyblock, RBC Capital’s strategist believes that

the sell-off appears to be an over-reaction given the sharp acceleration in Chinese money metrics and the ongoing upturn in global leading economic data. We believe that base metals, chemicals and agriculture are likely to offer leadership in the resource space given the profile of leading indicators.

This excellent strategist offers two charts to support his expectation.

Myles adds the following chart reflecting the tight inverse correlation between Materials and the U.S. dollar, probably hoping that the dollar’s rally will soon reverse. Fingers crossed

Materials are indeed highly inversely correlated to the U.S. dollar (read below) but they also need demand momentum which can be monitored through the trends in industrial production across the world. Outside the U.S., IP trends are not buoyant.

U.S. IP Y/Y GROWTH FRED Graph

JAPAN IP FRED Graph

GERMAN IP FRED Graph

U.K. IP FRED Graph

FRANCE IP FRED Graph

BRAZIL IP FRED Graph

ITALY IP FRED Graph

RUSSIA IP FRED Graph

KOREA IP FRED Graph

I am missing China, a big piece admittedly. China’s IP continues to grow but the rate of growth, currently in the 10% range is nowhere near the 15-20% growth rates pre-2011.

Japan’s Industrial Output Rises as Yen Boosts Export Outlook

Output climbed 1 percent from December, when it rose 2.4 percent, the Trade Ministry said in Tokyo today. The ministry said that increases in production of cars and memory chips contributed to the overall gain in the month.

Of the 138 companies on the Nikkei 225 Stock Average for which Bloomberg News has estimates, almost 64 percent beat earnings estimates for the most recent quarter, as a weaker yen pushes up profits.

Back to the weak dollar hope. I am no forex expert but there are signs out there suggesting that the dollar may in fact be about to rise. Excerpts from a good analysis by George Magnus, UBS.

A U.S. DOLLAR BULL MARKET?

(…) If history is anything to go by, and the nascent signs of economic healing in the US become more convincing, the US dollar could yet rise significantly further over the next two to three years, perhaps reaching 120- 130 against the Japanese Yen, and parity to 1.05 against the Euro. More than likely, many emerging countries will be prepared to allow their currencies to decline against the US dollar too.

(…) according to the Congressional Budget Office, the budget deficit under current laws will drop to under $500 billion in 2013, or 5.3% of GDP, the lowest since 2008. The central forecast, based on an undemanding GDP growth rate, is that it will continue to drop to 2.4% of GDP by 2015.

The CBO notes that the real fiscal and debt sustainability issues for the US are unlikely to become pressing until later in the decade and the 2020s. If the deficit should halve in the next two years, as suggested, sentiment in US capital markets is likely to be buoyed, for a while at least.

A higher US dollar, and an increase in US real interest rates would mark a significant shift in the financial and investment environment. But the most challenging implications might be for emerging markets and industrial commodity prices, both of which have prospered during the US dollar downwave since 2001. The two previous US dollar bull markets since the collapse of Bretton Woods, from 1978-1985, and from 1992-2001, had a detrimental effect on Latin America, and Asia, respectively. (…)

There are no grounds for complacency, of course, but several other parts of the US economic and financial kaleidoscope seem to be slowly falling into place. Nominal GDP growth from the trough in 2009 to the end of 2012 had moved up to 4%. The housing sector has stabilised, capital spending by companies is contributing more to GDP growth, and non farm payroll jobs have averaged a little over 150,000 per month for two years, topping 200,000 in the fourth quarter 2012.

(…) And if the economy remains on a growth path of around 2-3%, the debate about QE exit strategies will gather relevance this year and next, not least in the expectations of US bond investors. If US bond yields rise to reflect more robust expectations of a turn away from QE because of the return of selfsustaining growth, they are likely to pull the US dollar higher. (…)

From a more structural standpoint, there has been a lot of conjecture about the path towards US energy independence, courtesy of growing domestic energy output and foreign sales of natural gas and oil. (…) But whether or not the US achieves independence any time soon, the steady decline in the energy trade deficit is already fact.

And similarly, the US technological lead in advanced manufacturing is an asset that should stand it in good stead for a long time to come, as cost structures decline, sharpening the country’s competitive edge and providing incentives to create output and jobs at home.

Even if you want to reserve judgment about the prospects for US fiscal politics, energy independence, and leadership in advanced manufacturing, the US dollar may still appreciate against other major
currencies. The US economy is, relatively speaking, in better cyclical and
structural shape, the Fed will likely be the first central bank to exit QE, and the US dollar faces weak competition in the rest of the developed world. (…)

And this from Bill Gross in today’s FT:

Sell currencies of serial QE offenders

(…) How should an investor respond? Respect the drone, I suppose, and don’t fight the central bank in the immediate term.
In currency terms, one has only to observe the 15 per cent depreciation of the yen against the dollar and its 20 per cent depreciation versus the euro without a shot even being fired. Japan’s Prime Minister Shinzo Abe has one-upped Federal Reserve Chairman Ben Bernanke simply with a promise to print.
Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.
The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.
Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.
Unless there is a white flag or an ultimate ceasefire, money printing lowers the value of all global currencies – much like horsemeat lowers the value of any burger or shepherd’s pie.

Talking of the U.S. energy revolution:

Gas Boom Projected to Grow for Decades

U.S. natural-gas production will accelerate over the next three decades, research indicates, a further sign the energy boom remaking America will be long-lived

The most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that.
The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43. (…)
The shale-gas boom has led to a reorientation of the U.S. energy economy. This has led to a steep decline in coal consumption for electric generation and prompted companies to announce or consider multibillion-dollar investments to export gas and build chemical, steel and fertilizer plants that will consume enormous quantities of gas.

Exponential growth in ‘Saudi Texas’ oil; output has doubled over last 3 years and completely reversed a 23-year decline (Carpe Diem)

The Energy Information Administration released new data today for US oil production by state through the end of last year, and its report showed that “Saudi Texas” produced an average of 2.22 million barrels per day (bpd) in December, the highest average daily output in the state in any month since June 1986, more than 26 years ago. Texas oil production increased by 30% in December from a year earlier, and by 73% from two years ago.

Amazingly, oil production in the Lone Star State has doubled in only three years, from 1.1 million bpd in January 2010 to 2.22 million bpd in December 2012, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. (…)

NEW$ & VIEW$ (27 FEBRUARY 2013)

Posted on February 27, 2013 by Denis Ouellet

New home sales. House prices. Italy.

Builders Fuel Home Sale Rise

Sales of new homes are surging in the U.S., far outpacing results for less expensive existing homes and creating an unusual disparity in the housing recovery.

New-home sales jumped 28.9% in January from a year earlier to the highest annual sales pace in four years, according to data released Tuesday by the Commerce Department. Sales of previously owned homes rose 9.1%. The disparate selling pace exists even though a typical new home costs 37% more than one already built, the widest price gap since the figures started being tracked in 1968, according to an analysis of home prices by Barclays Capital.
In the past two years, more home builders have offered to pay closing costs and arrange home loans through in-house mortgage operations. They have hosted free credit-counseling sessions for buyers with bad credit scores, and made heavy use of government-backed mortgage programs that allow buyers to get a home with little or no down payment.
The result is that for many buyers, it has become far easier to buy a new home than an existing one. “It’s as if people were going to the car dealership and realizing that there aren’t any used junkers left, so they’re buying these shiny new SUVs,” said Ivy Zelman, an independent housing analyst. (…)
Builders have stepped up construction in response. Many of the top U.S. builders have reported double-digit growth in orders for new homes, leading to construction starts at an annual pace of 613,000 single-family homes in January, a gain of 20% over a year earlier, according to the latest Census figures.

Bill McBride at CalculatedRisk explains the ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales.

U.S. Case-Shiller Home Price Index Improves

The seasonally adjusted Case-Shiller 20 City Home Price Index rose 6.9% during the twelve months ended in December, the strongest rise since mid-2006. The narrower 10 City Composite Home Price Index rose 6.0% y/y, also the quickest since 2006. (Haver Analytics)

large image

U.S. House Prices Rose 1.4 Percent in Fourth Quarter 2012

But not (yet) in NYC (BMO Capital):

The loss of high-paying financial sector jobs continues to take a bite out of the Big Apple’s housing market.

Bernanke Backs Bond Buying

Bernanke came down firmly in favor of continuing the Fed’s bond-buying programs, even as he noted concerns that the efforts might encourage risk-taking that could destabilize markets or the economy.

“Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation,” he said. (…)
The Fed chairman said the central bank is trying to wipe out the advantages of big banks.

“The benefits of being large are going to decline over time, which means that some banks are going to voluntarily begin to reduce their size because they’re not getting the benefit they used to get,” he said.

What does that mean exactly?

J.P. Morgan to Cut 17,000 Jobs

J.P. Morgan Chase & Co. stepped up the pace of bank cost cutting, setting plans to eliminate 17,000 jobs by the end of next year and reduce expenses by at least $1 billion annually.
The move announced Tuesday by the New York company, the nation’s most profitable bank in 2012 and the biggest U.S. lender by assets, will reduce its staff by 6.5% in one of the most aggressive reductions to date amid widespread financial-industry cutbacks. (…)
The four largest U.S. banks cut 29,793 jobs last year, according to company filings.

Dimon Says Banks to Have More Capital Than They Can Use

“I think all banks will have too much capital in two and a half years. And they’re not going to know what to do with it.”
Dimon, 56, has said excessive regulation could impede growth as international authorities and the Federal Reserve push banks to guard capital to better withstand another financial crisis.
JPMorgan said that by the end of this year its capital will account for 9.5 percent of risk-weighted assets under rules planned by the Basel Committee on Banking Supervision.

Italy shatters some comfortable eurozone assumptions (FT’s Gavyn Davies)

(…) The comfortable assumption, which until now has been held by the policy elite in the eurozone, and mostly in the financial markets, that in the end “sensible” democracies will always support conventional economic policies has been shattered. (…)
In the short term, it seems likely an immediate second election might be avoidable. This is just as well for the future of the euro, since it cannot be taken at all for granted that the 2012 “Greek solution” will work in Italy in 2013. Last summer, the Germans and others decided that they could afford to keep Greece inside the euro, as long as the Greek electorate was willing to bite the bullet, and support “austerity” in exchange for monetary assistance from the rest of the eurozone. The Greek electorate accepted this ultimatum – if only just – in the election last June, and they were rewarded by a new package of official debt forgiveness later in the year. Ultimately, when faced with the prospect of being forced out of the euro, Greece blinked. (…)
If Italy’s fiscal arithmetic begins to miss the agreed targets, which seems almost certain in the coming months, the traditional eurozone playbook demands that financial support for Italy should be withdrawn until there is a clear signal from the electorate that they will support a medium-term programme designed to stabilise, and then reduce, Italy’s public debt ratio, which currently stands at more than 125 per cent of GDP.

In Sunday’s election, at least a quarter of the electorate abstained, and another quarter voted for a party which is anti-austerity, anti-euro and anti-corruption, not necessarily in that order. Almost a third of the electorate still supports Silvio Berlusconi, who also ran on an anti-euro, anti-austerity ticket, with tax cuts thrown in. It is a stretch to imagine that this combustible mixture would end in a clear vote for the euro, and for “austerity”, in the event of an “ultimatum election” of the Greek variety.
(…) Jens Weidmann was complaining only yesterday that France should stick to its fiscal targets more rigidly, despite the worrying economic data that have been emerging from the eurozone this year.(…)
That leaves the question of how the markets, and the ECB, will react to the new situation. Until now, there has been another comfortable assumption, which is that the ECB balance sheet will be available, in extreme conditions, to prevent a “run” on the Italian bond market. (…)
Mario Draghi has agreed to do “whatever it takes” to keep the euro intact, but does that include buying unlimited quantities of Italian bonds, backed by a government unable to accept a eurozone-style economic agenda in the country? If the Bundesbank is jumpy about France, just imagine what they will make of that situation in Italy. And, in that respect, they may have more support on the governing council than in the past.
An immediate financial crisis of the sort endured in 2011 and 2012 is not the most likely development, because an Italian government of some variety can probably emerge from the rubble in the next few weeks. But the markets may now have to adjust to two new truths: the electorate in mature European democracies will not necessarily always support conventional eurozone medicine, and the calming influence of the ECB balance sheet can no longer be taken entirely for granted. These are major new headaches that will not disappear overnight.

Investors fret that Italy may undermine ECB backstop (Reuters)

“The most annoying thing about this outcome is that the ECB might be constrained in launching an OMT program. Without a strong government in Italy, it will have difficulty reaching any memorandum of understanding with European authorities.”

Italy’s anti-austerity ‘rebellion’ promises to spread (G&M)

Egypt struggles as joblessness soars Seventy-four per cent of under-30s are without work

NEW$ & VIEW$ (20 FEBRUARY 2013)

Posted on February 20, 2013 by Denis Ouellet

Obama Calls For Delaying Sequester The president prodded Congress to act to avoid automatic spending cuts set to kick in March 1.

JPMorgan Leads U.S. Banks Lending Less of Deposits

The biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years as cash floods in from savers and a slow economy damps demand from borrowers.
The average loan-to-deposit ratio for the top eight commercial banks fell to 84 percent in the fourth quarter from 87 percent a year earlier and 101 percent in 2007, according to data compiled by Credit Suisse Group AG. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show.

Wait. Banks are back lending:

Business Loans Flood The Market

Banks are increasing lending to businesses, but the cheap rates and flexible terms some offer are raising worries about the risks.

So-called commercial and industrial loans were up 4.4% in the fourth quarter and 16% for all of 2012, according to data compiled by research firm SNL Financial of Charlottesville, Va.
The push comes at a time when many banks have been flooded with deposits as slow economic growth and low interest rates crimp investment. Domestic deposits since mid-2008 have surged 29% to $9.06 trillion, according to Federal Deposit Insurance Corp. data. (…)
Yet the profitability of the loans that banks are making is under pressure.
More than half of banks surveyed in the quarterly Federal Reserve survey of loan officers said that lending spreads—a rough gauge of profit that measures the gap between the rates at which a bank borrows money and lends it out—had narrowed in the past three months. The survey said standards on loans to medium and large firms eased for the fourth quarter in a row. Respondents “cited more-aggressive competition,” the Fed said. (…)
The majority of Wells Fargo’s increase in business lending, said Perry Pelos, head of the San Francisco bank’s commercial-lending unit, came from business owners who delayed buying equipment for years but now are comfortable enough to make that investment and borrow the money to fund it. (…)

U.S. HOUSING

Toll Brothers Swings to Profit

(…) Wednesday, Chief Executive Douglas C. Yearley Jr. said demand has strengthened and “momentum is building,” noting that first-quarter contracts were up 49% in units, while contracts for the first three weeks of the second quarter were up 40% compared with the year before.
“We are continuing to gain market share and see little competition from local private builders,” he said. “As the Spring selling season kicks off, we are also enjoying increasing pricing power due to the release of pent-up demand colliding with limited supply in the affluent markets where we operate.” (…)

China Orders More Cities to Limit Home Purchases as Prices Rise Chinese Premier Wen Jiabao called for local authorities to “decisively” curb real estate speculation and take steps to rein the property market after data showed prices surged the most in two years last month.

THE U.S. ENERGY GAME CHANGER

Changing Canada’s game as well as NBF Financial writes:

According to the latest projections from the U.S. Department of Energy, U.S. production of primary energy is expected to continue to outstrip demand at an accelerated pace. As a result, the Energy Information Administration (EIA) has again revised down its projections for U.S. volume imports of primary energy.

As today’s Hot Chart shows, imports have already been revised down by 22% relative to the baseline forecast made just five years ago. So far, the drop in U.S. demand had spared Canadian electricity exporters. This situation is unlikely to last. In fact, the EIA believes that 2012 was the peak year for U.S. electricity imports.

According to the organization, volume imports could fall by as much as 18% in 2013, the worst annual decline since the 2008-2009 recession. As shown, the outlook shows continued deterioration after that with a cumulative drop of 44% by 2030. It is of course possible that the EIA could get its projection wrong as much will depend on further
technological improvements for energy extraction.

Still, none of the Canadian energy-producing provinces can ignore the profound changes that are taking place in the U.S.

Pointing up Surplus energy = falling prices.

Exxon Replaces 115% of 2012 Production

Exxon Mobil Corp. added slightly more oil and gas to its reserves than it produced in 2012, with most of the new reserves coming from oil-rich assets in North America.

Exxon said it added more than 750 million oil-equivalent barrels from the Woodford and Bakken shale areas in North Dakota, which are among the fastest-growing oil fields in the world. About 600 million barrels of oil equivalent came from additions in Alberta and off the shore of Canada.

Bulgaria’s Government Resigns

Austerity felled its latest political victim as Bulgaria’s government resigned after days of protests against economic policies.