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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North American Banks Ranking (Dec. 2013)

North American banks market caps rose 8.6% since my last ranking on September 3, 2013, underperforming the S&P 500 Index (+10.4%) during the same period. U.S. banks rose in line with the U.S. market with a 10.2% gain but Canadian banks advanced only 4.0% in U.S. dollars as the loonie lost 4.3%.

Gains were fairly uniform among banks. Morgan Stanley (+18.4%) and BB&T (+2.9%) were the only real outliers since September 3rd.

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Canadian banks continue to dominate on Price to Book Values but U.S. money centers closed some of the huge gap during the last 12 months. Four of the 11 U.S. banks ranked here still trade below book value. BAC continues to trade at the lowest P/BV at 0.76x.

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Canadian banks also dominate on Price to Tangible BV. Only one U.S. bank (C) still trade below TBV, a far cry from USB and most Canadian banks which sell around 3x TBV.

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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 (2014e) of more than 15% (BMO at 14.4%) with an average of 17.0% (17.9% last September, 17.6% last March). The U.S. banks’ average expected ROE is 9.8% (9.7% last September, 9.4% last March). Excluding USB (15.2%), the remaining 10 U.S. banks are expected to earn a ROE of 9.3% (9.1% last September, 8.8% last March), still substantially less than the return enjoyed by Canadian banks even though the gap is slowly declining.

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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 of 0.76x, its low expected ROE justifies its low valuation relative to its peers. Contrary to September 2012, BAC is not undervalued relative to its peers on the basis of expected 2013 ROEs.

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JPM and USB remain the only big outliers on each side of the regression line. Here are the September 2013 and the March 2013 charts for comparison:

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

 
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NEW$ & VIEW$ (6 DECEMBER 2013)

Business Stockpiling Fuels 3.6% GDP Rise

The economy grew at a faster pace in the third quarter than first thought, but underlying figures suggest slower growth in the year’s final months.

catGross domestic product, the broadest measure of goods and services produced in the economy, grew at a seasonally adjusted annual rate of 3.6% from July through September, the Commerce Department said Thursday. The measure was revised up from an earlier 2.8% estimate and marks the strongest growth pace since the first quarter of 2012.

High five The upgrade was nearly entirely the result of businesses boosting their stockpiles. The change in private inventories, as measured in dollars, was the largest in 15 years after adjusting for inflation.

As a result, inventories are likely to build more slowly or decline in the current quarter, slowing overall economic growth. The forecasting firm Macroeconomic Advisers expects the economy to advance at a 1.4% rate in the fourth quarter. Other economists say the pace could fall below 1%.

Real final sales—GDP excluding the change in inventories—rose just 1.9%, a slowdown from the second quarter. Consumer spending advanced only 1.4%, the weakest gain since the recession ended.

This huge inventory bulge may explain the bullish manufacturing PMIs of the past few months as Lance Roberts writes today:

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I posted on the apparent inventory overhang Wednesday, particularly at car manufacturers but also in retail stores as can be easily seen at any mall near you. Right on cue:

Honda Offers Dealers Incentives

Honda is offering its U.S. dealers big cash incentives to pump up their new-car sales in the final month of the year after its November U.S. sales fell slightly even as the overall market rose nearly 9%.

Honda told dealers on Wednesday it would pay bonuses of $3,000 for every vehicle they sell above their December 2012 sales total, according to dealers briefed by the company. Retailers can use the extra money to drop prices on new vehicles or finance other incentives to persuade customers to buy.

Auto makers often offer similar bonuses to their dealers, but Honda’s new program is noteworthy because the Japanese company typically offers much less in sales incentives than its competitors.

Honda’s program is being rolled out amid signs that other major auto makers in the U.S. also are sweetening rebates and other sales promotions.

Lance Roberts reminds us of the importance of final demand which is at really uncomfortably low levels:

Real final sales in the economy peaked in early 2012 and has since been on the decline despite the ongoing interventions of the Federal Reserve.  The lack of transmission into the real economy is clearly evident.

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Furthermore, as shown in the next chart, consumer spending has continued to weaken since its peak in 2010.  The last couple of quarters has shown a noticeable decline is services related spending as budgets tighten due to lack of income growth as disposable personal incomes declined in the latest report.  The slowdown in dividends, wages and salaries were partially offset by a rise in social welfare and government benefits.  Unfortunately, rising incomes derived from government benefits does not lead to stronger economic growth.

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The latest GDP data are for Q3. The last and most important quarter of the year is off to a slow pace:

Retailers Post Weak November Sales

The nine retailers tracked by Thomson Reuters recorded a 1.2% increase in November same-store sales, or sales at stores open at least a year, versus the 2.3% consensus estimate and the 5.1% increase posted a year ago.

The 1.2% result is the weakest result since September 2009′s 0.7% result.  Off-price retailers continue to outperform the sector, suggesting shoppers still want designer brand names for less. Companies that missed expectations blamed the shorter holiday season, very competitive and difficult environment.

Hopefully, this will help:

U.S. Crude-Oil Glut Spurs Price Drop

The U.S. Gulf Coast—home to the world’s largest concentration of petroleum refineries—is suddenly awash in crude oil. So much high-quality oil is flowing into the area that the price there has dropped sharply.

So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.

In fact, some experts believe a U.S. oil glut is coming. “We are moving toward a significant amount of domestic oversupply of light crude,” says Ed Morse, head of commodities research at Citigroup.

And the glut on the Gulf Coast is likely to grow. In January, the southern leg ofTransCanada Corp.’s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.

The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product.

Globally, the surge in supply and tumbling prices are attracting notice. On Monday, a delegate to the Organization of the Petroleum Exporting Countries said Saudi Arabia is selling oil to the U.S. for less than it would fetch in Asia. Nonetheless, the Saudis have continued to ship crude to refineries they own in Texas and Louisiana, according to U.S. import data, further driving down prices.

The strongest indication of a glut is the falling price of “Louisiana Light Sweet,” a blend purchased by refiners along the Gulf Coast. Typically, a barrel of Louisiana Light Sweet costs a dollar or two more than a barrel of crude in Europe.

But on Wednesday, a barrel of Louisiana crude fetched $9.46 less than a barrel of comparable-quality crude in England. (…)

Some industry officials argue that U.S. light crude will simply displace more “heavy” imported oil. But many Gulf Coast refineries are set up to turn the more viscous crude into diesel fuel, and converting their facilities to process additional light oil wouldn’t be easy. (…)

San Antonio-based Valero, the nation’s largest oil refiner, all but stopped importing lightweight crude to the Gulf Coast and Memphis a year ago because there was so much U.S. product available, says spokesman Bill Day. It is also shipping crude from Texas and Louisiana all the way up to its refinery in Quebec because the price of Gulf Coast oil is so low. (…)

How about feeding New York City where prices are 17% higher than in Houston, Tx.? (Obama focuses agenda on relieving economic inequality) Winking smileBut this can’t help housing, even with the Fed trying as hard as it can:Neither can this:

While higher mortgage rates have moderated U.S. home sales recently, the potential supply of buyers has also taken a surprising step back. Annual household formations are running well below one-half million recently, compared with a three-decade norm of 1.1 million. This is surprising given that the echo boomers are old enough to leave the familial home by now—unless they simply can’t find work and feel compelled to stay there. (BMO Capital)

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TOUGH TO BE CONSTRUCTIVE ABOUT EUROPE

However you look at it, the pattern is the same: strong and stronger Germany (20% of EU GDP, 16% of EU population), weak and weaker France (16%, 13%) and Italy (12%, 12%).

  • German construction sector growth helps drive economic expansion The construction industry looks set to provide a boost to the German economy in the fourth quarter, according to Markit’s PMI data. The construction PMI – which measures the overall level of business activity in the sector – registered expansion for the seventh successive month in November. Although the headline index dipped slightly from 52.6 in October to 52.1, the average reading in the fourth quarter so far is consistent with the sector’s output rising by some 7% compared to the third quarter.
  • France: Construction sector downturn deepens The downturn in France’s construction sector gathered pace in November. Activity and new orders both fell at sharper rates, while the pace of job shedding quickened. Confidence regarding the year-ahead outlook meanwhile plunged to the lowest in 2013 to date.
  • Italian construction sector set to post contraction in final quarter Italy’s construction sector looks set to remain a drag on GDP in the final quarter of the year, with businesses in the industry having recorded further reductions in total activity levels in both October and November. The latest contraction was the slowest in five months, but nevertheless still solid overall and broad based across the housing, commercial and civil engineering sectors.

German Factory Orders Decline in Sign of Uneven Recovery

Orders, adjusted for seasonal swings and inflation, slid 2.2 percent from September, when they rose a revised 3.1 percent, the Economy Ministry in Berlin said today. Economists forecast a decline of 1 percent, according to the median of 40 estimates in a Bloomberg survey. Orders advanced 1.9 percent from a year ago when adjusted for the number of working days.

Foreign orders fell 2.3 percent in October, while those from within the country dropped 2 percent, today’s report showed. Demand from the euro area declined 1.3 percent.

EURO BANKS NEED MORE WORKOUTS:

(Morgan Stanley)

Red heart Thank You All

I have not been able to personally and directly thank all of you who reacted to my help demand last Tuesday. While it was on a rather minor thing, I am relieved to see that if I ever lost my mind, my readers from across the world will surely help.

Your kind words were also nice to read. I am happy to see I can help some, me being first in line, remain focused, objective and disciplined.

I wish I had advised you to buy bitcoins early this year but you just paid me handsomely with your buddycoins!

Other harmless ways readers can contribute to this absolutely free blog is by clicking on the ads on the sidebar from time to time just to encourage my advertisers to stay with me and/or to use the Amazon search box on the sidebar to reach the Amazon web site before ordering. This will earn News-To-Use a small referral fee. All moneys received are reinvested into research material, less and less of which if free.

 
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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.

 
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NEW$ & VIEW$ (3 DECEMBER 2013)

Global Output and new orders rise at fastest rates since February 2011

 

At 53.2 in November, up from 52.1 in October, the J.P.Morgan Global Manufacturing PMI™  registered its highest level since May 2011. The headline PMI has signalled expansion for 11 successive months. The faster improvement in overall operating conditions was underpinned by stronger expansions of production, new orders and further job creation.

Among the largest industrial regions covered by the survey, the PMI for the US bounced back to reach a ten-month high, after slowing sharply to a one-year low in October. Growth meanwhile remained solid in Japan and the UK, with the PMI in each of these nations at their highest levels since July 2006 and February 2011 respectively. The modest and fragile
recovery in the euro area continued, while the China PMI also posted slightly above the 50.0 mark.

Global manufacturing output and new business both expanded at the quickest pace since February 2011. The trend in international trade also showed further signs of improvement, as the growth rate of new export orders hit a 32-month record.

A sign that current capacity was being tested by the combination of solid demand growth and lacklustre job creation was provided by a third successive increase in backlogs of work. Outstanding business rose at the quickest pace since March 2011.

Companies reported some success in passing on higher input costs to their clients, as average factory gate prices increased for the fourth month in a row.

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Surge in Public Construction Spending Offsets Private Pullback

October’s U.S. construction data offered a surprise for era of penny-pinching governments: A surge in public spending more than offset a decline in private building.

Spending on construction increased at a seasonally adjusted annual rate of 0.8% in October from the month before, beating the 0.4% gain forecast by economists.

The strength came from an unexpected source. State and local governments, which fund the majority of public construction, boosted spending at 3.2% pace.

The federal government boosted outlays by 10.9% in October, the largest monthly gain since January 2011. The October increase, the first month of the new fiscal year, more than reversed declines the prior two months. Federal construction spending had been weak most of the year due to across-the-board cuts put in place in March.

Meanwhile, private construction slipped in October. Private home building declined 0.6%, the third decrease in the last four months. Spending on communication, power infrastructure and recreation also fell during the month. (…) (Chart from Haver Analytics)

Factory Owners Wary of Bangladesh Pay Rise

Millions of Bangladeshi garment workers—key players in a supply chain that produces inexpensive clothing for Western retailers—got a pay raise over the weekend, as a new government-mandated minimum wage of $67 a month kicked in.

That puts Bangladesh into roughly the same league as other low-cost apparel exporters such as India, Sri Lanka and Cambodia. But factory owners here said the increase risks making the industry, a mainstay of the impoverished country’s economy, less competitive. (…)

For years, extremely low wages helped Bangladeshi apparel makers win contracts by offsetting other weaknesses that plague the industry—from inefficient factories to poor shipping infrastructure and frequent political upheaval that disrupts production.

An appreciating local currency is also adding to the challenges facing Bangladeshi exporters. The Bangladeshi taka is now trading at around 77 to the dollar, considerably stronger than January’s rate of about 84 to the dollar.

That has the effect of making Bangladeshi products more expensive overseas, at the same time that some of the country’s garment-making rivals benefitted from falling currencies. The rupee in neighboring India, for instance, is down about 12% from where it started the year, giving exporters there a boost. (…)

Factory owners said the wage increase means they will need to charge more. “At an average, we’re looking at a 20-30 cents rise on every product and that’s a surprise leap for any brand or any producer,” said Mohammadi’s Ms. Huq. (…)

A recent World Bank study found that the unit cost of producing a basic polo shirt in Bangladesh is approximately $3.46 per shirt, excluding margins and the cost of transportation to port, compared with a cost of $3.93 per shirt in China. But Bangladeshi workers produce 13-27 polo shirts per person per day, lower than the 18-35 pieces per person per day in China, the study found. (…)

European banks: más capital
Periphery banks looking better, but crisis is far from over

(…) This is typical of how banks are getting to their Basel III numbers – small disposals, exits from a few capital-intensive business lines and other changes to the asset side of the balance sheet.

But capital-raising on a different scale looms, spurred on by the European Central Bank’s Asset Quality Review next year, a new regulatory focus on the leverage ratio (capital as a proportion of total assets), and the growing tide of conduct fines. PwC estimates that Europe’s banks have a shortfall of €280bn and that €180bn of that will have to come from new equity. That is well over the new equity that the sector has raised in any year since 2008. Berenberg puts the capital shortfall at €350bn-€400bn.

So the stage is set for a tricky sales pitch to investors. Return on equity at most European banks is poor, barely scraping into double digits despite promises from some that they can make it into the mid teens. Adding more equity will not help. Offsetting that is a fall in the cost of equity – PwC says that for 16 US and European banks it has fallen from 11.5 per cent in 2011 to 9.8 per cent now. Banks might beat their cost of equity after all, but not by much. So the investment case might centre on dividends. But a sector with so much uncertainty about the amount of capital it needs is in a weak position to be making generous dividend promises.

Just kidding This could rock markets in 2014.

SENTIMENT WATCH

Has the Contrarian Investors’ Day Come?

One by one, the bears have fallen.

(…) And now there are precious few leading investors who admit to taking bearish positions on U.S. equities. Indeed, various surveys show that among investment advisers and individual investors the ratio of bears to bulls has rarely, if ever been as low as it is now.

Whisper it quietly, but this is a classic signal for contrarian investors.

The latest high profile bear to capitulate is Hugh Hendry, at the hedge fund Eclectica Asset Management. Although relatively small–Eclectica had $1.3 billion under management at the start of the year–Mr. Hendry has had a high profile for much of the past decade, having been a prominent bear in the run up to the 2007 crash.

But having taken pain from being on the wrong side of a soaring market during the past couple of years, he said recently that he’d thrown in the towel. He hates the market, but is now positioned for it to go up further.

Jeremy Grantham of the giant fund GMO and another prominent bear recently figured the U.S. market could advance another 30%, despite being some 50% overvalued. John Hussman, of Hussman funds and another bear, also figures there are risks of a further market “blowoff”–i.e. a continuation of the recent upward trend. As does Bob Janjuah at Nomura.

None of the high profile bears has actually come out and said that they believe in a bull case, that markets are cheap and need to be bought at these levels. By and large they all expect a correction and for deep market underperformance. But they’ve mostly pared back their bearish positions. But after the U.S. equity market tacked on another 30% this year, having already doubled from 2009 lows by last year, there’s not a lot more pain these investors can take.

As John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can stay solvent.”

Even if bears haven’t entirely disappeared, they seem to be in deep hibernation. (…)

The visuals, courtesy of Short Side of Long:

Based on volume trends, equities are rising not really because people are buying but rather because they are not selling, frozen in their tracks. Disappointed smile

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Meanwhile:

Boy Girl U.S. 15-Year-Olds Slip in Rankings Crying face

U.S. 15-year-olds made no progress on recent international achievement exams and fell further in the rankings, reviving a debate about America’s ability to compete in a global economy.

The results from the 2012 Program for International Student Assessment (PISA), which are being released on Tuesday, show that teenagers in the U.S. slipped from 25th to 31st in math since 2009; from 20th to 24th in science; and from 11th to 21st in reading, according to the National Center for Education Statistics, which gathers and analyzes the data in the U.S. (…)

U.S. scores have been basically flat since the exams were first given in the early 2000s. They hover at the average for countries in the OECD except in math, where American students are behind the curve. Meanwhile, some areas—Poland and Ireland, for example—improved and moved ahead of the U.S., while the Chinese city of Shanghai, Singapore and Japan posted significantly higher scores. (…)

And this chart, courtesy of Grant Williams (Things that Make you Go Hmmm…)

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Hmmm…

Call me  HELP!

I have accidentally totally removed my Dec. 2nd New$ & View$ post and it seems that the only way to recover it would be if anybody has it opened in a browser and copied it in Word or as pdf and email it to me.  Or if anybody printed it, it could be scanned and emailed at fidanza@gmail.com.

 
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NEW$ & VIEW$ (29 NOVEMBER 2013)

Storm cloud  EUROZONE RETAIL SALES REMAIN WEAK

 

Markit’s latest batch of retail PMI® data for the eurozone signalled an ongoing downturn in sales in the penultimate month of 2013.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, edged up to 48.0 in November,  from 47.7 in October. That was indicative of a moderate depletion in sales. The PMI was only just below its long-run average of 48.5, however, and greater than the trend shown over the first half of 2013 (45.7).

Eurozone retail sales continued to fall on an annual basis in November, extending the current sequence of contraction to two-and-a-half years. The rate of decline eased since October, but remained sharp.

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German retail sales increased for the seventh month running in November, the third-longest sequence of continuous expansion since data
collection began in January 2004. The rate of growth remained moderate, however, and slower than the trend pace registered since May.

Retailers in France registered a third successive monthly decline in sales in November. That said, the rate of reduction slowed further to a fractional pace.

The Italian retail sector remained mired in a steep downturn in November. Sales fell for the thirty-third month in succession Disappointed smile, the longest sequence of decline in the survey history. Moreover, the pace of contraction accelerated again in November, to the fastest since July.

Retailers continued to cut purchases of new stock and jobs in November. Adjusted for seasonal factors, purchasing activity fell for the twenty-eighth month running, the longest sequence of decline in the survey history. Moreover, the rate of contraction in the latest period was the fastest since April.

Stocks of goods held by retailers declined in November, having risen slightly in October. Retail employment meanwhile fell marginally for the third month running.

Average purchase prices paid by retailers for new stock rose sharply in November, at a rate broadly in line with the long-run survey average. Italian retailers continued to feel the effects of the recent VAT increase, although Germany posted the strongest overall rate of inflation. By product sector, food & drink registered the steepest inflation of purchase prices for the fifteenth month in a row.

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Euro-Area Inflation Holds at Less Than Half ECB Ceiling

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent.

The core inflation rate rose to 1 percent in November from 0.8 percent. Economists had forecast that it would increase to 0.9 percent.

Euro-Area Unemployment Unexpectedly Drops Amid Recovery

The jobless rate fell to 12.1 percent in the 17-nation economy from a record 12.2 percent in the prior month, the European Union’s statistics office in Luxembourg said today. Economists had forecast the jobless rate to remain at 12.2 percent, the highest since the euro’s debut, according to the median of 34 estimates in a Bloomberg survey.

The jobless rate in Spain rose to 26.7 percent in October, even after the economy resumed growth in the third quarter. Italy’s unemployment rate held at 12.5 percent last month, today’s report showed. In Germany, Europe’s largest economy, the jobless rate remained steady at 5.2 percent.

A Stumbling Core Presents ECB Fresh Worries

The recent news from the euro zone gives the European Central Bank plenty to chew over. The region’s most beleaguered economies are getting a bit better. But the core is getting worse.

The latest mini-bombshell to hit the euro-zone economy was the decision of credit agency Standard & Poor’s to strip Netherlands sovereign debt of its AAA-rating, notwithstanding that the Dutch government has been paring back its deficit, that the country’s gross debt is moderate and that it routinely runs current account surpluses in excess of 10% of GDP.

Instead, S&P focused on the fact that the Dutch economy is contracting and unemployment has been rising. Those weak fundamentals will cause the government’s deficit to get worse and national debt to swell over the coming years, according to IMF forecasts.

But the Netherlands isn’t the only core country to raise concerns. Recent German data have also shown some worrying trends–albeit not nearly to the same degree.

German jobless claims have ticked up during the past couple of months, surprising forecasters. At the same time, consumption has stumbled. Retail sales declined again in October, having fallen the previous month.

France is slipping from the doldrums to something worse. This is a problem as it’s widely seen as a bellwether for the wider euro zone: though its economy is only second in size to Germany, it isn’t quite core while it also can’t be lumped in with region’s hardest hit countries. Consumer spending is down, unemployment is high and there are precious few signs of where growth might come from.

So where does that leave the ECB?

Recent fears that the single currency region was slipping towards a deflationary spiral were alleviated a little by the latest set of inflation numbers: euro-zone consumer prices rose 0.9% on the year to November up two tenths of a percentage point from October. At the same time, the unemployment picture eased slightly, with the jobless rate declining to 12.1% in October from a record 12.2% the previous month.

But set alongside the news from the core, that’s hardly solace.

The ECB cut its key rate a quarter point at its October meeting. Rates can’t really go down much from here before going negative. Although the ECB assures us that it is prepared to take that step, there are good reasons to believe it would avoid doing so as long as possible for fear of signalling it has nothing left in its monetary armory.

And yet it needs to do something. The most recent data show that euro-zone money supply is barely growing while the pace at which credit to the private sector is contracting seems to be accelerating.

One possible step is to do another round of bank funding, but making it contingent on banks’ extending loans to households and firms, similar to the Bank of England’s Funding for Lending scheme.

The ECB won’t have failed to notice that the U.K. economy has picked up to the point where the Bank of England yesterday said it would stop making further FLS funds available for mortgage lending from January. That might work if the stumbling block in Europe is lenders’ unwillingness to extend credit. But if it’s a question of reluctant borrowers because they can’t see where income growth is going to come from to pay back from loans, the ECB is stuck.

Hollande boosted by fall in unemployment

(…) Figures from the ministry showed the number of people without work seeking iobs fell in October by 20,500, although the total stood at 3.27m, still close to a record high. (…)

Unemployment, on internationally comparable measures, still stands at just under 11 per cent of the workforce. Most economists predict it will not peak until next year. (…)

But critics have pointed out that much, if not all, of the improved figures on unemployment is due to state-sponsored, make-work schemes aimed chiefly at those under 25 years of age. Tens of thousands of jobs are being created this way.

Economic growth remains well below levels needed to generate significant numbers of private-sector jobs. (…)

Upgrade Lifts Spanish Shares

Spanish shares and bonds were lifted by an upgrade to the country’s credit outlook by Standard & Poor’s, while wider European stocks and the single currency took a pause from their recent rally.

European Banks Could Take Their Hits Early

European banks could face a torrid fourth quarter as they face up to next year’s asset review by the European Central Bank.

That’s not the banks’ only problem. They also need to comply with minimum capital requirements under Basel III regulations; and ensure they meet leverage ratio rules designed to make them less reliant on borrowed funds. In sum, European banks could need to plug a €280 billion ($380.21 billion) capital gap, according to a report by PwC. Technical adjustments could reduce the gap by around €100 billion. But banks could still have to raise €180 billion from new capital raising or restructuring, PwC reckons.

Rather than wait for the ECB, banks could try to get ahead. Already this year European banks have issued €60 billion of new equity, according to Thomson Reuters data, up from €30 billion in the whole of 2012. Banks like Barclays and Deutsche Bank have undergone sizable rights issues.

But the process is far from complete. One implication is that banks could use upcoming fourth-quarter results to clear the decks, so that their balance sheets anticipate as far as possible the rules they expect the ECB to apply in its asset quality review. The European Banking Authority last month issued standards for defining nonperforming loans, aimed at stemming divergent practices across the euro zone. Banks could apply them as soon as the current quarter, according to senior executive at a major European bank—with the aim of getting their balance sheets in shape before the ECB’s inspectors come to town.

That could make the coming earnings season something of a bloodbath. Already, reserves against bad loans look short in some countries. Italian banks’ reserves covered only 41% of their bad loans at the end of September, according to Morgan Stanley.  If they were to raise that ratio to 65%, say, Italian banks would need an extra €11.3 billion of capital to meet a minimum core tier one equity ratio of 8%.

Banks in other countries have made progress earlier. Spain’s central bank this year forced its banks to clean up their mortgage lending books. That’s one reason why Spanish banks on average trade at close to their tangible book value, compared with Italian banks that trade at around 0.6 times tangible book, according to Berenberg Bank: Investors simply trust Spanish banks’ accounts more right now.

Bridging the credibility gap is becoming a matter of urgency for Europe’s banks.

Mind the WTI-Brent spread!

The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.

As JBC Energy wrote on Thursday:

January crude futures moved in opposite directions with ICE Brent posting a moderate gain of 43 cents per barrel to settle at $111.31 even as Nymex WTI took a heavy hit, settling at $92.30 per barrel, down $1.38 on the day. Brent prices found further support in ongoing chaos in Libya. Plenty of excitement also came on yesterday’s release of both weekly and monthly EIA data. US crude production for the week ending 22 November surpassed the 8 million b/d level for the first time since 1989 and crude stocks appear to be zeroing in on the record levels seen in May, despite higher utilisation. This is all the more remarkable considering that this is the time of the year when stocks tend to remain flat before heading south due to less maintenance and tax considerations. It is therefore hardly surprising that the market reacted to this strong counter-seasonal trend by widening the WTI/Brent discount by another $1.80 to $19.01 per barrel.

Lacking a legal way to export crude, Saudi America was supposed to find a way to export shale surpluses by way of product markets. Turns out, however, there’s only so much the US system can export in this way. Not because it doesn’t want to, but rather because there’s a fresh bottleneck impeding such exports.

Most product exports come out of Padd III, the Gulf coast, but the area has a finite capacity. Currently, refiners and product sellers can’t load the product quickly enough onto ships to take advantage of the spread that can be captured. This means Padd III stocks are rising, turning the Gulf Coast into something like the new Cushing. This is particularly apparent during the non-US driving season, when refiners are forced to rely more on export markets.

Here’s a chart illustrating the phenomenon from Stephen Schork last week:

Product cracks are arguably the best clue we have to how quickly these bottlenecks are being overcome. So, whilst they are currently weak, if the US really was having the sort of export binge that could correct the WTI-Brent spread, they’d probably be much, much weaker.

If and when product spreads begin to collapse, one can consequently expect the WTI-Brent spread to turn begin diminishing.

For now, a chart courtesy of the EIA, in which the new ballooning Padd III post-shale product hoarding trend can be clearly observed:

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Sober Look adds:

These changing dynamics in the US energy markets are having two major effects:

1. US refineries are loving this. The government is holding down domestic crude prices by limiting exports, while allowing refiners to sell as much gasoline abroad as they want. Refined products abroad are generally priced based on Brent, allowing the refineries to capture the spread. In effect the US government is subsidizing the refining business at the expense of crude oil producers. And here is how the stock market is reacting to these recent price changes.

(TSO = Tesoro Corporation, a major refiner; XLE = diversified energy index ETF)

2. This is putting pressure on nations who traditionally sell crude to the US. While in the past they were able to sell their crude close to international prices, they now get paid much less due to Louisiana Light Sweet becoming significantly cheaper than Brent.

FT: – Imports to the Gulf Coast tend to be priced off local benchmarks including LLS and the Argus sour crude index, a basket of four heavier Gulf Coast crudes. With Gulf Coast prices falling, exporters such as Saudi Arabia and Venezuela are receiving less revenue for their sales into the US.
The discounts of US crude show no sign of ebbing with oil inventories continuing to rise as production grows, and many refineries remaining closed for maintenance.

Needless to say, these nations are not happy with the US as they now have to find alternate buyers in order to get the full price for their product. And many in the US are quite happy with this outcome.
When Louisiana crude was trading at a premium to Brent, analysts thought that by improving the transport system from Oklahoma to the Gulf will eliminate the Brent-WTI spread. Instead it simply shifted the discount further “downstream”. And with that came other unintended consequences that often result from uneven regulation.

 
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NEW$ & VIEW$ (5 NOVEMBER 2013)

WEAK HALLOWEEN SALES

Weekly sales declined 0.6% last week, and the 4-week m.a. is down for the 12th consecutive week (+1.6% YoY).

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Nobody should be surprised as BloombergBriefs explains:

(…) the pace of per capita disposable personal income was 2 percent for the 12 months ended in August. This equates to a 1.8 percent increase in GAFO retail sales, which represents sales at stores that sell merchandise traditionally sold in department stores.

Credit conditions are similarly poor and indicative of a consumer reluctant to spend. During August, the pace of revolving credit (credit cards) contracted at an annualized 1.2 percent — the third consecutive monthly drop.

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TAPER WATCH

Three Fed Policy Voters Signal Prolonged Easing to Stoke Growth

“Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said yesterday in a speech in San Francisco. Boston Fed President Eric Rosengren backed further easing to “achieve full employment within a reasonable forecast horizon,” while James Bullard of the St. Louis Fed said in an interview on CNBC he wants the Fed to “meet our goals,” singling out inflation.

And now this: Fed’s Bullard: Need to see “tangible evidence” inflation moving back towards 2% before Taper
Is the Fed getting worried about deflation?

SAME SURVEY DATA, SEVERAL ACCOUNTS:

Domestic banks are making loans more readily available, easing lending policies to businesses as competition stiffens and relaxing standards on mortgages as demand for home loans cools, a Federal Reserve survey shows.

“Banks eased their lending policies for commercial and industrial loans” as well as standards on prime residential mortgage loans in the third quarter, the central bank said in its survey of senior loan officers released today in Washington. The share of banks relaxing mortgage standards was described as “modest.”

Banks reported “on net, weaker demand for prime and nontraditional mortgage loans” while demand for business loans “experienced little change,” according to the report. For other types of lending to consumers, banks “did not substantially change standards or terms.”

(…) Nearly 80% of banks said their credit standards for mortgages remained basically unchanged from July through September, according to a quarterly Fed survey of bank loan officers released Monday. Only about 15% of banks said their standards for mortgages have eased somewhat. (…)

More than 40% of banks said they saw a lower volume of mortgage applications since the spring, prior to the increase in mortgage rates. About a third of banks said demand was about the same or stronger.

(…) “Very few banks” reduced fees, lowered the minimum required down payments or accepted borrowers with lower credit scores, the report said. Several banks also reduced staff allocated to processing mortgage applications. (…)

Separately, very few banks said they have changed lending standards for approving credit cards or auto loans. Only about a quarter of banks saw stronger demand for auto loans since the spring.

But increased competition has driven some banks to loosen their commercial and industrial lending standards, the report said. Banks said they have experienced little change in demand for those loans.

  • Easing Loan Standards No Match for Higher Rates  (BMO)

More U.S. banks eased lending standards in Q3 but higher mortgage rates still resulted in weaker demand for residential mortgages. This could point a further slowing in home sales in the fourth quarter

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However,  banks are loosening standards for commercial real estate loans and demand is rising (charts via CalculatedRisk)

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EU Lowers Euro-Area Growth Outlook as Debt Crisis Lingers

Gross domestic product in the 17-nation currency bloc will rise by 1.1 percent in 2014, less than the 1.2 percent forecast in May, the Brussels-based European Commission said today. Unemployment, now at its highest rate since the euro was introduced, will be 12.2 percent in 2014, higher than the 12.1 percent predicted six months ago. (…)

Next year’s projected return to growth will come after the euro-area economy contracts an estimated 0.4 percent in 2013, the commission said in today’s report. That follows a decline in GDP of 0.7 percent in 2012, the first time output has fallen in two consecutive years since the introduction of Europe’s single currency in 1999.

Signs of a fragile recovery in 2014 disguise a north-south divide in the euro area, in which the economies of Germany, Belgium, Estonia and Ireland are predicted to gain momentum next year, while Spain, Greece, Italy and Portugal are projected to experience much weaker growth rates. The exceptions are Finland and the Netherlands, whose growth figures now lag behind their northern neighbors.

Italy’s finance minister warns on euro
ECB urged to ease monetary policy

Italy’s finance minister has warned of the risks of a strengthening euro to Europe’s fragile recovery, urging the European Central Bank to ease monetary policy to help the continent’s small and medium enterprises.

 

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Li Says China Needs 7.2% Expansion to Maintain Job Growth

Expansion at that pace would create 10 million jobs a year to maintain the urban registered jobless rate at about 4 percent, Li said in an Oct. 21 speech to the All-China Federation of Trade Unions published yesterday on its website. China’s growth has entered a stage of medium-to-high speed, meaning about 7.5 percent or above 7 percent, Li said.

Kellogg to Cut 7% of Workforce by 2017

Kellogg Co. said Monday that it will cut about 2,000 jobs, or 7% of its global workforce, over the next four years as part of a billion-dollar cost-cutting plan.

“We do see weaker top-line growth than we expected as some of our categories remain challenging,” Chief Executive John Bryant said in an interview, citing cereal in the U.S. as one of those segments.

 
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NEW$ & VIEW$ (30 OCTOBER 2013)

U.S. Retail Sales Slip But Spending less Autos Firms

Retail sales and food services posted a 0.1% slip (+3.2% y/y) during September following an unrevised 0.2% August rise. A 2.2% decline (+5.1% y/y) in motor vehicle purchases held back total sales for the month. It was consistent with the earlier reported fall in unit vehicle sales. Retail sales excluding autos rose 0.4% (2.8% y/y) after a 0.1% August uptick. A 0.3% rise had been expected.

Sales at general merchandise stores gained 0.4% (0.6% y/y) after a 0.2% August decline. Sales at furniture and electronics stores also rose 0.4% (3.0% y/y) on the heels of a 0.6% rise. Sales of nonstore retailers gained 0.4% (8.9% y/y) following a 0.3% August increase. Sales of building materials and garden equipment ticked up 0.1% (5.8% y/y) following their 0.3% shortfall. Countering these gains was a 0.5% decline (+2.7% y/y) in apparel store sales after a 0.2% August drop.

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Morgan Stanley economist Ted Wieseman said that post-shutdown auto-sales numbers still look weak and traffic at shopping malls remained slow into the second half of the month. “We’re not off to a strong start in the fourth quarter,” Mr. Wieseman said. (WSJ)

HALLOWEEEN SPENDING (Bus. Week)

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Home Prices Rose in August, but Pace of Gains Is Slowing

U.S. home prices continued to advance in August but increases are decelerating, according to the S&P/Case-Shiller home-price report released Tuesday.

Home prices in August were up 12.8% from the year-earlier period, the fastest pace since early 2006, according to the Standard & Poor’s/Case-Shiller home-price index. Of the 20 cities in the main index, 13 posted double-digit annual gains.

However, monthly details of the Case-Shiller report show some softening. Home prices rose 1.3% in August, the smallest monthly gain since March, as 16 of the 20 cities saw slower growth. After seasonal adjustments, home prices in August rose 0.9%, below a recent peak of 1.9% in March.

Land Prices Hit the Brakes

The slowdown in sales of newly built homes since last summer has sapped momentum from the land market, as home builders are starting to balk at paying increasingly lofty prices for lots.

Nationally, lot prices have gone from a gain of nearly 7% in the first quarter of 2013 compared with the previous quarter, to gains of about 6% in the second quarter and 4% in the third quarter, according to a survey of land buyers and sellers in 55 U.S. markets conducted by housing-research and advisory firm Zelman & Associates. (…)

The land-price increases went hand-in-hand with the rising prices of new homes. The average price of a new home in the U.S. reached an all-time high of $337,000 in April, census data show. During the housing crisis, the average dipped as low as $245,000 in January 2009.

Wholesale Prices Tame as Fed Meets

The producer-price index, which measures how much companies pay for everything from footwear to computers, fell 0.1% in September from August, the Labor Department said Tuesday. The decline was primarily the result of an 18% decline in fresh-vegetable prices.

Excluding food and energy components, core wholesale prices rose 0.1%. Compared to the same period last year, September wholesale prices rose by 0.3%, the lowest annual level since October 2009.

German Unemployment Rises a Third Month as Growth Slows

The number of people out of work climbed a seasonally-adjusted 2,000 to 2.97 million, after gaining by a revised 24,000 in September, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 36 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Unemployment in East Germany rose by 2,000, leaving the jobless rate unchanged at 10.3 percent. The number of people out of work in West Germany was unchanged and the rate stayed at 6.1 percent. The national rate of 6.9 percent is near the lowest level in two decades.

Euro-Zone Banks Tighten Lending Standards

Euro zone commercial banks tightened their standards on new loans to private-sector firms during the third quarter, the European Central Bank said Wednesday, suggesting the region’s recovery remains hampered by a lack of funds to finance new spending, investment and hiring. (…)

The net percentage of banks reporting higher lending standards to nonfinancial businesses stood at 5% in the third quarter, the ECB said, compared with 7% in the second quarter. The figures are calculated by subtracting the percentage of banks reporting looser standards on new loans from those saying that they have made it tougher for companies and households to obtain them.

The findings “confirmed the ongoing stabilization in credit conditions for firms and households in the context of still weak loan demand,” the ECB said.

The sluggish economy continued to weigh on business demand for new credit, according to the report. Demand for housing loans and consumer credit rose slightly in the third quarter from the second, the ECB said.

Banks in the region expect loan demand to pick up across all categories in the fourth quarter.

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Troubled loans double at Europe’s banks
Non-performing loans approach €1.2tn as review of assets looms

A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. (…)

He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012. (…)

PwC’s figures, which are derived from lenders’ accounts, showed that Germany, the EU’s biggest economy, had the highest amount of non-performing loans at the end of 2012, at €179bn, unchanged on the previous year’s number.

Spain had €167bn of NPLs, up sharply from the €136bn recorded for 2011. Britain’s €164bn of non-performing loans represented a decline from €172bn in 2011. (…)

EARNINGS WATCH

296 companies representing 66.0% of S&P 500’s market-cap have reported so far. Surprise is at 64% on earnings (63% last week) and 31% on revenues (30%). RBC Capital’s blended earnings growth for Q3 is now +4.9% (4.6% last week).

 
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