NEW$ & VIEW$ (20 JANUARY 2014)

China’s Economic Growth Slows to 7.7%

China’s economic growth slowed slightly in the fourth quarter, complicating the challenge for the country’s leaders as they seek to reshape the world’s No. 2 economy.

In the fourth quarter of 2013, China’s economy grew 7.7% from a year ago, slower than the 7.8% it posted in the third quarter, according to data released Monday by China’s National Bureau of Statistics. That translates into 7.4% growth on a quarter-to-quarter annualized basis, the way most major economies report growth. China doesn’t release a similar figure.

Investment, which accounts for about half of China’s economic output, was a major drag on growth in the fourth quarter, a result of monetary authorities making credit more expensive. Fixed-asset investment expanded 19.6% on-year in 2013, down from 19.9% from the first 11 months of the year, indicating slowing capital spending, according toANZ Bank. (…)

The economy was growing more slowly in December than at the beginning of the final quarter of the year.

Louis Kuijs, an economist at RBS in Hong Kong, points out that industrial production grew 9.7% on-year in December versus 10.3% in October. And export growth slowed in December after a strong showing in November. That could point to a slow start to 2014, unless other drivers like exports or local demand pick up above expectations.

One area of brightness in the fourth quarter was retail sales, which grew 13.6% on-year in December, almost the same pace of growth as November. (…)

Sarcastic smile  See anything strange in this CLSA chart? How about 7 straight quarters of stable growth.



China’s Central Bank Providing Short-Term Cash to Lenders

In a rare accommodative measure, the state-run People’s Bank of China is providing short-term cash to the country’s biggest lenders, in a move seen as a bid to avoid a liquidity crisis near the Lunar New Year holiday.

The PBOC said it will inject further liquidity into the system via reverse purchase agreements, a form of short-term loans to banks, when it conducts its twice-a-week open market operation on Tuesday.

It said the moves are intended to maintain the stability of China’s money market ahead of the weeklong Spring Festival that kicks off on Jan. 31. (…)

The central bank’s apparent reassurance came after China’s financial system showed fresh signs of stress on Monday, with short-term borrowing costs for banks soaring on heavy holiday-induced demand for cash and rising worries over the vast shadow-banking sector.

The benchmark cost of short-term loans between banks, the weighted average of the seven-day repurchase agreement rate, rose to 6.59% on Monday, from 5.17% Friday and 4.35% Thursday. The current level marks the rate’s highest since Dec. 23, when it hit 8.94%.

The surging rates in the money markets also hammered stocks, with the benchmark Shanghai Composite falling below the key level of 2000 to 1991.25, its weakest in almost six months and down 5.9% this year, the worst performer in Asia. (…)

Housing Starts and Building Permits Decline

Housing Starts and Building Permits for the month of December both showed month/month declines but were still up compared to last year.  Relative to expectations, though, Housing Starts exceeded forecasts (999K vs. 985K), while Building Permits missed forecasts (986K vs. 1014K).



The NFIB detailed report for December shows that employment was likely stronger than what the last NFP reported:

Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development (apparently undetected by BLS).

Note the recent  spike in the marginal increase in employment per firm, bumping against its historical highs.image

Coming wage pressures?

Two percent reported reduced worker compensation and 17 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (up 5 points), the best reading since 2007. A net seasonally adjusted 13 percent plan to raise compensation in the coming months, down 1 point from November. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery.

Margins pressures?

With a net 19 percent raising compensation but a net negative 1 percent raising selling prices, profits will continue to be under pressure. Higher compensation costs are not being passed on to customers, but there will be more pressure to do so as Obamacare begins to impact small businesses in 2014.

Pointing up Small firms capex is also brightening:

The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005.

Of those making expenditures, 43 percent reported spending on new equipment (up 5 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 6 points). The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy. 



We now have 52 S&P 500 companies’ Q4 results in, 19 of which are financials.

  • Of the 53 companies in the S&P 500 that have posted earnings for the latest quarter, 57% have topped analysts’ average earnings estimate, according to FactSet.
  • Out of the 52 companies in the gauge that have posted fourth-quarter results so far, 62 percent have exceeded analysts’ profit estimates, and 63 percent have topped revenue projections, according to data compiled by Bloomberg.

S&P’s own official tally shows a 52% beat rate and a 35% miss rate. Financials beat in 58% of cases while only 48% of non-financials beat (39% missed), so far.

Zacks has the best analysis:

The 2013 Q4 earnings season ramps up in the coming days, but we have results from 52 S&P 500 members already, as of Friday January 17th. And even though the early going has been Finance weighted, the overall picture emerging from the results thus far isn’t very inspiring.

The earnings reports thus far may not offer a representative sample for the S&P 500 as a whole. But we do have a good enough sample for the Finance sector as the 19 Finance sector companies that have reported already account for 47.5% of the sector’s total market capitalization and contribute more than 50% of the sector’s total Q4 earnings. (…)

Total earnings for the 19 Finance sector companies that have reported already are up +14.2% on -1% lower revenues. The earnings beat ratio is 63.2%, while only 36.8% of the companies have come out with positive top-line surprises.

Pointing up This looks good enough performance, but is actually weaker than what we had seen from these same banks in recent quarters. Not only are the earnings and revenue growth rates for the companies below what they achieved in Q3 and the 4-quarter average, but the beat ratios are weaker as well. The insurance industry, the sector’s largest industry behind the large banks, has still to report results and could potentially turnaround this growth and surprise picture for the sector.

We haven’t seen that many reports from companies outside of the Finance sector. But the few that we have seen don’t inspire much confidence. Hard to characterize any other way what we have seen from the likes of Intel (INTC), CSX Corp. (CSX), UPS (UPS) and even GE (GE). But it’s still relatively early and we will know more in the coming days.

The lack of positive surprises is ‘surprising’ following the sharp drop in Q4 estimates in the run up to the start of the reporting season.

The composite picture for Q4 – combining the results for the 52 companies that have reported already with the 448 still to come – is for earnings growth of +7.1% on +1.5% higher revenues and 50 basis points higher margins. The actual Q4 growth rally will most likely be higher than this, a function of management’s well refined expectations management skills.

Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +25.0%. Outside of Finance, total earnings growth drops to +3.4%.

Profits Show Banks Back From the Brink

Large U.S. banks are finally emerging from the wreckage of the financial crisis, on the back of rising profits, a recovering economy and drastic cost cutting.

(…) As a group, the six earned $76 billion in 2013. That is $6 billion shy of the collective all-time high achieved in 2006, a year U.S. housing prices peaked amid a torrid economic expansion. (…)

One way for banks to improve their standing with investors is to cut compensation, jobs and business lines. This past week, Goldman Sachs announced its 2013 payroll was 3% lower than 2012’s, while Bank of America disclosed it eliminated 25,000 positions during the year. J.P. Morgan and Morgan Stanley both are in the process of exiting from the business of storing physical commodities.

Banks still face numerous headwinds, including high legal costs as regulators and investigators work through a backlog of industry activity and scrutinize everything from overseas hiring to potential manipulation of currency and interest-rate benchmarks. Higher borrowing costs are reducing homeowners’ demand for mortgages, a major profit center for some banks during the early half of 2013, and several firms reported fourth-quarter trading declines in fixed-income, currencies and commodities trading.

Despite the many challenges, big banks are beginning to find ways to boost revenue. The six largest banks posted a 4% revenue gain during 2013.

Smaller banks are recovering, as well. Earnings reports are still being released, but, together, all 6,900 commercial banks in the U.S. are on pace to match or exceed the industry’s all-time earnings peak of $145.2 billion in 2006, according to an analysis by The Wall Street Journal of Federal Deposit Insurance Corp. data. (…)

Another factor fueling earnings growth is a dramatic reduction in the reserves banks have set aside for future loan losses, as fewer U.S. borrowers default. J.P. Morgan, Bank of America, Citigroup and Wells Fargo freed up $15 billion in loan-loss reserves during 2013, including $3.7 billion in the fourth quarter. That money goes directly to the bottom line, boosting profits. The releases made up 16% of these banks’ pretax income for that final quarter. (…)

A closely watched investment-performance ratio called return on equity is well below levels achieved a decade ago. What pushed ratios lower were hundreds of billions of dollars of additional capital raised to protect the institutions from future problems and comply with new regulatory guidelines.

Goldman’s return on equity, which hit a peak of 33% in 2006, fell to 11% in 2013. The ratio was even lower for J.P. Morgan and Bank of America.

Banks are scrambling to make changes as a way of improving returns. The six biggest banks have reduced their workforces by more than 44,000 positions in the past year, while J.P. Morgan told investors it was done with an aggressive branch expansion and would no longer add to its network of 5,600 locations. Goldman Sachs’s 2013 pay reduction brings compensation expenses down to 36.9% of total revenue, the lowest percentage since 2009.

Banks will have to show they can earn money from lending and other businesses, as opposed to releasing reserves, said Fitch Ratings analyst Justin Fuller. Lending for the biggest banks was up 2% on the year, but there were limited signs that slim margins on those loans had begun to widen or at least stabilize.

Light bulb But if capex strengthen, loan demand will rise. Higher volume with the current steep yield curve = higher profits…



Half of Americans say investing $1,000 in the stock market right now would be a bad idea, even though the Dow Jones Industrial Average and Standard & Poor’s 500 index have recently hit record highs. Forty-six percent of Americans say investing $1,000 in the stock market would be a good idea. Trend: Americans' Views on Investing in the Stock Market

In January 2000, when the Dow was at a then-record high of 11,500, Americans were much more likely to say investing in the stock market was a good idea than they are today. A record-high 67% of Americans that month said investing was a good idea.

After the onset of the 2008-2009 Great Recession, the percentage of Americans who believed investing in the markets was a bad idea swelled to 62%. While that percentage has dropped, Americans’ confidence in buying stocks has clearly not returned to levels seen during the heady days of the early 2000s.

Stock Ownership Among Americans Still Near Record Low

Fifty-four percent of Americans now say they own stock, little changed from the 52% who said so last April — which was the lowest in Gallup’s 16-year trend of asking this question in its current format. Stock ownership is far lower than it was during the dot-com boom of 2000, when 67% said they owned stock — a record high. While staying above 60% for much of the 2000s, the ownership percentage fell into the 50% range as the Great Recession took hold and has not yet rebounded. Despite economic booms and busts, however, a majority of Americans have maintained an investment in the markets in the past 15 years. Trend: Americans' Ownership of Stocks

Although fewer Americans now own stocks, those who do, not surprisingly, are much more likely than non-owners to believe investing in the market is a good idea, 59% to 30%.

Bottom Line: The Dow is 5,000 points higher today than it was in 2000, but confidence in the markets is much lower, as is participation.

VOX DEI: Bearish Bond Belief At 20-Year Extremes

Jeff Gundlach recently warned that the trade that could inflict the most pain to the most people is a significant move down in yields (and potential bull flattening to the yield curve). (…) despite this, investors remain entirely enamored with stocks and, as the following chart shows, Treasury Bond sentiment now stands at 20-year extremes of bearishness.

Citi: “Time For Yields To Correct Lower”

The end of 2013 saw bond yields at their highs and the US equity markets making higher highs. This came as the Federal Reserve started to finally slow down its asset purchases and, as Citi’s Tom Fitzpatrick suggest, has now seemingly turned a corner in its so called “emergency” policy. That now leaves room for the market/economy to determine the proper rate of interest; and, he notes, given the patchy economic recovery, the fragile level of confidence and the low levels of inflation, Citi questions whether asset prices belong where they are today. As the Fed’s stimulus program appears to have “peaked” Citi warned investors yesterday to be cautious with the Equity markets; and recent price action across the Treasury curve suggests lower yields can be seen and US 10 year yields are in danger of retesting the 2.40% area.

US economic surprise index

General economic surprises look like they are now approaching a peak again. Only twice over the past 7 years have we been above current levels and they were short lived.

We should note that this index is naturally mean reverting as expectations rise with better than expected data and vice versa. A fall back below zero if seen may be quite important. (…)

High five  There is a lot more to Citi’s technical analysis, all mostly pointing to lower rates ahead. But before you get too technical, go back up and re-read the piece on the NFIB report.

Just kidding Up and Down Wall Street

Another sign of froth in European sovereign debt is described by Peter Tchir, a credit-market veteran who heads TF Market Advisors: Spain’s bonds due 2023 yield 3.68%, just a hair above the 3.60% from Apple‘s (AAPL) bond due 2023 issued in its then-record $17 billion offering to fund its share buyback. He admits the comparison is well, apples to oranges.

“One is denominated in euros, the other in dollars. One is a sovereign nation with devoted citizens, the other is Spain. One has so much cash on hand that trying to convince them to do something with that cash hoard has become the ultimate hedge-fund pastime. The other would have trouble rubbing two pesetas together, even if it hadn’t moved to the euro. Fifty percent of the world’s population under the age of 25 already owns or wants to own a device made by Apple. That is still a little behind the 57% in Spain who want a job (assuming some of the unemployed youth actually want jobs).”


Physical Gold Shortage Goes Mainstream

As BNN reports, veteran trader Tres Knippa, pointing to recent futures data, says “there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion.” As he goes on to explain to a disquieted anchor, “the underlying story here is that the people acquiring physical gold continue to do that. And that’s what is important,” noting large investors like hedge fund manager Kyle Bass are taking delivery of the gold they’re buying. Knippa’s parting advice, buy physical gold; avoid paper.

One of the problems…

That won’t end well…


IMF warns on threat of income inequality

Lagarde raises stability concerns

(…) “Business and political leaders at the World Economic Forum should remember that in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability,” she told the Financial Times. (…)

The message is hitting home. Shinzo Abe, Japan’s prime minister, is coming to Switzerland with the message that Japanese companies must raise wages, while the government of David Cameron, his UK counterpart who is also attending the forum, called for a large inflation-busting rise in the British minimum wage last week.

In U.S., 67% Dissatisfied With Income, Wealth Distribution

Two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S. This includes three-fourths of Democrats and 54% of Republicans.

Satisfaction With Income and Wealth Distribution in the U.S., January 2014

The same poll updated a long-time Gallup trend, finding that 54% of Americans are satisfied, and 45% dissatisfied, with the opportunity for an American “to get ahead by working hard.” This measure has remained roughly constant over the past three years, but Americans are much less optimistic about economic opportunity now than before the recession and financial crisis of 2008 unfolded. Prior to that, at least two in three Americans were satisfied, including a high of 77% in 2002.

Satisfaction With Americans' Opportunities to Get Ahead by Working Hard, 2001-2014 Trend



Auto U.S. Car Sales Soar to Pre-Slump Level

The U.S. auto industry has shifted into high gear with new-car buyers snapping up vehicles last month at a pace not seen since before the financial crisis.

All told, buyers purchased 1.5 million vehicles last month, up 17% from a year ago, with nearly all major auto makers reporting double-digit sales gains.

August’s sales translated to an annualized pace of 16.09 million vehicles, up from December 2007’s about 16 million. Some 17.4 million vehicles were sold in 2000.

Automotive website estimates car companies spent an average of $2,477 on sales incentives last month, down 2.6% from a year ago and the lowest level since January.


Pointing up  The CalculatedRisk chart above shows that car sales are back to their previous 4 cyclical peaks if one accepts that the 1998-2007 levels were boosted by the irrational exuberance that characterized those years and are unlike to repeat anytime soon. However, unlike housing, interest rates on car loans have not risen just yet. But keep in mind that truck sales have jumped lately on the back of an improving housing sector.

(Bespoke Investment)

The WSJ article goes on with these interesting facts on the auto industry:

While the sales pace returned to prerecession levels, the U.S. auto industry looks nothing like its old self. GM, Ford and Chrysler Group LLC are now much leaner. GM employs about 212,000 people in the U.S., about 31,000 fewer than in 2008. Ford’s workforce here is about 171,000, down 42,0000 from five years ago. Before Chrysler was split off from its German partner, Daimler AG, it employed 83,000. Today, its payroll is about 65,000.

That’s nearly 100k (-24%) fewer employees for the same sales volume. 

The three auto makers combined have closed more than two dozen auto-assembly, stamping, engine and transmission plants across the Midwest and in Canada. Health care costs for retired union workers, which once added about $2,000 to the cost of a car, are now born not by the companies but union-controlled trusts. Union wages have also fallen. New hires started at about $14 an hour, half of what veteran workers make.

Detroit auto makers abandoned brands such as Pontiac, Saturn, Hummer and Mercury. GM and Chrysler dropped more than 2,000 dealers from their sales networks, and all three companies stopped profit-denting practices such as dumping cars into rental car fleets and stuffing dealers with cars and trucks that consumers didn’t want.

As a result, the Detroit Three can now make money at lower sales volumes, and on lower-priced vehicles. A decade ago, all three companies struggled to make money when Americans were buying more than 16 million cars a year regularly. Now they say they can make money with sales below 12 million vehicles a year.



Data Signal Consumer-Spending Rise

Imports rose 1.6% in July from the prior month, aided by strengthening domestic demand for industrial supplies and consumer products, Commerce Department figures showed Wednesday. Exports fell 0.6%, giving up some ground after the surging to a record high in June, though several key U.S. export markets showed signs of firming.


A quick look at the imports chart reveals precious little hint of a revival. Imports have been flat for 18 months. Now, that is partly due to declining oil imports which the WSJ article omits to mention. Actually, total imports are up 4.5% annualized in the last 3 months but non-petroleum imports are up a meagre 0.8% annualized and only 1.3% Y/Y in July as this Haver Analytics chart shows.


Here’s the interesting part from the trade report:

July exports to the European Union rose a non-seasonally adjusted 2.6% from the same period a year earlier, bucking a recent downward trend.

July exports to Brazil of $4.4 billion were the highest on record. Exports to China also rose, reflecting a stabilization in the world’s second-largest economy after a sharp slowdown in growth earlier in the year.

The positive trend in U.S. exports to the E.U. becomes even more significant when we consider that Canadian exports to the E.U. were down some 18% YoY in July. Big market share shifts underway?


From BMO Capital:



U.S. Economy Grew at Modest to Moderate Pace in July, August

(…) The central bank’s “beige book” report, a summary of conditions in its 12 districts from early July through late August, was largely positive. Eight districts reported moderate growth, while three said growth was modest. The remaining district, Chicago, said economic activity had improved.

Back-to-school shopping helped boost overall consumer spending, particularly in Boston, Kansas City and Dallas. Sales were mixed in New York, and were more modest in the other districts. Activity in the travel and tourism sectors expanded in most areas.

Demand rose in part from stronger car sales and housing-related goods such as furnishings or home-improvement items, the report said. Still, several regions said consumers remain cautious and “highly price-sensitive.” (…)

Wage pressures remained modest overall, with some companies in the New York region reporting more willingness to negotiate salaries. Still, pay rates “have not escalated significantly,” the report said. Rising health-care costs have continued to put upward pressures on overall compensation costs.

Lending activity weakened a bit, the report said, with several districts reporting less-favorable conditions than in the preceding period. Several regions described business lending as largely flat, and Chicago said that the recent interest-rate rises were likely depressing commercial investment. (…)





Bank of Japan Says Economy Is on Recovery Track

The Bank of Japan on Thursday formally proclaimed that the world’s third-biggest economy is back on a recovery track, a move that could tip the balance in favor of those who support a sales-tax hike from next spring as Prime Minister Shinzo Abe nears a decision on whether to go ahead with the plan.

The upgrade in the central bank’s assessment will likely strengthen speculation that it will hold off on any additional monetary easing for the time being, at least until the sales-tax increase is launched in April. The BOJ’s nine-member policy board Thursday decided to stand pat on monetary policy.

China Record Drop in Credit Growth Puts Momentum at Risk

New yuan loans were probably little changed in August, after aggregate financing, the broadest measure of credit, posted a fourth straight drop in July, the longest streak in 11 years of data.

The moderation in credit after a record first-quarter financing boom stands to cap an economic rebound being driven by a recovery in confidence and Premier Li Keqiang’s support measures, such as faster spending on railways. Overcapacity and pressure to clean up debt loom as challenges, according to JPMorgan, which sees growth slowing to 7.2 percent in 2014 from 7.6 percent this year.

DIGGING FOR YIELD? Make sure you don’t burry yourself.

For the full year, bonds rated CCC or lower have gained 7.1% while AAA debt has lost 5%. It’s only the third time since 1996 low-rated debt has gained while top-rated paper lost value.

America’s ‘Baby Bust’ Starts to Ease The nation’s fertility rate stabilized last year for the first time in five years. That follows four years of big declines during the economic downturn that pushed the rate to the lowest levels on record.


Demographic Intelligence, a for-profit forecasting firm, projects the so-called total fertility rate—which measures the average number of children born to women over their lifetimes—will rise slightly from 1.89 children per woman in 2012 to 1.90 in 2013. The rate stood at 2.12 in 2007.

Sam Sturgeon, the firm’s president, sees “modest” increases in 2014 and 2015 too, though not enough to reach the 2.1 rate that is considered the level needed to keep the U.S. population stable. When asked, American women still say they want two children—one boy and one girl, Mr. Sturgeon said.


NEW$ & VIEW$ (17 JUNE 2013)


U.S. Wholesale Prices Rise More Than Forecast on Fuel, Food

The producer-price index rose 0.5 percent after falling 0.7 percent in April, which was the biggest drop in more than three years, according to a Labor Department report released today in Washington. So-called core wholesale inflation, which excludes often-volatile food and energy prices, increased 0.1 percent.

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(Doug Short)



The Netherlands is bracing for a new round of belt-tightening despite a growing public backlash against austerity, barely a year after similar bind caused the government to collapse.

The coalition parties are set to begin negotiations next week on how to cut the budget deficit by €6 billion, equal to $8 billion or 1% of the country’s gross domestic product, next year to satisfy European Union budget rules. (…)

With the euro-zone mired in its longest recession in decades, even the so-called core Northern countries are increasingly feeling the pain.

The Belgian government needs to find €500 million ($670 million) in budget savings this year to be sure of avoiding EU sanctions, Prime Minister Elio Di Rupo said Friday in Brussels. The country has already made budget savings of around €18 billion—equivalent to about 5% of annual economic output—since Mr. Di Rupo’s six-party coalition took office in December 2011.

Finnish Prime Minister Jyrki Katainen said on Tuesday that he could not rule out additional austerity measures to keep the budget under control if the economy didn’t turn around soon. (…)

  • France Retail Sales

French retail sales continue to be weak. In May retail sales volumes fell by 0.2% month-to-month with a rise of 5.1% in food sales blunting a drop of 2.8% in nonfood sales. Nonfood sales have fallen for four months in a row.

The overall retail sales volume change over the past 12-months ranks in the lower 17th percentile of all Yr/Yr sales changes back to 1994 (see ‘rank % Y/Y’ in the table). Food sales are relatively stronger, standing in the 37th percentile of their historic queue with nonfood sales in the 15.8 percentile of their queue. Of the categories in the table, textiles, footwear and furniture are the relative weakest according to their queue standings. (…)


Total retail volume has declined 1.1% after 5 months, –2.6% annualized. Food sales reportedly rose 4.5% (+10.8% a.r.) while non-food sales volume has cratered 3.2% after 5 months, a 7.7% annualized rate. New car sales, meanwhile, jumped 9.0% (+21.6% a.r.). I have a hard time believing these breakdowns but the overall picture fits with Markit’s retail PMI:


Nominal hourly labor costs rose 3.9 percent in Germany in the first quarter, the EU’s statistics office Eurostat said on Monday, faster than the overall euro zone rate of 1.6 percent. It was Germany’s biggest jump since the first three months of 2009. (…)

Spanish labor costs fell 0.7 percent in the first quarter, while exports rose 3 percent in the same period, Eurostat said.


From The Economist:

THE gloom in Spain is almost palpable. (…) The numbers are grim. The economy is in deep recession. In the first three months of the year GDP shrank for a seventh quarter in a row. The public finances remain stretched, with the budget deficit at 7% of GDP. Bond yields have fallen, but the credit crunch for small firms is worsening. Corporate bankruptcies are running at ten times pre-crisis levels. And unemployment is at a record 27% (see article).


Unlike France, it has made big structural reforms. Unlike Italy, it has a strong government that expects to last until the next election in late 2015. (…)

The government’s programme of restructuring and reform has also started to produce results. As many as 38 financial institutions have been merged, mainly local cajas brought down by property lending. The remaining banks have been recapitalised and some €50 billion of their worst assets transferred to a bad bank, Sareb. Provisioning against bad debts has risen sharply. Unlike many other euro-crisis countries, the public sector is shrinking: 375,000 civil-service jobs have gone.

The real economy is also showing signs of improvement. Measured by unit labour costs, Spain has done more than most to regain competitiveness. The external current account has switched from a deficit of almost 10% of GDP in 2008 to a surplus, and not only because of import compression. In 2012 exports rose faster than in any other EU country. Reforms last year made it easier to fire workers, so industry is readier to hire again. This new labour-market flexibility is one reason why many car makers are moving production from other EU countries to Spain.

Even so, three big problems could undo this limited progress. One is the credit crunch. Despite lower bond yields, credit for small and medium-sized enterprises remains scarce and expensive compared with northern Europe. (…)

The second problem is reform fatigue. Spaniards have accepted changes, including wage cuts, to restore lost competitiveness. But more is needed: welfare reforms, a lower minimum wage in some regions, encouraging mini-jobs and part-time work and reducing the burden of pensions. It is not clear that Mr Rajoy’s government has the guts to push such reforms through. (…)

Above all is the third problem, insufficient demand and a lack of sources of growth. With public spending, consumption and investment constrained, the government is relying on rising exports. Yet total exports are less than a third of GDP and almost two-thirds go to the recession-hit euro zone. (…)

  • Eurozone exports

In another positive sign, euro zone exports to the rest of the world grew 9 percent in April while imports only rose 1 percent, giving the 17 countries sharing the single currency a trade surplus of 14.9 billion euros ($20 billion).

However, April seasonally adjusted exports declined 0.8% MoM and while exports have grown since December 2012, they are merely back to their August 2012 level.image



Singapore Exports Fall More Than Estimated on Electronics Slump

Non-oil domestic exports slid 4.6 percent from a year earlier, after falling 1 percent in April, the trade promotion agency said in a statement today.  Shipments of electronics dropped 13.2 percent from a year ago, extending the slump to a 10th month.

India Holds Rates as Rupee Drop Risks Fueling Inflation

Vietnam’s Central Bank Says It Intervened to Slow Dong Decline

Vale Sees China Slowdown Blunted by Brazil Currency Depreciation

The real, the worst-performing emerging-market currency in the past three months, probably will weaken to about 2.40 from 2.15 per U.S. dollar, bolstering Brazil’s competitiveness, said Jose Carlos Martins, Vale’s executive director for ferrous and strategy. China’s iron-ore and steel demand growth is set to slow to about 5 percent from 10 percent in the first five months of the year, he said.

“The Brazilian currency will devaluate further,” Martins, 63, said in a June 14 interview at the company’s Rio de Janeiro headquarters. “The slowdown in China is negative, devaluation is positive because not only our costs in dollars will be reduced but also investments will be lower.”



Foreigners Sell Off U.S. Debt

(…) Overall, foreign investors sold a net $70 billion in Treasury securities, cutting their total portfolio of U.S. government debt by roughly 1.2%. Investors have long watched the monthly Treasury capital-flows report for insight into the global appetite for U.S. debt, as foreign demand has been perceived as a key factor in financing U.S. spending.


Treasury auctions this week drew lower-than-average demand for the third consecutive month. (ISI, with chart below)



Warning: aggregators have different ways to compile data. I use S&P as the official “data keeper”.

From S&P:

The second quarter comes to an end in a little more than two weeks, and a number of companies have already started previewing what quarterly numbers will look like. The advance peak isn’t pretty. Of the 110 companies that have provided forecasts, according to S&P Capital IQ, 79 have been “negative,” with 18 positive and 13 in-line. That works out to a ratio of 4.4 negative-to-positive, well above the 10-year average of 2.1.

Profit growth for the second-quarter is seen around 3.5%, according to S&P. Sales growth is seen contracting 1%, according to the firm. “If you are hoping for 3-4% revenue growth – the kind that allows profit margins to expand – you’ll have to wait until 2014, at least according to Wall Street analysts,” wrote Nicholas Colas, the chief market strategist at ConvergEx Group.

From Factset:

Overall, 86 companies have issued negative EPS guidance for Q2 2013, while 21 companies have issued positive EPS guidance. Thus, 80% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 62%.

If the final earnings growth rate for the quarter is 1.1%, it will mark the third consecutive quarter of growth for the index. However, only four of the ten sectors are projected to report an earnings increase for the quarter, led by the Financials (17.5%) and Telecom Services (10.1%) sectors. On the other hand, the Information Technology (-6.3%), Materials (-4.5%), and Health Care (-3.9%) sectors are predicted to see the lowest earnings growth. The estimated revenue growth rate for the index for Q2 is 1.3%, down from an estimate of 2.7% at the start of the quarter.

ISI sees hope in an improving First Call earnings revision trend, even though it remains below 50 for now. The black lines are ISI’s way to show how things seemingly got better in the second half on each of the last 3 years. The red line is my way to show that positive revisions are fewer and fewer.


DRIVING BLIND (continued)

John Mauldin’s recent Thoughts from the Frontline letter should be read by everybody who relies on economists to make any kind of decisions in their life. As the Fed is preparing to alter its monetary stance, John’s letter helps understand the recent high level of volatility in financial markets. Everybody is driving blind just as a major turn approaches. My recent note warned that the Fed was currently Driving Blind but John says that the Fed is actually truly blind, now and always before and in the future!

Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What’s worse is that they fail miserably even at understanding where the economy is today. (…)

In plain English, economists don’t have a clue about the future.

If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.

Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn’t even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon.

Trusting central bankers now is a big bet that (1) they’ll know what to do, (2) they’ll know when to do it. Sadly, given the track record, that is not a good wager. Unfortunately, the problem is not that economists are simply bad at what they do; it’s that they’re really, really bad. They’re so bad that it cannot even be a matter of chance. (…)

If economists were merely wrong at betting on horse races, their failure would be amusing. But central bankers have the power to create money, change interest rates, and affect our lives in multiple ways – and they don’t have a clue.

And don’t think for a moment that private economists are any more useful:

In December 2007 a Businessweek survey showed that every single one of 54 economists surveyed actually predicted that the US economy would avoid a recession in 2008. The experts were unanimous that unemployment wouldn’t be a problem, leading to the consensus conclusion that 2008 would be a good year.

As Nate Silver has pointed out, the worst thing about the bad predictions isn’t that they were awful; it’s that the economists in question were so confident in them. Now, this was a very bad forecast: far from growing by 2.4%, GDP actually shrank by 3.3% once the financial crisis hit. Yet these economists assigned only a 3% chance to the economy’s shrinking by any margin at all over the whole of 2008, and they gave it only about a 1-in-500 chance of shrinking by 2 percent, as it did.

In truth, John goes too far considering that he is, in fact, one who uses economists, including his good friend Nouriel Roubini, the most successful useless economist around, extensively in his publications, conferences and other venues offered by Mauldin Economics. No doubt he must see the irony…

Another Mauldin friend is Joan McCullough, the deliciously snappy macro strategist at East Shore Partners. She is also not fond of economists, particularly the IMF crowd (via John Mauldin).

How fast was the turnip truck goin’ when the IMF fell off the back?

Right. So take the visual and allow it to linger while we make an attempt to recap this latest load of baloney from the organization which is #2 on my list of “agencies to be disbanded immediately” … right after the IRS.

I often wonder why I have long held the IMF in such low regard. Besides the obvious, there is likely a deep-seated, psychological resentment here, too. Occasioned by the fact that for a period of years, they issued a paycheck to one Timothy Geithner. On which he paid no income tax until caught. After which they let him run Treasury which oversees the IRS.
Which put me in a very bad frame of mind. (…)

Here’s how Joan qualifies the recent IMF report titled The Concluding Statement of the 2013 Article IV Mission to The United States of America”. As a bonus, we get, in a single paragraph, a complete account of the State of the Union:

Did you ever read such high-falutin’ insanity in your life? As if these
massive issues can be resolved effortless, with the wave of a wand or the push of a button. No problem. Like I said, it’s a freakin’ term paper.

So there you have it. Please note: There is not a single mention of the fact that the US has record debt and record unemployment, food stamps, disability and Medicaid enrolment. With almost half of us paying no federal income tax whatsoever. That Obamacare is s driving health insurance premiums wild. That after almost 5 years of ZIRP and 3 rounds of QE and a wildly bloated central bank balance sheet, that we
are lucky to get 2% growth. That the quality of jobs being created is piss poor and that wages are stagnant. And while CPI inflation is tame, the cost of living which is not reflected therein, is anything but. And that we also have up to 20 million illegals in this country whose welcome hangs in the balance. Right now. With talk that the State Department is considering taking Syrian refugees as well. Once we determine which ones are Al Qaeda sympathizers and which are not. And most of all, they never addressed this reality: that the FED has painted itself into a corner. And that any suggestion that the FED should carefully plan an exit while being careful not to upset the applecart. Is just plain disingenuous. Either that, or there’s been an en masse psychotic break at the IMF headquarters. Your call.

So if you wanna’ claim that they rolled stocks over because of this worthless bit of writing from a bunch of out-of-touch bureaucrats, be my guest.

This is why I write News-To-Use and use the Rule of 20 to measure the attractiveness of equities: no forecasts. “Simply” objectively measure and monitor the equity risk/reward ratio using trailing profits and inflation and meticulously follow and assess, in as an unbiased way as possible,  the trends and momentum of some of the main economic drivers. While doing that, I try to understand conventional wisdom and how it is likely to behave (i.e. veer) in the near future.

Doing that, I read much media and broker crap, but also numerous great pieces from great minds, economists or not.


NEW$ & VIEW$ (27 MARCH 2013)

Lost deposits. Eurozone employment remains weak. U.S. soft patch watch. House prices strong. Durable goods. Vietnam GDP soft. Triple A’s shrink.


EU to push for losses on big savers at failed banks: lawmaker

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout. (…)

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

“You need to be able to do the bail-in as well with deposits,” said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks. (…)

“Deposits below 100,000 euros are protected … deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in,” Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line. (…)

Pretty clear!  Where do you want your money now? Ready to do a due dill on your bank? How lucky do you feel?

BTW: Call me  British Banks Have Capital Shortfall of $38 Billion, BOE Says

Depositing some calm, at least for the little guys

The first chart is from HSBC, showing how many depositors fall within the bracket of the €100k guarantee mandated by EU law. The second chart is from JP Morgan’s F&L team, and shows percentages of insured and uninsured deposits in the eurozone. Essentially, the share of large or uninsured deposits is likely to be close to half of total deposits.

Together they give something of a picture of the insured versus uninsured in the zone (health warning: the data are from 2007) and it’s worth noting that for other peripheral countries relative to Cyprus, large deposits are mostly domestic. As JPM said, “the share of non–domestic deposits in peripheral banks is rather modest at 7 per cent as of the end of 2012.”

Crying face  Cyprus Sets Bank Restructuring

Cyprus gave the first indications of the steep losses facing large deposit holders at the island’s two biggest banks.

Cyprus’s central bank chief said Tuesday that large depositors at the island’s biggest lender, Bank of Cyprus Pcl, could lose as much as 40% on their deposits. In a television interview later, the finance minister said large uninsured deposit holders at the second-biggest, Cyprus Popular Bank Pcl, might only see one-fifth of their money returned and could wait several years before being paid back.

Based on estimates from government officials, the losses would affect some 19,000 deposit-holders at the Bank of Cyprus who, combined, hold some €8.01 billion ($10.30 billion) in uninsured deposits. Uninsured savers at Cyprus Popular Bank, who hold a combined €3.2 billion, will lose most of that.

Euro’s Bears Go Back on Prowl

Wagers on a weaker euro have grown for four of the past five weeks in the futures market, according to the latest data from the U.S. Commodity Futures Trading Commission. As of March 19, investors were betting $7.2 billion that the euro would fall against the dollar, the biggest aggregate position since November.


Red heart Broken heart Poland opens way to euro referendum
Strong public opposition to the common currency

Donald Tusk, Poland’s prime minister, took a big political gamble on Tuesday when he opened the door to a referendum on joining the euro, in the face of strong public opposition to the common currency.

Lightning  Temp Hiring Tumbling in Euro Zone  Temporary hiring through agencies is falling in the euro zone at a double-digit percentage rate in year-to-year terms.

Agency employment across Europe is falling 10% to 15% year-to-year, he estimates.

Temporary employment fell at an annual rate of 15.5% in France and 3% in the Netherlands in January, its figures show. In Belgium, the most recent figures show employment fell 6.0% in December. German agency work fell 14.8% in November.


Yesterday’s economic releases were generally on the weak side. 

  • The Richmond Fed index lost 3 points.

In March, the seasonally adjusted composite index of manufacturing activity lost three points settling at 3 from February’s reading of 6. Among the index’s components, shipments slipped two points to 8, the gauge for new orders moved down four points to end at -4, and the jobs index added one point to end at 9.

Pointing up Note that new orders have been weak for 3 consecutive months.

Other indicators also suggested weaker activity in March. The index for capacity utilization turned negative, losing fourteen points to -3, and the index for backlogs of orders dropped two points to finish at -14.



The neighboring Philly Fed survey also shows uninspiring new order patterns.


  • New home sales dropped -4.6% in February and January’s gain was revised down. Bundling January and February data, new home sales are up nearly 19% Y/Y.
  • Consumer confidence dropped to 59.7 in March from 68.0 in February. 
  • Expectations for economic activity over the next six months dropped to 60.9 from a revised 72.4, originally reported as 73.8. The assessment of current economic conditions slipped to 57.9 from a revised 61.4, first put at 63.3.

Open-mouthed smile  Home Prices Post Big Rise

Prices rose by 8.1% in January from a year earlier, the largest such gain in 6½ years, according to figures from the S&P/Case-Shiller index of home prices in 20 major metropolitan cities released Tuesday. All 20 cities posted annual increases.

Prices also defied their usual winter slowdown and rose 0.1% in January from December, a period when prices often fall because sales activity is slow. After adjusting for seasonal factors, prices gained 1% from December.


Smile  Firms Shift Spending to Higher Gear

America’s businesses stepped up investment in the first quarter, as the threat of the year-end fiscal cliff was averted and despite fresh economic risks emerging in Washington and around the world.

One closely watched gauge of business investment—new orders for nondefense capital goods, excluding aircraft—fell slightly in February after climbing in January, the government said Tuesday.(…) The gauge’s three-month moving average has risen every month since October.


Vietnam GDP Growth Slows in First Quarter as Banks Struggle

Gross domestic product expanded 4.89 percent in the first three months of the year from the same period a year earlier, the General Statistics Office said in Hanoi today. That compares with a previously reported 5.44 percent pace in the last quarter of 2012 and the median estimate of 5.2 percent in a Bloomberg survey of 10 economists. Growth in the first quarter of 2012 was revised to 4.75 percent, the Statistics Office said.

Retail sales increased 11.7 percent in the first quarter from the same period a year earlier, slowing from a 21.8 percent pace in the same period a year earlier, the Statistics Office also said today.

Global pool of triple A status shrinks 60%
Dramatic re-drawing of world credit ratings map

(…) The expulsion of the US, the UK and France from the “nine-As” club has led to the contraction in the stock of ­government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11tn at the start of 2007 to just $4tn now, according to Financial Times analysis.

The shrinkage, largely a result of US’s downgrade by S&P in August 2011, is part of a dramatic redrawing of the world credit ratings map, which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of “safe” assets.


NEW$ & VIEW$ (5 MARCH 2013)

Eurozone retail sales rise in January but beware February. Europe car sales plummet. Eurozone fiscal rules: firm but flexible. Sentiment watch. Watch corporate bonds.


Sales volumes rose 1.2% in one of the slowest month of the year after declining 0.8% in December. Nevertheless, the 3 month growth of 0.6% (2.5% a.r.) sure beats the previous 3 month 1.6% drop (-6.6% a.r.).  Core sales did even better with a 2.0% gain in January after 4 consecutive declines totaling 3.0%.




High five  That said, Markit’s latest retail PMI for the Eurozone signaled a sharp decline in February, as reported in my Feb. 28 New$ & View$:

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.

image image

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.

Auto  Lightning  German car sales plunge as Europe’s auto crisis deepens

New car sales in Germany fell by more than 10 percent year-on-year in February, signaling the crisis for Europe’s auto makers is deepening as recession-hit consumers curb spending.

The data, which comes as executives gather for Wednesday’s opening of the Geneva Car Show, follows an 8.5 percent decline in new car registrations in Europe’s largest economy in January. (…)

Pointing up   Germany continues to outperform markets such as France and Italy, where car registrations tumbled 12 percent and 17 percent respectively in February.(…)

German car sales fell 2.9 percent in 2012, including a 16 percent drop in December.



EU Opens Way for Easier Budgets After Backlash


European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets.

Italy’s deadlocked election, France’s refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis.

Economic strains “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits,” European Union Economic and Monetary Commissioner Olli Rehn told reporters late yesterday after a meeting of euro- area finance ministers in Brussels.

In the same FT: good news…
Shares rebound as China sticks to targets
Sentiment improves as investors bet on further easing


(…) But the SCI has recovered by 2.3 per cent after Beijing maintained its economic growth target at 7.5 per cent while lowering its inflation goal to 3.5 per cent as the National People’s Congress opened on Tuesday.

…not so good news:
Wen issues China growth warning
Outgoing premier says 7.5% GDP target will be ‘hard to attain’


Warning signs for US corporate bonds

Debt looks expensive and borrowers are paying higher premiums

Could the bond boom be turning? Warning signs are flashing as investors demand higher yields even on US bonds issued by the world’s largest and safest corporate borrowers.

In recent weeks, big investment grade bond issues by the likes of Philip Morris International and UnitedHealth Group have been sold at higher yields than the levels their older bonds were trading at in the secondary market.

Returns on IG bonds taper off after 2012 peak


NEW$ & VIEW$ (7 FEBRUARY 2013)

Economic storm coming? Low mortgage rates helping consumers. Slower growth in S. Korea, India. China car sales. Oil price management. Social security fund depletion. Beware earnings estimates.


Storm cloud Storm cloud Brace for Uglier Data as Cliff Meets Sequester

(…) The payroll-tax increase on Jan. 1 has been taking a bite out of paychecks for more than a month, though key gauges of consumer spending for January haven’t been released yet. The last-minute passage of the fiscal cliff deal also will delay tax refunds, deferring some consumer spending and complicating the seasonal adjustments in data for retail sales and consumer spending. Both of those forces are set to hit just as the government prepares for widespread spending cuts on March 1, followed by a potential government shutdown in late March. (…)

Storm cloud Consumers Skid From Fiscal Cliff to Oil Slick

Consumers are taking a wild ride this quarter, from peering over the fiscal cliff to skidding on an oil slick.

(…) The 18-cent jump in gasoline prices in the past week–the biggest weekly gain in almost two years–adds another negative risk to the consumer outlook this quarter. Not only are workers taking home less pay, more of that smaller stash is being spent at the gas pump. (…)

The general rule is that a 10-cent increase in the price of gas costs drivers about $1 billion a month. If prices remain at their current high level with no change in buying habits, households will have to spend less on other goods and services, creating a drag on the overall economy. (…)


Boehner: Spending Must Be Tackled  The chances of avoiding roughly $85 billion in government spending cuts scheduled to begin next month are dwindling, as House Republicans resist overtures from Democrats to replace the spending cuts with some tax increases.


Mortgage refinance applications remain at a relatively high level early in 2013. That is good news for homeowners as it comes against a backdrop of record low mortgage rates (courtesy of the Fed’s QE campaign). As today’s Hot Chart shows, the recent wave of refis has resulted in a tangible decline in the effective interest rate on mortgage debt outstanding. To the extent that job creation remains on track and that home prices remain on an uptrend, we think that there is room for refis to further reduce the spread between the market and effective mortgage rates.

According to Feddie Mac’s just-released quarterly analysis, the average interest rate reduction on refinancings was 1.8 percentage point in Q4, a
savings of about 33 per cent in interest rate. That is the largest percent reduction in 27 years. Our research has found that households get a windfall of around $70 billion annually at the economywide level from every one percentage decline in the effective mortgage rate. (NBF Financial)

Storm cloud  Weak sales hit S Korea growth hopes
Data follow warnings from exporters of darkening outlook


Sales at South Korea’s top department stores and discount shops fell sharply last month, renewing concerns about the country’s fragile economic recovery.

The weak data were a blow to hopes that Asia’s fourth-largest economy had bottomed out, and came soon after leading exporters warned of a darkening outlook for the coming months. (…)

In addition to weak domestic spending, South Korea also faces challenges on the export front as the won’s strength threatens the country’s export competitiveness. (…)

Storm cloud  India Expects GDP to Grow 5% This Year

The Indian economy is estimated to grow 5% in the fiscal year through March, the lowest in a decade, significantly slower than the 6.2% expansion last year.

In December, the finance ministry had cut its growth projection to about 5.8% from an initial forecast of 7.6% made when the federal budget was unveiled in March.

Auto  China Passenger-Vehicle Sales Surge as SUV Sales Double  China’s passenger-vehicle sales surged 49 percent to a monthly record, beating analysts’ estimates, as demand for SUVs almost doubled and Ford Motor Co. extended gains in market share.

(…) Wholesale deliveries, including multipurpose and sport utility vehicles, climbed to 1.73 million units in January, the state-backed China Association of Automobile Manufacturers said in an e-mail today. (…)

Total sales of vehicles rose 46 percent to 2.03 million units last month, according to the association. (…)

High five  The holiday distortion means that sales may decline in February. Economists and analysts typically calculate January and February figures together to explain the Chinese market. (…)

PBOC Signals Inflation Concern as Economy Rebounds

China must be alert to changes in price-gain expectations and to imported inflation, the People’s Bank of China said yesterday in its fourth-quarter monetary policy report. The costs of labor-intensive products, services and agricultural goods may rise persistently on slowing labor-supply growth, the PBOC said.



Brent Crude Rises to Four-Month High, Extends WTI Premium  Brent crude climbed to its highest level in more than four months in London, extending its premium over West Texas Intermediate for a seventh day.



Saudi Arabia Stabilizes Oil Output as OPEC Maintain Cap


The world’s largest crude exporter produced 9.05 million barrels a day in January, little changed from last month when output reached the lowest in 20 months, the Persian Gulf official said on condition of anonymity.

The kingdom, while keeping its production stable, supplied 9.26 million barrels a day to the market compared to 9.15 million a month ago, he said. The difference of 210,000 barrels between supply to market in January and production figures is made up for by deliveries from inventories, he said.

The Organization of Petroleum Exporting Countries trimmed output by 465,000 barrels a day in December to 30.4 million as budget wrangles in the U.S., speculation about stimulus measures in Japan and Europe’s struggle to boost growth clouded the outlook for fuel demand. Cuts were led by a reduction in Saudi Arabia, the group said last month in its monthly report, citing secondary sources. That’s 800,000 a day more than the 29.6 million the group estimates it will need to provide this year.

Saudi Arabia started producing at about 9 million barrels a day in December after pumping at 9.9 million for most of the second half of 2012, according to data compiled by Bloomberg.

Remember, Saudi Arabia’s budget is based on $100 Brent.

Punch  U.S. Treasury Considers Ways to Extend Debt Maturity

The U.S. Treasury and its Wall Street advisers are weighing steps to more rapidly extend the maturity of government debt, a development that could partially blunt the Fed’s effort to lower long-term interest rates.

(…) The U.S. Treasury Wednesday said the average maturity of its outstanding debt had risen to almost 65 months at the end of 2012, up 34% since an October 2008 trough. That is the longest average maturity in a decade.

The trend looks set to continue. Under current policies, the average maturity of debt is set to rise to 80 months by 2022.

And the Treasury Borrowing Advisory Committee, composed of executives from some of Wall Street’s largest banks and bond investors, at its most recent meeting explored more aggressive measures to extend the maturity even faster.

Scenarios under consideration included the issuance of the 50-year and 20-year bonds. (…)

Crying face  Social Security Trust Fund Likely To Run Out In 2031

Social Security’s financial outlook took another hit this week, as the Congressional Budget Office hiked its estimate for cash deficits from 2013 to 2022 by $212 billion.

The wider deficits — mainly due to weaker revenue estimates — mean a quicker depletion of Social Security’s trust fund, after which the program could only afford to pay about 75% of benefits. (…)

To offset a 25% lifelong benefit cut with 18 years of saving would require that average earners set aside about 6% of annual wages, assuming Treasury returns and a lifelong annuity. (…)


Just kidding  How accurate are analyst annual EPS projections one year in advance?

Over the past 15 years, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has been +10.3%. In other words, analysts on average have overestimated the final EPS number by about 10% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in ten of the fifteen years and underestimated the final value (i.e. the final value finished above the estimate) in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded three months after the end of each calendar year (March 31) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season (January through March).

However, this 10.3% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+35.9%), 2008 (+53.4%), and 2009 (+27.4%). Using the median instead of the average, the median difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +5.5% over the past 15 years. (Factset)

S&P 500 Bottom-UP EPS: One-Year Prior EPS Estimate vs. Final EPS Number


NEW$ & VIEW$ (15 JANUARY 2013)

Storm cloud Europe Malaise Hits German Economy  The German economy finally succumbed to the weakness gripping the rest of the euro zone, shrinking in the fourth quarter of 2012.

[image]Germany’s federal statistics office Destatis Tuesday said Europe’s largest economy expanded 0.7% in 2012, but its gross domestic product probably fell by 0.5% in the fourth quarter. That equates to a contraction of 2.0% in annualized terms.

(…) the government is cutting its 2013 economic growth forecast to 0.4% from 1.0% previously, a German economics ministry official told The Wall Street Journal on Tuesday.

Storm cloud  Empire Manufacturing Starts off the Year Slow

Manufacturing in the state of New York started off the year on a slow note as the January Empire Manufacturing report came in weaker than expected (-7.8 vs. 0.0) this morning.  This is now the sixth month in a row where this indicator has been below zero.  (…) 

The top chart below shows the General Business Index of the Empire Manufacturing index for current conditions and six months out.  Interestingly, even as the current conditions component has been declining, the outlook six months out has been improving.  The current spread between the two indices is the widest it has been since April 2012.  Let’s hope that manufacturers are not getting overly optimistic and actually have reason to be more optimistic.

The second chart below shows the outlook for capital expenditures and technology spending over the next six months.  As shown, both indices have been in multi-month downtrends.  In fact, the outlook for capital expenditures (4.3) is the lowest since July 2009.



Smile  Producer Prices Decline

Wholesale prices dropped 0.2% in December, a sign that inflation remains subdued.

The decrease was driven by a 0.9% decline in food prices and a 0.3% drop in energy costs. Gasoline costs slid 1.7%, the third consecutive monthly decline. Excluding volatile food and energy costs, producer prices increased 0.1%.

Fingers crossed  U.S. RETAIL SALES HANG ON

Retail and food-service sales increased 0.5% in the final month of 2012 to a seasonally adjusted $415.70 billion. (…) excluding autos, retail sales were up 0.3%. Excluding autos, building materials and gasoline—a figure closely watched by economists, who use it as a better gauge of spending—retail sales rose 0.6% during December.

December’s gain in overall retail sales followed a revised 0.4% gain for November. (WSJ, chart and table from Haver Analytics)


Pointing up  Credit Suisse economists noted (via FT Alphaville)

We look at average weekly earnings of all employees on private nonfarm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. And if weekly earnings held steady in January, at the December level, workers would feel like they earned $802.32 instead. That’s the equivalent of losing all the 2012 gain in weekly earnings in one month.

As a percentage of income it hits the middle class hardest because it applies only to the first roughly $114,000 in wages, effectively a regressive measure that takes money from the people most likely to spend it. The cuts themselves had been well-designed to be consumed, as noted by the NY Fed, and that effect will now be reversed.*

Wal-Mart plans $50 billion “buy American” push

Wal-Mart Stores Inc will buy an additional $50 billion in U.S.-made goods over the next decade in areas like sporting goods and high-end appliances in what the world’s largest retailer called a bid to help boost the U.S. economy.

Wal-Mart, the largest private employer in the United States, also said on Tuesday it plans to hire 100,000 newly discharged veterans over the next five years, at a time when the U.S. unemployment rate is at 7.8 percent.

Winking smile  China Defends Export Data After Economists’ Skepticism  China’s customs administration said every dollar of trade is documented, defending the quality of export data that analysts at UBS AG and Australia & New Zealand Banking Group Ltd. said may fail to capture the true picture.

Here’s a dependable stat:

Electricity consumption rose sharply in December – the fourth straight month. For all of 2012, the 5.5% rise was modest (for China), versus 11.7% in 2011. But just in the last four months, electricity use has risen over 8%. The 2013 China economy – a strong start. (ISI)


Fed Sees Bond Buys Continuing

“There are some positives, but I want to be clear that while we’ve made some progress there is still quite a ways to go,” Mr. Bernanke said, speaking about the economy at the University of Michigan’s Gerald R. Ford School of Public Policy here. The Fed has said that continuing these programs—such as an $85 billion-a-month bond-buying effort—hinges on progress in the U.S. job market. (…)

The Fed chairman cited bright spots for the economy, including the energy boom that is lifting output in some states, an improving housing market and resilient consumer confidence. He defended the effect of Fed policies on the economy. The programs helped drive down long-term interest rates to support growth, he said, as evident from “incredibly low” mortgage rates. That, he added, was a factor making housing more affordable and helping the sector recover.

Eventually, that will stop and the old normal will reappear…



NEW$ & VIEW$ (20 NOVEMBER 2012)


U.S. Existing Home Sales Improve

The National Association of Realtors reported that sales of existing homes increased 2.1% during October to a 4.790M annual rate. The gain followed a downwardly revised 2.9% September decline to 4.690M, initially reported as 4.750M. Sales of existing single-family homes alone rose 1.9% to 4.220M, up 9.6% y/y. Sales of condos and co-ops rose 3.6 m/m to 0.570M, up 21.3% y/y.

The median price of an existing home ticked up 0.2% (+11.1% y/y) to $178,600 following three straight months of decline.

The supply of homes on the market fell to a six year low of 5.4 months. The months’ supply of single-family homes on the market slipped to 5.4 and for condos & coops it fell to 5.3 months. The total number of homes on the market continued its steady decline and fell 1.4% m/m, down 21.0% y/y. Inventories of single-family homes fell 20.9% y/y while inventories of multi-family homes fell 26.9%.

Pointing up  This is the real big thing. Housing starts, and prices, can only continue  to recover.


(Chart from WSJ)

Housing Starts in U.S. Increase to Four-Year High

Starts rose 3.6 percent to a 894,000 annual rate, the fastest since July 2008 and exceeding all estimates in a Bloomberg survey, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, eased after surging the previous month.

Permits decreased 2.7 percent to an 866,000 annual rate from 890,000 in September. The drop in October permits reflected fewer applications for multifamily construction, while those for one-family units rose to the highest level since July 2008.

Construction of single-family houses eased 0.2 percent to a 594,000 rate from 595,000 the prior month. Work on multifamily homes, such as and apartment buildings, jumped 11.9 percent to an annual rate of 300,000.

From BMO Capital:

The surge in homebuilder confidence to the highest level in more than 6 years bodes well for continued positive U.S. housing market momentum. Below, we plot homebuilder confidence against housing starts, but you can easily swap out starts for sales or prices and get a similar (optimistic) picture. image

FDI in China declines in Oct  Foreign direct investment in China edged down by 0.24 percent from a year earlier to $8.31 billion in October, the Ministry of Commerce said.

The first 10 months saw FDI in China decline by 3.45 percent year-on-year to $91.74 billion.

FDI from the US went against the downward trend and expanded by 5.3 percent year-on-year to $2.7 billion from January to October while the first nine months saw US FDI in China drop by 0.63 percent year-on-year.

Moody’s Cuts France Rating

Moody’s stripped France of its triple-A rating, following in the footsteps of Standard & Poor’s and delivering a stinging critique of President Hollande’s attempts to turn the economy around

Moody’s Investors Service stripped France of its triple-A rating Monday, following in the footsteps of Standard & Poor’s Ratings Services, and delivering a stinging critique of President François Hollande’s attempts to turn the economy around amid the euro-zone crisis.

The ratings firm said the main reasons for its action, which leaves Fitch Ratings as the only ratings firm to keep France at triple-A, is the economy’s weakness and the risks to the government’s finances “posed by the country’s persistent structural economic challenges.” (…)

Moody’s cut France’s rating to Aa1 from Aaa and kept a negative outlook on the rating. (…)

French Bonds Still Hold Broad Appeal

French government bond prices weakened only slightly after Moody’s Investors Service’s one-notch ratings downgrade, the country’s second loss of its prized triple-A rating this year.