NEW$ & VIEW$ (21 SEPTEMBER 2012)



Thumbs up Thumbs down Greek Bailout Fight Looms

A confrontation is brewing among Greece’s international creditors over who will provide the financing needed to keep the country afloat.

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece’s bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece’s debt-service burden. (…)

Northern creditor countries, led by Germany, the Netherlands and Finland are adamant that Greece won’t get more loans from them. Such loans would require the approval of Germany’s parliament, where Chancellor Angela Merkel fears many of her center-right allies would revolt, causing a government crisis.(…)

Spain Sale Improves Funding Prospects

(…) In a sign that the effects of the ECB’s pledge are allowing Spain to continue to access debt markets, the country’s treasury sold €4.8 billion ($6.26 billion) of bonds, above its €3.5 billion to €4.5 billion target. The offer received €8.577 billion in bids.

The ECB’s pledge to buy bonds with a maturity of up to three years encouraged Spain’s treasury to launch a new three-year bond, maturing in October 2015 and carrying a coupon, or scheduled interest payment, of 3.75%. This bond accounted for the bulk of the funds raised at Thursday’s auction, with the rest coming from the sale of an existing 10-year bond. (…)

Data from before Thursday’s auction show Spain had borrowed funds at an average cost of 3.87% so far this month, down from 5.75% on average in July, according to Jean François Robin, strategist at Natixis. Mr. Robin said ECB President Mario Draghi’s June 26 pledge to do whatever is needed to safeguard the euro “has clearly brought about a complete sea change as regards Spain’s funding costs.”

Spain has completed about 82% of its annual gross fundraising target of €86 billion for 2012, but some investors believe the country could soon need financial support from the European Union as Madrid faces a worsening recession, high borrowing costs and looming debt repayments, including about €30 billion in October. Spain has requested a euro-zone rescue loan of as much as €100 billion to overhaul its ailing banks, which are still reeling from a 2008 property-market crash.

On Thursday, International Monetary Fund Managing Director Christine Lagarde said a report on Spain’s banking sector due this month will show that recapitalization needs are lower than many feared, and close to projections of around €40 billion made by the IMF in June. (…)

The rift between Catalonia and Spain is expected to escalate, and analysts say that the drop in Spain’s financing costs may be short-lived, particularly if Moody’s Investors Service were to cut Spain’s debt rating to below investment grade, making it the first of the three major ratings firms to lower Spain to junk level.

A decision by Moody’s is likely by the end of the month. Such a move would further damp demand for Spanish debt.

Pointing up  That said, it sure looks like Spain is lining itself up for the big request:
EU in talks over Spanish rescue plan
Brussels is helping Madrid draft new economic reform policy

EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme that will be unveiled next week.

According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

Exclusive: Spain eyes pension reform with aid package in sight

Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said.

(…) Sources with knowledge of the government’s thinking said Rajoy’s comments were a sign that his stance was shifting.

“He just said that he would not cut the pensions. But did you hear anything else? We both know that there are several ways of cutting. One is to simply leave them steady against inflation,” said one of the sources. (…)

Call me  EU Bailout Fund to Launch Without Leverage Options

Europe’s permanent bailout mechanism is almost certain to start its life next month without the two leverage vehicles that were agreed for its temporary predecessor because of renewed Finnish concerns about its exposure to the funds, several people familiar with the situation said.

The leverage options were designed to allow the euro zone to mobilize far more than the EUR500 billion ($649 billion) lending capacity ceiling on the new bailout fund, the European Stability Mechanism, by offering extra protection to investors. (…)

Finance ministers from the euro zone discussed transferring the leverage vehicles to the ESM at a meeting in Cyprus last Friday. According to officials, there was broad support for the idea but objections from Finland blocked agreement.

One EU official said he believes Finland’s objections could be worked out. However, with the ESM due to be launched Oct. 8, the leverage vehicles now won’t be included in the ESM guidelines that will detail the tools available to the new rescue fund and the conditions for using them, two officials said.

That means the leverage vehicles aren’t likely to be available for use if a broader Spanish request for a bailout from the ESM were to come soon. (…)

Surprised smile  Italy slashes growth forecast for 2012
Rome expects 2.4% contraction, twice as deep as it previously estimated

Rome also revised sharply upwards its predicted public deficit for this year from 1.7 per cent of gross domestic product to 2.6 per cent, and from 0.5 per cent to 1.8 per cent in 2013, underlining how tough austerity measures have made fiscal consolidation more difficult to achieve.

It predicted the economy would continue to shrink next year, by 0.2 per cent, rather than grow by a modest 0.5 per cent.



Jobless Claims Drop, Remain Elevated

Initial unemployment claims fell 3,000 to a seasonally adjusted 382,000 last week but remain high, showing the labor market is struggling to sustain improvement, while leading indicators dropped 0.1% in August.

The four-week moving average of claims-—which smooths out weekly data—increased by 2,000 to 377,750. That is the highest level since the week ended June 30.


Yesterday’s Philly Fed Survey results were quite weak. Hopefuls jumped on the 6-m forecast to which I give little attention. Doug Short’s 3-months moving average plot  smooths out the Index monthly volatility.

Click to View

And Scott Barber displays the details:


See anything to cheer about there?


KB Home Reports a Profit

KB Home posted a fiscal-third-quarter profit as the builder delivered more houses at higher prices.

Orders were up 3.4% to 1,900 homes, and backlog—an indication of future business—climbed 33%.


Storm cloud  China Slowdown Seen Longer Than in Crisis by State Economist  China’s economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said.

“The slowdown will definitely extend into the first quarter of next year,” said Yuan, 58, who advises the government without being directly involved in policy making. “That will provide a good starting point for the new generation of leadership to make a turnaround, because things can’t get worse.” Sarcastic smile

(…) “China’s medium and small-sized businesses are finding it increasingly hard to borrow money from banks — the most fundamental part of the economy is suffering,” Yuan said.

Storm cloud  China Money Rate Sees Biggest Weekly Increase Since February  China’s overnight money-market rate had the biggest weekly advance in seven months on speculation banks are hoarding cash to meet quarter-end requirements.

Fingers crossed  IEA allays oil fears with Saudi pledge
Energy watchdog’s comments come as crude hits six-week low


Oil priceMaria van der Hoeven, executive director of the Paris-based IEA, told an energy conference on Thursday that the oil market was “sufficiently supplied” with Saudi Arabia, the US and Canada delivering more crude to the market. (…)

“The Saudis remain the key factor in dictating the eventual price of crude,” said Mark Thomas, head of European energy at Marex Spectron, the commodities broker. He added that investors ultimately needed to “listen to and watch carefully Saudi price guidance”.


A Golden Cross for Gold

Fittingly, gold has experienced a “golden cross” today, which is a technical signal that occurs when the 50-day moving average crosses above the 200-day moving average as both moving averages are rising.   Market technicians use the “golden cross” as a bullish indicator, but has it historically been bullish for gold?

Also supportive at this time:image


MasterCard warns at an investor meeting that second-half revenue growth will come in lower than the pace it saw in Q2. The core of the problem could be that it sees worldwide processed transaction growth falling to 24.9%, down from its previous pace of 29.3%. The company also cites foreign exchange as a headwind, forecasting a 5-6 ppt negative effect in Q3 and 3-4 ppt in Q4. (webcast, slides)  (SA)




Steaming mad Brazil’s finance chief attacks US over QE3
Mantega says Fed could restart ‘currency wars’

Brazil GDP growth, Brazilian real against the dollarGuido Mantega, Brazil’s finance minister, has warned that the US Federal Reserve’s “protectionist” move to roll out more quantitative easing will reignite the currency wars with potentially drastic consequences for the rest of the world. (…)

He cited Japan’s decision this week to expand its own QE programme, coming on the heels of the Fed’s decision to launch further QE last week, as evidence of growing global tensions. “That’s a currency war,” he said. (…)

“I would say today the currency is at a reasonable value, still overvalued against a basket of Brazil’s trading partners, but at current levels [it is] helping make Brazilian companies more competitive.” (…)

“The US, Europe and the UK are more protectionist than Brazil,” he said.

Money  Long-term corporate bonds – dirty thirty
Companies are in a rush to lock in as much long-term debt as they can

US 30-year corporate bond salesThey have sold more than $100bn of 30-year investment-grade corporate debt in the US so far this year, on pace for an annual record. Average yields on long-term corporate bonds are at 4.5 per cent, according to a Barclays index. (…)

But even if the debt is issued by a rock-solid company, this is a risky bet on interest rates. Remember the bond maths. Novartis this week sold 30-year bonds that pay a fixed 3.7 per cent; they are trading at almost $102.

If interest rates on equivalent bonds rise just 2 percentage points in five years’ time – well within historical ranges – the bond price will fall to about $75. Want to get par back? See you in 2042. (…)

Underfunded pension managers who lock in low yields will struggle to boost returns and close the funding gap when rates rise. Paper losses will be crystallised for mutual fund investors if the funds’ shareholders get spooked and start selling, which would force the manager to sell bonds at a loss. (…)

Punk  Funds Leap Beyond Benchmarks

With bond yields shrinking, many mutual funds have found a way to look better: Invest in riskier bonds but continue to measure the funds’ performance against benchmarks composed of safer investments.

Benchmarks are the main tool investors use to measure mutual funds’ performance. But bond funds are free to choose—and change—their benchmarks.


Here’s Moody’s take on high yield spreads. I am not sure about the “positive outlook for capacity utilization” however.

During the previous recovery, capacity utilization peaked at 80.8% in April 2007 and corporate credit spreads bottomed soon thereafter. Similarly, in the 1990-2000 business cycle upturn, the capacity utilization rate peaked at the 84.9% of November 1997, which was close to September 1997’s cycle bottom for the high yield bond spread.

Given the positive outlook for capacity utilization, the recent 528 bp spread of high yield bonds seems wide. However, seemingly excessive caution is warranted by above average macro and political risks. In addition, some question the sustainability of a now record low 6.2% composite speculative grade bond yield if only because of its exceptionally low benchmark Treasury yield. Nevertheless, the expected containment of inflation and the likelihood of subpar economic growth weigh against sharply higher Treasury yields.


BTW, Markit on its recent U.S. PMI:

imageThe US remained something of a bright spot, with the PMI unchanged on its August reading of 51.5. However, the PMI remains well below levels seen earlier in the year and the ongoing sluggish pace of expansion meant the manufacturing sector saw the worst performance for three years over the third quarter as a whole. Moreover, the output sub-index of the PMI fell to its lowest since September 2009 pointing to a near-stagnation of production.


(…) The following important measures go into effect at the beginning of calendar 2013 under existing law. Because the fiscal year begins on 1 October, the changes will affect only three quarters of the 2013 fiscal year.

1. Individual income tax rates will rise for ordinary income, capital gains, and dividends. In addition, certain tax credits will shrink and the alternative minimum tax (AMT) will affect a larger number of taxpayers. The Congressional Budget Office (CBO) estimates that total revenue from individual income taxes will rise from 7.2% of GDP in fiscal 2012 (which ends 30 September) to 9.0% in 2013 and 9.4% in 2014, the first full fiscal year the new tax levels would be in effect.

2. The Social Security payroll tax paid by employees will rise from 4.2% of income to 6.2% (on income up to $110,100), resulting in total social insurance taxes (also including Medicare) going from 5.5% of GDP in 2012 to 6.0% in 2013 and 6.2% in 2014.

Primarily because of these two tax increases, but also due to a number of smaller measures, the CBO estimates that total government revenue will rise from 15.7% of GDP in 2012 to 18.4% in 2013 and 19.6% in 2014, a rise of about 4% of GDP in just two years.

3. An automatic reduction in discretionary spending in 2013 and a cap on spending growth thereafter that were included in the Budget Control Act of August 2011 will, together with other measures including a reduction in payments to physicians for Medicare and the expiry of extended unemployment benefits, result in total spending falling from 22.9% of GDP in 2012 to 22.4% in 2013 and 21.9% in 2014.

The steep increase in revenues and the spending reductions/caps, if actually implemented, would result in the budget deficit falling from 7.3% of GDP in fiscal 2012 to 4.0% in 2013 and only 2.4% in 2014. The 4.9% reduction in the deficit over two years would be unprecedented since the end of the Second World War and is what has been referred to as the “fiscal cliff.” It would result in government debt as a percentage of GDP peaking in 2014 and declining thereafter. The economic effect of this fiscal scenario would be a recession, with the CBO estimating a drop of 0.3% in real GDP during calendar 2013.

GOOD QUOTE via Raymond James’ Jeffery Saut:

“Everyone kept saying ‘a top is not in place yet.’ They persistently pointed to the ‘normally reached’ levels of this or that statistic that were not yet there to reinforce their desire to remain bullish. … Apart from statistical measures of increasing blindness, this unwillingness to acknowledge what they themselves were already feeling revealed a comfortableness, a confidence, a conviction that whatever was happening – short-term survivable dips – would continue … until ‘the top,’ like a strip tease artiste of our youth would with decorum appear on stage, bow, and then, accompanied by applause from all the bulls eager to cash in on their excitement, would begin to twirl its statistical tassels in front of everyone.

I’ve gotten so old I can’t remember the names of those ladies at the Old Howard, but I can remember that all you got was a flash of this or that, before they waltzed off. Stock market tops are like that. You know it’s there somewhere if you squint hard enough, but you never quite see it, so you keep waiting for more. And then, in the end, as the curtain comes down on the bull market you realize that the one rule about tops is not that they provide this or that signal, but that they come before anyone is ready.”

… Justin Mamis


NEW$ & VIEW$ (7 August 2012)

Punch  Premier Talks Tough in Bid To Save Euro

Three years into Europe’s financial turmoil, Italian Prime Minister Mario Monti has become the most determined challenger to Germany’s approach toward tackling the euro crisis.

“Germany says that if the market is forcing you to pay high borrowing rates, it means you haven’t done enough to fix your local economy. This view neglects the fact that high spreads in the recent past also reflect market fears of a breakdown of the euro,” Mr. Monti said in the July interview.

“What we ask is that European authorities certify Italy’s good conduct by translating that into interventions to keep spreads within reasonable limits. I have often told Merkel that, if this isn’t done, she risks finding herself before an Italian parliament that repudiates Europe, monetary stability and the euro and is not friendly toward Germany,” he said.

Lightning  Italy sinks deeper into recession as Monti’s problems swell

Italy’s economy contracted by 0.7 per cent in the second quarter, data showed on Tuesday, compounding the difficulties for Mario Monti’s technocrat government as it grapples with a debt crisis that threatens the whole euro zone.

The 0.7 per cent fall in gross domestic product was the fourth consecutive drop for an economy mired in recession since the middle of last year, with the rate of contraction easing only marginally from a 0.8 per cent decline in the first quarter.

Official statistics agency ISTAT reported that GDP was down 2.5 per cent year-on-year after a fall of 1.4 per cent in the first quarter.

Industrial output dropped 1.4 percent in June from May and 1.8 percent in the second quarter, Istat said.

Storm cloud  German Factory Orders Fall Twice as Much as Forecast

Orders, adjusted for seasonal swings and inflation, dropped 1.7 percent from May, when they rose 0.7 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.8 percent decline, according to the median of 35 estimates in a Bloomberg News survey. From a year earlier, orders fell 7.8 percent when adjusted for work days.

Orders from the euro region sank 4.9 percent in June after jumping 7.8 percent in May, today’s report showed. Domestic orders fell 2.1 percent, while demand from non-euro nations rose 0.6 percent.

Fingers crossed  Bond buying plan heightens ECB dilemma
Markets risk reading too much into Spain’s apparent U-turn

(…) some analysts worry that the ECB may be limiting its own room for manoeuvre by putting the onus on politicians to act first.

Erik Nielsen, chief economist at UniCredit, said: “The ECB may be trotting into dangerous territory when they now insist on specific policy conditions before undertaking market operations.

“I cannot recall another example of a central bank telling its democratically elected officials that there will be a threshold in terms of their policy stance below which the central bank will simply throw in the towel and accept that markets, dysfunctional or not, have made it impotent with respect to its ability to steer policies to fulfil its mandate,” Mr Nielsen added.

There is little immediate pressure on Spain, or Italy, to ask for help.

How Draghi is changing the ECB’s playbook

Now that the immediately negative market reaction to the European Central Bank’s decision Thursday is past, it is worth revisiting the results and assessing ECB president Mario Draghi’s remarks in the post-council press conference.


The just-released Senior Loan Officer survey by the U.S. Federal Reserve showed a significant cooling in demand for commercial & industrial loans in Q3. For the small business sector, banks actually reported flat growth during the quarter. As today’s Hot Chart shows, this is the worst showing since Q4 of last year. Even if conditions in the U.S. are nowhere near as bad as in the Euro zone, the fact remains that there is a lack of traction from monetary policy. This does not augur well for acceleration in global
economic activity in H2 2012. (NB Financial)



Surprised smile  U.S. FISCAL CLIFF DEEPENS: Weak Economy Wiping Out Last Summer’s Deficit Cuts

The White House’s new budget projections show cumulative 2012-15 deficits will be $860 billion higher than its October 2011 estimates. That slippage, due partly to a weaker growth outlook, has already eroded about half the deal’s $1.75 trillion in reduced (noninterest) spending over a decade.


The Cass Freight Index weakens

imageJuly volumes (-0.7%) showed the first month‐to‐month decrease in 2012. Freight expenditures declined 2 percent in July, which marked the second monthly drop.

Unfortunately, many economic indicators are pointing to a further slowdown for the movement of freight. The Institute of Supply Management’s purchasing managers index (PMI) showed that economic activity in the manufacturing sector contracted in July for the second month in a row after 34 consecutive months of expansion. New orders are declining both domestically and abroad, meaning there will be less freight to move in the coming months. Import and export growth are well below 2011 levels, and given global demand exports are not expected to pick up for the remainder of the year.


Pointing up  July and August retail sales remain weak:

ICSC-Goldman reports very weak same-store sales in the August 4 week, at only plus 1.4 percent which matches the lowest rate of the recovery last seen in June this year and in January last year. The 4-week average, at plus 2.3 percent, is very nearly the weakest of the recovery. The report notes that tax holidays in 12 states failed to spark much interest in back-to-school shopping.


The gasoline stimulus is waning fast:


Railroad stats not much better:


Pointing up  imageEight of the 20 commodity categories tracked bythe AAR saw carload gains in July 2012 year over year, the lowest such number since May 2011 (see table at right).


Note also that ISI’s company surveys keeps falling and is now at 48.7. ISI’s China sales survey also keeps falling and is now at 42.3.


Storm cloud  China’s rail cargo volume growth just turned negative in June:

The chart below shows the cargo volume by transportation mode.  With the exception of rail cargo volume growth, the data points seem rather random with compared with GDP growth.  If Li Keqiang is correct about the usefulness of rail cargo volume, this suggests that the economy has probably not bottomed in the second quarter.


So, Beijing is pulling on some strings!

Project approval at peak rate

The National Development and Reform Commission approved more than 200 investments projects each month in the last quarter after the government asked for additional efforts to maintain steady economic growth.

Zhang Changmao, an economics professor at the Party School of the Communist Party of China Central Committee, said that the faster approval was a move to revitalize the cooling economy, but that the projects had also been repeatedly discussed before being approved.

“The approval process is likely to see a slowdown this year when the economy gets back on track,” Nddaily quoted Zhang as saying. He added that more policies are needed such as tax cuts and easing monetary policies.

However, Li Huiyong, chief analyst of macroeconomics at Shenyin Wanguo Securities, said that the sources of funding for the projects might be a top concern for cash-strapped local authorities.


Confused smile  Chart Of The Day: Follow The Money

The bond market is substantially larger than the stock market, and while stock market participants are all about taking risk, players in the bond market are about analyzing and managing credit risk.  Therefore, historically, the bond market has been a much better gauge in regards to risk management than the stock market.


While the markets push forward on “hope” for more intervention by Central Banks – the bond market is signaling that it is not so sure help is coming any time soon.  The current divergence between stock prices and bond yields is at it widest level this century.  Either yields will rise sharply as money rotates into stocks pushing asset prices markedly higher or stock prices will fall to close the gap with yields.  What is for sure is that the current divergence is unlikely to be the “new normal.”


Thumbs up Thumbs down Economic Indicators Turning More Positive

While the actual numbers have not been great, a large majority of the US economic indicators that have been released over the past two weeks have been better than expected.  Two weeks ago, 14 economic indicators were released, and 9 came in better than expected versus just 4 that came in worse than expected (1 was inline).  Last week, the numbers were just as strong, with 13 indicators beating economist estimates versus 6 that missed (2 were inline).

Here’s the chart on economists’ pendulum swings (from Cullen Roche via SA):


Now, go back up and read about the recent freight data again.


NEW$ & VIEW$ (16 April 2012)


Let’s begin positively:

Smile  U.S. CPI +2.7% YoY

Good news for equity valuation as per the Rule of 20. The YoY inflation rate fell from 2.9% to 2.7% and the MoM change was 0.3% even though energy prices jumped 0.9%. Core CPI and the Cleveland Fed’s other benchmarks shown below all rose 0.2% MoM, in line with recent trends.





(…) “The economy has experienced both a reduction in the demand for goods and damage to its productive capacity,” Narayana Kocherlakota, president of the Minneapolis Fed, said in a speech in Minnesota this week. “It does not appear that demand is significantly below the productive capacity of the United States.” Because of that, inflation hasn’t receded as much as the Fed forecast, he argues.

Many others in the central bank, including the Fed’s most powerful decision makers, disagree with Mr. Kocherlakota, who declined to comment for this story. These officials believe there is still a great deal of spare capacity in the economy which will hold inflation down despite temporary spikes. High unemployment—at 8.2% in March, well above its long-run average of less than 6%—is their key piece of evidence.

“There is still slack in the U.S. economy, and this is really the important thing to focus on,” New York Fed President William Dudley told students at Syracuse University Friday. Because of that, he said he expects inflation to fall below 2% by next year.

Fed researchers have been wrestling with this question, too. Fed staff at the central bank’s last policy meeting in March revised downward their estimates of the economy’s potential output, a slight nod to the Kocherlakota argument.

But the revisions were small and the staff argued to officials that there still are lots of underused assets holding back inflation, minutes of the Fed’s March meeting show. (WSJ)


The selloff began on April 3, after the release of the minutes from the Federal Open Market Committee’s March 13 meeting. The rally-shaking information in the report had little to do with the state of the economy or how long the Federal Reserve expected to keep rates at ultralow levels. Rather, it boiled down to a single word: According to the minutes from the most recent Fed meeting, a “couple” of Fed governors believed that the economy was weak enough to justify a third round of bond buying, or quantitative easing, in the near future. In January, a “few” had favored that approach.

Pointing up    Just as “fewer” Fed officials are worried about the economy, the Aruba-Diebold-Scotti Business Conditions Index, a high frequency indicator, which looked stronger in mid-February (left chart), is showing signs of weakness lately:

image image



Confused smile   Is the ECB split over Spain?

Bloomberg on Wednesday attributed the following comments to ECB executive board member Benoît Coeuré:

(…) “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”…

…”We have a new government in Spain that has taken very strong deficit measures,” Coeuré said. “All this takes time. The political will is enormous.”

Mr Coeuré’s view that Madrid’s political will is “enormous” contrasts somewhat with comments made by his boss, ECB president Mario Draghi at last Wednesday’s presser, which suggested that market pressure was justified both by economic fundamentals and the Spanish government’s inaction.

(…) But, by and large, I would read the recent developments not so much as an example of market fragility, but simply as an example that markets are expecting reforms. What markets are saying is that they are asking these governments to deliver, i.e. fiscal consolidation, structural reforms, etc. But I do not think that it is really to be looked at as a specific symptom of market uneasiness, but rather of market attention upon fundamentals.

The program “is still in place,” ECB Executive Council member José Manuel González-Páramo said late Thursday in Madrid, though Klaas Knot, another top ECB official, said Friday there is “no good reason” to resume bond purchases.


Lightning   Spain Jolts Global Markets

Fresh signs of stress among Spanish banks sent shudders through European markets on Friday and helped push U.S. stocks to their worst week this year.

[SPAIN]Gross daily borrowings by Spanish banks averaged €316.3 billion ($417.10 billion) in March, up from €169.86 billion in February and €106.3 billion in November, before the ECB stepped in heavily, data released by the Bank of Spain on Friday showed. That means Spain, the euro zone’s fourth-largest economy, accounts for nearly 28% of the €1.1 trillion lent by the central bank across the euro zone.

Spanish banks have used some of the LTRO money to refinance maturing debt and to buy more than €40.6 billion of government debt so far this year, allowing the government to raise more than half of its estimated 2012 funding needs.

Spanish banks have a mountain of bad loans

 The construction industry is down to multi-decade low employment

(Charts from Business Insider)

THIS MORNING:  Spanish Yields Rise Above 6%  Spain’s worries mounted as the cost of protecting against a Spanish default rose to a fresh record high and a slide in Spanish bonds sent 10-year yields above the 6% level for the first time since December.

Spain is scheduled to sell bonds at an auction on Thursday and the sale will be seen as another test of investor’s appetite for lower rated government debt.

Mission impossible
Wolfgang Münchau on Spain’s doomed cuts

European policy makers have a tendency to treat fiscal policy as a simple accounting exercise, omitting any dynamic effects. The Spanish economist Luis Garicano made a calculation, as reported in El País, in which the reduction in the deficit from 8.5 per cent of GDP to 5.3 per cent would require not a €32bn deficit reduction programme (which is what a correction of 3.2 per cent would nominally imply for a country with a GDP of roughly €1tn), but one of between €53bn and €64bn. So to achieve a fiscal correction of 3.2 per cent, you must plan for one almost twice as large. (…)

I can see only two outcomes for Spain. The crisis will end either in a catastrophic Spanish withdrawal from the eurozone, or in a variant of a fiscal union that includes a joint eurozone backstop to the financial sector. If the Spanish government pursues the strategy it has announced to the bitter end, the first outcome will become vastly more probable.


With the LTRO, the ECB lent cheaply to banks which then bought sovereign debt to pocket the carry.The problem is that, unlike the U.S. Fed’s QEs, capital risk remains, in fact, grows, within the Eurozone banks and not at the central bank, creating a nasty virtuous circle.

Andrew Roberts, credit chief at RBS, said Spanish banks used ECB funds to purchase five-year Spanish bonds at yields near 3.5pc in February and 4.5pc in December. The same bonds were trading at 4.77pc on Wednesday, implying a large loss on the capital value of the bonds.

It is much the same story for Italian banks pressured into buying Italian debt by their own government. Any further dent to confidence in Italy and Spain over coming weeks – either over fiscal slippage or the depth of economic contraction – could push losses to levels that trigger margin calls on collateral.

“The banks are deeply underwater. This is turning into a disaster for the eurozone periphery now that the liquidity tap has been turned off,” said Mr Roberts. “But given the opposition in Germany, the ECB can’t easily do another LTRO until there is a major crisis.”(…)

“It is going to be a problem if the funding market does not open soon and they have to liquidate their holdings,” said Guy Mandy from Nomura. “What the LTRO has done is concentrate systemic risk even further. If everything now goes wrong, it could go wrong in a hurry.” (Ambrose Evans-Pritchard, Daily Telegraph)

Wilted rose   Can we really hope that the funding market will open soon? Who in their right mind would buy Spanish, or Italian debt, in the current circumstances, knowing too well that only private investors will take the haircut?

Gavyn Davies discusses the odds of a new eurozone crisis in 2012:

The latest problems have arisen for three main reasons:

1. The Budget

(…)  A contracting economy is the main reason why independent economists think that the official targets will not be hit. For example, Andrew Benito at Goldman Sachs, forecasts that the deficit will miss the official 2012 target by 1.5 per cent of GDP. That would mean that the public debt ratio will rise by about 12 percentage points of GDP this year, taking it above 80 per cent. The speed of deterioration is alarming.

More front-ended fiscal austerity will not work. A better approach would be to commit credibly to much longer term cuts in public spending, and higher sales taxes, while also reducing marginal rates of income and corporate taxation.

2. The Banking Sector

(…) the renewed recession in 2012 is causing concern that the country’s largest banks, which the Bank of Spain has repeatedly said are in good shape, may after all, require further injections of new capital. The central bank governor admitted as much in what was otherwise an optimistic speech this week.

(…) The hit under “stressed” economic conditions seems likely to be at least 5-10 per cent of GDP, and there are concerns about how this money can be found, given that the government continues to rule out state aid for banks. The rest of the eurozone could certainly help here. Surely that is what the ESM is for?

3. The Labour Market

The rigidity of the Spanish labour market, well summarised by the OECD here, has long been recognised as the core structural problem facing the economy. (…)

However, the chronic shortage of aggregate demand in the economy certainly makes all this far more difficult to achieve. (…)

The rest of the eurozone has a choice. It can either help Spain through its current difficulties, with support from the ECB in the form of bond buying via the SMP, and from the ESM in the form of capital injections into the banks. Or it can wait until the crisis gets much worse before it is forced to act.

Co-ordinated and pre-emptive action, by Spain and the eurozone together, is urgently needed. There are few signs from either party that it will be forthcoming.

Call me   More meetings of all types coming up…  Left hug Work Right hug
Outlook for Spanish banks dims
Banesto profits slump 88%
Doubts emerge over Spain’s leaders
Prime minister denies need for a financial bailout

José Luis Alvarez, a professor at the Esade business school, says Mr Rajoy, directly elected with a clear majority, at least enjoys a political legitimacy that his counterpart Mario Monti lacks in Italy. But Mr Rajoy seems to have copied Mr Zapatero in choosing the “path of least resistance” rather than launching bold reforms. “There’s a general disenchantment . . . because nothing has changed. The only thing that’s changed are the managers.”

Downgrades Loom for Europe Banks

Under pressure from banks, Moody’s Investors Service said Friday that it is delaying until early May its highly anticipated decision on whether to downgrade the credit ratings of 114 banks in 16 European countries.(…)

“This is a serious problem for all European banks, especially in peripheral countries,” said the chairman of a top European bank that expects to be downgraded.

For example, Deutsche Bank AG said in its recent annual report that a one-notch downgrade of its credit rating could expose the bank to a €45 billion “funding gap.”

A Top Euro Banker Calls for IMF Boost

Top European Central Bank official Jörg Asmussen called on the rest of the world to pledge more money to the International Monetary Fund’s crisis war chest—a view expected to put Europe at odds with other regions at talks in Washington later this week.(…)

Persuading other parts of the world to put more money in the IMF’s war chest, at a time when much of IMF lending is to European countries struggling with their debts, will be a challenge. The U.S. and many emerging economies have so far argued that Europe needs to do more to help itself. (…)

And Mr. Asmussen insisted Europe is a safe place to invest. A repeat of the contagion that gripped markets in Europe and beyond last fall—when financial panic nearly led to the unraveling of Italy’s huge government-debt market—is unlikely, he said. Greece’s debt restructuring, which wiped out about half what Greece owed private creditors, won’t be repeated in other euro-zone countries, he said. “This should be clear to investors around the globe,” he added.

Flirt male   Spanish minister asks ECB to buy bonds

“If you’re demanding ultra-restrictive fiscal policies from Spain and Italy then it makes sense to have monetary policy with stronger bond purchases,” said Garcia-Legaz, a former secretary general of the Faes research institute that’s linked to the ruling People’s Party.

High five  THE END OF THE ROAD? High five

Kicking the can down the road necessarily ends when the road hits the wall. Draghi’s LTRO seemed to be a clever way to kick the can hopefully far enough down the road to allow time to heal some of the wounds. But, the wall is now moving rapidly towards Spain! Markets are realizing that Draghi will be short of time and Spanish banks soon short of money. True, Spain is not Greece: Spain is too big to fail but too big to save.

Mr. Draghi will soon need to speak German and Mrs. Merkel to stop simply saying “Nein!”. What’s “genuine QE” in German? Tony Boeckh sees a different outcome:

The Germans ultimately hold the financial cards and will continue to play the brinkmanship/enforcer role. But there is a political limit. Ultimately Germany’s only option may be to pull out of the euro along with a few other small countries which have manageable debt levels and tolerable unemployment. However it plays out, the next few months are very likely to see a resumption of serious eurozone financial stress, triggering increased market volatility.

I don't know smile   Sarkozy Embraces Growth Role for ECB

France’s President Nicolas Sarkozy said in an about-face Sunday that if re-elected for a second mandate in May he would push for the European Central Bank to actively support economic growth, and not limit its role to taming inflation. (…)

After a meeting with German Chancellor Angela Merkel and Italy’s Prime Minister Mario Monti in November, Mr. Sarkozy had said publicly that he would no longer comment on the ECB’s operations.(…)

A survey released Thursday showed that Mr. Hollande could garner 27% of the votes in the first round of the presidential election on April 22, against 26% for Mr. Sarkozy. In a run-off, on May 6, Mr. Hollande would defeat Mr. Sarkozy with 57% of the votes, the survey conducted by French polling agency CSA showed.

Winking smile   HERE’S A WAY OUT!

In Rasquera, they reckon marijuana is the solution.

On Wednesday, the authorities in the eastern Spanish village, population 900, announced that the residents had agreed to an unsual plan that the municipality has come up with to fight the crisis. In the future, Rasquera will lease several fields to a Barcelona association that plans to grow hemp there. The revenue is intended to help the municipality reduce its debts of €1.3 million ($1.7 million). (Der Spiegel)


American companies seem to be gaining market share abroad.

Recent upturns by both the global composite PMI and the ISM-derived composite index of US export orders bode well for sales of US output to the rest of the world. (Figure 6.) After sinking from the 57.8 of 2011’s first half to the 52.4 of the second half, the composite index of export orders received by US businesses subsequently recovered to Q1-2012’s 55.7. In turn, the slowing by the moving three-month sum of US exports from September 2011’s 15.7% to February 2012’s 8.6% ought to be supplanted by a summertime acceleration of exports. The recent recovery by US export orders suggests that any slowdown by the global economy may be relatively mild. (Moody’s)

image image


The U.S. foreign trade deficit in February declined to $46.0B versus a little-revised $52.5B in January. Exports ticked up just 0.1% (9.3% y/y) but imports declined 2.7% (+7.6% y/y). Real exports fell 1.0% (+7.3% y/y) but real imports declined a greater 3.9% (+1.9% y/y). (Haver Analytics)


Pointing up   The important line is the last one on Haver’s table. Imports of non-petroleum goods dropped 3.0% in February. The last time I looked, the U.S. was the only area of “strength” in the world among larger economies. If U.S. imports stall, let alone decline, who will Europe and China sell to?

 EUROZONE EXPORTS have increased in recent months, but for how long? Eurostat does not give a seasonally adjusted breakdown of exports but the non s.a. data showed that exports of energy goods jumped 27% YoY in January vs +11% for total exports (Feb. data not available).



Storm cloud   BOK Cuts Growth, Inflation Forecasts

South Korea’s central bank lowered its economic growth forecasts for the year, fueling market expectations that the central bank will maintain its accommodative monetary stance to underpin growth amid subdued inflation.


Fingers crossed   EARNINGS WATCH  Fingers crossed

Here’s what most media are writing about the start of Q1 earnings season:


Overall, 32 companies in the index have announced results to date. Of these 32 companies, 75% have reported actual EPS above the mean EPS estimate, which is slightly above the 72% average of the past four quarters. In terms of revenue, 84% of companies announced sales that surpassed estimates, well above the 63% average of the prior four quarters.


 Nowhere have I seen what followed in Factset’s release:

The blended earnings growth rate of 0.0% is slightly higher than last week’s estimate of -0.1%. If this is the final growth rate for the quarter, it will mark the end of the streak of consecutive quarters of earnings growth for the index at nine. Excluding Apple, the earnings growth rate for the index would fall to -1.5%.

Analysts have significantly decreased their Q1 earnings expectations. They were forecasting +8% YoY six months ago, +3% three months ago and now zero. This low hurdle rate should mitigate negative surprises in coming weeks. Should we all rejoice on that?

The upcoming week marks the start of the “peak” weeks of the Q1 2012 earnings season, as 84 companies in the S&P 500 and 12 companies in the Dow 30 are scheduled to report earnings results.

Money   Bank Earnings Worry Investors

J.P. Morgan Chase and Wells Fargo released first-quarter results that disappointed investors, underlining the industry’s struggles with a sluggish economic recovery.

J.P. Morgan Chase & Co. and Wells Fargo & Co., two of the strongest banks in the U.S., faced a barrage of questions from analysts over their problems containing expenses, which increased largely because of legal problems stemming from the housing bust. Although earnings at both banks exceeded Wall Street estimates, that was largely because both are scaling back the amount of money they have set aside to cover future losses.

J.P. Morgan Chief Executive James Dimon said Friday that the economy “looks OK,” even though “we all wish it were a little stronger. Whether we have a strengthening recovery, we don’t know yet.”

J.P. Morgan and Wells Fargo both offered assurances that the housing market is reaching a turning point. Wells Fargo originated $129 billion of mortgages in the first quarter, up from $84 billion a year earlier, and its mortgage applications were up 20%.

“Housing is getting very close to the bottom,” Mr. Dimon said.

Pointing up   Moody’s on U.S. banks:

First-quarter improvements were far more measured at JPM’s and WFC’s domestic retail and commercial operations, a sign that other less-diversified US banks may struggle to generate operating leverage. Low interest rates, a quarterly slowdown in deposit growth, and continued run-off of legacy portfolios continued to pressure net interest income and dampened overall loan growth for these two companies. This will be a market-wide trend. Meanwhile, bank fees nationwide will continue to be restrained by the CARD Act (credit cards), Reg E (overdraft fees) and the Durbin Amendment (debit “swipe” fees). Therefore, we expect the profit improvement will be more measured for less diversified banks that rely more heavily on these traditional businesses.



Ghost   Market seasonality should not be dismissed as this Barron’s chart reveals:


Here’s another look that helps justify one working on his golf game or going fishing during the next several months:




Good stuff from Moody’s:

imageRecent hints of slower growth abroad were quick to heighten investor anxiety. For both businesses and investors, the rest of the world has provided a valuable escape from the US economy’s torpid state. In view of how the US economy is likely to lag the rest of the world for thirteenth consecutive year in 2012, the quest for growth must be global in scope. In 2012, projected US real GDP growth of 2.3% is expected to lag the 3.6% growth rate for the rest of the world. During the previous 12-years-ended 2011, the rest of the world’s average annualized growth rate of 4.4% more than doubled the US’s accompanying average annualized growth rate of 1.8%.

imageUS real GDP last outran the rest of the world during the late 1990s, which coincided with the last great wave of technological innovation that included the introduction of the Internet and advancements in telecommunications technology.

Similarly, US growth also outpaced global growth when the personal computer brought about considerable technological change during the mid-1980s. Apparently, advanced economies with aging populations have considerable difficulty realizing significant gains in living standards without assistance from substantive technological progress.

imageEvidence of subpar technological progress can be found in the recent data on US exports. During the three-months-ended February 2012, the 5.5% year-over-year growth of US exports of high technology products trailed the 9.1% growth of all other US exports. Longer term, the five-year average annualized growth of high tech exports has lagged that of other exports since 2001, which coincided with the fading of the wave generated by major advancements in communications technology.


The US high-yield bond spread shows a remarkably strong correlation of 83.5 with the global composite PMI. The latest high yield bond spread of 627 bp is historically consistent with Q1-2012’s global composite PMI of 54.8. When the global composite PMI averaged 57 during the four-years-ended June 2007, the high yield bond spread averaged 341 bp. Thus, a significantly higher global composite PMI may be required if the high yield bond spread is to return to its 446 bp average of Q1-2011. (Moody’s)


Pointing up   COPPER
Codelco buys in copper to meet deliveries
Rare move underscores struggle to lift output to meet demand

Codelco, Chile’s state-owned mining company, bought copper on the spot market earlier this year after problems at one of its smelters left it struggling to meet its annual contracts, according to traders with direct knowledge of the transactions.(…)

Despite record prices, Chile has struggled to lift output, with production in the 12 months to February the lowest since 2004, according to the national statistics agency.

Poor production could counterbalance worries about slowing Chinese demand, which on Friday forced prices below $8,000 a tonne for the first time in three months.

(Reuters also has that story for FT non-subscribers)

Winking smile   LOSING BY  A HAIR

Fund Manager to Lose Hair After Betting on $2,000 Bullion

Charles Oliver, a Sprott Asset Management Inc. portfolio manager in Toronto, will have his head shaved today after losing a bet on the gold price.

Oliver joined Sprott in January 2008 and told clients at a meeting four months later he was so convinced bullion would reach $2,000 an ounce by April 16, 2012, he was willing to stake his hair on it. Gold was at $945 an ounce at the time.

“We got to $1,923 last September, I thought it was all good and easy straight from there on in,” Oliver, who co- manages the C$500 million ($501 million) Sprott Gold and Precious Metals Fund, said in a telephone interview today. “The markets can sometimes tease you.”


NEW$ & VIEW$ (27 Feb. 2012)

RECESSION CALLS: The Last of the Mohicans

ECRI remains convinced that a recession is coming. Lakshman Achuthan gave two good interviews last week. The Bloomberg Radio interview is also interesting.


David Rosenberg also gave a Bloomberg Radio interview the same day. David is only “concerned” about the risk of a recession. Of note, David talks about the employment rate. Here are some of the facts on the ER since 2005:

             Employment Rate  16-24 yrs                        Employment Rate  25-29 yrs

image image

             Employment Rate  25-54 yrs                        Employment Rate  55+ yrs

image image

Pointing up    The change in the ER by major age group has been: 16-24: -10 pts or -18%; 25-29: -7 pts (-9%); 25-54: -5 pts (-6%) and 55+: +3 pts (+8%).

For those who missed the Feb 16 New$ & View$ here’s the part on the Participation Rate:

(…) much of the recent decline in the participation rate is in the 16-19 and the 20-24 age groups, not as economically significant as if it were in the prime working and family-forming groups. If these young people have decided to go back to school, as recent consumer loan stats suggest (student loans jumped 55% in the first 9 months of 2011), they and the economy will eventually benefit. It thus appears that the drop in the PR is not as dramatic as many want us to believe.

Note also the uptrend in the 55+ age group. So long “freedom 55” as the collapse in house prices and exceedingly low interest rates prevent people from living from their lifelong savings.




Gas Prices Annoy Consumers but Don’t Dim Outlook Yet

The University of Michigan’s consumer sentiment index rose for the sixth consecutive month, as recent job-market gains overcame gas-price worries.

“Consumers are not as concerned with the current level of gas prices as they were in past episodes,” said Jonathan Basile, an economist with Credit Suisse.




Rainbow   More anecdotal evidence of a market firming up:

  • From Arizona State University’s newest real-estate report. (Via

“Single-family home prices overall in the Phoenix area have been moving up since they reached a low point in September,” Orr said in his debut monthly housing report.

The median price of all home sales, including new homes, reached $120,500 in January of this year, Orr reports. That compares with $113,166 a year earlier. The average price per square foot of Valley houses has climbed 3 percent since last year.

There were approximately 8,000 new and used homes sold in January, up from 7,500 in January 2011. Orr said investors have snatched up the oversupply of homes for sale under $300,000.
“Many people think there’s a glut of homes the banks are hiding somewhere, and that may be the case in other markets, but not here in the Phoenix area,” he said.

“We’ve gone through so many foreclosures that the system has been working itself out for about five years.” In January, there were 2,450 single-family foreclosures in both Maricopa and Pinal counties, compared with 4,200 during January 2011, according to the ASU report.

Surprised smile   The supply of homes listed for sale in metro Phoenix is down 42 percent from a year earlier.

For the third consecutive year, the median rental rate for a residential property located in the coastal Boca Raton / Deerfield Beach market in Southeast Palm Beach / Northeast Broward counties has increased, rising nearly seven percent in 2011 on a year-over-year basis compared to 2010, according to a new report from

Tenants paid a median lease price of $1.89 per square foot per month in 2011 compared to $1.76 per square foot in 2010 and $1.47 per square foot in 2009, according to an analysis by the Rental Division of the licensed Florida brokerage Condo Vultures® Realty LLC.   

As of Feb. 21, 2012, there are more than 120 properties available for lease in the Boca Raton / Deerfield Beach market where tenants rented an average of less than 35 properties per month in 2011, according to the report. 

Just kidding   SHOW ME THE MONEY!

G-20 Defers Move On Aid for Europe

Officials from the world’s leading economies deferred for months key decisions on international aid for Europe as they awaited more euro-zone action to fight the Continent’s debt crisis.

“There’s a vicious circle here where each is waiting for the other to do the right thing,” Bank of Canada Gov. Mark Carney said at a conference for the Institute of International Finance, a banking group, alongside the G-20 meeting.

G20 turns up pressure on Germany
Global finance ministers seek stronger EU firewall

“There is broad agreement that the IMF cannot substitute for the absence of a stronger European firewall and that the IMF cannot move forward without more clarity on Europe’s own plans,” said Timothy Geithner, the US Treasury secretary.

Germany has become increasingly isolated within the eurozone with the Dutch government vocally supporting the increase; Finland, Germany’s other traditional ally, has also indicated it would be willing to back an increase.

Rainbow   Germany softens resistance to eurozone ‘firewall’
Berlin considers combination of funds

Wolfgang Schäuble, finance minister, said using “the remaining funds” in the European Financial Stability Facility to bolster the European Stability Mechanism was “one possible solution to the question” of how to better guard against bond market sell-offs hitting Italy or Spain.



Auto   European auto manufacturers are down sharply this morning on reports over the weekend that China’s government may favour local brands for future car purchases by state agencies. (ISI)


Storm cloud  The MNI China Business Survey rose to 58.9 in February, up from 56.0, the second consecutive gain after 3 monthly declines. MNI reports that new orders and production gained in February. However, ISI’s seasonally adjusted number ticked down; it has remained flat since August 2011.

Take a look at the last item of this post.


This strength has acted as a competitive challenge for Canadian companies. Over the past six years, Canadian unit labor costs have risen 40% relative to the U.S., and Mr. Carney attributed two thirds of that to the higher dollar.

Mr. Carney said one “low-hanging fruit” for Canada to help its competitiveness is to increase productivity, which he says is currently around three quarters of the levels seen in the U.S. (WSJ)



What a rising market can do! Perma-bears are shaming back into hibernation and now the scenarists are writing the plot for the next act. The FT dismisses any need for multiple expansion. As long as the world avoids recession, “the middle managers of this world” will manufacture the necessary earnings. Simple enough? Where were theses managers in Q4’11 when earnings ex-Apple declined 9.1% QoQ?

Bulls sniff out plenty of reasons to be optimistic
S&P 500 passes post-crisis closing high

(…) Higher valuations are not necessary for optimism, however. Assume that the world economy will grow at a lacklustre pace of around 3 per cent a year over the next three to five years. To do that emerging markets need to expand at a moderate 4-6 per cent clip, with the developed world notching up 2 per cent annually. Not much to get excited about, but no recession by any means.

Assume then the middle managers of this world cut costs, boost productivity and tighten belts such that 3 per cent sales growth – the S&P 500 is more international than the US economy – can be turned into 6 per cent profit growth each year.

Finally, factor in the potential for healthy corporate cash piles to fund share buy-backs. Smithers & Co calculates that before 1986, US companies persistently issued new stock, in aggregate. However, the corporate sector has been the only net buyer of stocks for the past two decades. Since 1991, companies have bought a net $3.2tn worth of stocks, from the households, foreigners and institutions who were net sellers.(…)

Yet, whatever the rationale, while the large cash reserves of companies have become an investment cliché, there is little baked into market valuations for the effect that such buying would have. With share buy-backs, those modest expectations for economic growth could translate into 8 per cent growth in reported earnings each year.

So, come 2014, the companies of the S&P might produce $125 or $130 of net profits. Perhaps they won’t start to buy each other, pushing up valuations, and maybe savers will continue to prefer the safety of bonds even as inflation eats away at their nest egg. But at 14 times earnings that would still translate into a market above 1,800.

Perhaps 2012 will be the year of missed opportunity?

For this FT writer, no doubt about it!

Money  CHEAP MONEY!  Money

Barron’s Michael Santoli: (my emphasis)

Film and cable company Viacom (ticker: VIA) last week issued $750 million in new debt. The $500 million three-year piece will cost the triple-B-plus-rated company 1.25% a year, the $250 million 30-year portion 4.5%, never mind that we don’t know whether there will be a film or cable industry as we know them in 30 years.

Viacom will use the money to pay down some short-term debt and help fund an estimated $2.8 billion share buyback this year. It’s paying a blended rate just above 2.3% to buy shares at nearly a 10% free-cash-flow yield, shares whose dividend payout is 1.9%. Probably not what central bankers had in mind in keeping rates near zero to goose economic growth and hiring, but a good deal for big-company CFOs and, perhaps, their shareholders.


Light bulb   STILL BUYING BONDS? Here’s a handy tool to manage your risk:

The folks at iShares are out with a handy fixed income portfolio builder that allows investors to pick bond ETFs based on the duration of the funds and their credit profile. According to the company’s calculations, a low-risk fund with an average duration of 5-years will yield on average 1.26%, while moving up to the highest risk category fetches 6.58%. (SA)


Satellite Pictures Of The Empty Chinese Cities


NEW$ & VIEW$ (24 Feb. 2012)

Fingers crossed   “Testing, testing”. At the 1370 barrier again.  Fingers crossed


Smile   U.S. Initial Claims For Jobless Insurance Are Stable And Low

Job market improvement remains in place. Initial unemployment insurance claims were unchanged last week at 351,000. (The previous week was revised from 348,000). The latest are the lowest figures since March 2008. Claims averaged 359,000 (-11.3% y/y) during the last four weeks, a new cycle low.

Smile   Consumer Comfort Highest in Almost Four Years

imageThe Bloomberg Consumer Comfort  Index rose to minus 38.4 in the period ended Feb. 19, its fifth consecutive gain, from minus 39.8 the previous week. It marked the second straight week above minus 40, which is the level associated with recessions and their aftermath. Men, homeowners and households with annual incomes of more than $50,000 were the most optimistic in more than a year.

Two components of the weekly consumer comfort index improved, while the third declined. An index of the buying climate increased to minus 42.7, the highest since January 2011, from minus 47.4. The gauge of personal finances was little changed at 1, the highest since July, after a reading of 0.2, with 51 percent rating their finances as positive. The measure of Americans’ views on the state of the economy fell to minus 73.3 from minus 72.1 the prior week.


Rainbow   FHFA House Prices Offer Some Optimism (BMO Capital)

imageThere was a nice upturn in U.S. house prices, as measured by the Federal Housing Finance Agency, in December. The 0.7% monthly gain was the largest back-to-back increase in over six years. Granted prices remain below year-ago levels but the trend is looking promising. This stands in stark comparison to the latest picture painted by the S&P Case Shiller index, which showed that prices fell faster in November.

Bear in mind that the FHFA index looks only at mortgages backed by
Fannie Mae and Freddie Mac, while S&P Case- Shiller looks at homes
backed by all financing types, including subprime loans that are now in
foreclosure. The latter measure’s prices have continued to plunge, weighing on the overall index. Outside of distressed home sales, prices are slowly picking up.


Auto   This week, the U.S. Department of Transportation reported that miles driven increased 1.4% YoY in December, the first monthly increase for miles driven since February.



  • “Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.
  • “There have been lots of talks and conversations. I hear about them but I haven’t seen any official investment [from China] in European financial markets,” Mr. Draghi said.
  • “It’s hard to say if the crisis is over,” he said. Confused smile
  • Mr. Draghi argued that austerity, coupled with structural change, is the only option for economic renewal. While government spending cuts hurt activity in the short run, he said, the negative effects can be offset by structural overhauls.
  • After a weak fourth quarter, the overall euro-zone economy is stabilizing, he said.

Pointing up   I’m not so sure about that last one. Markit’s February PMI report revealed that new orders and order backlogs keep falling. More from the interview:

  • Portugal, which many analysts think is next in line after Greece for another bailout, won’t need to be rescued again, Mr. Draghi said.
  • Banks appear to have used a significant share of the three-year loans to buy back their own bonds coming due, Mr. Draghi said.

…And their own national debt:

Banking on Another ECB Liquidity Fix

The big uncertainty is whether some banks will use the LTRO to fund carry trades, borrowing cheap ECB money to buy higher-yielding sovereign bonds. Spanish banks appear to be doing this already: Madrid has already raised 35% of this year’s funding needs, but 65% of issuance has had maturities under five years, compared with less than 35% in normal years, according to Morgan Stanley. That points to heavy buying by banks. Italy, in contrast, has so far raised just 10% of this year’s target, suggesting limited carry trades. What seems certain is that there is limited appetite for cross-border carry trades.

But the carry trade is much less attractive than last December (Morgan Stanley via FT Alphaville).

This is particularly pronounced in the Spanish and Italian markets, where the three-months-carry (assuming funding costs of 1.000%) has dropped by as much as 40bp in the past few weeks.

Well, this is Europe after all:
Annoyed   Madrid presses EU to ease deficit targets
Spanish economy forecast to contract 1%


Advisers to Mariano Rajoy, the centre-right Spanish prime minister elected in November, are asking the commission to accept that a contracting economy makes a target agreed by the previous government of limiting the national budget deficit to 4.4 per cent of gross domestic product this year unrealistic and even counterproductive. They want a new target above 5 per cent of GDP. “There are conversations under way,” said one Madrid official.




A buoyant CBI industrial trends survey provides further welcome evidence that the UK economy will avoid a slide back into recession.
The CBI’s measure of order book volumes surged higher in February, matched by a similar jump in the exports measure. The orders net balance rose from -16 to -3 while the exports order net balance leapt from -26 to -2.



The survey data mean that manufacturing output stands a good chance of returning to growth in the first quarter, having contracted by a worryingly steep 0.9% in the final quarter of last year. This revival of the manufacturing sector will significantly reduce the risk of the UK having slipped back into recession. (Markit)



Rainbow   Japan Auto Makers Boost Output

Japan’s top three auto makers boosted their domestic production in January as demand surges on the back of new government purchasing incentives, helping to relieve pressure on an industry that has been squeezed by the strong yen.

The association expects Japan’s auto demand to increase 19% to 5.02 million vehicles in 2012 due to the government’s incentive scheme.

The scheme helped to spur an industry-wide 41% on-year surge in sales, excluding mini vehicles, in January, according to data released earlier this month by the Japan Automobile Dealers Association.

LONG LONG BONDS? Think about these charts from Moody’s:



So? Staying on board Big Ben’s wagon? Let’s twist again!


Danny, one of my sons sends me this link from MIT with the note that this could be very disruptive.

Mobile phone  The Palo Alto, Calif.-based OnLive Desktop Plus app is finally available for users to download today, after years of development. The app uses OnLive’s cloud service — which the company also uses to deliver high-end games to low-end computers — to stream desktop apps such as Microsoft Word to the iPad. The paid service is also packaged with an Internet Explorer web browser that can transfer data at 1 gigabit per second, and it can handle Adobe Flash applications, which normally don’t run on an iPad.

“Our whole concept of what we think is possible on the web is going to change,” Steve Perlman, chief executive of OnLive, told VentureBeat

Google Inc. applied last week to provide video service to residents of Kansas City, Mo., according to state records, setting the stage for the Web giant to offer a cable-TV-like package in addition to the high-speed Internet service it plans to market there later this year.

The video service, if approved, would thrust the Mountain View, Calif., company into closer competition with satellite and cable companies, such as Time Warner Cable Inc., that already sell pay-TV service in Kansas City.

Airplane   “Clearly there is a vast amount of overordering,” said Aengus Kelly, chief executive of AerCap Holdings NV, which owns 350 planes and is the No. 3 global leasing company after the Gecas unit of General Electric Co. and ILFC, a unit of American International GroupInc. that is slated for an initial public offering of stock.(…)

“Is it realistic that a small airline in Indonesia is the largest customer of the world’s largest exporter?” Mr. Kelly said of Boeing’s 230-plane order from Lion Air, valued at $22.4 billion at list prices.(…)

Lion Air executives maintain that orders that envision as much as an eight-fold expansion of its fleet are justified by soaring domestic and regional demand. Their counterparts at Norwegian are similarly bullish, viewing opportunities in Europe’s low-cost market to grow from a fleet that totaled 62 planes at the end of last year.

“I would be surprised if Ryanair and easyJet allowed a large competitor to emerge on their doorstep,” Mr. Kelly said, referring to Europe’s two dominant discount operators, Ryanair Holdings PLC and easyJet PLC.


NEW$ & VIEW$ (23 Feb. 2012)


Smile  The Chicago Fed National Activity Index decreased to +0.22 in January from +0.54 in December, but remained positive for the second straight month for the first time in a year. Three of the four broad categories of indicators that make up the index improved from December, and only the consumption and housing category’s contribution was negative in January.

The index’s three-month moving average, CFNAI-MA3, increased from +0.06 in December to +0.14 in January, reaching its highest level since March 2011. January’s CFNAI-MA3 suggests that growth in national economic activity was slightly above its historical trend.


Fifty of the 85 individual indicators made positive contributions to the index in January, while 35 made negative contributions. Forty-eight
indicators improved from December to January, while 36 indicators
deteriorated and one was unchanged. Of the indicators that improved,
15 made negative contributions. The December monthly index was revised to +0.54 from an initial estimate of +0.17.

Smile  Existing-Home Sales Rise Again in January, Inventory Down

Total existing-home sales increased 4.3% to a seasonally adjusted annual rate of 4.57 million in January from a downwardly revised 4.38 million-unit pace in December and are 0.7% above a spike to 4.54 million in January 2011. But the gain came only because the NAR sharply lowered December sales to 4.38 million. If December sales had stayed at their original 4.61 million, January sales would have been down slightly.

Total housing inventory at the end of January fell 0.4% to 2.31 million existing homes available for sale, Pointing up   the lowest number since March 2005. Total unsold listed inventory has trended down from a record 4.04 million in July 2007, and is 20.6 percent below a year ago.

The national median existing-home price for all housing types was $154,700 in January, down 2.0% from January 2011. Distressed homes – foreclosures and short sales which sell at deep discounts – accounted for 35% of January sales (22% were foreclosures and 13% were short sales), up from 32% in December; they were 37% in January 2011.

First-time buyers rose to 33% of transactions in January from 31% in December; they were 29% in January 2011.


Lightning   EU Expects 2012 Recession

The euro area will slip back into recession in 2012 after the economic recovery unexpectedly stalled last year, the European Commission said.

On an annual basis, the 17-country euro-zone group is forecast to contract by 0.3% and remain unchanged in the larger European Union. Last November, the EU forecast euro-area gross domestic product up 0.5% this year and EU GDP up 0.6%.

2012 GDP Forecasts

Country New forecast Old forecast*
France 0.4% 0.6%
Germany 0.6 0.8
Greece -4.4 -2.8
Italy -1.3 0.1
U.K. 0.6 0.6
Euro zone -0.3 0.5
EU 0.0 0.6

Change from previous year. *Autumn 2011 forecast. 
Source: European Commission


Mug   German Business Is Confident

German business confidence increased substantially in February, Germany’s Ifo Institute said, beating forecasts and confirming expectations that Germany’s economic slump will likely be short-lived.

The sub-index assessing current conditions rose to 117.5 from 116.3, while the sub-index for business expectations rose significantly to 102.3 from 100.9 in January.

Storm cloud   Euro denominated oil hits record
Brent reaches €93.63 prompting talk of ‘regional oil shock’

The new euro record comes just a day after Brent hit a record in sterling terms.

In dollar terms, oil prices also surged more than 1 per cent higher, touching a fresh nine-month peak of $124.48 a barrel, though they remain well below their 2008 record of $147 a barrel.

Pointing up   But here’s the catch on seemingly lower U.S. prices: adjusted prices are at record levels.

Retail prices usually decline this time of year with reduced seasonal demand. To account for this pattern, Haver Analytics calculates seasonal factors. As a result, the adjusted gasoline price was $3.84 last week.

Annoyed   Germany fights eurozone firewall moves

“The German government’s position has not changed,” he said. “That means no, it is not necessary.”

Ms Merkel and her finance minister, Wolfgang Schäuble, are looking isolated in the face of strong pressure from Christine Lagarde, managing director of the IMF, and the other 16 members of the European monetary union.

The Dutch government, which like Germany has taken a hard line on committing resources to the Greek crisis, however indicated it had switched positions.


Wen Seen Setting China Growth Target Below 8% in 2012: Economy

Wen will target an expansion of less than 8 percent in his report to the National People’s Congress in Beijing on March 5, the equivalent of the U.S. President’s State of the Union address.

A cut may indicate policy makers are prepared to tolerate a slower expansion as they move the economy’s drivers to consumption from exports and investment, a shift that may address global imbalances blamed for the last financial crisis. The survey results tally with state economist Fan Jianping’s prediction last week that a reduced goal will be set to send a message to local officials bent on chasing growth.



Final Earnings Season Stats

Earnings season came to an end yesterday with Wal-Mart’s (WMT) release of its quarterly numbers.  Wal-Mart’s report must have been bittersweet for market bulls since the S&P 500 rallied more than 6.5% this past earnings season. 

As shown below, the percentage of companies that beat earnings estimates for the reporting period finished at 60.4%.  This is slightly lower than the reading from the prior earnings season and 1.6 percentage points below the historical average of 62%.



Winking smile   Last week, I published THE BULLS ARE BACK, RIGHT ON CUE, highlighting the fact that a number of bears, even perma-bears, were turning bullish right when earnings, the lifeblood of equities, were showing signs of peaking. Bruce Krasting yesterday noted:

It has been my observation over (sadly) a long period of time that when all of the “stars” line up and point in one direction, it’s often time to go in another direction. The commentary on the TV shows and newspapers is usually the last place one would go to for investment advice. The media is, however, a good place to consider if one was looking for signs that sentiment has gotten away from reality. I wonder if the market enthusiasm in this ABC News clip isn’t a signal that we have reached a tipping point.

All of these “stars” are now on the same page. Is it possible that they could all be right? If so, that would be a first.


Ghost   TOPPISH MARKET: As some would say, market “internals” are not strong.



Alan Brochstein wrote a good piece highlighting the lack of participation of retail investors in equity markets:

2012 is off to a fabulous start, with the rare event of no one being able to buy at last year’s prices so far. As you can see, the year is actually tracking our fast start in 2011:

Alan is also bullish noting:

Let me tell you what really encourages me most: Early signs that the number one challenge the market has faced is ending. The headwinds of retail redemptions from stocks have been blowing furiously for five years now. Take a look:

According to the Investment Company Institute data, almost $500 billion has come out of domestic equity mutual funds. Now, I know retail chases performance, so the outflows from the second half of 2007 through early 2009 weren’t surprising, but the divergence between market direction and retail participation since then has been stunning. In late 2009, they redeemed as the market recovery began. As soon as the market stalled in 2010 and in 2011, the redemptions kicked in again. It’s no wonder that valuations are so puny these days!

Now, on the flip-side, look at where the money has been going:

While it’s way too early to call it a trend, recent data has shown an uptick in equity inflows. In the most recent week reported (2/8), flows were $1.8 billion, which was the best week in quite some time.

For the week ended Feb. 15, equity funds had net inflows of $1.04 billion.

High five   Prieur du Plessis has some charts for bond holders showing the impact that the Fed’s Operation Twist is having on interest rates. Caveat emptor.


Risks, Hedges & Opportunities: ZIRP for the Greater Good

Guest post by Hubert Marleau, Chief Investment Officer, Palos Management Inc.

Several reputable critics of conventional monetary theory are manifesting suspicion about the supposed beneficial economic effect of the Fed’s ZERO-INTEREST-RATE POLICY (ZIRP) that was introduced in December 2008 and recently extended to late-2014 with a return to normalcy in 2018. A now ten-year project that advocates believe to be necessary and appropriate to suppress and contain the very long expected episode of the debt deflation effect on the prospective level of economic activity.

However, a body of experienced bankers and seasoned bond portfolio managers seem to think that Chairman Bernanke is not above it and media is giving them space to make their point. They are arguing in the public press that the standard Keynesian-monetary line that was the appropriate remedy to prevent an economic disaster in 2008 may not be the one to push the economy forward and upward to full employment. They are calling for the Fed to raise interest rates now.

In an oblique, perhaps weird, way it appears to have found its source out of libertarian ideology. Yet, I fail to see any of this in the Austrian school of economic thought where libertarian philosophy is at its best. I stand to be corrected, but my understanding is that the cost of money must ratchet downward to a point of inflection where risky investments can outperform bonds over a very long time. It is only at that moment that investors can be rewarded consistently and over a safe period of time for taking riskier investment decisions.

Complaints from the community of bankers and bond managers are much more about the concerning effect that a protracted period of low interest rates can have on banks’ net interest margin and bond portfolios’ profitability. They may be omitting the greater good. An appropriately obliging monetary policy should eventually spur loan and capital demand and ultimately support the economic recovery, job creation and returns for savers.

Incidentally, we may be approaching this point of inflection. During the past twenty years, the risk premium on stocks has been negative with returns on bonds and loans outdoing those on stocks. That is about as long as previous secular cycles of this type have been. It may be too early to predict a turn for the better, but excess bank reserves peaked on July 20 and have since been in a slow-but-steady downward trend; also most of the fall came from increased bank lending and corporate bond purchases. What all this means is that a slow-but-steady improvement in economic activity is becoming visible while missteps and blips could be overcome by continued monetary accommodation.


NEW$ & VIEW$ (13 Feb. 2012)

Thumbs up  “GREXIT”  Thumbs down

Storm cloud   Japan’s GDP shrinks 2.3% in fourth quarter
Economy squeezed by strong yen and low demand

Preliminary government figures showed that real gross domestic product fell 0.6 per cent between the third and the fourth quarters, dragged down by a 3.1 per cent fall in exports and a 0.3 per cent decline in private inventories.

That is equivalent to a 2.3 per cent fall in GDP on an annualised basis, significantly worse than consensus forecast of a 1.3 per cent decline. The data also showed sluggish public investment, which fell 9.5 per cent on an annualised basis.(…)

Top executives at Toyota and Nissan have claimed it is impossible to export cars from Japan profitably at current exchange rates. At Toyota’s third-quarter earnings briefing last week, Takahiko Ijichi, a senior managing director, said business conditions remained “extremely tough”.


Bloomberg had this story last Saturday morning:

Wuhu Waives Tax, Subsidizes Buyers as First Chinese City Easing Home Curbs

  Wuhu in eastern China will waive a deed tax and subsidize some home purchases, becoming the first city in the nation to ease property curbs this year even as the central government reiterated plans to maintain restrictions. “Local governments, especially those third-tier cities, rely largely on the property sector for economic growth; they are facing a lot of pressure now,” Bai said. “More cities will follow suit this year.”

This morning, the FT reports that Beijing forced the city to backtrack:

But within two days of its announcement, the central government sent an inspection team to Wuhu. Late on Sunday the city posted a short notice saying that it would postpone implementation of its subsidies and tax cuts “in order to ensure the stable, healthy development of the property market”.

Underlining that Beijing was not yet ready for a relaxation, Premier Wen Jiabao was quoted by state media on Monday as saying that the government “would not waver in encouraging housing prices to return to a reasonable level”.

Pointing up   Yet, it looks like the beginning of the end and Beijing will try to gradually relax its grip on housing, but at its own pace. And this is one of the reasons:

China extends loans to avoid mass default
Provinces and cities owe a mountain of debt but will get extensions

Critics have pointed to dangers in the loan rollover plan. Repayment delays will hinder banks’ lending abilities. Some bad loans will simply be prolonged instead of recognised. Problems will remain concealed.

Standard & Poor’s has warned the extension would be a “backward step” for the Chinese banking sector that could “shake investors’ confidence”.

Finally, this from the horse’s mouth (my emphasis):

Chinese Premier Wen Jiabao said that the government is paying close attention to the economic situation in January and the first quarter of this year. “We have to make a proper judgment as early as possible when things happen and take quick action,” Wen said, adding fine-tuning of macro policies should begin in the first quarter.

Clock  February 13 looks right in Q1.


China registered a capital and financial account deficit in the fourth quarter, indicating a net capital outflow, according to preliminary data released by the State Administration of Foreign Exchange (SAFE) on Friday.

SAFE reported a $47.4 billion capital and financial account deficit during the period, compared to a $66.2 billion surplus in the third quarter.

Surprised smile   That’s a 113.6B swing in one quarter.

Foreign exchange reserves increased by $11.7 billion in the fourth quarter, adjusted for exchange rates and asset price fluctuations, SAFE said.

According to data released by the central bank in January, China’s foreign exchange reserves declined on a quarterly basis for the first time in more than a decade, falling to $3.18 trillion at the end of last year from $3.2 trillion at the end of September.


Many pundits are commenting on the “surprising” disconnect between equity prices and Treasury rates. Joe Weisenthal summarizes the puzzleness of many in his Feb. 7 post which displayed the chart below (the green line is the S&P 500; the orange line the yield on 10Y Treasuries).

It’s weird because you’d think that as stocks rose — indicating increased risk appetite and expectations of growth — that yields would rise too, since demand for risk-free instruments would want. But that hasn’t happened. Stocks have had a really nice run, but yields have gone nowhere.chart

Two things need to be understood on the relationship between equities and interest rates.

  1. Interest rates generally reflect trends in inflation: rising inflation = rising rates and vice-versa.
  2. Price/Earnings multiple vary inversely with inflation as the Rule of 20 clearly shows.

However, rapidly rising inflation rates also impact earnings positively, pushing equity prices higher even though PE multiples are shrinking.

So, generally, equities should move in opposite direction of interest rates except when:

  1. inflation accelerates rapidly, which also helps accelerate earnings growth which may offset much of the PE contraction resulting from rising inflation;
  2. recession causes earnings to fall faster than inflation is slowing as a result;
  3. the Fed succeeds in prying long term rates down.


So the current disconnect is certainly not unusual. In fact it is rather the norm when inflation is contained absent a recession. What is unusual this time is that real treasury yields are negative, presumably because the Fed has been a huge buyer since October 2011, intentionally driving long-term rates down.

Such low long term interest rates, especially negative real rates, tend to push investors toward riskier investments such as high yield bonds and equities, potentially pushing PE multiples above fair value although this is not the case now.

Operation Twist is thus a success so far.

Pointing up  Punch   MOODY’S ON HIGH YIELD BONDS

(…) the US’s recent 625 bp spread for high yield bonds seems too wide given the depth of January 2012’s 0.8 of a percentage point year-to-year drop by the unemployment rate, to 8.3%. The market’s unwillingness to more fully price-in the latest decline by the US jobless rate suggests that the high yield bond market senses that the latest decline by the Labor Department’s official jobless rate overstates the actual rise in labor force utilization. In particular, the current economic recovery’s atypically large number of labor force dropouts casts doubt on the meaning of January’s 8.3% unemployment rate. (Figure 2.)


Suppose that the number of working-age individuals not in the labor force had instead expanded at the 2.0% annualized rate of the first 31 months of 2002-2007’s business cycle upturn (vs 1.5% during the last 2 recoveries). In that case, January 2012’s count of those not in the labor force would have been 2.6 million less than the actual 87.9 million. If we further assume that the 2.6 million would have been unemployed had they remained in the labor force, then January’s unemployment rate would have been 9.8% instead of the reported 8.3%.

One way of eliminating the distortions stemming from the tendency of prolonged unemployment to boost the number of labor-force dropouts is to focus on the ratio of employment to the working-age population, as opposed to the unemployment rate. Unlike the relative ease of exiting from the labor force, dropping out of the working-age population calls for either emigration, institutionalization, or death.

As the employment ratio climbs higher, credit spreads tend to narrow. In January, employment approximated 58.5% of the working age population, which matches its ratio of October 2009, or when the unemployment rate peaked for the cycle at 10.0%. However, January’s 0.1 of a percentage point year-to-year rise by the ratio of employment to the working age population was constructive for the high yield bond spread. When the ratio of employment to the working age population first rose by 0.1 of a percentage point from a year earlier following the recessions of 2001 and 1990-1991, the high yield bond spread averaged 430 bp — which was well under its recent 620 bp. Nevertheless, January’s slight rise by the employment ratio was less bullish for high-yield bonds than was the accompanying deep drop by the unemployment rate. (Figure 3.)


The latest news on initial state unemployment claims suggests that the recent decline by the unemployment rate was not illusory. As of February 4, the moving four week average of jobless claims sank to 366,000, which was its lowest such reading since May 2008. When the moving four week average of jobless claims first sank to 366,000 following the recessions of 2001 and 1990-1991, the high-yield bond spread averaged 462 bp. Expectations of a fuller utilization of the US workforce support expectations of narrower credit spreads. (Figure 4)



Smile  Sad smile  Budget to Call for Taxes on Wealthy   Obama’s budget request to Congress on Monday will forecast a deficit of $1.33 trillion in fiscal year 2012, equivalent to 8.5% of GDP and will include hundreds of billions of dollars of proposed infrastructure spending.

Mr. Obama repeats many of his previous budget prescriptions, resists sweeping cuts to government programs, preserves the structure of Medicare and Medicaid, and calls for close to $1.5 trillion in tax increases on higher-income Americans over 10 years.

(…) it calls for more than $350 billion in measures such as extending the payroll tax cut, $30 billion for updating schools, the continuation of a tax subsidy for business investment, and a new tax credit aimed at boosting hiring by small businesses. It also proposes a six-year, $476 billion proposal for roads and other surface transportation projects, which would be funded partly by the gasoline tax.