NEW$ & VIEW$ (17 JANUARY 2014)

Philly Fed Stronger Than Expected

Following on the heels of yesterday’s stronger than expected Empire Manufacturing report, today’s release of the Philly Fed Manufacturing report for January also came in stronger than expected.  While economists were looking for the headline index to come in at a level of 8.7, the actual reading was slightly higher at 9.4, which was three 3 points higher than the reading for December.

As shown, the majority (5) of components increased this month, while just three declined.  The biggest increases this month came from Number of Employees and Unfilled Orders.  The fact that Number of Employees increased seems to provide more evidence that last Friday’s employment report was an outlier.  On the downside, the biggest declines were seen in Inventories, Average Workweek, and New Orders.  Believe it or not , the 35.6 decline in the Inventories index was the largest month to month drop in the history of the survey (since 1980).  While that drop is large for one month, it takes that index back to levels seen as recently as April.

Homebuilder Sentiment Slips

Homebuilder sentiment for the month of January slipped from a revised reading of 57 down to 56 (expectations were for 58).  While sentiment slipped, it is important to note that any reading above 50 indicates optimism among homebuilders.

The table to the right breaks out this month’s report by components and region.  As shown, Present Sales, Future Sales, and Traffic all declined this month, with the biggest drop coming in traffic.  (…)

The chart below shows the historical levels of the NAHB Sentiment survey going back to 1985 with recessions highlighted in gray.  The current level of 56 is down slightly from the post-recession high of 58 reached in August.  While the index has seen a remarkable improvement since the lows from the recession, optimism still has some work to do on the upside before getting back to the highs from the prior expansion.

INFLATION WATCH

So while everybody is talking deflation risk:

  • Core CPI rose at a 1.8% annualized rate in Nov-Dec. and is up 1.7% YoY.
  • Same with the Cleveland Fed’s 16% trimmed-mean Consumer Price Index .
  • The median CPI has accelerated from +0.1% MoM in October to +0.2% in November and to +0.3% in December. The median CPI is up 2.1% YoY in December, unchanged for 6 months.

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The WSJ recently polled economists on a number of items. The tilt towards faster growth is clear:image

Even more interesting is that the WSJ did not bother to enquire about inflation and interest rates. Bernanke really did a fine job!

Shopping Spree Ends in Retail Stocks

A disappointing holiday shopping season has investors dialing back expectations for retail stocks after last year’s big runup in the sector.

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Stores Confront New World With Less Foot Traffic

A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.

(…) Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.

Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows. (…)

On Wednesday, J.C. Penney said it planned to close 33 underperforming stores and trim 2,000 positions to focus on locations that generate the strongest profits.

Such closings could accelerate: Leases for big retailers typically last between 10 and 25 years, meaning many were negotiated before e-commerce really took off.

Only 44 million square feet of retail space opened in the 54 largest U.S. markets last year, down 87% from 325 million in 2006, according to CoStar Group, Inc., a real-estate research firm. (…)

NMHC Survey: Apartment Market Conditions Softer in Q4 (CalculatedRisk)

Apartment market conditions weakened a bit in January compared with three months earlier. The market tightness (41), sales volume (41) and debt financing (42) indexes were all a little below the breakeven level of 50, although the equity financing index rebounded to 50. (…)

Although markets are a little looser than in October, this is largely seasonal; overall markets remain fairly tight.

“New supply is finally starting to arrive at levels that will more closely match overall demand. In a few markets, we are seeing completions a little higher than absorptions, but this is likely to be short term in nature. Fundamentally, demand for apartment homes should be strong for the rest of the decade (and beyond) – provided only that the economy remains on track.”

CORPORATE DELEVERAGING

From SocGen via ZeroHedge:

US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers.

Don’t forget that corporate cash is heavily concentrated in just a few companies.

SHELL WOES

 

Shell Warns On Profit

The company said profit would be significantly weaker partly because of higher exploration costs. The warning is rare for an oil major, and marks an inauspicious start to energy earnings reports.

The oil major said it expects to post fourth-quarter earnings of $2.2 billion on a current-cost-of-supplies basis—a figure that factors out the impact of inventories, making it equivalent to the net profit reported by U.S. oil companies—down from $7.3 billion a year earlier. Full-year earnings on a CCS basis are expected to be about $16.8 billion, down from $27.2 billion last year.

Shell blames refining woes for warning Oil group issues first profits warning in 10 years

And the wrap up:

Shell warns of ‘significant’ profit miss

Royal Dutch Shell issued a “significant” profit warning on Friday, detailing across-the-board problems and the extent of the challenges facing the oil major’s new boss Ben van Beurden, who took over two weeks ago.

Now you know! Winking smile

 

NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:

 

  • Auto Makers Rebound as Buyers Go Big 

    Five years after skyrocketing fuel prices and turmoil in financial markets knocked auto makers into a tailspin, the U.S. market has recovered to its former size and character.

(…) U.S. car and light truck sales rose less than 1% in December, reflecting in part a hangover from a surge the month before. But overall, the U.S. auto industry in 2013 had its best sales year since 2007, and industry executives said on Friday they expect gains to continue in 2014, though at a slower pace.

For the year, U.S. consumers bought 15.6 million vehicles, up 7.6% from 2012, according to market researcher Autodata Corp., the strongest volume since 2007. Purchases of light trucks including sport-utility vehicles exceeded cars, a reversal from the year earlier. (…)

But as gas prices drifted lower last year, U.S. consumers trading old vehicles for new favored pricey pickup trucks, SUVs and luxury cars. Ford, for example, boosted sales of its F-150 pickup by 8.4% in December over a year ago, while sales of its subcompact Fiesta and compact Focus cars plunged by 20% and 31% respectively. (…)

Consumers also are springing for more luxurious models, driving average new-car selling price to $32,077 in 2013, up 1.4% from a year earlier and up 10% from 2005, according to auto-price researcher KBB.com. (…)

High five December points to slower growth ahead as auto makers found gains harder to achieve against year-earlier results.

GM said its December sales fell 6.3% compared with the same month last year because of what executives said were aggressive pickup truck promotions by Ford and tougher competition from Asian auto makers.

December also marked the first monthly year-over-year decline in car sales at GM, Ford and Chrysler for 2013. Gains in pickups and SUVs offset weaker car sales at Ford and Chrysler. (…)

  • Here’s the monthly sales pattern (WardsAuto):

An expected post-Christmas surge in LV sales failed to materialize, as U.S. automakers reported 1.35 million monthly sales – an increase in daily sales of 4%. December devliveries equated to a 15.3 million-unit SAAR for the month.

ZeroHedge zeroes in on domestic car sales:

 

Via SMRA,

Nearly every automaker has reported lower-than-expected sales for the month of December relative to our forecast and the consensus. At this time, domestic light vehicle sales are running at a disappointing low 11.3 million annualized pace, which compares with 12.6 million for November.

If taken into context, we can say that the strong selling pace in November pulled sales away from December. In September and October, domestic light vehicle sales fell under 12.0 million due to the impact of the federal government shutdown, slipping to 11.7 million for both months, as it negatively impacted on buying confidence.

In November 2013, sales recovered strongly to 12.6 million, perhaps too strongly to the detriment of December’s sales. Therefore, if we average November and December together, we get 12.0 million, which is a respectable, though not spectacular, selling pace.

The times, they are a-changing:

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Hmmm…

Total car sales using a 3-month m.a. to smooth out monthly fluctuations.

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Girl “Daddy, is this a cyclical peak?”

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Just kidding “May well be, but let’s hope not…”

 

From my Nov. 20 post:

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers.

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

Demand for cars has been helped by the aging of America’s vehicles.

(…) during the 2007-2009 downturn and after, financial problems and tight credit standards prevented many consumers from replacing their old vehicles. As a result, estimate analysts at IHS Automotive, the average age of a vehicle stands at a record 11.3 years. The average age increased faster in the five years ended in 2013, than in the five years before that. The trend is true for cars and for light trucks.

(…) IHS projects vehicle sales will total just over 16 million in 2014, and the new cars will help to slow the aging of America’s car fleet.

Truth is that cars do last longer.

And seems that people want, need or can only afford fewer cars (chart from ZeroHedge)

Cases in point:

Office-Rental Market Is Gaining Strength

(…) Businesses occupied an additional 8.5 million square feet of office space in the quarter. That was only a 0.25% increase from the third quarter, but Reis said it was the largest gain since the third quarter of 2007.

The expansion of tenants was offset by the completion of 9.1 million square feet of new office space during the quarter, the most since the fourth quarter of 2009, according to Reis, which tracks 79 major U.S. office markets. That left the market’s vacancy rate at 16.9%, unchanged from the previous quarter.

The vacancy rate had been steadily falling from the recent high of 17.6% in early 2011, but it still is well above the low of 12.5% in the third quarter of 2007, Reis said.

The amount of occupied office space now stands at slightly more than 3.4 billion square feet, which falls short of the market’s peak in late 2007 by 79 million square feet.

At the current rate that companies are leasing new offices—known as “positive absorption”—it would take more than two years to reach that peak level again.

(…)  Average asking rents increased in the fourth quarter to $29.07 per square foot a year, up 0.7% from the third quarter but still short of the recent high of $29.37 hit in 2008. (…)

Economic research firm Moody’s Analytics projects office-using jobs will increase 2.1% this year to nearly 33.9 million. That growth rate, along with a 2.1% gain in 2012, are the largest since last decade’s boom. “I would expect 2014 to be the best year since 2006 for office-using jobs,” says Mark Zandi, chief economist at Moody’s Analytics.

Reis’ preliminary forecast for 2014 calls for office-vacancy rates to decline by roughly half a percentage point by year’s end and asking rents to increase 2.8%, the largest gain since 2007. (…)

Alien ‘Polar Pig’ Threatens Coldest U.S. Weather in Two Decades

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida. Mike Musher, a meteorologist with the U.S. Weather Prediction Center in College Park,Maryland, said 90 percent of the contiguous U.S. will be at or below the freezing mark today.

Freezing temperatures spur energy demand as people turn up thermostats to heat homes and businesses. Power generation accounts for 32 percent of U.S. natural-gas use, according to the Energy Information Administration. About 49 percent of all homes use the fuel for heating.

China Shows Signs of Slowdown

Four purchasing managers’ indexes—two compiled by the government and two by HSBC Holdings PLC all dropped last month, the first time that has happened since April. The HSBC Services PMI, released Monday, fell to 50.9 for December, compared with 52.5 the month before. (…)

All four PMIs remained in narrowly positive territory for December, indicating that expansion continues, albeit at a slow pace. But that masks difficulties for individual companies in some sectors. Conditions are worsening for small and medium-size businesses, according to the official manufacturing PMI. The subindex for large companies, which has performed best in recent months, also fell in December, though it remains above the 50 mark that separates growth from contraction.

The data show manufacturers cut back stocks of both raw materials and finished goods, suggesting they are expecting weaker sales ahead. (…)

GUIDANCE ON GUIDANCE

This is what the media have been posting from Factset in recent weeks:

For Q4 2013, 94 companies in the S&P 500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.

The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).

These following info from the same Factset release have generally been omitted by the media:

Although the number of companies that have issued negative EPS guidance is high, the amount by which these have companies have lowered expectations has been below average. For the 107 companies in
the S&P 500 that have issued EPS guidance for the third quarter, the EPS guidance has been 5.7% below the mean estimate on average. This percentage decline is smaller than the trailing 5-year average of -11.1% and trailing 5-year median of -7.8% for the index. If -5.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q2 2012 (-0.4%).

That could mean that companies are more prone to reduce guidance than before. Here’s what has happened following Q3 guidance:

At this point in time, all 114 of the companies that issued EPS guidance for Q3 2013 have reported actual results for the quarter. Of these 114 companies, 84% reported actual EPS above guidance, 9% reported
actual EPS below guidance, and 7% reported actual EPS in line with guidance. This percentage (84%) is well above the trailing 5-year average for companies issuing EPS guidance, and above the overall performance of the S&P 500 for Q2 2013.

Under-promise to over-deliver!

Companies that issued quarterly EPS guidance for Q3 reported an actual EPS number that was 9.5% above the guidance, on average. Over the past five years, companies that issued quarterly EPS guidance reported an actual EPS number that was 12.8% above the EPS guidance on average.

Now this:

For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 56% (149 out of 265), which is below the percentage recorded at the end of September (61%).

Since the end of September, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by eight, while the
number of companies issuing positive EPS guidance has increased by 15.

Pointing up There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

As a result:

Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q4 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

So, do you really want to use forward earnings in your valuation work?

Bernanke Kicks Off Farewell Tour In Philly. Some of his comments:

  • I have done my job:

At the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.

  • Politicians have not:

Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.

  • So get to it now:

But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.

  • That’s for you bankers as well:

The Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates;

  • Get ready for higher rates:

in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the (Fed) will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates.

Need more warning?

 

Fed’s Plosser: May Need to Employ Aggressive Tightening Campaign

(…) Mr. Plosser, who spoke as part of a panel discussion held in Philadelphia at the annual American Economic Association, will be a voting member of the monetary policy setting Federal Open Market Committee this year. (…)

Currently, the Fed expects to keep short-term rates very low until some time in 2015. The veteran central banker is uneasy with that, and warns the Fed should prepare for a faster and more aggressive campaign of rate hikes given the inflation risks presented by all the liquidity it has provided markets.

Mr. Plosser said the Fed would like to raise rates “gradually” but added “it doesn’t always work that way.”

“How fast will we have to move interest rates up…we don’t know the answer to that,” Mr. Plosser said. He warned that the Fed may have to be “aggressive,” and he added “people like to think the Fed has all this great control over interest rates, but the market does its own thing.”

JPMorgan Shows The US Is The Most Expensive Developed Market In The World

JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

Foreign direct investment in the U.S. appears to have dropped 11% last year, to about $148 billion, according to preliminary Commerce Department data, as analyzed by the Congressional Research Service.

This follows a decline in 2012 to about $166 billion from 2011’s estimated $230 billion. Foreign direct investment, or FDI, had peaked in the U.S. at $310 billion in 2008 and sank to about $150 billion in 2009, before rebounding in 2010 to $206 billion.

The steep fall in 2012-2013 has many possible causes, including the heated presidential elections and the knockdown, drag-out budget battles that culminated in last year’s government shutdown. Our politics frighten foreigners. We also saw tougher air-quality regulations from the Environmental Protection Agency and the new Dodd-Frank rules. Nevertheless, the U.S. last year emerged for the first time since 2001 as the most promising destination for FDI, thanks to our productivity gains, according to a survey of 302 companies from 28 countries by A.T. Kearney, a New York international consulting firm.

Obama seems to be in the mean-reverting biz now with many priorities aimed at reversing trends…(see below)

Stock Buybacks’ Allure Likely to Fade

(…) In the fourth quarter, S&P 500 companies may have bought back nearly $138 billion worth of stock, says Howard Silverblatt, Standard & Poor’s senior analyst. If that estimate proves correct as companies file their quarterly disclosures, it’ll be the biggest quarter for buybacks since 2007 and a 40% jump from the level a year ago.

Companies have already repurchased a staggering $445 billion worth of shares in the 12 months ended on Sept. 30. (…)

The S&P 500 Buyback Index, which covers the 100 companies that are the busiest buying back shares, rose 48.3% in 2013, trumping a 33.3% return for even the S&P Dividend Aristocrat Index brimming with companies that have hiked dividends every year for a quarter-century.

Conventional wisdom now expects 2014 to be an even bigger year for buybacks. After all, global growth is improving at only a drowsy pace, and receding crises heap pressure on management to spend their cash stash. Goldman Sachs, for one, sees repurchases increasing 35% this year.

(…) Rising interest rates will make it dearer for companies looking to borrow to finance buybacks or replenish their cash hoards. (…)

Besides, buybacks work better as an interim measure for returning cash to shareholders when the outlook is iffy. Today, a broadening recovery nudges management to rely less on financial engineering and to begin the riskier, tougher task of finding growth, investing in research and development, or inventing the next big thing—whether it’s ocean-driven hydropower or a cure for male-pattern baldness. Reflexively buying back shares was the easy, momentarily crowd-pleasing part. Figuring out where future growth lies and how to secure it is the real challenge that lies ahead.

BANKS

 

Biggest Lenders Keep On Growing

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial.

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial. That expansion has been reshaping banking since at least 1990, when the top five institutions held 9.67% of bank assets. (…)

At the same time, the number of U.S. banks fell last year to the lowest level since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

There were 6,891 banks as of the third quarter, down from a peak of 18,000. Between 1984 and 2011, more than 10,000 banks disappeared through mergers or failures, according to FDIC data.

The banking units of J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo and U.S. Bancorp held $6.46 trillion in assets as of the third quarter, the report, released Thursday by SNL, found. The total for the rest of the banking industry, comprised of thousands of midsize, regional and smaller players, was $8.15 trillion.

Meanwhile.

Sarcastic smile Barack Obama has played 160 rounds of golf since taking office. (Time). That’s 32 per year over the past 5 years.

 

NEW$ & VIEW$ (5 NOVEMBER 2013)

WEAK HALLOWEEN SALES

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

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Nobody should be surprised as BloombergBriefs explains:

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

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

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TAPER WATCH

Three Fed Policy Voters Signal Prolonged Easing to Stoke Growth

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

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

SAME SURVEY DATA, SEVERAL ACCOUNTS:

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

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

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

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

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

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

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

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

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

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

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

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EU Lowers Euro-Area Growth Outlook as Debt Crisis Lingers

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

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

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

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

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

 

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Li Says China Needs 7.2% Expansion to Maintain Job Growth

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

Kellogg to Cut 7% of Workforce by 2017

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

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

 

NEW$ & VIEW$ (15 OCTOBER 2013)

Senate Nears Deal on Debt, Shutdown

Top Senate leaders said they were within striking distance of an agreement to reopen the government and defuse a looming debt crisis just days before the U.S. could run out of money to pay its bills.

The latest proposal would reopen the government at current spending levels until Jan. 15 and extend the federal borrowing limit until early February, according to aides familiar with the talks. Lawmakers also would begin longer-term negotiations on the budget, with the task of reaching an agreement by Dec. 13. (…)

Still, a deal would mark a major breakthrough in the impasse that has gripped Washington for weeks, shutting federal agencies and threatening the government with a debt default. (Cartoon by Mike Flugennock)

This is the new definition of a “major breakthrough”?

Storm cloud  Here’s a real breakthrough!:

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Chain store sales have been weak for a while, +2.0-2.3% YoY since mid-summer, but the 4-week moving average slipped to +1.5% last week, breaking through 1.5% for the first time since February 2010.

Commercial-Property Loans Rise

(…) As of June 30, U.S. banks had $991.2 billion in total commercial real-estate loans, up 3.3% from a year earlier, according to research firm SNL Financial.

J.P. Morgan Chase JPM +0.38% & Co. on Friday reported that outstanding commercial-real-estate loans rose to $61.5 billion in the third quarter, a 12% increase from a year earlier. “The commercial-real-estate business continues to grow strongly,” J.P. Morgan Chief Financial Officer Marianne Lake said during a conference call with analysts, noting loans have increased “every month for the last 13 months.” (…)

Last year’s 2.4% rise in total commercial real-estate loans to $972.7 billion was the first growth in four years, according to SNL. Analysts said the lending rebound, still in its early stages, is being fueled largely by one area: apartment projects. The boom could start to peter out as the single-family housing market recovers, but for now banks are eager to keep lending. (…)

EARNINGS WATCH

Early report from Factset:

With 6% of the companies in the S&P 500 reporting actual results, the percentage of companies reporting earnings above estimates is below the four-year average, and the percentage of companies reporting revenues above estimates is also below the four-year average.

Overall, 31 companies have reported earnings to date for the third quarter. Of these 31 companies, 61% have reported actual EPS above the mean EPS estimate and 39% have reported actual EPS below the mean EPS estimate. Over the past four quarters on average, 70% of companies have reported actual EPS above the mean EPS estimate. Over the past four years on average, 73% of companies have reported actual EPS above the mean EPS estimate.

In terms of revenues, 52% of companies have reported actual sales above estimated sales and 48% have reported actual sales below estimated sales. The percentage of companies beating sales estimates is above the percentage recorded over the last four quarters (48%), but below the average over the previous four years (58%).

In aggregate, companies are reporting sales that are 0.4% below expectations. Over the previous four quarters on average, actual sales have exceeded estimates by 0.4%. Over the previous four years on
average, actual sales have exceeded estimates by 0.7%.

Heading into the start of the peak weeks of the Q3 2013 earnings season, 110 companies in the index have issued EPS guidance for the third quarter. Of these 110 companies, 91 have issued negative EPS guidance and 19 have issued positive EPS guidance.

If 91 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 88, which was recorded in Q2 2013.

If 19 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing positive EPS guidance
for a quarter. The current record is 22, which was also recorded in Q2 2013.

The percentage of companies issuing negative EPS guidance is 83% (91 out of 110). If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006.

Call me  If you missed it, I recommend that you read yesterday’s New$ & View$’ EARNINGS WATCH segment.

HOUSING WATCH

Home Sales, Prices Slowing in Bust-and-Boom Markets

(…) Phoenix: Investor purchases fell to 20% of sales in September, down from 29% a year earlier, and purchases by nine major institutional investors dropped to 110 sales, down 72% from 398 sales one year ago. Just four of the nine investors bought homes in September, compared with all nine one year ago. Second home purchases dropped by 23%, but purchases by owner-occupants increased by 21%, according to the Arizona Multiple Listing Service.

There were 2.5% fewer homes sold in September compared with a year earlier, even as the number of homes for sale increased by 9.4% over that span, according to the Arizona MLS. (…)  Distressed sales were down 59% from a year earlier.

Sacramento: The number of homes that sold in September fell by 6.8% from a year earlier, and the number that went under contract fell by 3.6%. Listings jumped by 40.3%, according to TrendGraphix Inc. Median prices rose by 1.2% from August and by 36.1% from one year earlier.

Las Vegas: The share of homes that sold in cash last month stood at 47.2%, down from 54.8% in August and one year ago, and down from a high of 59.5% in February, according to the Greater Las Vegas Association of Realtors. Many cash buyers tend to be investors.

Home sales were down 1.2% from a year earlier, even though there were more homes for buyers to choose from. The number of single-family homes listed for sale, at 14,659, stood 12.6% below last year’s levels, but the inventory of “non-contigent” listings—homes that don’t have any offers and aren’t under contract—was 60.5% above year-earlier levels. The median sales price in September fell for the first time in 19 months.

(…) “the market is softening tremendously,” said Bryan Lebo, a local real-estate agent. “Buyers are becoming a lot pickier. They’re more patient.”

In some neighborhoods, he says, homes are now selling for 10% less than they were just a few months earlier, and builders are beginning to offer generous incentives, such as home upgrades to buyers and commissions to real-estate agents, in order to stay competitive.

SPAIN EXITING RECESSION ON STRONG EXPORTS (Markit)

Official GDP data released later this month looks set to announce the end of the recession in Spain, in line with PMI data covering the manufacturing and service sectors, which in Q3 posted its highest quarterly average since the current recession began in Q2 2011.

One of the most positive aspects of the recent PMI data has been strong growth of manufacturing exports. New export orders increased at the fastest rate in more than two-and-a-half years in August, and maintained this pace in September. Exports have now risen for five months in a row. (…)

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Spanish firms have been able to take advantage of recent signs of economic improvement in some of their main export markets. PMI data suggest that the eurozone recovery gathered pace at the end of Q3, while the UK posted particularly strong growth. The Export Climate Index for Spain suggests that conditions for exporters have strengthened in three successive months, largely on the back of these improvements.

Monthly export data from the Bank of Spain also highlight the UK as a key source of current growth in external demand, with rises also seen in the eurozone. However, after increasing strongly towards the end of 2012, exports to the US have shown signs of weakness in recent months.

Further evidence of the recent solid performance of exports in Spain can be seen by splitting the PMI data into exporting and non-exporting companies. This shows that manufacturers that export have recorded growth in overall new orders in recent months, while non-exporters have continued to see falling levels of new business as domestic demand in Spain lags behind. (…)

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This over-reliance on external markets is a cause for concern given that economic recoveries in the eurozone and UK are far from assured, and political stalemate in the US has the potential to throw the world economy back into turmoil. It is therefore too early to judge whether the Spanish economy is starting a real recovery or just experiencing another false dawn.

But Spain is not out of the woods just yet (chart from The Economist):

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Nor is Europe for that matter (chart from CLSA):

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Goldman Sachs: The Growing Income Divide in Four Charts How the rich and poor view the economy has diverged to some of the widest levels in years, data from Goldman Sachs’s latest consumer survey shows.

Pointing up  Chris Wood at CLSA (tks Gary):

Meanwhile, a dramatic social development in America is the ever more glaring extremes in terms of the distribution of income. The latest information on this came from a recently published study by economic professor Emmanuel Saez at University of California, Berkeley, based on income tax data published by the IRS (see “Striking it Richer: The Evolution of Top Incomes in the United States”, 3 September 2013 by Emmanuel Saez, UC Berkeley).

The results are startling and have not surprisingly generated media attention. But the findings are worth repeating for those who missed them. The incomes of the top 1% Americans rose by 19.6% in 2012 while the incomes of the bottom 99% of Americans rose by only 1%. As a result, the top 1% accounted for 19.3% of total household income, excluding capital gains, in 2012, the largest share since 1928. While if capital gains are included, the top 1%’s income share has risen from 18.1% in 2009 to 22.5% in 2012 (see Figure 6).

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The above findings provide more evidence that quanto easing is helping the wealthy via asset price appreciation but doing little to improve the overall economy. This is potential politically explosive.

 

NEW$ & VIEW$ (3 OCTOBER 2013)

U.S. Showdown Bites Manufacturers Layoffs and Production Disruptions Loom at Firms Tied to U.S. Federal Government Shutdown Hits Military Contractors, Suppliers

The partial shutdown of the federal government is leading to layoffs and production disruptions at defense contractors and some manufacturing companies.

Retailers Weigh Into U.S. Shutdown Debate

The National Retail Federation, an industry trade group, came out with its annual holiday forecast Thursday, predicting sales will grow by a middling 3.9% from the year before to $602.1 billion. Early forecasts are sometimes off the mark, and the industry group warned the results could be worse if Washington doesn’t resolve debates over the budget and raising the debt ceiling.

Holiday sales rose by 3.5% in 2012, falling short of NRF’s initial forecast of 4.1% growth.

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 Fingers crossed Price of Gasoline Drops For 30th Straight Day

 

 

U.S. planned layoffs fall 20 pct in September: Challenger

Employers announced 40,289 layoffs last month, down from 50,462 in August, according to the report from consultants Challenger, Gray & Christmas, Inc.

High five  Still, the September job cuts were up 19 percent from the same month last year. For 2013 so far, employers have announced 387,384 losses, close to the 386,000 seen in the first nine months of last year.

The healthcare sector saw the biggest layoffs, with plans to cut 8,128 employees as health companies faced lower government payments, up from 3,163 in August.

The financial sector saw the next largest number of planned job cuts, with 6,932 in September compared with 3,096 a month earlier.

 China Services Index Increases in Sign of Sustained Rebound

The non-manufacturing purchasing managers’ index rose to 55.4 in September from 53.9 in August, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said today.

The federation said a gauge of new orders jumped, retail spending grew strongly and a logistics industry index rose.

 Italy’s Letta Survives but Battle Looms

Italian Prime Minister Enrico Letta won the fight to keep his government alive Wednesday. But the bigger battle will be to revive a sclerotic economy that is emerging as a major threat to the euro-zone recovery.

After days of political chaos, Mr. Letta won confidence votes in both houses of parliament when conservative leader Silvio Berlusconi at the last minute abandoned his bid to topple the government. But the near-death of the coalition, just five months after its formation, illustrates the challenges of pursuing an ambitious economic overhaul amid a fragmented and quarrelsome political scene. (…)

“The Italian political system is preoccupied with itself, it has no time for the country,” says a senior European policy maker. (…)

But don’t worry, Mario Draghi will do “whatever it takes” whatever mess they make!

The stakes are high. Italy’s sheer size, dysfunctional politics and faltering economy are a bigger headache for Europe’s crisis managers than even Greece, which represents only 2% of the euro-zone economy, compared with Italy’s 16%.

And the country’s €2 trillion ($2.7 trillion) public debt makes it too big for Europe’s bailout funds to rescue, should Italy ever lose access to bond markets. (…)

Italian GDP is now 9% smaller than at its precrisis peak in late 2007—a worse performance than Spain or Portugal, and second only to Greece for lost economic output.

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Large chunks of Italy’s manufacturing base—the second-largest in Europe after Germany—are in distress. Many of Italy’s signature industries, such as steel, white-goods manufacturing and textiles, are in deep distress. (…)

Italian labor costs today are 30% higher than in Spain, while productivity is 6% lower. So car companies such as Renault and Ford are moving production to Spain. In Greece, costs have fallen so sharply that Unilever has begun producing a new line of low-cost products there for the Greek market. (…)

Over the last five years, Italy attracted an average of just $12 billion of foreign investment a year, compared with $37 billion for France and $66 billion for the U.K.

Euro-Zone Retail Sales Rise

The European Union’s official statistics agency Thursday said sales volumes rose by 0.7% from July, although they were still 0.3% lower than in August 2012.

The figures for July were also revised higher, with Eurostat now estimating that sales volumes rose by 0.5%, having previously calculated they increased by 0.1%.

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High five  The details are not as positive. Core sales volume rose 0.6% MoM in August after dropping 0.1% and 0.8% in the previous two months, leaving core volume down 0.3% between June and August, much weaker than during the March-May period when core sales rose 1.1%. image

To repeat Markit’s Eurozone Retail PMI for September:

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August.

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Malls Are Recovering From the Downturn

Large enclosed malls are recovering from the downturn faster than strip shopping centers, a sign that malls are being hurt less by online retailing.

The vacancy rate of U.S. malls in the third quarter declined to 8.2% from 8.3% in the second quarter, according to new statistics released by Reis Inc., a real-estate data firm. Mall vacancy was 8.7% in the third quarter of 2012, said Reis, which tracks the top 77 markets in the U.S.

But the improvement hasn’t been as strong with shopping centers—typically open-air retail strips that face parking lots. The average national vacancy rate for neighborhood and community shopping centers held steady in the third quarter at 10.5% from the previous quarter, down from 10.8% in the third quarter of last year.

The national average asking rent at shopping centers was $19.25 per square foot, up just 1.5% from the recession low of $18.97 in 2011. The average asking rent for malls in the largest 77 U.S. markets rose to $39.77 per square foot in the third quarter, up 1.4% from the same quarter last year, according to Reis Inc.

(…) Mall vacancy rates are now falling partly because there has been little to no new mall development since 2006, Mr. Calanog said. (…)

Reis: Office Vacancy Rate declines slightly in Q3 to 16.9%

Reis reported that the office vacancy rate declined to 16.9% in Q3 from 17.0% in Q2.  This is down from 17.2% in Q3 2012, and down from the cycle peak of 17.6%.
From Reis Senior Economist Ryan Severino:

Vacancies declined by 10 basis points during the third quarter to 16.9%. This is a marginal improvement after last quarter when the vacancy rate did not change. However, since the market began to recover in mid‐2011, the vacancy rate has been unable to decline by more than 10 basis points in any given quarter. While this is technically an improvement versus last quarter, it is nonetheless a weak result. On a year‐over‐year basis, the vacancy rate fell by just 30 basis points, in line with last quarter’s year‐over‐year decline.

On new construction:

Occupied stock increased by 6.652 million SF in the third quarter. … On the construction side, this quarter 4.099 million SF were completed, down from last quarter’s mini‐spike of 8.049 million SF. While last quarter’s bump in construction activity appears to be an aberration, construction activity for office has been slowly if inconsistently trending upward. Year‐to‐date, the market has developed 15.161 million SF. This is almost double the 8.820 million SF that were constructed through the third quarter of last year.

On rents:

Asking and effective rents both grew by 0.3% during the third quarter. This marks the third consecutive quarter in a row with slowing asking and effective rent growth. Though in reality, rental growth rates are so low that the quarter‐to‐quarter differences are rather minor and could simply be idiosyncratic. Nonetheless, asking and effective rents have now risen for twelve consecutive quarters. Yet, the simple truth is that with vacancy remaining elevated at 16.9%, it is far too high to be conducive to much rent growth. At that level of vacancy, landlords have little leverage to either increase face level asking rents or to remove concessions from leases. A meaningful acceleration in rent growth will not be possible until vacancy falls to pre‐recessionary levels.

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U.S. Rises to No. 1 Energy Producer

The U.S. is overtaking Russia as the world’s largest producer of oil and natural gas, a startling shift that is reshaping markets and eroding the clout of traditional energy-rich nations.

[image]The U.S. produced the equivalent of about 22 million barrels a day of oil, natural gas and related fuels in July, according to figures from the EIA and the International Energy Agency. Neither agency has data for Russia’s gas output this year, but Moscow’s forecast for 2013 oil-and-gas production works out to about 21.8 million barrels a day.

U.S. imports of natural gas and crude oil have fallen 32% and 15%, respectively, in the past five years, narrowing the U.S. trade deficit. (…)

The U.S. last year tapped more natural gas than Russia for the first time since 1982, according to data from the International Energy Agency. Russia produced an average of 10.8 million barrels of oil and related fuel a day in the first half of this year. That was about 900,000 barrels a day more than the U.S.—but down from a gap of three million barrels a day a few years ago, according to the IEA. (…)

Saudi Arabia remains the world’s largest supplier of crude oil and related liquids. As of July, Saudi Arabia was pumping 11.7 million barrels a day, according to the IEA. Russia was second, at 10.8 million barrels, while the U.S. was third, at 10.3 million. (…)

U.S. energy producers also are drilling more efficiently and cutting costs in other ways. Some companies have said that the amount of oil and gas produced by shale wells isn’t dropping as fast as predicted.

Ken Hersh, chief executive of NGP Energy Capital Management LLC, a private-equity fund with $13 billion under management, said the immense amounts of oil and gas uncovered in recent years indicate that the U.S. energy boom could last a long time.

“It is not a supply question anymore,” he said. “It is about demand and the cost of production. Those are the two drivers.” (Chart from Ed Yardeni)

SENTIMENT WATCH

One factor S&P Dow Jones indices uses in their stock classifications is an Earnings and Dividend Quality Ranking measurement. The basis for this measurement is to provide investors with a ranking that S&P evaluates based on a company’s stability of earnings and dividend over time. The highest ranking is A and the lowest is D (a company in reorganization).

With this as background S&P has constructed indices based on these rankings. The S&P 500 High Quality Rankings Index consists of stocks with a ranking of A and better. The S&P 500 Low Quality Rankings Index consists of stocks with a ranking of B or lower. The high quality index has a larger weighting in sectors like consumer staples that tend to hold up better in a more defensive or “risk off” market. As the below table shows, this year, the low quality index has outperformed the high quality index by a wide margin.


This pattern of the “risk on” and more cyclical stocks outperforming has continued in the the second half of September, in spite of a down equity market.

(From The Blog of HORAN Capital Advisors)

(…) One characteristic of lower quality stocks is many of them do not pay a dividend. True to form, through the end of the third quarter, the non dividend paying stocks in the S&P 500 Index are outperforming the payers by a wide margin. The return comparison is detailed in the below table.

Nerd smile  Hmmm…Remember, the cream always ends up at the top.

(…) In recent weeks, both Warren Buffett and Carl Icahn warned stocks aren’t cheap. Others are urging investors to move cautiously.

“The opportunity sets aren’t as robust and the margins of safety are smaller,” said David Perkins, who oversees the $1 billion Weitz Value fund at Weitz Investment Management, an Omaha, Neb., value-oriented fund manager that oversees $5 billion.

Mr. Perkins says the firm’s internal readings on the stocks they follow are at their most expensive levels since 2006. He is holding more cash as a result.

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  • It’s right here, sir!

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Hmmm…

GOOD READS

“Character” (Jeffrey Saut, Chief Investment Strategist, Raymond James)

“The true prophet is not he who predicts the future, but he who reads history and reveals the present.”

… Eric Hoffer, American moral and social philosopher

I could almost hear my history teacher espousing Eric Hoffer’s words last week as I was asked by a particularly prescient media type if trust and character would really command a “premium” price/earnings multiple for the stock market? My response was “of course,” and as an example I referred him to a quote from John Pierpont Morgan, who built his family’s fortunes into a colossal financial empire. The referenced verbal exchange took place when an aging J.P. Morgan testified before a House of Representatives’ committee investigating the financial interests of the “House of Morgan.” A tough lawyer named Samuel Untermyer queried him. The conversation went like this:

Untermyer: “Is not commercial credit based primarily upon money or property?”

Morgan: “No sir, the first thing is character.”

Untermyer: “Before money or property?”

Morgan: “Before money or property or anything else. Money cannot buy it … because a man I do not trust could not get money from me on all the bonds in Christendom.”

While Morgan’s language is from an era gone by, the essential insight is as clear today as it was decades ago. I recalled the Morgan/Untermyer exchange as I read Friday’s Wall Street Journal, in particular, “Robbery at J.P Morgan.” The article began, “Government lawyers are backing up the truck again at J.P Morgan Chase (JPM/$52.24/Strong Buy) to extract another haul from the country’s largest bank.” Recall that JPM is one bank that did not need taxpayer assistance during the financial fiasco of 2008, or ever since.

To me that speaks volumes about the character of JPM’s CEO, Jamie Dimon. This lack of government dependence, combined with Mr. Dimon’s remarks about how the Dodd-Frank financial reform act is hurting the economy, is likely what put Mr. Dimon in the government’s crosshairs. This also explains why the government is beating up on JPM again over the “London Whale’s” $6 billion trading loss, even though there were NO public costs.

The irony is that Jamie Dimon is one of the few bank CEOs who avoided the credit excesses. He also, at the pleading of the government, rescued Bear Stearns and Washington Mutual (WaMu). Then-FDIC Chairperson Shelia Bair said, “[The WaMu situation] could have posed significant challenges without a ready buyer. … Some are coming to Washington for help; others are coming to Washington to help.” Now it appears Washington is suing JPM for helping.

I have no doubt about Jamie Dimon’s character. I do, however, doubt the character of some of the folks inside the D.C. Beltway, on both sides of the political equation, who are about to close down the government.

HEALTH SYSTEMS

Compare the US health system to those of the other large high-income countries. The US spends 18 per cent of its gross domestic product on health against 12 per cent in the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada, though many people are left uncovered. US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK. What does the US get in return? Life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher. For males this must be partly due to violent deaths. But it is also true for women. (FT’s Martin Wolf)

Ingram Pinn illustration

 

NEW$ & VIEW$ (25 JULY 2013)

U.S. New-Home Sales Surge 8.3%

Sales of newly built homes rose to a five-year high in June, boosting a key sector driving the economic recovery.

New-home sales increased 8.3% last month to a seasonally adjusted rate of 497,000, the Commerce Department said Wednesday. That was the highest level since May 2008. Sales were up 38% from a year earlier.

The stock of new homes for sale at the end of June was 161,000. That would take 3.9 months to deplete at the current sales pace, the quickest since January. Meanwhile, the median price for a new home sold in June was $249,700, up 7.4% from that time last year.

However, new home prices declined by 5.0% MoM in June, following a 6.8% decrease in May.

Pointing up The latest report showed that sales were weaker in earlier months than previously reported. May’s pace was revised down to 459,000 from  476,000, and April’s figure also was a slower rate than first estimated. (Charts from Haver Analytics)

 

 

Orders for U.S. Durable Goods Increase More Than Forecast

Bookings for goods meant to last at least three years increased 4.2 percent, led by transportation equipment, after a revised 5.2 percent gain in May that was bigger than initially reported, the Commerce Department said today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 1.4 percent advance. Unfilled orders for big-ticket goods rose the most since December 2007.

Orders excluding transportation equipment, which is volatile month to month, were unchanged after a 1 percent advance in May that was twice as much as previously estimated.

Pointing up  Orders for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, climbed 0.7 percent in June after rising 2.2 percent the prior month.

Here’s Doug Short’s chart that matters:

Click to View

And Zero Hedge’s one to keep you gloomy. Note that this is for shipments, not orders:

The WSJ continues:

In a sign industrial production will be sustained, the backlog of orders to factories jumped 2.1 percent in June, the most since the end of 2007. Unfilled orders for non-military capital goods excluding transportation equipment climbed 1.7 percent last month after a 1.2 percent increase.

Thumbs down  Macroeconomic Advisers in St. Louis, which updates its estimate of gross domestic product with each new piece of data, forecasts the economy grew at a 0.7 percent annual rate in the second quarter, down from a 1.7 percent estimate at the start of July. Second-quarter data are scheduled to be released July 31. The world’s largest economy expanded at a 1.8 percent pace in the first quarter.

Growth is projected to pick up in the second half of the year, climbing 2.3 percent in the third quarter and 2.6 percent in the last three months of the year, according to the medians in a Bloomberg survey of 70 economists.

Construction Index Dips in June, Still Shows Growth

The Architecture Billings Index, released by the American Institute of Architect son Wednesday, dipped to 51.6 in June from 52.9 in May. Despite the slip, the index remained in growth territory and was led by the new projects inquiry index component, which jumped to 62.6 from 59.1 the previous month.

The two-month sustained positive numbers come after a dip into negative territory in April, when the index fell to 48.6, the first time in 10 months the index had dropped below 50.

Billings were strongest in the Northeast, which had a reading of 55.6. The South posted a 54.8, the West 51.2, and the Midwest trailed with 48.3.

The commercial and industrial sector index led with 54.7, followed by multi-family residential with 54.0. The mixed-practice segment, a combination of retail and residential space, and the institutional segment were both in positive territory.

(CalculatedRisk)

Obama Turns Focus to Economy

(…) In the first of a series of about a half-dozen speeches that will lay out his blueprint for sustained economic growth, Mr. Obama offered mostly familiar policy prescriptions. (…)

“Washington has taken its eye off the ball. And I am here to say this needs to stop,” he said at Knox College here, positioning himself as an outsider in the debates in the nation’s capital. (…)

Mr. Obama’s own job-approval rating has slumped to 45%, the lowest level for him since late 2011, while disapproval of Congress has reached a record 83%. (…)

Sprinkled throughout the speech were familiar proposals, including calls for investments in infrastructure; government job training programs that are more directly connected to business needs; expanded pre-kindergarten programs; federal policies designed to reduce college costs; and an increased minimum wage.

He also called for an end to the across-the-board spending cuts known as the sequester, which he described as a meat cleaver that has cost jobs and harmed growth. And he made a new pitch for an overhaul of the immigration system, saying more legal immigrants could pay the taxes to help finance imperiled retirement programs. (…)

Hopeful Signs for Euro Zone

Businesses in Germany and the Netherlands became more optimistic about their prospects in July, as did Italian consumers, another indication that the euro zone is emerging from its longest postwar economic contraction.

Germany’s closely watched Ifo business confidence index rose to 106.2 in July, its third consecutive monthly increase. Italian consumer confidence hit its highest level in more than a year in July as households’ optimism about the economic outlook improved, official data showed Thursday. The Dutch producer confidence index reached its highest level since April 2012, but still came in negative at minus-3.5 in July, the statistics bureau CBS said, adding that Dutch businesses are only “slightly less pessimistic.”

But persistently weak loan growth suggests any recovery for the region’s economy is likely to be modest.

Surveys from Germany and Italy signaled that businesses and consumers are feeling more upbeat about their outlook, and business sentiment in the Netherlands also showed some improvement this month. The indicators come after euro-zone business activity expanded in July for the first time in 18 months, according to a closely watched survey released on Wednesday.

Weak demand for credit and risk-averse banks continue to drag on the economy, dampening any prospects for a full recovery in the euro zone. Loans to euro-zone businesses fell by €13 billion ($17.2 billion) in June, following similar drops in April and May, data from the European Central Bank showed Thursday. Loans to households also fell in June, the ECB said. (…)

Banks continue to expect demand for loans from firms to weaken in the third quarter as they further tighten standards, albeit at a slower pace, a quarterly ECB banking lending survey showed earlier this week, blaming weak fixed investment and economic uncertainty.

Spain’s jobless data boost recovery hopes
Economists caution improvement is due to seasonal factors

The number of unemployed Spaniards fell by 225,000 in the second quarter of the year, the largest such drop since the financial crisis started more than five years ago and a boost to government claims that the economy is finally picking up.

The fall takes the total jobless figure to 5.98m, while the rate decreased by 0.9 points to 26.3 per cent. (…)

The government was bolstered earlier this week when the Bank of Spain published an estimate showing that the economy may have contracted by as little as 0.1 per cent in the second quarter – after a drop of 0.5 per cent in the first three months of the year. If confirmed, the second-quarter estimate would be consistent with Madrid’s forecast of a return to growth in the second half of the year. (…)

Spain traditionally sees a spike in employment ahead of the summer tourist season.

That bounce is likely to have been even stronger this year, as holiday-makers from Germany, Britain and other European countries shun destinations such as Turkey and north Africa, which have suffered well-publicised bouts of political instability. (…)

Ford: picking up speed in Europe
Carmaker signals the worst may be over for the continent

Ford’s revival in Europe echoes results from General Electric. Last week, the industrial conglomerate said that orders in Europe were up 2 per cent. That does not sound great, especially when orders in the US were up 20 per cent, but European orders in the first quarter had been down a dispiriting 17 per cent and had contributed to disappointing earnings in that period.

SLOW AND SLOWER

Markit comments on its flash China PMI survey:

China manufacturing
Further downturn signalled as flash PMI drops to near post-crisis low in July

The headline PMI fell from 48.2 in June to 47.7, its lowest since last
August and signalling a third successive monthly deterioration of business conditions in China’s vast goods-producing sector. Since early-2009, the lowest reading of the PMI has been 47.6.

imageThe survey therefore adds evidence to suggest that the rate of growth of the world’s second largest economy has slowed further at the start of the third quarter, with growth having already weakened to an annual pace of 7.5% in the second quarter, which was the second-weakest pace seen for four years.

The slowdown is also not confined to the goods producing sector. The manufacturing PMI’s sister survey showed service sector growth slowing to near stagnation in the second quarter, indicating that the sector was undergoing one of the softest patches seen in the seven-and-a-half year history of the survey.

imageLooking at the details, the flash data showed output falling for a second successive month, dropping at the fastest rate since last October. New orders fell for the third straight month, likewise seeing the rate of decline accelerating, hitting the fastest since August of last year. Worryingly, backlogs of work fell to the greatest extent since January 2009, down for a third successive month.

imageThe acceleration in the rate of loss of orders was driven primarily by the domestic market. New export orders also fell, down for a fourth month running, but the rate of decline was the slowest since May.

 
China unveils measures to boost economy
Move indicates leadership’s concern about slowdown

(…) The “mini stimulus”, though limited in size, could herald more policy moves to prop up growth. The government will eliminate taxes on small businesses, reduce costs for exporters and line up funds for the construction of railways. (…)

First, it has temporarily scrapped all value-added and operating taxes on businesses with monthly sales of less than Rmb20,000 ($3,250). It said the tax cuts, which go into effect at the start of August, would help more than 6m enterprises which employ tens of millions of people

Second, the government pledged to simplify approval procedures and reduce administrative costs for exporting companies. Among the various moves, it said it would temporarily cancel inspection fees for commodities exports and streamline customs inspections of manufactured goods.

Third, it said it would create more financing channels to ensure that the country can fulfil its ambitious railway development plans. More private investors will be encouraged to participate and new bond products will be issued.

Ghost  SoGen on why China matters (via Business Insider)

 

“China is a major source of global demand,” with imports equivalent to 30% of GDP, Societe Generale Michala Marcussen points out in a new report. So a hard landing would have a major impact on economies that are reliant on China for their exports.

“Drawing on different studies, mainly from the IMF and the OECD, we estimate that the impact of the trade channel from the type of hard landing in China described in the previous section would cut GDP growth by around 4.5pp in Taiwan, 2.5pp in South Korea and Malaysia, 1.2pp in Australia, 0.6pp in Japan, 0.2pp in the euro area and 0.1pp in the US. For the global economy ex-China, the trade channel effects would bring about a reduction of around 0.6pp to GDP growth.”

There’s also the impact of the decline in investment, since “investment has significantly higher import content than consumption, most notably through commodities and machine tools.”

Here’s a look at the countries that would be hit the hardest by a slowdown in China:

countries hit by chinese slowdown

SocGen China

South Korea growth strongest in two years
Consumer spending helps buoy economy

The economy expanded a seasonally adjusted 1.1 per cent in the second quarter from the first three months of the year, the Bank of Korea said on Thursday. That marked its strongest performance since the first quarter of 2011. Compared with the same period a year earlier, gross domestic product grew 2.3 per cent. (…)

Construction contributed strongly to the growth, rising 3.3 per cent quarter-on-quarter. However, a decline of 0.7 per cent in facilities investment – particularly transport equipment – reflected fragile business confidence. Private consumption grew 0.6 per cent after a 0.4 per cent fall in the previous quarter, while exports of goods and services increased 1.5 per cent.

The central bank predicts full-year growth of 2.8 per cent, rising to 4 per cent in 2014. (…)

World Trade Volume Fell by 0.3% in May

In its monthly report, the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Wednesday said the volume of exports and imports fell 0.3% from April, having risen 1.3% in that month.

The decline in trade volumes was spread across the globe, although was sharpest in Central and Eastern Europe.

The CPB also provides a measure of world factory output, which was unchanged in May, having risen 0.2% in April.

Emerging economies now seem to be underperforming

Latest data from the CPB show that growth in global industrial production (IP) is on track to decelerate a bit in the second quarter. That’s mostly due to the worst IP growth in emerging economies since 2009, in sharp contrast with the uptick observed in advanced economies
(the latter due to the rebound in economic activity in Europe but primarily in Japan).

So much so that, as today’s Hot Charts show, the gap in IP growth between advanced and emerging economies in the second quarter was the biggest since the Asian crisis. And based on Markit’s July manufacturing purchasing managers’ indices, which showed a further worsening in China, it seems that advanced economies could continue to
outperform emerging ones in Q3 as well.

The eurozone despite its structural problems seems to be slowly
returning to growth as evidenced by July’s above-50 manufacturing PMI, Japan’s recovery is set to continue buoyed by loose policies from a government emboldened by its absolute control of parliament, while the US is set to bounce back after a temporary sequester-related setback in Q2. In the meantime, China’s rebalancing act is biting into growth, while other emerging economies continue to adjust not only to the loss of competitiveness relative to the yen, but also to the recent run up in bond
yields. (NBF Financial)

image

 

 

Bond Investors Look to Cash  Investors are cashing out of bonds but remain hesitant to plunge into stocks even as they reach new highs, preferring to buy money-market mutual funds despite their low returns

Investors withdrew an estimated $43 billion from taxable bond mutual funds last month, the largest-ever monthly outflow, according to the Investment Company Institute. (…)

But in a twist, the main beneficiary of the rush out of bonds has been money-market funds, which are cash-like investments that appeal to safety-minded investors.

Assets in these portfolios increased for the fourth week in a row in the week ended July 17, rising $8.5 billion to $2.6 trillion, ICI data show. That left money-market funds, which pay barely more than simply holding dollars, with the most cash since early April. (…)

An estimated $6.3 billion came out of U.S. stock mutual funds in June. But as markets stabilized this month, investors moved $7 billion back into U.S. stock mutual funds in the first two weeks of July, according to the ICI. (…)

Since the financial crisis, investors have plowed money into bond funds and pulled out of U.S. stock funds. Some $947 billion made its way into bond funds from the start of 2008 through the end of last year, compared with an outflow of $548 billion for U.S. stocks funds, according to ICI data. (…)

 

NEW$ & VIEW$ (9 JULY 2013)

Small Business Sentiment: A Decline After Two Months of Increase

Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.

Click to View(Doug Short)

Completed U.S. foreclosures decline in May from year ago: CoreLogic

There were 52,000 foreclosures completed, well below the 71,000 in May last year, CoreLogic  said. Even so, that was up from 50,000 in April 2013.

Prior to the housing market’s collapse, completed foreclosures averaged 21,000 a month between 2000 and 2006. There have been approximately 4.4 million foreclosures finished since the start of the financial crisis in September 2008, the report said.

About 1 million homes were in some stage of foreclosure as of May, down from 1.4 million a year earlier. The foreclosure inventory accounts for 2.6 percent of all homes with a mortgage.

Florida had the largest number of foreclosures in the 12 months ending in May, followed by California, Michigan, Texas and Georgia. Those five states accounted for almost half of all completed foreclosures.

Apartment Rents Rise, Pace Slows

Nationwide, landlords increased rents an average of 0.7% to $1,062 in the second quarter, according to a report to be released Tuesday by Reis Inc.,  a real-estate research firm. While that is a hair above the 0.6% increase notched in the first quarter, it is well below the 1.3% rise achieved a year earlier.

“The weak labor market and income growth continue to hold rent growth in check,” Reis wrote in its report.

The vacancy rate, meanwhile, held steady at 4.3% in the second quarter, unchanged from the first quarter and marking the first time the rate didn’t decline since early 2010. (…)

Developers are expected to complete the construction of 160,000 new apartment units in the top 54 metropolitan areas this year, more than double the amount added to the market last year, according to CoStar Group. A further 350,000 could be finished by 2015. (…)

New York City remains hot: Its rental rates jumped 2.6% to $3,017—the nation’s highest—while its vacancy rate fell to 2%. “The demand is so high, we have two to three potential tenants for every available apartment,” said Ed Azrilyan, owner of brokerage Chartwell F.H. Realty. “Last summer, we were showing 10 apartments to somebody. [But] people can’t be picky right now.” (…)

Consumers Boost Borrowing

Consumer credit, a measure of borrowing that does not include home mortgages, rose by $19.6 billion in May to a seasonally adjusted $2.84 trillion, the Federal Reserve said Monday.

Revolving credit, which is mostly credit-card debt, rose at a 9.3% annual rate. It was up by $6.6 billion to $856.5 billion, which was the highest level since September 2010. Outstanding credit-card debt bottomed out two years ago and in May saw the largest jump in a year.

Nonrevolving credit, which includes student loans and auto financing, rose by $13 billion in May to $1.98 trillion on a seasonally adjusted basis, the Fed said. The figure rose at a 7.9% annual pace and also marks the 21st straight monthly increase, matching gains from late 2006 through mid-2008.

Credit-Card Delinquency Falls to Lowest Rate Since 1990 Americans are keeping up with their credit card bills better than any time in the past two decades, a reflection of both an improving economy and lingering caution among banks and consumers.

Nearly 1 in 6 Americans Receives Food Stamps

Food-stamp use rose 2.8% in the U.S. in April from a year earlier, with more than 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.)

Food stamp rolls increased on a year-over-year basis, but were 0.4% lower from the prior month, the U.S. Department of Agriculture reported. Though annual growth continues, the pace has slowed since the depths of the recession.

The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), is at 47.5 million, or nearly one in six Americans.

Chinese inflation rebounds in June

Credit surge adds to consumer price rise of 2.7%

Consumer prices rose 2.7 per cent year on year in June, up from 2.1 per cent in May, the highest rate since February. Higher pork prices, a major component of China’s consumer price basket, were the biggest contributor to the jump. Rental costs also edged higher, a reflection of how Chinese property inflation has accelerated this year.

But for producers, price trends left little doubt about the economy’s underlying weakness. The producer price index fell 2.7 per cent year on year in June. It was its 16th straight month in deflationary territory, dragged down by falling commodity prices as well as sluggish domestic demand.

China forecasts are being cut ahead of Q2 release

From Bloomberg Briefs’ Michael McDonough via FTAlphaville:

China Q2 GDP growth forecast revisions - Michael McDonough, Bloomberg Briefs

 

Europe Keeps Greek Aid Flowing

The decision came even though Greece’s international creditors reported that all isn’t well with the country’s mammoth bailout program.

Greek outlook bleaker than lenders think, local think tank calculates

Greece’s economy could shrink by as much as 5 percent this year, the Athens-based IOBE think tank said on Tuesday, revising down its previous projection and offering a more pessimistic forecast than the country’s foreign lenders.

Just kidding  An end to austerity will not boost Europe, writes Martin Feldstein

The eurozone periphery is on a risky path to end fiscal austerity and accept larger budget deficits. Portugal is the most recent dramatic shift in that direction; Italy, Spain and even France are also abandoning plans to cut spending and raise taxes.

This move away from budget discipline reflects a combination of popular political pressure, more accommodating bond markets and encouragement from the International Monetary Fund.

But ending fiscal austerity is not a strategy for achieving growth. It will reduce downward pressure on aggregate spending but will not lift growth and employment. Instead, it will raise interest rates and threaten a new fiscal crisis.

Europe needs three things: structural changes to boost long-run potential gross domestic product, a short-term stimulus to increase employment, and a commitment to longer-term spending reductions to shrink the national debt.

(…) governments must combine long-run deficit reductions with short-run fiscal stimulus. Slowing the growth of pensions and other transfers would reduce future debt and prevent near-term increases in interest rates. To make these changes politically acceptable, governments should combine them with an immediate programme of infrastructure investment and manpower training. This would not only raise current GDP but would also strengthen long-run productivity and real incomes.

The slower growth of transfer programmes would also permit lower payroll tax rates, cutting the cost of labour and increasing employment. Lower labour cost would also raise the competitiveness of European products in international markets.

A lower value of the euro could provide a further boost, making it possible to lift employment while shrinking the short-term fiscal deficits. Although a lower euro would not change the exchange rate within the eurozone, countries outside the eurozone account for roughly 50 per cent of the peripheral countries’ trade. (…)

The bond fund outflow, charted

(Credit Suisse via FT Alphaville)

EARNINGS WATCH

Here Is Why Alcoa Just “Beat” Earnings

Alcoa reported adjusted earnings (because the unadjusted earnings were a disaster) of $76 million, or $0.07, on consensus expectations of a $0.06 print. In other words, a beat. So just how did the company beat its forecast?

 
 
China smog cuts life expectancy by 5.5 years
Study shows health risks far greater than feared
 

NEW$ & VIEW$ (8 JULY 2013)

Job Gains Show Staying Power The U.S. job market chalked up solid progress in June, bolstering evidence that the economy might be strong enough to grow with less help from the Federal Reserve and sending bond investors rushing to sell.

American employers added 195,000 jobs in June, the Labor Department said Friday, and tallies for April and May climbed by a combined 70,000.

Photo

Photo

Revisions are almost always up!

image(Markit)

However:

Job creation is still concentrated in the low-income, low wage industries. During June, 121,600 of the 195,000 jobs created (or 62 percent) were in leisure & hospitality (75,000), retail (37,100), and temporary worker (9,500) industries. It isn’t easy to get the economy going with jobs growth relatively isolated to these low-wage sectors. Overall, average hourly earnings increased just 0.4 percent in June, 2.2 percent from year ago levels. Once adjusted for the mild inflation of about 1.5 percent, real earnings are advancing at about a 1 percent pace. (Bloomberg)

Construction companies added 13,000 jobs, the most in three months, while automakers boosted employment by 5,100 workers, the biggest gain in four months. Hiring at auto dealerships and home-improvement stores also picked up, the report showed.

Factories reduced payrolls by 6,000 in June.

Doug Short illustrates the consumer earnings trends:

 

The next chart applies some simple math to the two data series. Let’s create a snapshot of hypothetical expected real annual earnings: multiply Real Average Hourly Earnings times the Average Hours Per Week and then multiply the weekly earnings times 50 (yes, a couple of weeks of unpaid vacation).

 

 

Some Troubling Signs In June’s Jobs Report  The latest June jobs report isn’t quite all roses.

Behind the solid payroll gains are a few troubling signs. The number of Americans working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month.

As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6,″ for its data classification by the Labor Department. (…)

The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago. (…)

Prime-Age workers remain jobless:
 

To get a cleaner read of trends in job opportunities we look at the EPOP after removing young people and people near or above retirement age. As the figure below shows, the employment-to-population ratio of “prime-age” workers—workers age 25–54—dropped from over 80 percent in early 2007 to 74.8 percent at the end of 2009, and has since increased to 75.9 percent. In other words, we are four years into the recovery, and we have climbed only about one-fifth of the way out of the hole left by the Great Recession. (Heidi Shierholz at the Economic Policy Institute)


 
 Annoyed  Jobs Strength Keeps Fed on Track

The Labor Department’s strong June employment report improved the odds the Fed will begin to pull back on its $85 billion-per-month bond-buying program by the end of the year.

The Labor Department said U.S. employers have added more than 200,000 jobs per month over the past six months, hitting a benchmark some Fed officials have cited as an indication of the kind of economic progress they want to see before shrinking their bond purchases.

But the market is not waiting for the Fed:
 

“The Fed has made clear that at the end of the day it is employment which will call the tune,” Mr. Feroli said. “Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting.”

The Atlanta Fed’s “Jobs Calculator” says if the economy can add an average of 180,000 jobs per month, that 7% jobless mark could be hit in a year’s time, all other labor force factors being equal.

Rising long-term rates are not without consequences:

Incidentally, ISI’s homebuilders’ survey has been wakening in recent weeks.

And the PMIs:

image

And this big danger:

image

 

Hmmm…

Office Recovery Stays Slow

The U.S. office market continued its slow-but-steady recovery in the second quarter, as employers took on additional space at a modestly improved pace compared with recent anemic levels.

The amount of office space occupied by employers increased by 7.2 million square feet, or 0.2% of the total occupied stock, during the quarter, according to real-estate research service Reis Inc. That was the biggest increase since the economy began slowing in 2007.

But the pickup still was below levels seen in more typical periods of economic growth. During such times, the volume of occupied space can increase some 10 million to 20 million square feet per quarter. In contrast, employers have generally taken on between three million and five million square feet of additional space per quarter since the market began improving in 2011.

Without faster growth, the office-vacancy rate is likely to continue to stay high—and rents relatively low. In the second quarter, the overall U.S. vacancy rate stayed flat at 17%, down from a postrecession peak of 17.6% reached in mid-2010.

Rents sought by landlords ticked up to $28.78 per square foot in the second quarter, from $28.66 per square foot in the first quarter and $28.18 one year earlier, according to Reis, which tracks 79 metropolitan areas.

Ripple effects:

FT’s John Authers: ECB comes to the market’s rescue again

(…) Friday’s US jobs report, revealing the US labour market continued to show slightly greater strength than many expected, forced the message home. Despite much ongoing weakness in the US economy, if its labour market keeps improving like this, the chances are that the Fed stimulus will end next summer. In response, bond yields moved sharply upwards across the world. This may well have been what Mr Bernanke wanted, even if Fed colleagues later downplayed his remarks.

What is now beyond doubt is that the market went very far beyond anything the BoE or ECB could tolerate.

To counter rising rates, the ECB said it “expects the key rates to remain at present or lower levels for an extended period of time”, while the BoE’s new governor, Mark Carney, said “the implied rise” in future rates was “not warranted by the recent developments in the domestic economy”. In other words, the market had set gilt yields too high.

As a result, although the Fed is still buying bonds, while the ECB’s balance sheet is contracting, the extra yield on German Bunds compared to US Treasury bonds reached its highest since the crisis.

There is irony here. When the Fed launched its programme of bond purchases in early 2009 – arguably a form of printing money – the rest of the world complained that it was fighting “currency wars”. Low US rates made for a weak dollar, and cheaper US exports. The response was for other countries to cut their rates. In effect, the Fed exported its low interest rates. Now the problem has reversed. The Fed is exporting higher rates, and the ECB and BoE have been forced to be more lenient.

There is one safe bet out of this, which is prolonged weakness for sterling and the euro, already near their lows for the year. When their central banks appear so much more dovish than the Fed, this can only weaken them against the dollar.

A second, slightly less safe bet is on European equities. Easy money is good for stocks, and these announcements will prop up stock markets which in Europe have been anaemic. (…)

While European stocks enjoy support from their central banks, it is a bad idea to bet against them. But in the longer term, the reasons for concern about the eurozone and UK are not going away. That they share the world with a Fed that is talking up rates only adds to the hazards.

Canada Jobs Little Changed in June After May’s Huge Gain

Employment fell by 400 last month after May’s surge of 95,000 while the jobless rate was unchanged at 7.1 percent, Statistics Canada said today in Ottawa. (…)

Canada’s job gains have slowed so far this year, with the average monthly gain of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said.

Full-time employment fell by 32,400 in June, following a 76,700 gain the prior month. Part-time positions rose by 32,200, Statistics Canada said.

Private companies cut 5,300 workers last month after May’s 94,600 increase, while public-sector employment rose by 1,000.

Meanwhile, in the Eurozone

German Industrial Production Decreased in May

Production fell 1 percent from April, when it gained a revised 2 percent, the Economy Ministry in Berlin said today. That’s the first decline since January. From a year earlier, production decreased 1 percent when adjusted for working days.

Orders are also falling:

German Factory Orders Drop as Euro-Area Economy Struggles

Orders, adjusted for seasonal swings and inflation, dropped 1.3 percent from April, when they fell a revised 2.2 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 1.2 percent, according to the median of 42 estimates in a Bloomberg News survey. Orders slid 2 percent from a year ago, when adjusted for the number of working days.

Germany’s domestic orders declined 2 percent in May from the prior month, today’s report showed. Overseas demand shrank 0.7 percent, with orders from the euro area slumping 3.9 percent. Orders for basic goods fell 0.1 percent from April, while investment-goods orders slid 1.8 percent. Demand for consumer goods dropped 3.1 percent, with orders from the euro area down 5.7 percent.

The FT adds:

This follows a weak 48.6 in June’s manufacturing PMI survey. Economists at Markit said: “There’s a lack of demand both at home and in export markets, so stagnation seems to be the best that we can expect for the time being.”

Sweden’s IP fell 2.6% in May MoM, after dropping 1.1% in April. Turkey’s IP fell 0.6% in May MoM, following a 1.4% rise in April.

French Firms Cut Back on Investments

Despite low interest rates, French companies and entrepreneurs are cutting back on their investments. They’re delaying plans to expand existing factories, and canceling plans to build new ones.

[image]Higher taxes and cheaper foreign competition have pushed margins for French companies down to their lowest level since 1985—reducing companies’ ability to stomach risk. At the same time, French business leaders say the challenges from unpredictable tax rates and ever-changing French red tape are rising. (…)

Investment by nonfinancial companies in the euro-zone’s second-largest economy has contracted every quarter since the beginning of 2012. A recent survey by French statistics agency Insee showed French businesses in manufacturing expect to cut investment by 4% this year, while in January they expected to keep investment at the same level as 2012.

France isn’t alone in seeing shrinking private investment as the recession across much of Europe pushes businesses from Germany to Greece to tighten their purse strings. But economists say the decline is particularly worrying in France because of the lower profitability of French companies. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at 25.7% at the end of last year, compared with 35.2% on average in the euro zone, according to data from European the statistical agency Eurostat.

Greece’s Economic Future ‘Uncertain’

Hours before a euro-zone finance ministers’ meeting to approve the disbursement of aid to Greece, the technocrats overseeing its bailout said the country’s economic outlook remained cloudy

CHINA SURVEY POINTS TO SLOWER GROWTH
 
CEBM Research latest survey:

Industrial demand has remained weak during the traditional off-season with few bright spots among industrial sectors. Additionally, the recent liquidity squeeze in the interbank market has led to higher financing costs, worsening cash flows and higher credit risks among small and medium sized enterprises (SMEs).

In detail, a number of industrial sectors surveyed by CEBM did not achieve their sales targets during the month of June. Cement demand declined due to the upcoming off season, and actual sales were weaker than expectations. Steelmakers and machinery sales showed no improvement due to the off season. Auto sales, which have been quite robust over the past few months, decreased in June and were below seasonal trends, partially due to tightening credit conditions for car loans. Property sales were stronger than expectations but mostly due to lowered sentiment among property developers.

The most significant change during the course of June was of course the liquidity squeeze in the interbank market, which has expanded to enterprises and has led to higher financing costs, tightening cash flow, and increasing risk of default on debts. Current bill financing rates increased to an annualized cost of around 10-12% for enterprises, leading to significant pressure on their profitability and short term cash flow. A few cement producers and metal traders reported that they received a lot more commercial bills than they did previously, in addition to the rapid increase of other receivables. Many banks surveyed by CEBM are now concerned about the potential outburst of credit risks among SMEs, particularly those located in the Yangtze delta area. (…)

Consumer sector performance in June showed signals of further decline. Respondents in department stores, home appliance retailers, and supermarkets all reported weaker sales growth (Y/Y). Performance of restaurants further diverged.

Japan bank lending hits four-year high
Loan growth suggests stimulus is spurring fund demand

Outstanding loans held by Japanese banks rose 1.9 per cent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.

SENTIMENT WATCH

Global Earnings Downgrades Worst In 12 Months

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012.

But not in America:

Analysts Boost S&P 500 Target 11%, Lower Earnings Growth

The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.

Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate. (…)

Analysts are looking past profit growth this year and predicting improving investor sentiment will push stocks higher. They’ve boosted price estimates for the S&P 500 by 11 percent from 1,608.50 on Dec. 28, the fastest rate since July 2011, according to data compiled by Bloomberg.

U.S. equity volume, in retreat since 2009, is showing signs of picking up. Trading on all American markets has averaged 6.77 billion shares a day since the start of June, compared with 6.35 billion between January and May and 6.42 billion in 2012, according to data compiled by Bloomberg.

Well, if earnings are not cooperating, P/Es ought to rise! Why? “Improving sentiment”!”

What about rising interest rates…The same people calling for higher rates are calling for higher P/Es.

Hmmm…

Fingers crossed Fingers crossed Maybe this might help:

A Turn in Economic Indicators