NEW$ & VIEW$ (3 JULY 2013)

Portugal Rocks European Markets  Portuguese bonds and stocks led heavy declines in European markets after the foreign minister resigned, triggering the worst political crisis since the country’s bailout two years ago.

Portuguese bonds were already on a weaker footing before the resignation; they had dipped Tuesday after the surprise resignation of Finance Minister Vitor Gaspar. On Wednesday, the selloff accelerated sharply.

Midmorning in Europe, Portuguese 10-year bond yields were up 1.4 percentage points at 7.87% amid fears Mr. Portas’s party will withdraw its support for the government. Yields pushed higher in other financially stressed euro-zone countries as fears of contagion grew. Bond yields rise as prices drop.

“The political problems increase the uncertainty surrounding Portugal’s bailout commitments and potentially even the prospect for negotiations of a precautionary program succeeding the current program running out in May next year,” RBC said in a note to clients. “We see the risk of further spillover effects into Spanish bonds and Italian bonds hampering the recent recovery.”


Total sales volume rose 1.0% MoM after 3 consecutive monthly declines totalling –0.7%. Core sales volume rose for the second month: +0.9% in May after +0.8% in April, more than offsetting the –1.5% drop in Feb-March. (Eurostat)



Auto  Summer Auto Sales Surge  U.S. auto sales rose at the strongest rate in more than five years in June, lending new confidence to industry executives’ belief that the nation’s auto recovery has more room to run.

Overall, auto makers sold 1.4 million cars and light trucks in June, 9.2% more than a year ago, according to researcher Autodata Corp., and putting the industry on track to make 2013 its best sales year since 2007. Through the first six months of the year, Americans have purchased 7.8 million cars, 7.7% more than the same period a year ago.

image(Calculated Risk)

Imports’ share of the U.S. light vehicle market increased to 21.4% in June. (Haver Analytics)

Nissan deliveries increased 13 percent in June, the automaker said in an e-mailed statement, matching the average of eight estimates. The Yokohama, Japan-based company’s rise followed a 25 percent surge in May, which tripled the industrywide increase that month, after cutting the price of seven models. (Bloomberg)

Retail Vacancies Lowest in 4 Years

The average vacancy rate at U.S. retail property in the second quarter fell to its lowest level in more than three years to 10.5%, down from 10.6% in the first quarter, according to a report set to be released Wednesday by real-estate research firm Reis Inc. Asking rent increased to $19.19 a square foot from $19.13 in the first quarter.

The average vacancy rate at U.S. malls was at 8.3% at the end of the second quarter, the lowest rate in more than four years and down from 8.9% one year ago, according to the report. Strip-shopping centers, which include stores clustered around a common parking lot, ended the quarter with a 10.5% vacancy rate, down from 10.8% a year ago.

Still, nationwide vacancy remains well above the lows seen before the economic downturn. Overall vacancy was at 7.7% in the first quarter of 2008.



The market is generally improving for landlords partly because new development has been slow, putting a crimp on competition. About 31.5 million square feet of new space is expected to be delivered this year, compared with about 200 million in 2007 and 2008, according to the CoStar Group.

Development is picking up. CoStar projects that nearly 70 million square feet of new retail space will be delivered next year.

But Suzanne Mulvee, CoStar’s director of research-retail, doesn’t foresee a glut of space. “You’re still less than half of what we were doing,” she said. “This is nothing to be worried about.”

Cass Freight Index Report™ ‐ June 2013

The Cass Freight Index for June shows an increase in freight expenditures over May, while the number of shipments remained
virtually flat. The transportation sector continues to follow the up and down track it’s been on for the last two and half years.



June shipments rose less than 0.1 percent from May and were 1.5 percent lower than this time last year. In fact, the June 2013 value is the lowest of the last three June time periods. The shipment trend for 2013 remains
completely intertwined with those of 2011 and 2012. Cumulatively for 2013, the number of shipments is up 5.8 percent, but second quarter growth was much slower than first quarter growth. The high point year‐to‐date was hit in March, with June coming in 0.6 percent lower than the March high.

The railroad sector began and ended the last four weeks with drops in both carloadings and intermodal loadings, to end the period down 0.7 and 1.1 percent for carloadings and intermodal respectively. The trucking sector remains at high utilization rates with load size trending upward. Most truckers feel that shippers are still in control of pricing, but this could change quickly and soon. The American Trucking Association’s Truck Tonnage Index posted a 2.3 percent increase in May, which coincided with the strong 3.4 percent gain in number of shipments reported last month.

Oil Boom Gives U.S. More Policy Options

[image]The rise in North American petroleum production is a boon to government policy makers, who have less need to worry about the market impact of decisions they make.

(…) new U.S. shale-oil and Canadian oil-sands output provided an extra cushion amid a handful of production outages around the world.

Carlos Pascual, the State Department’s top energy official, said increased oil supplies, especially in the U.S., “have been absolutely essential at being able to undertake the kind of negotiations that we have had with countries around the world to reduce their imports of crude oil from Iran.”



NEW$ & VIEW$ (20 MAY 2013)


Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.

Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

Click to View
Click to View

Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

Click to View

Click to View

Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

  • Auto  Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, Sputteringaccording to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.

Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.

The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.

The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

  • Mexico’s First Quarter GDP Down, But Far From Out  Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

ChartMexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.

Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.

But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.

Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.

The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011. (…)

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.

However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting. Confused smile

Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.

At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)

This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.



Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile  (Looks like devaluation is more effective than austerity)




Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.

Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.

It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)


March 2013 CCRSI National Results Highlights

  • PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period. 
  • SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively. 
  • TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013.  Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010.  Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity. 
  • DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.



U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace
Obama approves wider LNG exports as door opens to Japan and EU



NEW$ & VIEW$ (4 APRIL 2013)

Jobless claims rise, gasoline declines. Rental business could get nasty. Japan prints. Spain pains. Does Draghi have a plan B? Slovania next Cyprus? Eurowoes charted. Hungary, Russia slow down. Large caps vs small caps: warning sign?

Initial Jobless Claims: +28K to 385K vs. 350K consensus,


Gasoline Takes a Tumble

Gasoline futures tumbled 4.2% as increasing activity by refineries has investors betting on a jump in fuel supplies.

The average U.S. price of regular retail gasoline stood at $3.640 a gallon Wednesday, according to AAA’s Daily Fuel Gauge Report, down nearly 11 cents from a month ago.


Apartment Vacancy Rates Decline (CalculatedRisk)

imageReis reported that the apartment vacancy rate fell to 4.3% in Q1, down from 4.5% in Q4 2012. The vacancy rate was at 5.0% in Q1 2012 and peaked at 8.0% at the end of 2009.

(…) By contrast, office sector vacancies have only fallen by a paltry 60 basis points since fundamentals began recovering five quarters ago.

The sector absorbed over 36,000 units in the first quarter, a relatively healthy rate comparable to the rise in occupied stock from one year ago (in 2012Q1). Deliveries have remained modest at 13,706 units, representing roughly the same pace of inventory growth as previous first quarter periods over the last two years.

Pointing up Apartment landlords have another quarter or two to enjoy tight supply growth before a large number of new properties come online. Over 100,000 units are expected to enter the market, most scheduled to open their doors in the latter half of the year. (…)

Asking and effective rents both grew by 0.5% during the first quarter. This is the slowest rate of growth for both asking and effective rents since the fourth quarter of 2011; every single quarterly data point in 2012 showed stronger asking and effective rent growth versus what was observed in the current quarter. What does this mean?

Optimists will point out that the first quarter tends to be weak, as most households move during the second and third quarters and bolster leasing activity and rent increases. The seasonal waxing and waning in rent growth was evident in the prior year, when the strongest periods centered around the second and third quarters.

However, given how tight vacancies have become, rent growth ought to be stronger (for perspective, in prior periods when vacancies were in the low to mid‐4s, annual rent growth was well above 4%). (…)

Rents Soften as Investors Buy More Homes  Investors have played key roles helping to stabilize home prices by scooping up distressed homes and renting them out. But a new report shows that those purchases also have begun to squeeze single-family rents.

Nationally, asking prices of single-family homes were up by 7.2% from one year ago in March, according to real-estate website Trulia. Asking rents, meanwhile, were up just 0.1% from one year ago.

The median asking rent for single-family homes in Las Vegas has fallen by 1.9% from a year ago. Rents are down by 1.2% in Fort Lauderdale, Fla., and Chicago, and by 0.7% in Washington, D.C., and Orange County, Calif.

Rents are still going up in several markets, with gains of at least 3.5% in Houston, Dallas, Orlando, Tampa, and California’s Inland Empire, about 45 minutes east of Los Angeles.

Trulia said Census data shows that there are nearly 4 million more single-family homes for rent in 2012 than in 2005, an increase of 32%. Meanwhile, the number of owner-occupied single-family units hasn’t changed over that span.

 Japan Bets On Easing

The Bank of Japan launched an aggressive easing program as new Gov. Haruhiko Kuroda embarked on a two-year campaign to free the country’s economy from more than 15 years of deflation.

Among the key measures agreed upon at Mr. Kuroda’s inaugural policy board meeting were a major expansion of its government bond purchases, include buying longer-term debt. The move is designed to drive down longer-term rates, which have remained stubbornly high despite previous easing.

It will double its purchase of Japanese government bonds to 7 trillion yen ($75 billion) monthly and will also expand purchases of other assets, including exchange-traded funds and real-estate investment trusts.

The bank also said that it will purchase longer-term bonds, a move it had been reluctant to undertake previously because such assets can decline in value, creating future losses for the bank.

Spain threatened by resurgent credit crunch
Small businesses fold as bank loans dwindle

(…) In the five years since the crisis started, no fewer than 450,000 small and medium-sized enterprises have gone under, says Jesús Terciado, the president of Cepyme, the Spanish SME association. “But it is not just about staying in business – it’s also about growth. There is no way you can grow your business at the moment,” he says.

Countries such as Spain and Italy are acutely sensitive to a lending crunch for SMEs, because so much of their economy depends on them – and because companies such as Mr Rodriguez’s in turn depend so heavily on bank loans. In the case of Spain, SMEs make up 99.9 per cent of all businesses and employ almost three out of every four workers. If they cannot survive and thrive, neither can the Spanish economy at large. (…)

Data from the Bank of Spain shows that lending to companies has fallen in every quarter since 2009.

Draghi Considers Plan B as Sentiment Dims Post Cyprus

(…) With Europe entering a second year of recession and fragmented financial markets preventing the ECB’s record-low borrowing costs from reaching the countries that need them most, Draghi may prefer to use so-called non-standard measures. He is particularly concerned about a lack of credit being extended to small and medium-sized companies in countries such as Italy and Spain, two of the officials said on condition of anonymity. (…)

An asset-purchase plan targeted at small- and medium-sized business lending is far from straightforward, said Jan von Gerich, chief fixed-income analyst at Nordea Bank in Helsinki.

“There are a lot of expectations but they’re quite limited in what they can do,” he said. “It’s most likely for them to ease collateral requirements and make it easier to package SME loans. But it gets messy quickly and hawkish members are probably not comfortable with it.”

Slovenia May Finally Be The First Country To Access The ECB’s ‘OMT’ Program

Slovenia is the country the market appears to be viewing as the next likely candidate for a bailout from the euro zone.

Government bond yields have surged there in the wake of the Cyprus deal, though they have started to back off a bit.

slovenia government bond yield

Euro-Area Producer-Price Inflation Slows More Than Forecast

Factory-gate prices in the 17-nation economy rose 1.3 percent from a year earlier, compared with a 1.7 percent increase in the prior month, the European Union’s statistics office in Luxembourg said today.

Energy costs at the producer level rose an annual 1.6 percent in February after a 2.2 percent increase in the previous month, today’s report showed. Prices of intermediate goods rose 0.7 percent after a 1.3 percent gain in January.

In Germany, Europe’s largest economy, producer-price inflation decelerated to 1.2 percent in February from 1.7 percent in January.

A Graphical Walk-Through Of An ‘Un-Fixed’ Europe (Via ZeroHedge)

Here’s a more up-to-date chart on Euro retailing (Markit). Notice the recent slump in France…

image image

These next charts should also change markedly after Cyprus…

Hungary to Use Central Bank Reserves in $2.1 Billion Growth Plan  Hungary’s central bank has started a 500 billion-forint ($2.1 billion) program to boost lending and help end the country’s second recession in four years, Magyar Nemzeti Bank President Gyorgy Matolcsy said.

 Russia’s bank chief warns on economy
Outgoing head of the central bank, Sergei Ignatiev, raises concerns

A sharp slowdown in economic growth in the first two months of 2013 is “causing serious concerns”, according to the outgoing head of Russia’s central bank, who said he “did not exclude” lowering interest rates if inflation targets were met.

Russell 2000 vs S&P 500 Divergence: April Fool’s Joke or Something Else?

(…) While the S&P 500 traded up modestly on Monday and Tuesday, the Russell 2000 traded down nearly 2%.  Given the fact that the Russell 2000 has led the overall market higher, the recent divergence with the S&P 500 has been especially concerning. 


NEW$ & VIEW$ (2 APRIL 2013)

Eurozone employment keeps falling.  U.K. also looks weak. So is China’s recovery. Global eco slowdown accelerates. U.S. construction worries. Chain store sales lackluster. Earnings watch. Sentiment watch.


The euro area1 (EA17) seasonally-adjusted unemployment rate was 12.0% in February 2013, stable compared with January. The EU27 unemployment rate was 10.9%, up from 10.8% in the previous month. In both zones, rates have risen markedly compared with February 2012, when they were 10.9% and 10.2% respectively.

Eurostat estimates that 26.338 million men and women in the EU27, of whom 19.071 million were in the euro area, were unemployed in February 2013. Compared with January 2013, the number of persons unemployed increased by 76 000 in the EU27 and by 33 000 in the euro area. Compared with February 2012, unemployment rose by 1.805 million in the EU27 and by 1.775 million in the euro area.


Gavyn Davies has a good piece today in the FT (Preventing contagion from Cyprus). This chart illustrates the divide between the North and the South and the ECB’s challenge, especially since France’s current rate advantage may not last for very long…

U.K. Data Point to Weak Growth

Data firm Markit and the Chartered Institute of Purchasing & Supply’s monthly Purchasing managers’ index for the manufacturing sector rose to 48.3 in March from February’s 47.9, but remains below the key 50 level which separates expansion from contraction, confirming the sector continues to shrink.

New orders fell again in March, although at a slightly slower pace than in February, while output fell at a faster pace. Job cuts continued at a similar pace to that reported in the previous month (…).

Lending to nonfinancial businesses, net of repayments, declined by £2.2 billion in February, and new mortgage approvals fell. Overall consumer lending was up as households took out unsecured loans and borrowed on their credit cards.

China In A Weak And Fragile Recovery

China’s official Purchasing Managers Index, released on April 1st, rose to 50.9 in March from 50.1 in February. March’s 50.9 reading, the lowest March PMI reading in recent years, indicates that the current recovery remains weak. Based on recent economic data and our survey results, we believe the current recovery remains fragile and will need the support of neutral-to-loose liquidity conditions in order to continue along a mild-recovery path. Economic data might not reflect a strong recovery in 2Q13. Due to the base effect, investment growth in 2Q13 will be relatively low. (CEBM Research)


Global Economic Slowdown Accelerates Again

It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe, the global economy is in Slowdown. Goldman’s Swirlogram has now seen its Global Leading Indicator in the ‘slowdown’ phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. (…)

Firms Stay Cautious on Renting

Businesses moved slowly to fill office space in the first quarter, reflecting continued caution about the recovery.

[image]An additional 4 million square feet of office space was leased during the quarter, increasing the amount of occupied space by just 0.12%, according to real-estate research service Reis Inc.  Asking rents increased 0.7% to $28.66 a square foot annually, while the national office vacancy rate fell to 17% from 17.1%.

The vacancy rate is still well above its 12.5% level at the office market’s peak in 2007. Employers today occupy about 101 million square feet less than they occupied then, according to Reis, which tracks 79 markets.

At the current rate of growth—which is about one-third the pace of the recovery that followed the dot-com bust last decade—it would take more than five years to return to that peak level.

U.S. Construction Spending Rebounds

Building activity improved in February. An expected 1.2% rise (7.9% y/y) in construction put in place followed a little-revised 2.1% January decline. December figures, however, were lowered sharply. Improvement in building activity was broad-based in February.

Private construction improved by 1.3% (12.6% y/y) led by 2.2% gain (20.1% y/y) in residential construction activity. That reflected a 4.3% rise (34.1% y/y) in new single-family building but multi-family construction fell 2.2% (+51.8% y/y). Spending on improvements ticked up 0.5% (1.1% y/y).

In the nonresidential sector, construction activity nudged up 0.7% (2.6% y/y). (…) Public sector building activity regained some momentum with a 0.9% rise but it still was down 1.5% y/y. Highways & streets construction rose 3.4% (5.1% y/y). Activity here accounts for nearly one-third of public sector building activity. (…)

Pointing up  What worries me is that the sequential trend has turned negative in the last 3 months, in all segments except residential:

image(Haver Analytics)


Sales surged 4.7% last week but Easter sales failed to reverse the weak trend observed since February. The 4-week moving average remains below its last 3 peaks and its Y/Y change is a slow 1.7%.



Fingers crossedimage


Investors Ignore Negativity

While the S&P 500 erased losses and strategists are raising year-end targets, the only people with legal inside information are surprisingly cautious.

[image](…) But a look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.

Apple had the largest drop, with estimates down 17%. Of those companies actively lowering guidance, materials companies such as Peabody Energy were overrepresented.

Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.

If you have missed yesterday’s New$ & View$, you should be aware that the above deals only with quarterly guidance. However, as Factset points out, negative annual guidance has stepped up in recent weeks.

For the current fiscal year overall, 168 companies have issued negative EPS guidance and 77 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 69%. This marks the third consecutive month that the percentage of negative EPS guidance has increased, as companies in the index transition to issuing annual guidance for 2013 as the new current fiscal year (instead of 2012).

The chart below, courtesy of Morgan Stanley via ZeroHedge, shows that 2013 estimates have stabilized at the $112 level, in spite of the worsening guidance. 



IPO Pricing Signals Surge In Demand

In the first quarter, 36% of U.S. IPOs were priced above the range originally outlined in registration documents filed with the Securities and Exchange Commission. That was the highest proportion in any year since at least 2004, according to Renaissance Capital, an IPO research and investment-management firm.

Meanwhile, less than one quarter of IPOs so far this year have priced below expectations, also the lowest rate in at least 10 years.


NEW$ & VIEW$ (24 JANUARY 2013)

Trying to monitor the U.S. economic beat as the first effects of the fiscal tightening are being felt as 75% of households are taking a 2%+ pay cut.

More specifically, growth in the informal eating out industry has been relatively flat to declining around the world and we expect that to continue. (…) McDonald’s said it expects January same-store sales to be down as global economic uncertainty continues.

  • ISI’s weekly company surveys remain good, so far. Their leading indicator of retail sales continues to project an acceleration in retail sales to 6% by May 2013, an uptrend driven by falling unemployment and rising asset prices. 

Jobs improvement, falling fuel costs, and home price appreciation are important offsets to other pressures in the economy.   As a reminder, our RSLI is a combination of five variables that historically have led U.S. retail sales by six months. Bad News:  The largest tax hike in 20 years is just hitting 75% of U.S. households.  2013 tax hikes pose an ISI est ~$160B headwind to DPI, and 125bp headwind to retail sales before any dynamic multiplier effects.  The bulk of Americans will see the impact with their first paycheck, typically around January 15th.

  • Weekly chain store sales are pretty weak, having dropped each week since Dec. 29 (seasonally adjusted). The 4-week moving average remains +3.2% YoY on weak 2012 comps.
  • ISI’s homebuilders survey has surged +7.8 over the past three weeks, the biggest increase in almost two years, and to a 7-year high.  This remarkable Jan surge suggests housing starts for the month could be very strong, particularly with seasonal adjustment, and significantly increases the odds of a 1Q real GDP upside surprise.
  • Fifth Consecutive Month of Gains in Architecture Billings Index

Business conditions at architecture firms continue to improve.  The American Institute of Architects (AIA) reported the December ABI score was 52.0, down from the mark of 53.2 in November.  This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings).  The new projects inquiry index was 59.4, down slightly from the 59.6 mark of the previous month.

“While it’s not an across the board recovery, we are hearing a much more positive outlook in terms of demand for design services,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA.

    • Regional averages: Midwest (55.7), Northeast (53.1),  South (51.2), West (49.6)
    • Sector index breakdown: commercial / industrial (53.4), mixed practice (53.0), institutional (50.9), multi-family residential (50.5)
    • Project inquiries index: 59.4 Smile

image(Chart from CalculatedRisk)


A few charts from Gary Shilling:

  • Real prices are back in the normal range:


  • Your 33 year-old is about to leave you alone…Fingers crossed


  • …forming his own household:



  • This is what keeps Shilling bearish on housing:


Another house price-depressing problem is the excess inventories of vacant houses. As we’ve noted in past reports, excess inventories are the mortal enemy of prices. Sure, listed inventories of new and existing houses are falling, and realtors in some areas complain of inadequate supplies of listings. But many foreclosed vacant houses aren’t yet listed—hidden inventories. Then there are vacant houses that were listed but withdrawn because sellers couldn’t stomach the bids they received. They
still probably want to sell and will do so at higher prices or when their patience runs out.

These two categories and related vacancies are contained in the Census Bureau’s “Vacant units held off the market for other reasons”—a
very descriptive title! This category has jumped by about a million units since the housing bubble burst in 2006. (…) The ratio jumped with the house collapse and has been declining. Still, it will take another 1.9 million
reduction in inventory to return to the long-run flat trend that we use as a measure of the normal working level for inventories. That decline is big, considering that in the long run, the U.S. builds about 1.5 million houses per year and now about half that.

Remember that housing is a local market and that the bulk of the phantom inventory is concentrated in only a few states. Banks control most of the excess hidden inventory and they are feeding markets at their own pace. Meanwhile, existing homes available for sale has collapsed.

Finally, the shadow inventory could evaporate faster than expected if house prices keep rising. CoreLogic estimates that 1.3 million properties regained positive equity during the first half of 2012 as prices rose. Another 2 million would if prices appreciated another 5%, out of a total 11 million underwater mortgages.

Goldman Still Sees Potential Growth Risks From Washington  The U.S. looks to have averted another debt-ceiling debacle, but Goldman Sachs economists warn two more fiscal drags looming in March could hurt growth: sequestration cuts and a failure to extend the government-agency spending authority.

Goldman says the sequester — if totally implemented — could reduce its gross-domestic-product growth estimate by 0.5-1.0 percentage points in the first and second quarters, and a government shutdown lasting a week might only reduce annualized growth by 0.1-0.2 percentage point in the quarter it occurs, “but it could have a more meaningful effect if it lasted longer.”

Storm cloud  Bank of Canada, IMF Lower Growth Forecasts

Canada’s central bank and the IMF cut their growth forecasts for the country, underscoring the deteriorating prospects for what was once seen as one of the developed world’s healthiest economies.

The Bank of Canada cut its growth forecast for 2013 to 2%, from the 2.3% forecast in October, citing a sharper-than-expected slowdown in the second half of last year, stemming from weaker business investment and exports. The growth projection for the fourth quarter of 2012 was slashed to 1% from 2.5%, and the central bank said it now expects the economy to have expanded 1.9% last year instead of 2.2%.

The IMF, meanwhile, said it now expects Canada’s economy to grow just 1.8% this year, down from its previously forecast 2% rate.

Reflecting the new economic headwinds, the Bank of Canada held its key overnight rate steady at 1.00% Wednesday, and softened language on the possibility of future rate increases. After hinting in recent rate-setting meetings that it was leaning toward eventual rate increases, the bank said Wednesday that while it still sees an eventual tightening, the timing is “less imminent.”

Confused smile  Shippers Tell Different Story on Chinese Exports

Many in the shipping industry see a sluggish year ahead for Chinese exports, a cornerstone of the world’s No. 2 economy, despite other indications of growing demand for China’s products.

imageSome executives from shipping companies that carry containers full of Chinese-made products mainly to Europe and North America say they see little evidence of a strong rebound in seaborne exports. Stephen Ng, director of trades for Orient Overseas Container Line Ltd., said the company wasn’t seeing “any particular upsurge” in container volumes on its Asia-to-Europe or trans-Pacific services.

OOCL is the container-shipping unit of Hong Kong-listed Orient Overseas International Ltd.  The parent said on Tuesday its container-shipping trans-Pacific services volume fell 6.8% in the fourth quarter compared with a year earlier. Volume on Asia-to-Europe services grew 2.8% compared with the year-earlier quarter.

Chinese exports in December grew a surprising 14% year-on-year compared with modest growth of 2.9% in November. (…) But many analysts believe the export numbers overstate the gain, and say the latest figures are influenced by exceptional factors such as backlogs caused by port strikes in the U.S.

South Korean growth hits three-year low
GDP 1.5% higher in fourth quarter than a year earlier

Gross domestic product in the last three months of the year was just 1.5 per cent higher than a year earlier, the Bank of Korea said on Thursday. That pace pulled full-year growth down to 2 per cent, the weakest figure since 2009. The central bank had forecast annual growth of 3 per cent as recently as July.

Exports account for more than 50 per cent of the manufacturing-driven economy but have been hurt by weaker demand from Europe and elsewhere. Recently, they have been threatened by steady gains in the South Korean won. Pointing up

South Korea’s exports rose 4 per cent year on year but declined 1.2 per cent from the previous quarter. Falling foreign sales of ships and general machinery cancelled out stronger performance from technology exporters such as Samsung Electronics.

Japan Posts Record Trade Deficit

Japan’s trade deficit nearly tripled to a record $78.3 billion last year, as a strong yen, territorial tensions with China and surging energy imports took their toll.

Figures for December alone showed the combination of weak exports and strong imports tipped the balance of trade in goods into a deficit for the sixth straight month that month—the longest run of such deficits since 1980. (…)

December exports were down 5.8% YoY, while imports rose 1.9%. Exports to China fell 15.8%.

Japanese manufacturers couldn’t immediately enjoy the full benefit of the yen’s 10% drop versus the dollar since November, which was fueled by expectations of the aggressive credit easing advocated by Mr. Abe, analysts said.

Despite the weakening yen, Japan logged a ¥641.5 billion deficit for the month of December alone, worse than economists’ forecasts.

Japan Lifts Economic View

A day after the Japanese government forged an unprecedented agreement with the central bank to pursue indefinite monetary easing, a report pointed to some signs of how the policies advocated by Prime Minister Shinzo Abe’s administration could be paying off.

The government on Wednesday raised its assessment of the economy in January, the first upgrade in eight months, citing improvements in export conditions and the positive impact from the weak yen.

Lightning  Spanish jobless rate hits record high
Almost 6m, including 60 per cent of under 25s, are unemployed

According to the latest labour market survey, there are now 5.97m jobless Spaniards, a rise of 363,000 compared with the third quarter of 2012. The unemployment rate now stands at 26.02 per cent from 25 per cent, the second-highest in the European Union behind Greece. The latest rise was once again largely due to staff cuts in the public sector and in the service sector.

High five  Beware of headlines:

Eurozone business activity improves January PMI jumps to 48.2, beating expectations

Even the FT can mislead. At 48.2, biz activity is still declining, just at a slower rate. See this a.m. post for the real stuff.

Light bulb  High yield has never looked more expensive when compared to equities (Niels Jansen)



NEW$ & VIEW$ (7 JANUARY 2013)


Tepid Job Growth Fuels Worry  U.S. employers closed out 2012 by maintaining the relatively slow pace of job creation, adding 155,000 to payrolls while brushing off the threat of higher taxes and spending cuts.


Employers added 155,000 jobs in December, in line with the average gains of 2011 and 2012. The unemployment rate, which is derived from a separate survey of households, sat at 7.8%, with the labor force rebounding from a drop tied to superstorm Sandy a month earlier. (…)

The private sector added about 1.9 million jobs in 2012, while the loss of 63,000 government jobs over 12 months marked the fourth year of public-sector job cuts.

Friday’s jobs report showed gains across most sectors in December, with the private sector adding 168,00 jobs, offset by a loss of 13,000 government jobs.

Smile  NBF Financial:

More than 200,000 full-time jobs were added in December according to the household survey. This brings the total to just over 2 million full-time positions in 2012, the best showing since 2006. As today’s Hot Chart shows, full-time employment is still 4% below its pre-recession peak
but it is catching up. This is important because the current mix of employment creation provides a much greater contribution to the growth in personal income. Full-time employment is also key for a rise
in homeownership and an uptrend in home prices in 2013.


Pointing up  Employment in the more cyclical construction (up 30,000) and manufacturing (up 25,000) sectors were higher on the month while employment in the retail sector declined by 11,000. Employment growth in the non-cyclical education and health services grew  65,000.

imageThese are pretty well balanced and momentum building trends as higher paying jobs are growing faster than lesser paying ones. Over the past 3 months, construction employment gains have averaged +15k. ISI says that housing starts tend to lead residential construction employment by 1 year, suggesting at least residential construction employment should now be in a rising trend.  And, according to ISI’s Stephen East, there is a 3x multiplier with residential construction jobs. (Chart from AAR)

Importantly, gains in average hourly earnings (+0.3% M/M) and the workweek (up 0.1 to 34.5) are encouraging signs that the labor market more broadly is firmly in recovery mode. Aggregate hours were up 0.4% M/M and 2% Y/Y. They rose an annualized 1.5% Q/Q in Q4 (up from 1.0% in Q3) and the payroll proxy of income was up 3.5%, up from 2.8%.

In all, employment income is accelerating with apparent momentum at its base. This should help offset some of the impact the fiscal cliff deal will have on consumers disposable income in Q1.

Canada Job Growth Surprises

Canada added almost eight times more jobs than expected in December, driving the unemployment rate down unexpectedly to a four-year low.

A total of 39,800 net new jobs were created–all full-time and primarily in the private sector–marking the fourth outsized gain in five months, including 59,300 in November, Statistics Canada said Friday. The jobless rate dropped to 7.1% from 7.2%, the lowest since the 6.8% posted in December 2008.

How Much Will Your Taxes Jump?


The Stealth Tax Hike 

Why the new $450,000 income threshold is a political fiction.


(…) The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.

The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn’t going to be pretty.

Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000. Here’s why:

During the negotiations, the White House won a concession from Republicans to allow phase outs for personal exemptions and limitations on itemized deductions, starting at an income of $250,000 for individuals and $300,000 for joint filers.

The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point.

High-income Americans with incomes of more than $1 million may lose up to 80% of their itemized deductions for home mortgage payments, health care, state and local taxes—and charities. Cue the local symphony’s development office.

Add it together and families in the 33% tax bracket could see their effective marginal rate paid on each additional dollar earned rise to above 38%.

A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.

How did this happen? Recall that early in the fiscal-cliff negotiations House Speaker John Boehner offered to cap itemized deductions to raise $800 billion, in lieu of raising tax rates, if the President would agree to spending cuts. The White House rejected that.

Mr. Obama then insisted on reviving PEP and Pease, thereby recapturing much of the income he claimed to be “compromising” away by agreeing to a higher income threshold for the top bracket. But instead of using phase outs to offset higher rates as Mitt Romney proposed, Mr. Obama insisted on raising tax rates too.

Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.

Taxpayers in blue states claim roughly twice as much in itemized deductions as those in red states. Income tax rates are steeper in California and New York than Texas and Utah. Chuck Schumer just put a tax bull’s-eye on upper-income Manhattanites, and Barbara Boxer whacked Silicon Valley. Some $150 billion, about one-quarter of all the money raised by this tax bill, will come from this stealth tax hike.

Mr. Obama purports this is merely “a return to the Clinton-era tax rates.” But capital-gains rates will be about three to five percentage points higher than in the 1990s, the Medicare tax is higher, and his stealth tax will raise personal rates higher than advertised. Forget the golden Clinton memories. Mr. Obama is pushing the U.S. back to the Carter era.



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Demand for Office Space Still Sluggish

[image]The amount of occupied office space grew by 3.7 million square feet in the quarter, nudging down the vacancy rate 0.1 percentage point to end the year at 17.1%, according to real-estate research firm Reis Inc. Asking rents rose to an average $28.46 per square foot, up 0.8% for the quarter and 1.8% for the year, said Reis, which surveys 79 metropolitan areas. (…)

The office market has generally tracked growth in the labor force, which added 155,000 jobs in December, the Labor Department reported Friday. “Until that starts to escalate a little more, we’re probably going to see more of the same,” said Ryan Severino, an economist at Reis.

Japan Auto Sales Slip

December sales of new cars, trucks and buses in Japan were off 3.4% from a year earlier, the fourth consecutive down month, as the end of the government’s buying incentives reduced demand for fuel-efficient cars.

For 2012 as a whole, sales were up 26% to 3.39 million vehicles—marking the first increase in two years, as the government’s subsidies for purchases of fuel-efficient vehicles helped spark sales before ending in September.


“Cliff” concerns give way to earnings focus

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa, are expected to be only slightly better than the third-quarter’s lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October. (…)

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. “fiscal cliff” was cited by at least nine as reasons for their earnings warnings.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data. (…)

Eli Lilly Issues Upbeat Outlook

On Friday, the company reiterated its goal that through 2014, annual revenue will be at least $20 billion, with net income of at least $3 billion and operating cash flow of at least $4 billion. After 2014, the company expects to return to more sustainable financial growth, thanks to expected new-product launches.

Lilly reiterated its previous forecast of full-year 2012 earnings of $3.68 to $3.78 a share, or $3.30 to $3.40 a share excluding certain items, on revenue of $21.8 billion to $22.8 billion. (…)

For 2013, Lilly expects full-year earnings of $4.03 to $4.18 a share, or $3.75 to $3.90 a share excluding the impact of income associated with the termination of a diabetes-drug partnership with Amylin Pharmaceuticals(…). The 2013 forecast excludes the one-time impact associated with 2012 that will be recorded this year from the fiscal-cliff legislation.

Lilly’s 2013 profit forecast is better than Wall Street expectations, while the revenue view is generally in line. For 2012, the mean Lilly earnings estimate of analysts surveyed by Thomson Reuters was $3.36 a share, excluding one-time items, rising about 10% to $3.71 a share for 2013.

From the WSJ:

On Thursday, seven retailers provided quarterly earnings guidance below expectations, while only two offered brighter prospects, according to research firm Retail Metrics. “This suggests some of the sales may have come at the expense of some margin,” Retail Metrics President Ken Perkins said.

Target was one of the retailers that gave a disappointing outlook, saying it sees fourth-quarter earnings only meeting or somewhat exceeding the low end of its expectations.

“December sales were slightly below our expectations, as strong results late in the month did not completely offset softness in the first three weeks,” Target Chief Executive Gregg Steinhafel said. Target reported flat same-store sales when a 0.8% rise was expected.

Macy’s, meanwhile, said same-store sales rose 4.1% in December, just past expectations for 4% growth, but the retailer still lowered its fourth-quarter guidance.

Kohl’s Corp. KSS -0.28% posted a 3.4% gain in same-store sales, when a 1.2% increase was expected. But the department-store chain said it was disappointed with results for the month and slashed its guidance for the fourth quarter, which closes at the end of January. Kohl’s now expects earnings per share of $1.60 to $1.62, compared with previous guidance of $2 to $2.08 a share. Surprised smile

“December sales were lower than planned,” Kohl’s Chief Executive Kevin Mansell said. “Additionally, sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned. We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the spring season.”

Gap reported December same-store sales rose 5%, while analysts expected a 3.5% increase. (…)

High-end department store Nordstrom also had a strong December, reporting an 8.6% increase in same-store sales, when a 3.4% rise was expected. Same-store sales at full-line stores combined with online rose 8.2%, while the Nordstrom Rack outlet posted an 8.1% increase.

Costco remained a standout, posting a gain of 8% in U.S. same-store sales not counting gasoline; analysts expected a 5.3% rise. The warehouse club said its sales for the month benefited by about 2% from an extra selling day because of the timing of the New Year’s holiday. Stores also were busier, with comparable traffic frequency posting a gain of slightly more than 5%.

Limited Brands, operator of Victoria’s Secret and Bath & Body Works, reported a rare miss, posting a same-store sales increase of 3%, when a 4.5% rise was expected.

Flat results at Victoria’s Secret offset 7% growth at Bath & Body Works. While the company said merchandise margins rose from a year earlier, the increase was “below expectations.”


China Stocks Rise, as CSI 300 Index Enters Bull Market on Economy Outlook


China’s CSI 300 Index (SHSZ300) entered a bull market after rallying 20 percent from its 2012 low amid signs of an economic recovery in the world’s second-largest economy.

The gauge tracking 300 yuan-denominated A shares traded in Shanghai and Shenzhen gained 0.5 percent to 2,535.99 at the close, led by health-care and financial companies. The CSI 300 rebounded 20 percent since hitting a near four-year low on Dec. 3, while the Shanghai Composite Index climbed 17 percent.

Call me  Remember my Nov. 29 New$ & View$ comment on the Chinese market (Capitulation?)?

Money  Banks Rally on Eased Rules

Bank shares rallied in an otherwise lower European market, after global banking regulators relaxed rules on Europe’s largest lenders.

Regulators Give Ground to Banks

Global banking regulators watered down an element of their plan for creating a safer financial system, giving ground to banks that argued the plans were unworkable and financially risky.

(…) Bowing to two years of intense pressure from the banking industry, the regulators made it easier for banks to meet the rule, known as the “liquidity coverage ratio,” and delayed its full implementation until 2019. (…)

The so-called Basel III accord, known for the Swiss city in which it has historically been negotiated, required banks to greatly thicken their capital cushions and come up with trillions of dollars of liquidity. The banking industry argued that the changes were overkill and would prompt them to dramatically reduce lending. Regulators ultimately accepted some of those arguments, and agreed to delay or ease key elements of the rules.

Meanwhile, questions are mounting in some countries, including the U.S., over whether the package will be implemented at all. It is up to individual countries to decide how to apply the rules to their financial institutions.



Pointing up This is big (re: the U.S. manufacturing renaissance)


Flextronics Warms to U.S.

The CEO of Flextronics International Ltd, a Singapore-based company that helped hundreds of firms move manufacturing of electronic parts and products to Asia, says it is getting “easier to justify” production in the U.S.

The difference in labor costs is narrowing and local officials in America have been giving more financial incentives to companies setting up plants in the U.S., Mike McNamara, chief executive of Flextronics, said in an interview Friday. Mr. McNamara said he could even imagine some smartphones being made in the U.S. eventually. But he cautioned that the return of manufacturing to the U.S. is likely to be a “slow and evolving process” rather than a flood. Many obstacles remain, including relatively high U.S. taxes, health-care expenses and regulatory costs, he said. (…)

While wage costs in the U.S. have been about flat in recent years, they have been rising 20% a year in China, a trend Mr. McNamara expects to continue for at least five years. He said labor costs for Flextronics rose about 30% last year in Malaysia and 40% in Indonesia.


NEW$ & VIEW$ (19 DECEMBER 2012)

Boehner Mulls Cliff Backup Plan  House Speaker John Boehner has decided to develop a backup plan to avoid the so-called fiscal cliff, a strategy for averting a year-end tax increase if negotiations break down.

(…) “They seem to be so close that I’d be surprised if it fell apart,” Sen. Charles Schumer (D., N.Y.), a member of the Senate Democratic leadership team, said on a conference call with reporters. “I think the likelihood is we will get an agreement.” (…)

Pointing up  The administration Tuesday worked to keep Democrats from breaking ranks as Mr. Obama negotiates a deal that already includes policy proposals that members of his party oppose. White House congressional liaison Rob Nabors met with House and Senate Democrats in the Capitol to explain the president’s offer and calm rising anxieties. (…)

Discussion of the latest Obama offer was eclipsed somewhat Tuesday by the introduction of the GOP backup plan. The bill, which is expected to come to a House vote Thursday, would do nothing to block the $110 billion in spending cuts that are due to take effect Jan. 2 in defense and domestic programs—a major part of the fiscal cliff that members of both parties have been hoping to avert.

However, GOP aides said the bill would include provisions to address two other looming year-end problems.

The bill would include an extension of a provision to protect millions of middle-class Americans from paying the Alternative Minimum tax, a levy initially designed to affect only the wealthiest Americans but that was not indexed for inflation. Congress has passed a series of stopgap measures to keep that from hitting couples with moderate incomes, and the “Plan B” bill would extend that protection permanently.

The bill also would block an impending increase in the estate tax and extend the current rate of 35% on estates valued at more than $5.12 million. Without action, the estate tax would jump to 55% on all estates valued at more $1 million on Jan. 1.

White House Press Secretary Jay Carney dismissed the backup plan as something that “can’t pass the Senate and therefore will not protect middle-class families, and does little to address our fiscal challenges with zero spending cuts.”

The WSJ is not happy: A Bad Budget Deal

(…) Mr. Boehner is certainly in a tough spot, with tax rates set to rise on January 1 if Congress fails to act. His fellow Republicans haven’t helped by whining about their lack of “leverage” and publicly negotiating with themselves over the terms of their tax surrender.

We think they have more leverage than they believe if they are willing to fight on taxes into next year. But if they’re not, at least they shouldn’t associate themselves with a deal that increases spending and taxes with little or nothing tangible in return.

Let Mr. Obama own the tax increase and its measly 7.5% annual reduction in a $1.1 trillion deficit. Let the sequester take effect as planned, which at least means some spending restraint. Then engage Mr. Obama next year in trench warfare over spending and the debt limit as voters figure out that soaking the rich doesn’t begin to solve the problem. A bad budget deal is worse than no deal at all.



Housing Starts in U.S. Post Best Three Months in Four Years  Builders in November capped the strongest three months for residential construction in four years and permits climbed as record-low borrowing costs buoyed the U.S. housing market.

Starts fell 3 percent to a 861,000 annual rate from a revised 888,000 annual pace in October. The number of building permits issued climbed 3.6 percent in November to an 899,000 annual rate, the most since July 2008.

Pointing up  Billings by architecture firms increased in November at the fastest pace in five years, a report from the American Institute of Architects showed today. The group’s billings Index climbed to 53.2 last month, the highest level since November 2007, from 52.8 in October.

U.S. Housing Inventory declines 17% in November

The total US for-sale inventory of single family homes, condos, townhomes and co-ops remained at historic lows, with 1.76 million units for sale in October 2012, down -17.00% compared to a year ago.

The median list price in October was $189,900, the same as a year ago. The median age of inventory was down -11.81% compared to one year ago.

(…) The recovery that began in Florida more than a year ago has since spread to California, Arizona, Nevada and other parts of the West, with many of these markets registering dramatic declines in the number of properties for sale coupled with year-over-year list price increases of 10 percent of more. However, a growing number of Midwestern and “rust belt” markets are registering signs of weakness, with list prices below the levels observed last year.


FedEx Maintains Full-Year Forecast Amid Economic Concerns  FedEx Corp., operator of the world’s largest cargo airline, maintained its full-year profit forecast amid growing concern that the U.S. economic growth may slow.

The Memphis, Tennessee-based company re-affirmed its full- year profit forecast of $6.20 to $6.60 a share, excluding costs associated with a voluntary buyout program. Profit will fall to $1.25 to $1.45 a share in the third quarter ending in February, FedEx said in a statement today. Analysts anticipated $1.45, the average of 22 estimates compiled by Bloomberg.

Profit in the second quarter ended Nov. 30 fell 12 percent to $438 million, or $1.39 a share, from $497 million, or $1.57, a year earlier, FedEx said. The profit, which included 11 cents in costs related to Superstorm Sandy, trailed the $1.41 average estimate.

Oracle Rises After Best Earnings Gain In 6 Quarters Oracle found stability in a tumultuous time, reporting late Tuesday its strongest earnings growth in six quarters as revenue unexpectedly rose. The business software giant’s fiscal second-quarter earnings rose 18.5% to 64 cents a share. Analysts had expected 61 cents. Revenue rose 3% to $9.1 billion, defying forecasts for a second straight slim decline, to $9.01 billion. Software demand offset continued weakness in hardware.


Euro Boosted by S&P Greece Upgrade  The euro reached a seven-month high against the dollar following a five-notch upgrade of Greece by ratings firm Standard & Poor’s, and investors welcomed progress in the U.S. budget negotiations, prompting a rise in stocks.

The euro hit its highest level since May 1 after Standard & Poor’s raised its rating on Greece to B-minus from selective default late on Tuesday. It is the highest rating S&P has given Greece since June 2011.

German Business Confidence Brightens Amid Euro-Zone Gloom

The closely watched Ifo business confidence index rose for the second straight month to 102.4 in December from 101.4 in November. (…)

The Netherlands Bureau for Economic Policy Analysis said Wednesday that the Dutch economy will contract by 1% in 2012 and shrink 0.5% in 2013, citing sluggish exports, government austerity measures and a persistent slump in the housing market. In September, it expected a 0.5% contraction in 2012 and 0.75% growth in 2013.

Elsewhere, industrial orders in Italy, which has been stuck in recession for over a year, were flat in October, data from the national statistics institute showed Wednesday. A further drop in domestic demand for industrial goods suggested the euro-zone’s third-largest economy isn’t about to turnaround. (…)

Euro area production in construction down by 1.6%

The slide resumes with October down 1.6% after September’s -1.3%.



If you ask, October construction activity cratered 5.3% in Germany (+2.4% in September), declined 1.1% in France (-0.5%), rose 1.9% in Italy (-7.75) and rose 0.5% in Spain (+0.3%).

BOE: Pound Hurting Economy The strong pound is holding back the U.K. economy, the Bank of England said, in its starkest warning yet on Britain’s diminishing export prospects.

FDI continues losing streak  China expects stable growth of foreign direct investment into the country next year although FDI continued to fall in November.

The country’s FDI decreased 5.4 percent in November from a year earlier to $8.29 billion, and the pace of the drop accelerated from 0.24 percent in October, according the Ministry of Commerce on Tuesday.

Except for a 0.05 percent increase in May, the country’s FDI has been declining since November 2011, as labor costs rose and economic growth slowed.

American Oil Growing Most Since First Well Signals Independence

(…) Domestic output grew by a record 766,000 barrels a day to the highest level in 15 years, government data show, putting the nation on pace to surpass Saudi Arabia as the world’s largest producer by 2020. Net petroleum imports have fallen by more than 38 percent since the 2005 peak and now account for 41 percent of demand, down from 60 percent seven years ago, moving the U.S. closer to energy independence than it has been in decades. (…)

The U.S. will produce an average of 6.41 million barrels a day this year, a 14 percent increase from 2011, according to a Dec. 11 report from the Department of Energy. It’s the biggest annual gain in the number of barrels since the industry began when Pennsylvania’s Drake well ignited the first American oil rush in 1859, department data show. Saudi Arabia pumped 9.7 million barrels a day in November, according to data compiled by Bloomberg. The Paris-based International Energy Agency said last month the U.S. is on track to become the top producer in about eight years.


NEW$ & VIEW$ (4 DECEMBER 2012)


Worldwide manufacturing conditions showed signs of stabilising in November, according to purchasing managers from 10,000 companies across the globe. The JPMorgan Global Manufacturing PMI, a survey
based barometer of business conditions produced by Markit, rose from 48.8 in October to 49.7 in November, the highest reading for five months and only fractionally below the no-change level of 50.0. Manufacturers reported the first increase in production, albeit marginal, for five months, as inflows of new orders fell at a reduced rate. New business decreased
only slightly in November to signal the smallest deterioration in demand since June.


RBC Capital adds:

The ISM Manufacturing Index for November disappointed, dipping to 49.5 from the previous month’s 51.7 reading. This slide was largely due to a drop in the new orders and employment sub-indexes, but the demand balance (i.e., new orders less inventories) showed decent improvement, rising for the third consecutive month.

PMI breadth continues to climb with 62% of countries offering monthly gains. This same metric was at 56% last month, 52% in the prior month and 45% three months ago. “Less bad” is starting to sneak into the picture for many countries around the globe which might not be coincidental given the large and coordinated global monetary easing program put in place about 15 months ago.

image(Chart from WSJ)

ISI’s global economic diffusion index keeps rising with broad based improvements. In the U.S., where the ISM PMI was weak last month, the diffusion index of ISI’s company surveys has jumped significantly over the past 4 weeks. And now this:

Smile  Big Gains in November Auto Sales

Sales of cars and light trucks jumped 15% to 1.14 million in November compared with a year ago and the seasonally adjusted annualized sales rate was 15.5 million, the highest since January 2008, said market researcher Autodata Corp. (…)

Ford Motor Co. said on Monday it will boost its first quarter North American production by 11% over 2012 levels. Its November sales of cars and light trucks rose 6.4% over a year ago to 177,092 vehicles.

Largest U.S. auto maker by sales, General Motors Co.however, signaled plans to idle at least one factory as it tries to shrink bloated inventories of unsold vehicles. (…)

Ford estimated that purchases driven by replacement vehicles damaged by the East Coast storm and resulting flooding drove up monthly industry sales by between 20,000 and 30,000 vehicles. (Chart from Haver Analytics)

Open-mouthed smile  U.S. Construction Spending Is Substantially Firmer

The value of construction put-in-place jumped 1.4% during October after a 0.5% September gain. Private sector spending surged 1.6% (15.5% y/y) led by a 3.0% (20.8% y/y) jump in residential building. Single-family construction surged 3.6% (29.0% y/y). Multi-family building gained 6.3% (53.2% y/y) while spending on improvements increased a lesser 1.8% (8.9% y/y). A relatively weaker gain was scored by nonresidential building which rose 0.3% (10.7% y/y). Commercial construction jumped 1.2% (9.5% y/y) but office building ticked up just 0.1% (17.6% y/y).

In the public sector, building activity gained 0.8% m/m (-1.0% y/y). Spending on highways & streets, which is 29% of total public construction spending, fell 2.4% (-5.0% y/y) as state budgets were pinched. Transportation spending, which is 10% of total public, offset some of that decline with a 5.8% (22.0% (0.2% y/y) rise while office construction rose 4.4% (-16.1% y/y).


Pointing up  Total construction activity has been a big drag on the U.S. economy, shrinking 15.3% in 2009, 11.2% in 2010 and 3.1% in 2011.. However, it is surging in 2012 with a 9.6% Y/Y jump through October. In the last 3 months, construction spending rose at a 12.6% annual rate. Even public spending is recovering, rising 8.7% annualized in the past 3 months.

Two real cliffs:



Construction employment is about to recover.

It’s not all rosy, however:

RECESSION WATCH with Lance Roberts:

As a business sentiment indicator the PMI index gives us some insight into what manufacturers across the country think.  However, as an economic indicator by itself, it can be somewhat misleading due to weighting issues, etc.  Therefore, I include the ISM PMI in a composite of other manufacturing related indexes to achieve a broader view of the economic data and trends.  The chart below is the Economic Composite Index which not only uses the ISM PMI but also the Chicago Fed National Activity Index, the NFIB small business survey, several Fed manufacturing indexes and the Chicago PMI.


As of November there are still a couple of the components, the CFNAI and NFIB, which have not reported as of yet.  However, if we assume that they do not deteriorate any further, the composite index would currently stand at 26.82, down .92 points from last month.  Historically, a reading of this level on the composite index has indicated that the economy was in, or was about to be in, a recession.  The only caveat was in 2011 as the economy slowed due to the debt ceiling debate and manufacturing shutdown due to the Japanese earthquake.  However, that slowdown was offset by a convergence plunging energy prices, global artificial stimulus and the warmest winter in the last 65 years.  Those events that provided a short term boost to the economy at that time are unlikely to repeat currently.

Are we in a recession now?  The answer is “no” but evidence continues to mount.  (…)

Look at how components have deteriorated in recent months.




Sarcastic smile  GOP Counters on Budget

House Republicans made a deficit-reduction offer that calls for $800 billion in increased tax revenue, half of what Obama proposed. The offer was immediately rejected by the White House.

The offer’s outlines are similar to a budget deal that was emerging in private talks between Mr. Obama and Mr. Boehner in mid-2011, when Mr. Boehner agreed to $800 billion in new revenues but Mr. Obama sought more. Those talks collapsed with each side blaming the other for the breakdown. (…)

Still, officials said, congressional leaders and the president could meet by the end of this week. Their last meeting was nearly three weeks ago. Discussions between congressional and White House staff continued over the weekend, officials said. (…)

Dates (WSJ)

Dec. 18, 2012 Last date for any bill to be introduced to Congress, which is expected to adjourn for the year on Dec. 21

Jan. 1, 2013 New tax rates and rules under fiscal cliff kick in

Jan. 2, 2013 $110 billion in fiscal-cliff spending cuts due to begin

December 2012 or January 2013 Federal government due to hit $16.394 trillion debt ceiling

March 27, 2013 Funding of federal government expires



Non-manufacturing PMI hits 3-month high  The performance of China’s non-manufacturing sector hit a three-month peak in November, the National Bureau of Statistics has said.

The country’s Purchasing Managers’ Index, or PMI, for the non-manufacturing sector increased by 0.1 point to 55.6 for the month, the bureau said.

Real estate prices rise for sixth month

The China Index Academy, a property research body, reported on Monday the average price of new homes in 100 monitored cities increased 0.26 percent monthly in November to 8,791 yuan ($1,395) per square meter. A rise of 0.17 percent was recorded in October.

Sixty of the 100 cities saw a rise in property prices, up from 56 in October. But 38 cities experienced a fall, down from October’s 42.

In 10 major cities, including Beijing and Shanghai, prices rose, reversing an 11-month decline. Their month-on-month growth rate hit 0.39 percent in November, 0.13 of a percentage point higher than the national average. (…)

Sales of existing homes in Beijing, for instance, saw a strong rebound in November, with transactions hitting 14,000 units for the month, close to the August peak.

The average price was 23,998 yuan per square meter, up 3.2 percent on the previous month and 6.3 percent on the same period last year, industry statistics showed.

The dark side is that new house prices are now merely 1% below their August 2011 peak. The problem of high housing prices remains.

Dow Chemical CEO Sees Signs of China Pickup

“They are starting to buy goods again, which means they are getting finance,” Mr. Liveris told reporters ahead of Dow Chemical’s annual investor day.

He said destocking by Chinese customers had hit global sentiment harder than the U.S. fiscal cliff and Europe’s slide into recession, prompting his company to shutter plants, shed jobs and trim investment.

Trafigura Predicts China Rebound as Emerging Markets Pick Up  The economy in China, the world’s biggest user of energy and copper, is expected to improve in the first half of next year, according to Trafigura Group, the third-largest independent oil trader.

“The news flows about China are starting to look more positive and we are looking for that to translate into the real economy,” Chief Financial Officer Pierre Lorinet said in an interview in Singapore yesterday. “Especially in the emerging world, we have come out of the cyclical downturn and will be back on the upswing.” (…)

Glencore, the world’s largest commodities trader (…) said on Nov. 1 that it saw no signs of an imminent recovery in global economic conditions.

“We are not that gloomy about the world,” Lorinet said. “There may be some big events we don’t know about, which if materialize could have significant repercussions. But, on balance, otherwise the world seems to be OK.”

Australia cuts rates to three-year low
Central bank responds to slowing resources sector

Policy makers hope an increase in residential construction will keep the economy ticking over as investment in new resources projects peak. But data released on Tuesday showed Australian building approvals fell 7.6 per cent to 12,540 units in October.


Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors discusses the politics that will shortly intrude the U.S. oil market.

In the spirit of economic nationalism, Raymond James believes that “as applications for crude export permits become more common, we would anticipate opposition to emerge, which means that the newly reelected Obama administration will probably suffer political backlash if it signs off on increasing exports of U.S. crude.”

The backlash that would result is likely because there is a common misperception between exporting crude and the price of a gallon of gasoline at the pumps, which is based on the Brent price of oil. “The irony here is that U.S. consumers pay a global price for gasoline, and exporting U.S. ‘land-locked’ light sweet crude would actually help push down the global price of gasoline,” according to Raymond James.

“Keeping the ‘land-locked’ crude in the U.S. does nothing to help domestic consumers, but as we all know, politics and reality can be very different things,” says the research firm.

If Washington prevents oil from leaving the country, the likely outcome is that barrels will begin stacking up in the Gulf Coast area. With the significant growth from areas such as the Bakken, Eagle Ford and the Niobrara Formation in Nebraska, Bank of America Merrill Lynch estimates that by 2017, refiners will likely be “saturated with light oil.”

US Shale Oil Production Growing