NEW$ & VIEW$ (31 DECEMBER 2013)

Smile Small Businesses Anticipate Breakout Year Ahead

(…) Of 937 small-business owners surveyed in December by The Wall Street Journal and Vistage International, 52% said the economy had improved in 2013, up from 36% a year ago. Another 38% said they expect conditions to be even better in 2014, up from 27%.

Three out of four businesses said they expect better sales in 2014, and overall, the small business “confidence index”—based on business owners’ sales expectations, spending and hiring plans—hit an 18-month high of 108.4 in December. All respondents, polled online from Dec. 9 to Dec. 18, had less than $20 million in annual revenue and most had less than 500 employees.

According to the latest data from the National Federation of Independent Business, a Washington lobby group, small-business owners in November ranked weak sales below taxes and red tape as their biggest headache, for the first time since June 2008.

In the group’s most recent survey, owner sentiment improved slightly in November but was still dismal compared with pre-2007. (…)

U.S. Pending Home Sales Inch Up

The National Association of Realtors said Monday that its seasonally adjusted index of pending sales of existing homes rose 0.2% in November from the prior month to 101.7. The index of 101.7 is against a benchmark of 100, which is equal to the average level of activity in 2001, the starting point for the index.

The November uptick was the first increase since May when the index hit a six-year high, but it was less than the 1% that economists had forecast.

Pointing up The chart in this next piece may be the most important chart for 2014. I shall discuss this in more details shortly.

Who Wins When Commodities Are Weak? Developed economy central bankers were somewhat lauded before the financial crisis. Recently, though, they’re finding it harder to catch a break.

(…) Still, here’s a nice chart from which they might take some solace.  Compiled by Barclays Research it shows the gap between headline and core consumer price inflation across Group of Seven nations, superimposed on the International Monetary Fund’s global commodities index. As can be seen at a glance, the correlation is fairly good, showing, as Barclays says, the way commodity prices can act as a ‘tax’ on household spending power.

During 2004-08, that tax was averaging a hefty 0.8 percentage points a year in the G7,  quite a drag on consumption (not that that was necessarily a bad thing, looking back, consumption clearly did OK). However, since 2008. it has averaged just 0.1 percentage points providing some rare relief to the western consumer struggling with, fiscal consolidation, weak wage growth and stubbornly high rates of joblessness.

So, what’s the good news for central bankers here? Well, while a deal with Iran inked in late November to ease oil export sanctions clearly isn’t going to live up to its initial billing, at least in terms of lowering energy prices, commodity-price strength generally is still bumping along at what is clearly a rather weak historical level.

And the consequent very subdued inflation outlook in the U.S. and euro area means that central banks there can continue to fight on just one front, and focus on delivering stronger growth and improved labor market conditions.

Of course, weak inflation expectations can tell us other things too, notably that no one expects a great deal of growth, or upward pressure on wages. Moreover, as we can also see from the chart, the current period of commodity price stability is a pretty rare thing. Perhaps neither central bankers or anyone else should get too used to it.

Coffee cup  Investors Brace as Coffee Declines

Prices have tumbled 20% this year, capping the biggest two-year plunge in a decade and highlighting commodity markets’ struggle with a supply deluge.

(…) The sharp fall in coffee prices is the most prominent example of the oversupply situation that has beset many commodity markets, weighing on prices and turning off investors. Mining companies are ramping up production in some copper mines, U.S. farmers just harvested a record corn crop, and oil output in the U.S. is booming. The Dow Jones-UBS Commodity Index is down 8.6% year to date.

In the season that ended Sept. 30, global coffee output rose 7.8% to 144.6 million bags, according to the International Coffee Organization. A single bag of coffee weighs about 60 kilograms (about 132 pounds), an industry standard. Some market observers believe production could rise again in 2014. (…)

The U.S. Department of Agriculture forecasts that global coffee stockpiles will rise 7.5% to 36.3 million bags at the end of this crop year, an indication that supplies are expected to continue to outstrip demand in the next several months. (…)

The global coffee glut has its roots in a price rally more than three years ago. Farmers across the world’s tropical coffee belt poured money into the business, spending more on fertilizer and planting more trees as prices reached a 14-year high above $3 a pound in May 2011.(…)

Americans on Wrong Side of Income Gap Run Out of Means to Cope

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

The result has been a downsizing of expectations. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. The lack of faith is especially pronounced among those making less than $50,000 a year, with close to three-quarters in the Dec. 6-9 survey saying the economy is unfair. (…)

The diminished expectations have implications for the economy. Workers are clinging to their jobs as prospects fade for higher-paying employment. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer rather than venturing out on their own.

In the meantime, record-high stock prices are enriching wealthier Americans, exacerbating polarization and bringing income inequality to the political forefront. (…)

The disparity has widened since the recovery began in mid-2009. The richest 10 percent of Americans earned a larger share of income last year than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

(…) The median income of men 25 years of age and older with a bachelor’s degree was $56,656 last year, 10 percent less than in 2007 after taking account of inflation, according to Census data.(…)

Those less well-off, meanwhile, are running out of ways to cope. The percentage of working-age women who are in the labor force steadily climbed from a post-World War II low of 32 percent to a peak of 60.3 percent in April 2000, fueling a jump in dual-income households and helping Americans deal with slow wage growth for a while. Since the recession ended, the workforce participation rate for women has been in decline, echoing a longer-running trend among men. November data showed 57 percent of women in the labor force and 69.4 percent of men. (…)

Households turned to stepped-up borrowing to help make ends meet, until that avenue was shut off by the collapse of house prices. About 10.8 million homeowners still owed more money on their mortgages than their properties were worth in the third quarter, according to Seattle-based Zillow Inc.

The fallout has made many Americans less inclined to take risks. The quits rate — the proportion of Americans in the workforce who voluntarily left their jobs — stood at 1.7 percent in October. While that’s up from 1.5 percent a year earlier, it’s below the 2.2 percent average for 2006, the year house prices started falling, government data show.

Millennials — adults aged 18 to 32 — are still slow to set out on their own more than four years after the recession ended, according to an Oct. 18 report by the Pew Research Center in Washington. Just over one in three head their own households, close to a 38-year low set in 2010. (…)

The growing calls for action to reduce income inequality have translated into a national push for a higher minimum wage. Fast-food workers in 100 cities took to the streets Dec. 5 to demand a $15 hourly salary. (…)

Cold Temperatures Heat Up Prices for Natural Gas

2013 by the Numbers: Bitter cold and tight supplies have helped spur a 32% rise in natural-gas futures so far this year, making it the year’s top-performing commodity.

(…) Not only are colder-than-normal temperatures spurring households and businesses to consume more of the heating fuel, the boom in U.S. output is starting to level off as well. These two factors are shrinking stockpiles and lifting prices. The amount of natural gas in U.S. storage declined by a record 285 billion cubic feet from the previous week and stood 7% below the five-year average in the week ended Dec. 13, according to the Energy Information Administration. (…)

Over the first 10 days of December, subzero temperatures in places such as Chicago and Minneapolis helped boost gas-heating demand by 37% from a year ago, the largest such gain in at least 14 years, according to MDA Weather Services, a Gaithersburg, Md., forecaster.

MDA expects below-normal temperatures for much of the nation to continue through the first week of January.

Spain retail sales jump 1.9 percent in November

Spain retail sales rose 1.9 percent year-on-year on a calendar-adjusted basis in November, National Statistics Institute (INE) reported on Monday, after registering a revised fall of 0.3 percent in October.

Retail sales had been falling every month for three years until September, when they rose due to residual effects from the impact of a rise in value-added tax (VAT) in September 2012.

Sales of food, personal items and household items all rose in November compared with the same month last year, and all kinds of retailers, from small chains to large-format stores, saw stronger sales, INE reported.

High five Eurozone retail sales continue to decline in December Surprised smile Ghost

image_thumb[5]Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

The overall decline would have been stronger were it not for a marked easing the rate of contraction in Italy, where the retail PMI hit a 33-month high.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, fell back to 47.7 in December, from 48.0 in November. That matched October’s five-month low and indicated a moderate decline in sales. The average reading for the final quarter (47.8) was lower than in Q3 (49.5) but still the second-highest in over two years.

image_thumb[4]Retail sales in Germany rose for the eighth month running in December, but at the weakest rate over this sequence. Meanwhile, the retail downturn in France intensified, as sales fell for the fourth successive month and at the fastest pace since May. Retail sales in France have risen only twice in the past 21 months. Italy continued to post the sharpest decline in sales of the three economies, however, despite seeing a much slower fall in December. The Italian retail PMI remained well below 50.0 but rose to a 33-month high of 45.3, and the gap between it and the German retail PMI was the lowest in nearly three years.

Retail employment in the eurozone declined further in December, reflecting ongoing job shedding in France and Italy. The overall decline across the currency area was the steepest since April. German retailers expanded their workforces for the forty third consecutive month.


Perhaps lost among the Holidays celebrations, Thomson Reuters reported on Dec. 20 that

For Q4 2013, there have been 109 negative EPS preannouncements issued by S&P 500 corporations compared to 10 positive EPS preannouncements. By dividing 109 by 10, one arrives at an N/P ratio of 10.9 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Strangely, this is what they reported On Dec. 27:

For Q4 2013, there have been 108 negative EPS preannouncements issued by S&P 500 corporations compared to 11 positive EPS preannouncements.

Hmmm…things are really getting better!

On the other hand, the less volatile Factset’s tally shows no deterioration in negative EPS guidance for Q4 at 94 while positive guidance rose by 1 to 13.

The official S&P estimates for Q4 were shaved another $0.06 last week to $28.35 while 2014 estimates declined 0.3% from $122.42 to $122.11. Accordingly, trailing 12-months EPS should rise 5.1% to $107.40 after Q4’13.

Factset on cash flows and capex:

S&P 500 companies generated $351.3 billion in free cash flow in Q3, the second largest amount in at least ten years. This amounted to 7.2% growth year-over-year, and, as a result of slower growth in fixed capital expenditures (+2.2%), free cash flow (operating cash flow less fixed capital expenditures) grew at a higher rate of 11.3%. Free cash flows were also at their second highest quarterly level ($196.8 billion) in Q3.

S&P 500 fixed capital expenditures (“CapEx”) amounted to $155.0 billion in Q3, an increase of 2.2%. This marks the third consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Because the Energy sector’s CapEx spending represented over a third of the S&P 500 ex-Financials total, its diminished spending (-1.6% year-over-year) has had a great impact on the overall growth rate.

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 6.1% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit a 13.7% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales were above the ten-year average.


Going forward, however, analysts are projecting that the CapEx growth rate will slide, as the projected growth for the next twelve months of 3.9% is short of that of the trailing twelve-month period. In addition, growth for capital expenditures is expected to continue to slow in 2014 (+1.6%) due, in part, to negative expected growth rates in the Utilities (-3.2%) and Telecommunication Services (-3.0%) sectors.

Gavyn Davies The three big macro questions for 2014

1. When will the Fed start to worry about supply constraints in the US?

(…) The CBO estimates that potential GDP is about 6 percent above the actual level of output. This of course implies that the Fed could afford to delay the initial rise in short rates well beyond the 2015 timescale that the vast majority of FOMC participants now deem likely. The very low and falling rates of inflation in the developed world certainly support this.

But the suspicion that labour force participation, and therefore supply potential, may have been permanently damaged by the recession is gaining ground in some unexpected parts of the Fed, and the unemployment rate is likely to fall below the 6.5 percent threshold well before the end of 2014 (see Tim Duy’s terrific blog on this here)This is the nub of the matter: will Janet Yellen’s Fed want to delay the initial rate rise beyond the end of 2015, and will they be willing to fight the financial markets whenever the latter try to price in earlier rate hikes, as they did in summer 2013? I believe the answer to both these questions is “yes”, but there could be several skirmishes on this front before 2014 is over. Indeed, the first may be happening already.

2. Will China bring excess credit growth under control?

Everyone now agrees that the long run growth rate in China has fallen from the heady days when it exceeded 10 per cent per annum, but there are two very different views about where it is headed next. The optimistic version, exemplified by John Ross’ widely respected blog, is that China has been right to focus on capital investment for several decades, and that this will remain a successful strategy. John points out that, in order to hit the official target of doubling real GDP between 2010 and 2020, growth in the rest of this decade can average as little as 6.9 per cent per annum, which he believes is comfortably within reach, while the economy is simultaneously rebalanced towards consumption. This would constitute a very soft landing from the credit bubble.

The pessimistic view is well represented by Michael Pettis’ writing, which has been warning for several years that the re-entry from the credit bubble would involve a prolonged period of growth in the 5 per cent region at best. Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.

As I argued recently, there is so far no sign that credit growth has dropped below the rate of nominal GDP growth, and the bubble-like increases in housing and land prices are still accelerating. The optimistic camp on China’s GDP has been more right than wrong so far, and a prolonged soft landing still seems to be the best bet, given China’s unique characteristics. But the longer it takes to bring credit under control, the greater the chance of a much harder landing.

3. Will the ECB confront the zero lower bound?

Whether it should be described as secular stagnation or Japanification, the euro area remains mired in a condition of sluggish growth and sub-target inflation that will be worsened by the latest bout of strength in the exchange rate. Mario Draghi said this week that

We are not seeing any deflation at present… but we must take care that we don’t have inflation stuck permanently below one percent and thereby slip into the danger zone.

This does not seem fully consistent with the ECB’s inflation target of “below but close to 2 per cent”. Meanwhile, the Bundesbank has just published a paper which confidently denies that there is any risk of deflation in the euro area, and says that declining unit labour costs in the troubled economies are actually to be welcomed as signs that the necessary internal rebalancing within the currency zone is taking place.

The markets will probably be inclined to accept this, as long as the euro area economy continues to recover. This seems likely in the context of stronger global growth.

But a further rise in the exchange rate could finally force the ECB to confront the zero lower bound on interest rates, as the Fed and others have done in recent years. Mr Draghi has repeatedly shown that he has the ability to navigate the tricky politics that would be involved here, but a pre-emptive strike now seems improbable. In fact, he might need a market crisis to concentrate some minds on the Governing Council.

So there we have the three great issues in global macro, any one of which could take centre stage in the year ahead. For what it is worth, China currently seems to me by far the most worrying.


Goldman’s Top Economist Just Answered The Most Important Questions For 2014 — And Boy Are His Answers Bullish

Goldman Sachs economist Jan Hatzius is out with his top 10 questions for 2014 and his answers to them. Below we quickly summarize them, and provide the answers.

1. Will the economy accelerate to above-trend growth? Yes, because the private sector is picking up, and there’s going to be very little fiscal drag.

2. Will consumer spending improve? Yes, because real incomes will grow, and the savings rate has room to decline.

3. Will capital expenditures rebound? Yes, because nonresidential fixed investment will catch up to consumer demand.

4. Will housing continue to recover? Yes, the housing market is showing renewed momentum.

5. Will labor force participation rate stabilize? Yes, but at a lower level that previously assumed.

6. Will profit margins contract? No, there’s still plenty of slack in the labor market for this to be an issue.

7. Will core inflation stay below the 2% target? Yes.

8. Will QE3 end in 2014? Yes.

9. Will the market point to the first rate hike in 2016? Yes.

10. Will the secular stagnation theme gain more adherents? No. With the deleveraging cycle over, people will believe less in the idea that we’re permanently doomed.

So basically, every answer has a bullish tilt. The economy will be above trend, margins will stay high, the Fed will stay accommodative, and inflation will remain super-low. Wow.

High five But wait, wait, that does not mean  equity markets will keep rising…

David Rosenberg is just as bullish on the economy, with much more meat around the bones, but he also discusses equity markets.

Good read: (

Snail U.S. Population Growth Slows to Snail’s Pace

America’s population grew by just 0.72%, or 2,255,154 people, between July 2012 and July 2013, to 316,128,839, the Census said on Monday.

That is the weakest rate of growth since the Great Depression, according to an analysis of Census data by demographer William Frey of the Brookings Institution.

Separately, the Census also said Monday it expects the population to hit 317.3 million on New Year’s Day 2014, a projected increase of 2,218,622, or 0.7%, from New Year’s Day 2013. (…)

The latest government reports suggest state-to-state migration remains modest. While middle-age and older people appear to be packing their bags more, the young—who move the most—are largely staying put. Demographers are still waiting to see an expected post-recession uptick in births as U.S. women who put off children now decide to have them. (…)



NEW$ & VIEW$ (27 DECEMBER 2013)

U.S. Holiday Sales Rise 3.5%, SpendingPulse Says

U.S. retail sales rose 3.5 percent during the holiday season this year, helped by deep discounts at malls and purchases of children’s apparel and jewelry, MasterCard Advisors SpendingPulse said.

Sales of holiday-related categories, such as clothing, electronics and luxury goods, rose 2.3 percent from Nov. 1 through Dec. 24 compared with a year earlier, the Purchase, New York-based research firm said today. SpendingPulse tracks total U.S. sales at stores and online via all payment forms. (…)

Sales were strongest in jewelry and children’s apparel, while sales of electronics and luxury items excluding jewelry were about the same as the same period last year, SpendingPulse said. Sales of women’s and men’s apparel fell from last year, the researcher said. (…)

Bullishness Jumps to Three-Year High

Individual investors were feeling especially cheery about stocks this holiday week.

The percentage of bullish individuals rose to 55.1%, the highest level in nearly three years, in the week ended Dec. 25, according to the American Association of Individual Investors. That was a jump from the 47.5% of investors who said they were bullish the previous week.

Bespoke provides the charts…


…and some caution

While the current level is definitely elevated, it’s by no means without precedent.  As shown below in the chart of the AAIIreading going back to 1987, sentiment has been above the 50% mark many times in the past.

The Blog of HORAN Capital Advisors adds this:

In addition to an elevated bullishness reading, the bull/bear spread has increased 37% and this spread is the highest since AAII reported the spread at 47% for the week of December 23, 2010.

Just a reminder: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!The bearish reading is more important.

Oh! there is also that:

Twitter Rally Picks Up Steam

Twitter shares have nearly tripled since their initial public offering last month, including an almost 5% gain on Thursday, making the microblogging service’s IPO one of the best performing this year.

Twitter Now Has A Larger Market Capitalization Than 80% Of All S&P 500 Companies

(…) Why the stock has exploded the way it has, nobody knows, and frankly nobody cares: it has entered that mythical zone of raging momentum where things work, until they don’t for whatever reason. But in order to present readers with a sense of where TWTR’s $40 billion market cap, which is greater than 403, or 80%, of all S&P 500 companies, puts in in the context of several companies all of which have a market cap that is lower than Twitter’s, we have shown on the chart below Twitter’s 2014 projected Revenue compared to this same universe of immediately smaller S&P500 companies. Again, just for the sake of perspective. (…)

And that: Copper Prices at Their Highest in 8 Months

But also this:

Treasury Yield Hits 3%

Treasury bond prices fell Thursday, pushing the yield on 10-year notes to 3%, a threshold that may signal a new baseline for higher interest rates.



Japan wages halt 17-month decline
Data suggest companies starting to heed calls to pay staff more

(…) Keidanren, the largest and most influential business lobby group, seems willing to recommend that its members prepare for the first increase in base salaries since 2008, when they enter spring negotiations with labour unions. (…)

But three-quarters of total salaries in Japan are paid by small and medium-sized businesses, which are mostly not unionised and where the recovery in profits has not been as strong. (…)

Another factor dragging on wages is the shift in the composition of Japan’s labour force from full-time to part-time workers. The government makes no distinction between the two in its calculations of average earnings per worker, which have fallen almost without interruption since the late 1990s.

And as data for part-timers take longer to calculate, the “encouraging” preliminary wage figures for November could be subject to a downward revision later, said Izumi Devalier, economist at HSBC in Hong Kong.

Other data released on Friday may strengthen policy makers’ confidence that Japan is shaking off 15 years of deflation. Consumer prices excluding fresh food rose 1.2 per cent from a year earlier, reaching a five-year high. Retail sales also increased more than economists expected, marking a fourth straight rise at 4 per cent from a year earlier.

The job-to-applicant ratio touched 1.00 for the first time since October 2007, meaning that there is one job available per applicant.

Ninja  A Metals Mother Lode Sits in Shadows Banks, hedge funds, commodity merchants and others are stashing millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses.

Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.

These facilities are known to some in the industry as “shadow warehouses” because they are unregulated and don’t disclose their holdings.

They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals.

As of October, a record seven million to 10 million tons of aluminum were being housed in these facilities, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.

The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal.

A similar shift is taking place with other industrial metals, analysts say. (…)

“It’s a real concern for anyone in the industry that metal can be sucked away into a nonreporting location with no expectation or date as to when it’s going to be available again,” said Nick Madden, senior vice president and chief supply-chain officer with Atlanta-based Novelis Inc., an aluminum-products maker that is among the world’s biggest buyers of the metal.

“The risk here is that the metal gets controlled by fewer and fewer hands, whose interests and business model is probably conflicting with that of end users,” he said. (…)

The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don’t have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage, analysts and traders say. (…)

Five companies operate 75% of the LME’s 778 licensed warehouses. All own shadow facilities as well, people familiar with the companies said.

In some instances, a single firm runs licensed and unlicensed warehouses in the same building, with the metal counted by the LME separated from hidden stockpiles by a chain-link fence, said David Wilson, a commodities analyst with Citigroup.

Until 2010, most warehouses were owned by logistics firms like Netherlands-based C. Steinweg Group. But as metal-financing trades became more popular, C. Steinweg was joined by units of Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. as well as commodity traders Glencore Xstrata PLC of the U.K. and Switzerland and Trafigura Beheer BV of the Netherlands. (…)

Many metal buyers and producers say they are worried that new rules approved by the LME in November will speed up the flow of metal into shadow warehouses. (…)


NEW$ & VIEW$ (27 NOVEMBER 2013)


Strong new orders, positive employment stats.

The composite index of manufacturing strengthened, climbing to a reading of 13 in November following last month’s reading of 1. The index of shipments improved 18 points, ending at 16, and the index for new orders advanced 15 points compared to a month ago. In addition, the index for the number of employees gained two points, finishing at a reading of 6.


Vendor lead-time shortened, shaving three points from last month’s index, to settle at 8. The backlog of orders index gained 14 points moving New Orders Indexto a reading of -1. Capacity utilization flattened in November; the index
gained five points, leveling off at 0. Finished goods and raw materials built up at a slightly slower rate this month. Those indexes shed one and three points respectively, with both gauges ending at a reading of 13.

Manufacturing employment edged up this month, moving the index to 6 from 4. The average workweek grew solidly, pushing that index up 13 points to end at a reading of 12. Additionally, average wages grew more quickly, reaching an index of 15 compared to last month’s reading of 9.


Housing Sector Shows Sign of Strength

Housing permits surged in October to their highest level in more than five years, driven by strong demand for multi-family buildings such as apartments and condos, a sign U.S. home construction could gain traction as the year ends.

Housing permits surged in October to the highest level in more than five years, driven largely by solid demand for multifamily buildings such as apartments and condominiums, the Commerce Department said Tuesday. And prices in most major U.S. cities rose in September, though more slowly than in prior months, according to the Standard & Poor’s/Case-Shiller home-price index.



High five  Remember that multi-family is very volatile and lumpy. From the Conference Boardès November survey (via the WSJ):

When asked about what type of home, however, consumers who plan to buy in the next six months are more interested in existing houses rather than new ones. During the boom years, the preferences were more evenly split.


Fed Reveals New Concerns About Long-Term U.S. Slowdown

Worker productivity, a key component of an economy’s health, has risen at an annual clip of 1 percent during the last four years, as the U.S. has struggled to recover from the worst recession since the Great Depression. That’s less than half the 2.2 percent average gain since 1983, according to data from the Labor Department in Washington.

“Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, according to the minutes released last week. That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued.

A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs. (…)

A lasting decline in the growth of productivity, or nonfarm business output per employee hour, would be bad news for the economy. Its potential — the ability of the U.S. to expand over an extended period without generating inflation — is determined by the sum of growth in the labor force and of productivity. A slowdown in the latter would limit how fast the U.S. can develop in the future.

That, in turn, would have far-reaching implications for policy makers, company executives, working Americans and investors. Fed officials would need to be more alert to inflation risks if growth picked up. Lawmakers would face even more difficulties reducing the budget deficit because tax receipts would be lower. Companies might have to settle for reduced revenue, employees for smaller paychecks and investors for diminished returns as a result of the slower expansion. (…)

Alan Blinder, who co-wrote a book with Yellen and is himself a former Fed vice chairman, says he’s concerned.

“Taking the Alfred E. Neuman view, what we’re experiencing is a give-back of the very surprising productivity gains” seen during the recession, he said, referring to the Mad Magazine character famous for saying “What, me worry?”

Blinder, now a professor at Princeton University in New Jersey, said he’s 65 percent convinced this is what’s going on. “The other 35 percent of me is puzzled by how low productivity has been and worried it might continue.” (…)

China set to unravel cotton stockpile
Auction to be closely watched by global markets


China is to start selling down its bloated state cotton reserves on Thursday, in an anticipated move that has already caused prices on global markets to unravel.

Chinese state cotton reserves stand at about 10m tons – or half the world total – after a three-year buying binge that lifted international prices. The China National Cotton Reserve Corp is caught in a dilemma, as any attempt to cut its position is likely to further pressure prices and result in steep losses.

Spot cotton prices on ICE have dropped steadily in recent months in anticipation of sales from the Chinese reserves.

Thailand Surprises With Rate Cut

Thailand’s central bank cut interest rates to the lowest in three years, citing a poor economic outlook and political tension that is hurting investor confidence.

The Bank of Thailand cut its benchmark rate by 0.25 percentage point to 2.25%. Nine of 10 economists surveyed by The Wall Street Journal had expected the bank to hold rates steady.

The bank also slashed its growth estimate for this year to 3% from 3.7%, and cut its 2014 growth target to 4% from 4.8%.

Policy makers were concerned over Thailand’s poor economy, which grew 2.7% in the third quarter from a year earlier, and especially a failure of exports to pick up more strongly, said Paiboon Kittisrikangwan, secretary of the bank’s monetary-policy committee. (…)

Other nations, including India and Indonesia, have been raising rates recently to combat inflation and attract foreign funds at a time when U.S. bond yields have trended higher.

Thailand entered a technical recession earlier this year but was unable to cut rates because of the need to attract capital as U.S. yields rose. These pressures have eased recently as the U.S. Federal Reserve has delayed ending its extraordinary monetary policies, pushing yields somewhat lower. (…)


NEW$ & VIEW$ (10 OCTOBER 2013)

U.S. Mortgage Applications Show Little Bounce

The Mortgage Bankers Association reported that the total mortgage market index improved by 1.3% (-54.7% y/y) last week following their slight down-tick during the prior week. Applications to refinance an existing loan led the gain with a 2.5% increase, but remained down by two-thirds versus last year. Homepurchase mortgage applications slipped 0.7% (-5.6% y/y) and were 14.7% below the early-May peak.

large image

German industrial production growth adds to signs of third quarter economic expansion

Looking at the three months to August, which avoids some of the volatility in the monthly data, industrial production increased 1.4% on the previous three month period, with manufacturing up 0.9% and
construction posting a healthy gain of 3.8% over the same period. While the gains in total industrial production and manufacturing output fell slightly short of the 1.5% and 1.2% respective increases seen in the
second quarter, the upturn in construction in the three months to August was the largest since May 2011.

The industrial production data follow factory orders numbers, which showed a 0.3% drop in orders in August following a 1.9% decline in July. However, orders were nevertheless still 2.1% higher in the latest three months compared with the prior three months,which is the second- strongest quarterly rate of expansion since early 2011.


  • France’s IP rose 0.2% MoM in August (+0.6% consensus). Manufacturing production +0.3%.
  • Italian IP decreased 0.3% in August following a 1.0% drop.

Lightning Greek Deflationary Pressures Push Nation Further Into Insolvency, Increased Funding Needs

Deflation in Greece is pushing the country further into a state of insolvency.

The embattled nation has slid into deflation. The headline consumer price
index declined 1 percent year over year in September. The core reading fell 2.7 percent year over year in August. The gross domestic product deflator dropped 2.3 percent year over year during the first quarter of 2013. (BloombergBriefs)

Li Sees China Growth Topping 7.5% in First Nine Months

(…) China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent. (…)

IMF fears $2.3tn bond losses from taper
Fund issues warning in global financial situation assessment

(…) If the Federal Reserve’s likely move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt raise long-term interest rates by 1 percentage point, the IMF’s Global Financial Stability Report (GFSR) estimates that the market losses on bond portfolios could reach $2.3tn.

Brazil raises rate for fifth time since April
Central bank move brings Selic rate close to double digits

(…) Brazil’s central bank raised its benchmark interest rate for the fifth time in a row on Wednesday night, bringing it close to double digits and raising questions about how much longer the tightening cycle has left to run.

The bank increased the Selic rate by 50 basis points to 9.5 per cent amid debate about whether it plans to continue the cycle at the next meeting in six weeks’ time, which would bring the rates to the politically sensitive 10 per cent level.

The monetary policy committee “evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year”, it said, repeating the brief statement issued at its last meeting in August.

The bank has been keen to underline the credibility of its inflation-targeting regime after perceptions of political interference earlier in the year.

(…) analysts said use of the same language in the terse statement that accompanies the monetary policy committee meeting decisions indicated that the bank would be likely to tighten by another 50 basis points in November. (…)

Inflation in September of items whose prices are freely determined by the market has been moderating but remained high at 7.4 per cent year on year, while inflation on items controlled by the government was declining and running at an “unsustainably” low 1.1 per cent.

Supply of copper set to outstrip demand Miners and traders expect lower prices

(…) The expectation of a shift into surplus in the copper market was echoed by many of the traders, analysts and hedge fund managers assembled in London for LME Week, the largest annual gathering of the metals and mining industry. For the first time since 2008, investors polled by Macquarie did not pick copper as their favourite metal for next year.

However, few expect a collapse in prices, as a recovering global economy lifts copper demand. “The surplus we are forecasting is very modest,” Mr Keller of Codelco said, predicting a “really marginal” oversupply of 300,000-400,000 tonnes, compared to annual consumption of more than 20m tonnes. (…)


James Y., a reader, asked if I have ever applied the Rule of 20 to other major indices. I don’t have data for other markets. Here’s how Société Générale, which does good work on valuation, looks at many world markets based on the P/BV vs ROE relationships (via Advisor Analyst).

The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.

This is a snapshot which provides little historical info. SoGen also shows this interesting chart on U.S. non-financial ROE since 1980 which suggest a cyclical peak is nearby.

Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.


Chinese Think Tank Puts Shadow Banking at 40% of GDP As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago.

(…) The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.

But the calculation is conservative compared with those done by international research houses. Fitch Ratings estimated earlier this year that China’s total credit including various forms of shadow-banking lending may have reached 198% of the country’s GDP, while J.P. Morgan estimates have put it at as much as 69% of GDP, or 36 trillion yuan. (…)

Based on available data from regulators, the academy’s report said shadow-banking activities involving wealth-management products and trusts stood at 14.6 trillion yuan by the end of last year, equivalent to 29% of the country’s GDP. (…)

The growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy, the think tank warned.

American Execs Say China is Getting Expensive, and Profitable Of all the challenges facing U.S. companies in China, costs top the list of concerns, with the majority saying they expect to give out hefty pay rises in the coming year

A survey of U.S. executives in China finds that, of all the challenges facing U.S. companies on the mainland, costs are at the top of their list of concerns

The cost of labor particularly has been rocketing in China, by double digits for many businesses the last few years. That’s prompted some U.S. manufacturing to leave China for other shores – including the U.S. and Mexico.

US-China Business Council

More than 90% of respondents said their China business is profitable, the highest level since the survey was started.

Overall, though, sentiment hasn’t changed much from the “tempered optimism” of recent years. Companies say that a range of longstanding problems – such as delays in licensing and other market barriers – generally have not improved.

Mobile Ad Spending Rises Sharply

Marketers are finally convinced that there’s money to be made advertising to the legions of consumers glued to their smartphones and tablets: Spending on mobile ads more than doubled in the first half of the year.

(…) Mobile-ad spending in the U.S. totaled $3 billion in the first half, up from $1.2 billion a year earlier, the Interactive Advertising Bureau estimates.

Adults in the U.S. are expected to spend an average of two hours and 21 minutes a day on smartphones and tablets this year, excluding time spent talking on phones, according to a recent study by eMarketer. In 2010, adults spent only 24 minutes on mobile devices, not counting talk time. (…)

Google is expected to capture 46.8% share of the U.S. mobile ad market this year, estimates eMarketer, thanks largely to Web searches conducted on mobile devices.

Facebook, too, is benefiting. After initially lagging behind in mobile, the Menlo Park, Calif., company has worked to bolster its mobile-ad products, an effort that is now bearing fruit.

Mobile accounted for 41% of its advertising sales in the second quarter, Facebook said. Facebook will have about 14.9% of the mobile ad market this year, eMarketer estimates.

Unilever said that 50% of its spending on Facebook goes to the social-network’s mobile products. (…)

Mobile’s share of total online ad spending in the U.S. more than doubled to 15% during the half, the IAB said. Overall U.S. online ad spending rose 18% to $20.1 billion during the period.

Spending on search and display ads continue to account for the bulk of the overall sector but their share of the total declined in favor of mobile advertising.

Spending on TV ads in the U.S. will increase 2.8% to $66.35 billion this year, eMarketer predicts. (…)

[image]Sad smile  Canadian Mogul Paul Desmarais Dead at 86 One of Canada’s wealthiest and most powerful businessmen, Paul Desmarais built a corporate empire by engineering a reverse takeover of Power Corp. of Canada and refocusing the company on financial services.


NEW$ & VIEW$ (1 OCTOBER 2013)

More Than 800,000 Federal Workers Are Furloughed


Shutdown Would Cost U.S. Economy $300 Million a Day: IHS

Lexington, Massachusetts-based IHS, a global market research firm, estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. (…)

Bank of America Merrill Corp. projects that a two-week closing would curb fourth-quarter growth by 0.5 percentage point, while closing for all of October would shave 2 percentage points from GDP, Ethan Harris, co-head of global economics research, wrote in a note to clients. (…)

While federal employees were repaid after the 1995-1996 furlough, a longer shutdown may prompt them to start paring their spending.

“Each day the shutdown drags on, the more federal employees will discount the possibility that they won’t get back to work anytime soon, and they will pull back on their spending,” Mark Zandi, chief economist at Moody’s Analytics Inc., said in an e-mail.

Few Parallels With Most Recent Shutdown

The country’s most recent shutdown, 17 years ago, offers at best a rudimentary road map for what may happen.

(…) “The biggest difference by far is that the last one was all about spending, and this one is not. It’s about policy,” said former North Dakota Sen. Byron Dorgan, who was in the Democratic leadership at the time.

The budget fight in late 1995 and early 1996 between GOP House Speaker Newt Gingrich and Mr. Clinton was bitter and at times dramatic. But it was at heart a fight over taxes and spending, and it began and ended with protracted negotiations between the two sides.

Neither is the case today. As the price of a budget deal, congressional Republicans demanded a delay in the implementation of President Barack Obama’s health-care law, a position that Mr. Obama and Democrats have said was nonnegotiable.

“The difficulty here is that Republicans have no achievable endgame,” said Daniel Meyer, a former Gingrich chief of staff who went on to serve as White House liaison to the House for President George W. Bush. (…)

Many who had ringside seats last time say they are struck by how different the main actors are this time.

In 1995, Mr. Gingrich was a central force, while the current House speaker, John Boehner, is struggling to shepherd an unruly GOP caucus.

In the Senate, Majority Leader Harry Reid, a Democrat, remains a steadfast ally to Mr. Obama and has no reason to give ground on the health-care law. Mr. Dole, on the other hand, was running for president in 1996 and wanted to broker a compromise.

Minority Leader Mitch McConnell, who has a record of deal-making in the Senate, now faces a primary challenge in his home state of Kentucky and has little interest in antagonizing his base by opposing efforts to curtail the health-care law.

Mr. Gingrich is equally mystified over how this might end.

Republicans, he said, “have an establishment wing that would like to see this all end and go home and do something nice. And we have a fighting wing that wants to force real change. That is a very deep split.”

According to the Congressional Research Service, there have been 17 federal government shutdowns since 1977, most lasted only a few days, none lasted more than three weeks, and none caused lasting damage to the economy. (FT)

Chicago PMI Kicks Off the Week on a Positive Note

While economists were expecting the headline reading to come in at a level of 54.5, the actual level was 55.7.  This was enough for the highest level since May’s reading of 58.7.

Of the index’s seven sub-components, this month we saw month/month increases in five components while Employment and Prices Paid were the only categories that showed declines.  Relative to a year ago, today’s report was equally as impressive.  Here again, Inventory and Prices Paid were the only two categories that declined relative to last year’s reading, while the remaining five categories are higher now than they were last year.

Employment Outlook Still on Track for Tapering

Politics aside, the trend in employment remains paramount in handicapping the odds of QE tapering. Accelerating monthly payroll gains prompted the Fed to act in early ’94. Monthly payroll gains have averaged 184k in the last 12 months, a level inferior to ’94. However, the
surge in small business hiring intentions could accelerate the pace of job gains in 2014 and set the stage for tapering (see Exhibits 5 and 6).


In addition, weekly jobless claims hit 305k last week and the four-week average currently stands at 308k. Granted there have been some data distortions earlier this month, last week’s number was distortion free. The current level of claims is the lowest since May 2007 and the sub-300k territory is in sight. As highlighted in Exhibit 7, the pace of monthly payroll gains tends to accelerate when claims dip under 300k. (NBF)


Amazon to Hire 70,000 Workers
For Holiday Selling Season

Amazon plans to hire 70,000 seasonal workers for its U.S. warehouse network this year, a 40% increase that points to the company’s upbeat expectations about the holiday selling season.

The online retailer expects another 15,000 temporary hires in the United Kingdom, a 50% increase over the prior year. (…)

Amazon’s holiday hires—totaling 85,000 for both the U.S. and U.K.—tops the stated plans of major competitors.

Wal-Mart, for instance, said this week it will add about 55,000 seasonal workers this year and Kohl’s Corp. is targeting 50,000. Target Corp.’s estimated 70,000 in seasonal hires is 20% lower than last year, the company said, reflecting the desire by employees to log more hours at work.

U.S. small business borrowing rises in August, slowly

(…) The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1 percent to 116.6, the highest level since August 2007. The index registered 115.4 in July, revised from an initial reading of 117.7, PayNet said on Tuesday.

Historically, PayNet’s lending index has correlated to overall economic growth one or two quarters in the future. (…)

Because small companies typically take out loans to buy new tools, factories and equipment, more borrowing could signal more hiring ahead.

But the sluggish pace at which borrowing is increasing makes accelerated growth in jobs unlikely, PayNet President Bill Phelan said. (…)

Delinquencies of 31 to 180 days fell in August to an all-time low of 1.48 percent of all loans made, according to the Thomson Reuters/PayNet Small Business Delinquency Index.

Accounts overdue as a percentage of all loans have fallen steadily since rising as high as 4.73 percent in August 2009.

Restaurant Performance Index declines in August

From the National Restaurant Association: Restaurant Performance Index Edged Down in August Amid Fading Operator Expectations

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 100.7 in August – up 0.6 percent from July and the first increase in three months. In addition, the Current Situation Index stood above 100 for the fifth consecutive month, which signifies expansion in the current situation indicators.

A majority of restaurant operators reported positive same-store sales in August, and the overall results were an improvement over July’s performance. … Restaurant operators also reported stronger customer traffic levels in August.

Apartment Market Tightens as Housing Costs Jump

The average monthly rent in the third quarter was $1,073, up 1% from the prior quarter, the largest quarterly gain in a year, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. Compared with the third quarter a year ago, average monthly rent was up 3%. None of the 79 markets tracked by Reis saw rents fall.


The rental increases were stronger than industry watchers expected and represent a turnaround from the past several quarters when it appeared that rent growth was slowing, reflecting falling demand for apartments as more families decided to buy homes. But as mortgage rates jumped over the summer, following big increases in home prices, the rising cost of homeownership has priced many families out of the housing market. (…)

New York City remained the nation’s most expensive market in the third quarter, with average rents climbing 2% from the prior year to an average $3,049. But cities in the West had the strongest rental growth, particularly in technology-centered cities. Seattle led the nation with a 7% rent gain when compared with a year earlier, for an average rent of $1,124; San Jose, Calif., saw rents climb 5.2% to an average of $1,686.

Some argue that rents can’t keep climbing at the current pace. In the past five years, rents have risen 7.6% nationally, according to Reis, and in excess of 10% in some markets.

(…) But there’s another reason why some expect the rent increases to slow: a flood of new supply on the horizon. Some 170,000 new units could hit the country’s largest 54 metropolitan markets this year—about 120,000 have already been finished—followed by 190,000 in 2014 and 300,000 more units in 2015-16, according to Luis Mejia, director of multifamily research for CoStar Group, a real-estate data firm. (…)

During the third quarter, the national vacancy rate—which hit 8% in the aftermath of the financial crisis—slipped to 4.2% from 4.3% in the prior quarter and 4.7% a year ago. (…)

Pointing up  Speaking of housing, KB Homes’ recent results revealed a 20% YoY drop in new orders per community. KBH’s California order growth dropped 35% YoY and its unsold spec home count surged 64% sequentially.

Bumper Crop Stalks Corn

Corn prices have tumbled 37% this year, making the grain one of the worst-performing U.S. commodities. Many investors are wagering that prices could fall even further as farmers harvest what looks to be a record crop.

The weak market for corn comes just 13 months after prices soared to a record settlement of $8.3125 a bushel as the worst U.S. drought in decades battered the Farm Belt. The high prices prompted farmers to plant the most corn acreage in 77 years this spring, and weather has been mostly favorable for growing the yellow kernels. Meanwhile, demand for U.S. corn from foreign buyers and ethanol producers has been sluggish.

As a result, corn futures in September dropped to their lowest level in three years. On Monday, corn for December delivery fell 2.8% to $4.4150 a bushel on the Chicago Board of Trade. That was the lowest closing price for a front-month contract since Sept. 2, 2010, and down 47% from the record last August.(…)

The U.S. Department of Agriculture estimated on Sept. 12 that the corn harvest will total a record 13.8 billion bushels, 28% larger than last year’s crop and 5.7% greater than in 2009, the prior record.

Corn prices tend to hit their lows of the year during the harvest, which is in its early stages in the Midwest, analysts said. Weather forecasts indicate little chance of an early frost that could hurt yields. About 12% of the harvest was completed as of Sept. 29, according to the USDA.


Goldman Sachs Group Inc. recently forecast that corn prices will fall to as low as $4.25 in the next three months. Many money managers, meanwhile, are betting on lower prices. Bearish positions in corn futures held by managed funds outnumbered bullish bets by 126,345 contracts as of Sept. 24, compared with a 104,211 advantage for bearish bets a week earlier, according to the U.S. Commodity Futures Trading Commission.

Smile Further declines in corn prices could have broad repercussions. The lower prices will benefit poultry and livestock producers that feed the grain to animals, as well as packaged-food companies. That should temper price increases in the grocery aisle.

Sad smile But cheaper corn will pinch farmers’ profits, potentially leading them to curb purchases of farm equipment, and to switch next year to planting other crops.

High five Some experts think corn prices are poised to climb. They argue that U.S. exports, which have been weak due to last year’s high prices and competition from rival grower Brazil, could pick up soon as lower prices tempt buyers in Asia.

Some analysts also say market participants may be overestimating the size of this year’s crop, citing chilly, wet weather this past spring.

“There was a fair amount of corn that, because of the cold rains in the spring, wasn’t planted,” said Kelly Wiesbrock, who tracks agricultural companies as a portfolio manager at San Francisco investment adviser Harvest Capital Strategies LLC. “The number of unplanted acres isn’t going to go down. So my sense is that the price of corn has bottomed.”

Euro-Zone Recovery Is Tepid

Eurostat, the European Union’s statistics agency, said Tuesday that unemployment in the euro zone edged lower for a third straight month in August. But the small improvement in the number of unemployed people to 19.178 million in August from 19.183 million in July wasn’t enough of a change to affect the rate, which held steady at 12%—just below the high of 12.1%.

The jobless rate rose in Italy, to 12.2% from 12.1%. It stayed at 26.2% in Spain, indicating continued suffering for households in that country and ongoing pressure on the government’s finances.

There were some brighter spots in the raft of releases, however.

The unemployment among under-25-year-olds edged down to 23.7% in August from a record of 23.8% in July and June.

Germany’s Unemployment Unexpectedly Rose in September

The number of people out of work climbed a seasonally adjusted 25,000 to 2.98 million, after gaining by 9,000 in August, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 27 estimates in a Bloomberg News survey. The adjusted jobless rate rose to 6.9 percent from 6.8 percent.

Italy in Disarray as ECB Pledge Keeps Nation From Brink

Italy’s government is on the verge of collapse and two of its most senior executives have lost the confidence of shareholders. Thanks to Mario Draghi’s promises, bond investors see the turmoil as more of a blip than a crisis. (…)

Without Draghi “little would have stood in the way of catastrophe,” Nicola Marinelli, who helps oversee $180 million as portfolio manager at Glendevon King Ltd. in London, said in an e-mail. “Italy would be facing very high refinancing rates, difficulties in issuing bonds at auctions, and the clear prospect of going out of the euro or defaulting on its debt.”




Devil  Let’s all realize that central banks are now playing backstop for inept politicians in all the Western World. Politicians can play all their games without worrying about their economic or financial consequences. The Fed was pretty open about that after the last FOMC when it admitted that possible government shutdown and debt ceiling crisis were part of their worries. Politicians no doubt noticed that.

Europe’s Car Makers Face Aging Population

European populations are getting older, driving less and turning to car-sharing, suggesting woes will continue for car makers like Ford, Renault, Opel and Fiat.

(…) Some industry executives and consultants warn that Europe’s economic crisis isn’t just sparking a temporary downturn in car sales, but is also accelerating a more fundamental decline in consumer appetite for cars—a decline that may presage more plant closings, job cuts and economic pain well into a broader recovery.

A combination of factors—rising fuel prices, more-durable vehicles, the car’s decline as a status symbol and fewer youth getting licenses, among them—has made buying new cars less of a habit for Europeans.


While some of those factors are playing out in the U.S., where auto sales have roared back to pre-slump levels, there is one difference: America’s driving-age population is still growing, while the number of driving-age Europeans is projected to shrink. (…)


IHS Automotive, an auto-industry forecaster, predicts European passenger-car sales will climb to 14.7 million vehicles in 2020, 8% short of their 2007 peak, from an estimated 12.2 million this year.

Some car makers see a glimmer of hope, arguing that sales have fallen so far in six years that Europeans will fuel a modest recovery when they replace aging cars. The average car age in Europe’s top five markets climbed to 8.7 years in 2012 from 7.9 years in 2009, according to the Roland Berger Strategy Consultants. (…)

More than any other of those structural trends, demographics is working against Europe. In the U.S., the population aged 15 to 65 is set to expand well past 2020, according to United Nations data.

The same population in Europe, in contrast, appears to have peaked in 2011, because of decades of declining birthrates, and the U.N. projects that it will contract 1.4% over the next decade.

A 2012 Morgan Stanley report projected that Europe’s aging population alone could depress sales by 400,000 cars a year over that period. (…)European youth who are coming of driving age also are less inclined to operate and own cars.

Across much of the developed world—including in the U.S.—fewer young adults have been getting their drivers’ licenses than in previous decades, according to a study by the University of Michigan Transportation Research Institute.

But many young adults in Europe appeared to be turning away from cars faster than youth in the U.S. even before the crisis. In Europe’s biggest markets—Germany, France and the U.K.—the under-30 crowd used cars for a smaller proportion of their total travel as of the mid-2000s than they did in the previous decade, according to research by BMW AG’s Institute for Mobility Research; Americans under 30 used cars for about the same proportion of their travel over roughly the same time period, it found. (…)

Such shifts have been especially pronounced in crisis-stricken parts of Europe, where unemployment has stolen legions of entry-level car buyers. But even in car-adoring Germany, Europe’s strongest economy and largest car market, the share of new cars bought by those under 30 fell to 2.7% of total auto sales in the first half of 2013 from nearly 6% in 1999, government data show; the population size of that age group remained roughly the same over that time.

Even before the crisis, young Germans’ attachment to cars appeared to be waning. Among households of people aged 18 to 34, 72% owned one or more cars in 2008, down from 80% in 1998, according to German-government data analyzed by the BMW research group.

Europeans, like Americans, also have been driving fewer miles per year since the mid-2000s, reducing wear and the need to replace cars as often. (…)

Europe’s dense public-transportation system has made it easy for Europeans to forgo owning cars. So has a surge in car-sharing services, from companies such as Avis Budget Group Inc.’s Boston-based Zipcar Inc. and ride-sharing networks such as Paris-based Blablacar that offer an option to drivers who don’t want to own cars. (…)

Some auto executives suggest that Europe’s aging population and economic woes mean its car market may come to look like that in Japan.

There, decades long economic stagnation and a declining driving-age population have suppressed annual car sales to 30% below their 1990 peak. 

(…) with a factory-capacity glut already—and Europe’s demographic and other long-term challenges—AlixPartners’s Mr. Aversa predicts the industry will likely have to cut capacity equal to another five to seven plants in Europe over the next five years. Even that, he says, would fall short of the roughly dozen factories it would need to shut to be profitable.

Some union leaders agree that the combination of trends may mean their workers’ pain will continue past any modest recovery. (…)

US carmakers happy to feel growing pains
Just four years after rescue, the issue now is meeting demand

(…) Demand in the US for cars is running almost 80 per cent higher than in 2009, when GM and Chrysler were forced into government-managed bankruptcies.

Growth for the Detroit Three has been particularly rapid as sharp improvements in their product line-ups have helped Ford and Chrysler regain lost market share and GM maintain its position.

However, the restructuring – in which GM alone closed three assembly plants, on top of three in the previous two years – is also forcing manufacturers to cope with systems whose capacity is significantly smaller than before. Manufacturers, which made tens of thousands of workers redundant during the downturn, are now struggling to recruit and train staff fast enough to meet the resurgent demand.

Pointing up  Be careful not to fall into the simple extrapolation trap. The CalculatedRisk chart below shows that car sales are back to their previous 4 cyclical peaks if one accepts that the 1998-2007 levels were boosted by the irrational exuberance that characterized those years and are unlikely to repeat anytime soon.

Unilever warning knocks consumer shares
Group highlights emerging market weakness

Shares in Unilever fell by the most in two years on Tuesday after the world’s second-largest consumer goods group issued a profit warning, blaming the slump in emerging market currencies.

The maker of Ben & Jerry’s ice cream and Dove soap said it expected underlying sales growth of just 3 to 3.5 per cent in the current quarter, compared with 5 per cent in both the first and second quarters.

More than half of Unilever’s sales – 57 per cent – come from emerging markets, including India, Thailand, Brazil and Russia, which have seen their stock markets and currencies fall this year because of concern about the timing of the US Federal Reserve’s decision to wind down its easy-money policies.



ISM Services Index Hits Highest Level Since 2005!

Combining today’s reading in the ISM Services with the ISM Manufacturing report earlier this month and weighting each indicator according to its weight in the overall economy, the overall reading of the ISM Manufacturing and ISM Services index came in at a level of 58.3.  This was tied for the highest reading in this indicator since November 2005.

(…) like the Manufacturing index, both Business Activity and New Orders were both above 60.  The last time both of these components were above 60 in each index was back in February 2011.

Surprised smile Here’s the important chart from BMO Capital:

If history were an infallible guide, we would be calling for 4% GDP growth in Q3. It isn’t, so we’re sticking with an estimate of half this rate (2.0%) based on a few soggy indicators. That said, for the first time this year, we now see some upside risk to our growth profile. It’s a start.


 August Retail Sales Shy of Hopes

Same-store sales—for the few companies that still report monthly results—came in slightly below expectations, which had been lowered in recent weeks thanks to a number of downbeat forecasts. (…)

Mall traffic remains weak, promotional activity is still high, and apparel retailers in particular are facing difficult comparisons following last year’s strong back-to-school season.

And given that a retailer’s performance during the back-to-school season is typically an indicator of holiday performance, this year’s sluggish August raises concerns about apparel retailers’ prospects for November and December.

The nine retailers tracked by Thomson Reuters reported 2.9% growth in August same-store sales. This compares with analysts’ expectations for 3.2% growth and with 6.5% growth a year earlier.

Many retailers, including the major department stores, have stopped reporting monthly results over the past year, making it more difficult to gauge the performance of the entire industry. (…)

But we have the weekly chain store sales from ICSC:


U.S. Freight Volumes Increase in August

Shipments rose 1.7 percent from July, supporting the prediction that 2013 will have a peak holiday shipping season, even if it is little more than a bump in volume. Railroad traffic was very strong in August, with carload traffic up 6 percent and intermodal shipments up 6.5 percent. The American Trucking Association’s truck tonnage index fell in July, however the not seasonally adjusted index actually rose 3 percent (latest figures available). August shipments were still lower than in the same month in 2011 and 2012, but the gap has narrowed. On a cumulative basis the number of shipments has risen 5.1 percent since the beginning of the year.


Emerging market output edges higher in August

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, recovered from July‟s post-crisis low in August, but signalled only a marginal rise in output across global emerging markets. The EMI rose from 49.5 to 50.7, the third-lowest figure in over four years. That said, it was the first rise in the
headline figure since March.

Manufacturing output was flat in August, as a fractional rise in China was weighed down by declines in other Asian economies and Brazil. Growth of services activity remained weak.

imageOf the four largest emerging economies, China and Russia posted mild increases in output following declines in July. Brazil registered a further marginal drop in activity, while India posted the steepest rate of
decline since March 2009.

Growth of new business resumed following July‟s contraction. The rate of expansion was only marginal, however, with manufacturing new orders little-changed on the month.

Employment declined further in August. The manufacturing workforce shrank for the fourth month running, while service sector staffing declined for the first time in over four years, albeit marginally.




National Bank Financial has one of the best groups of economists on the sell side. Here’s another reason why:

The British magazine “The Economist” recently took another shot at the Canadian housing market. According to an article published for its August 31 issue “Canada’s house prices are bubbly whereas Japan’s are undeservedly flat”. This conclusion is based on a simple comparison of price-to-rent and price-to-income ratios.

In our view, a more thorough analysis of home prices sustainability must also take into account the level of mortgage rates as well as another crucial factor: demographics. As it turns out, Canada has one of the fastest population growth rates in the advanced economies for people
aged 20-44 – the cohort most likely to form households.

As today’s Hot Chart shows, the annual growth in Canada is currently running at 1.2% vs. a 0.3% decline for all advanced economies and a 1.2% drop in Japan.


ECB Raises GDP Forecast

The ECB slightly upgraded its economic forecast and now expects a contraction in gross domestic product this year of just 0.4%. It shaved 0.1 percentage point from next year’s estimate and now expects GDP growth of 1%.

ECB economists expect inflation to average 1.3% next year, well below the bank’s 2% target, suggesting higher prices aren’t an impediment to additional economic stimulus.

German Exports Unexpectedly Dropped in July

Exports, adjusted for working days and seasonal changes, fell 1.1 percent from June, when they gained 0.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.7 percent, according to the median forecast of 13 estimates in a Bloomberg News survey. Imports rose 0.5 percent.

Spain industrial output falls for 23rd month in July

Calendar-adjusted output fell 1.4 percent year-on-year in July, data from the National Statistics Institute showed on Friday after a drop of 2.2 percent in June, which was revised down from a preliminary reading for a 1.9 percent contraction.

Japan Government Upgrades Economic Assessment  After 14 long months of “worsening” and “standstills”, Japan’s government finally upgraded its overall economic view on Friday.

Japan’s Cabinet Office deemed July’s coincident composite index—consisting of 11 key economic indicators including industrial output and retail sales—to be “showing improvement” after it rose 0.9 points on month to 106.4, the highest since April 2012. The government defines improvement as being when the index shows “a high likelihood of an economic expansion.” (…)

The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage, owing to hikes in semiconductor parts production.

According to a Cabinet Office official, even sectors that negatively impacted the coincident index—lagging retails sales—had more to do with bad weather, fewer calendar holidays and earlier-than-usual summer sales schedules rather than consumer mindset. Sales of luxury items such as expensive watches continued to perform well, the official said.

Reuters’s AlphaNow blog remains cautious: JAPAN AT RISK OF A 1997 RE-RUN?

(…) However, a closer look at the details unveils pockets of weakness in terms of the underlying trends—not only are deflationary pressures still brewing, but real wage growth turned negative in the twelve-months to July. This backdrop renders the upcoming decision—expected after the release of the Tankan survey in early October—on the introduction of a VAT increase in April even more contentious. In turn, the looming risk is that we witness a repeat of the mistake made by the Hashimoto administration in 1997. In our view, it is only following concrete signs of a pick-up in wage growth and private demand for credit that fiscal consolidation can be successfully enacted—something Mr Abe should not lose sight of.

Both headline and core—excluding fresh food—CPI measures posted an annual 0.7% increase in July, the highest in five years. However, after stripping out energy costs, CPI was a negative 0.1%. There are, of course, adverse consequences for real earnings, which fell 0.4% in the year to July. Were it not for a large increase in bonuses and overtime pay, the decline in real earnings would have been larger still. In conjunction with July’s declining real exports, these numbers suggest that not only has a weaker yen failed to contain—let alone reduce—Japan’s trade deficit, but it is also giving the economy the wrong kind of inflation. The balance Mr Abe has to strike, between pursuit of growth and fiscal discipline, is getting increasingly finer.

This situation is reminiscent of 1997, when the Hashimoto government proceeded with what proved to be premature fiscal consolidation. Back then, the decision to implement a combination of higher taxes and lower spending was predicated on the belief that the economy could ‘take it’, drawing confidence from a strong GDP report for the previous year. Ironically, we have a similar set of circumstances this time. (…)

Notwithstanding the fragile state of Japanese consumers’ purchasing power, it is predominantly government spending that is helping to sustain aggregate demand—Japan’s private sector is still saving at a rate equal to over 9% of GDP. Until there is clear evidence of growth in private demand for credit, which would act as an offset to fiscal consolidation, a tighter budget will more likely than not arrest Japan’s positive economic momentum.

Moreover, we are not at all convinced that the much-vaunted counterbalancing measures will stem the negative implications higher VAT has for domestic demand, at least in the short term. Any benefit from the introduction of corporate tax cuts and an accelerated depreciation scheme for business investment would be a long time coming, in contrast to the immediate impact of a tax on consumption. In addition, one lesson policymakers ought to have learned by now is that more QE is no direct substitute for fiscal retrenchment, particularly amid a balance sheet recession.

Mr Abe is between a rock and a hard place. Backing off on the VAT rise could be perceived as simply sending the wrong message to investors, both in terms of political credibility and commitment to fiscal discipline. But should a decision to proceed as planned backfire, this would constitute a heavy blow to Abenomics as a whole. A reversal of market sentiment on Japan could provide the catalyst for a broad selloff. The ‘honeymoon’ period for JGBs—which remain largely unaffected by Fed tapering talk—could be tested once again.

One policy option for the government might be to announce some additional targeted fiscal spending measures along with, and as an offset to, the tax increase. Mr Abe would do well to play it safe at this juncture—particularly as the sizes of Japan’s debt and deficit dwarfs those facing Mr Hashimoto in 1997.

Optimism grows for developed economies Government borrowing costs in the US and Europe surge

Treasury Yields Top 3%

Hours ahead of U.S. employment data that could seal the deal for the U.S. Federal Reserve to start pulling back on monetary stimulus this month, ten-year bond yields traded above 3% for the first time in over two years.

image(…) As Treasurys have tottered, yields on 10-year gilts have climbed to over two-year highs over 3%. The yield on the 10-year Bund has risen to 2.02%, the highest level since March 2012. The yield on 10-year Japanese government bonds climbed to a one-month-high Friday

An unwinding of monetary stimulus in the U.S. will also mean fewer dollars flowing into emerging markets. Jitters over Fed tapering have cast the market’s unfriendly gaze over countries with greater dependency on foreign money, such as Turkey and India. Bond markets from Brazil to South Africa have tumbled.


As the industry’s capital ratios have greatly improved from pre-crisis levels, we expect that eventually the industry’s “beta” will fall due to capital strength, a stronger regulatory framework, and enhanced transparency afforded by processes such as the CCAR. (RBC Capital)



In my Sept. 3 New$ & View$, I disagreed with John Mauldin on the long-term correlation between copper and equity prices:

Something inside me screeched when I read “Unless the long-term correlation has disappeared”. John is younger than me so his “long term” must differ. Here’s my “long term” which does not correlate copper with equity prices very well (sorry, I do not have John’s means to quickly combine both series on the same chart but the time frames are the same).

I may be short on means but not on friends. Terry Orstland (TSO Research) graciously sent me copper prices back to 1970. Here’s the chart combining both series:



Suzanne and I will be travelling in Europe for the next 3 weeks. Posting will continue as much as possible subject to our schedule. Switzerland, Germany, Holland, Belgium. Sounds like a beer tour! Mug




When I was managing money, after our group had discussed and explored all economic scenarios based on available data, we often concluded with the wishful expression “next month things will be clearer”. We kept repeating it month after month…

What we got last week:

  • Q2 GDP

Thumbs up The U.S. economy entered the second half of the year on firmer footing than previously estimated, with stronger growth, an uptick in corporate profits and consumers feeling better amid a rebound in housing. (WSJ)

The good news is, the U.S. economy grew more than initially expected a month ago. The first stab at the Q2 real GDP on July 31st was 1.7% a.r. Then the trade numbers came out and wow, the view changed and it looked like GDP grew in the neighborhood of 2½% a.r. Then, as the
days went by, more data on inventories and consumer spending caused estimates to be trimmed, leaving consensus and us at around 2.2%-to-2.3% for the second quarter. Now, gentle reader, it looks like we should’ve stuck with the trade data as real GDP did rise 2.5% a.r. in Q2, the largest increase in nearly one year. That and the fact that consumer spending wasn’t revised at all (still 1.8% a.r.) is encouraging. Exports were revised up nicely, and inventories added more to the bottom line. (BMO Capital)

A 2.5% growth is not particularly impressive, but when one takes into account (a) the fiscal drag of lower government spending and higher payroll taxes and (b) the financial drag of retaining revenues to rebuild private balance sheets, the results are beating expectations. Moreover, it is interesting to note that the current recovery has come about despite a declining trend in the velocity of money. (Palos Management)

Curb your enthusiasm:

Thumbs down The latest GDP update shows the current data point is lower than the onset of all recessions except the one that started in January 1980. (Doug Short)

Click to View

Thumbs down But domestic final sales, which strip away swings in the trade deficit and inventories, actually were revised slightly lower, to a 1.9% annual pace from 2%. Over the past 12 months, domestic final sales are up 1.5%, which is more in line with GDP year-on-year growth of 1.6% per annum. (WSJ)

Thumbs down We get a similarly weak picture in the YoY Real Final Sales (which excludes changes in private inventories). (Doug Short):

Click to View

Notice how current levels are indicative of recessionary conditions. (Note to Ian M.: thanks for the heads up on the ZH post. Doug’s chart is just so much better)


Thumbs down July Consumer Spending Up 0.1% Americans spent more cautiously in July as income growth slowed, signaling a potential risk for the economic recovery in the second half of the year.

Overall incomes improved slightly, but wages and salaries fell 0.3%, pushed down by federal spending cuts that spurred furloughs across the government. Government wages were reduced by $7.7 billion in July and $700 million in June due to the furloughs, the report said.

The weak growth of overall spending was partly due to falling demand for durable goods. The category fell 0.2% in July after rising 0.9% in June, marking the first decline since March.

Real disposable income was up 0.8% YoY and is really not growing enough to sustain the recent spending trends…

Click to View

…unless the consumer keeps dissaving. Bold call!

Click to View

Doug Short continues:

As the chart above illustrates, the US savings rate had generally declined since the early 1980s, a trend no doubt supported by the psychology of the secular bull market from 1982 to 2000. After stabilizing for a couple of years following the Tech Crash, a new surge in asset-growth confidence from residential real estate was probably a factor in that trough in 2005. But in 2008 the Financial Crisis reversed the trend … for a while.

Doug is absolutely right. Savings are the residual of income minus spending. When people borrowed against their house to pay for their third car and new boat, the savings rate collapsed, a phenomenon unlikely to be repeated for quite a while.

Thumbs down Several economists lowered their growth estimates for the third quarter after Friday’s weak report, which offered the first major gauge of consumer spending in the third quarter. The forecasting firm Macroeconomic Advisers now expects a 1.6% annualized growth rate, down two-tenths of a percentage point from its earlier estimate. Barclays economists lowered their estimate 0.3 percentage point, also to 1.6%. (WSJ)

Snail  What about August? Weekly chain store sales have been on the weak side so far (to Aug.24). Slow back-to-school sales generally herald sluggish Christmas sales.


Wait, wait:

Note: The automakers will report August vehicle sales on Wednesday, Sept 4th.
From Kelley Blue Book: Crossovers, Pickup Trucks Lift August Sales Nearly 14 Percent, According To Kelley Blue Book

In August, new light-vehicle sales, including fleet, are expected to hit 1,460,000 units, up 13.6 percent from August 2012 and up 11.0 percent from July 2013.
The seasonally adjusted annual rate (SAAR) for August 2013 is estimated to be 15.6 million, up from 14.5 million in August 2012 and down from 15.8 million in July 2013.

Press Release: J.D. Power and LMC Automotive Report: August New-Vehicle Sales Reach Highest Level in Seven Years

With consistency in the fleet environment, total light-vehicle sales in August 2013 are also expected to increase by 12 percent from August 2012 to 1,495,400. Fleet sales are expected to account for 15 percent of total sales, with volume of 225,000 units.
PIN and LMC data show total sales reaching a 16 million unit SAAR in August, which is the highest since November 2007, with actual unit sales the highest since May 2007.

From TrueCar: August 2013 New Car Sales Expected to Be Up 14.4 Percent According to TrueCar; August 2013 SAAR at 15.75M, Highest August SAAR since 2007

For August 2013, new light vehicle sales in the U.S. (including fleet) is expected to be 1,464,214 units, up 14.4 percent from August 2012 and up 11.8% percent from July 2013 (on an unadjusted basis).
The August 2013 forecast translates into a Seasonally Adjusted Annualized Rate (“SAAR”) of 15.75 million new car sales

The analyst consensus is for sales of 15.8 million SAAR in August.

July sales were 15.7M annualized.

After a six-month stretch where the headline index saw some extremely volatile month to month swings, the Chicago PMI has settled down over the last two months with back to back increases of 0.7 points.  To top things off, the headline reading also came in right in line with forecasts.

Thumbs up New orders at 57.2 from July’s 53.9. Impressive!

Thumbs up Overall prices rose just 0.1% in July from June, according to the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditures, released Friday. Core prices, which exclude volatile food and energy costs, also nudged up 0.1%. Both rose at a slower pace than in June. Compared with a year earlier, overall prices were up 1.4% while core prices rose 1.2%. (WSJ)

In effect, the U.S. economy looks like a building seemingly pretty solid from the outside but actually resting on weak foundations.

Fingers crossed And while the charts above showing that current readings on YoY growth in GDP and final sales generally reflect recessionary conditions, the Conference Board’s LEI charts keep hopes alive (more great Doug Short charts):

Click to View

Click to View

It may well be that the YoY change in key GDP numbers were unusually distorted by the “temporary” sequester. In fact, quarterly trends are not indicative of a coming recession . Last 3 quarters:

  • GDP: 0.1%, 1.1%, 2.5%;
  • Final sales of domestic product: 2.2%, 0.2%, 1.0%;
  • Final sales to domestic purchasers: 1.4%, 0.5%, 1.9%.
  • These while federal government spending was: –13.9%, –8.4%, –1.6%.

Palos’ Hubert Marleau:

We have noticed that the private sector has started to slightly lower its preference for cash and equivalents. Should the trend in the velocity of money turn upwards as theory would suggest, the US economy would certainly gather steam. It would either bring about an increase in growth or inflation or both. Given the existing slack in the economy, it is more likely to first have an increase in growth than inflation. This leads us to believe that the Fed is about to reduce its bond-buying program this Fall.

Confused? Pity the FOMC in a couple of weeks. But don’t worry, it will be clearer next month…Winking smile



Wait, wait:

Thumbs up (…)Yet investors aren’t exactly dumping their riskiest, priciest bets, notes Justin Walters of Bespoke Investment Group, who divided the 500-stock benchmark into 10 groups of 50 stocks based on various criteria. He found, for instance, that the 50 stocks with the richest price/earnings valuations had declined just 3.4%, the least among the 10 deciles. The 50 stocks paying no dividend lost just 3.9%, versus 4.9% for the 50 proffering the most generous yields. Heavily shorted stocks outperformed. Says Walters: “This is the type of relative performance you would see during a market rally, and not a market decline.”

Individuals also seem to be doing more of the selling, and the 50 stocks most heavily held by institutions fell just 3.5%, versus 4.9% for the 50 with the least institutional ownership. Bulls are rethinking their infatuation with U.S. exposure: The 50 stocks with the most foreign revenues fell just 3.2%, versus 5.2% for those with the most U.S. sales. Meanwhile, economically sensitive sectors continue to hold up. More than half of all industrials, materials and technology stocks hovered above their 50-day averages—a feat managed by less than 15% in the utilities and consumer-staples camps. (Barron’s)

Thumbs up expandFall Market Forecast Looks Sunny  With the economy growing and earnings on the rise, stocks could head higher in coming months. Market strategists like technology and industrials, but not utilities. Who’s afraid of the Fed?

The market, as represented by the Standard & Poor’s 500, has risen 14.5% year-to-date, and Wall Street’s investment strategists see more gains ahead both this year and next.

Barron’s recently checked in with 10 Street seers, whose consensus view is that the S&P will reach 1700 by year-end, 4% above Friday’s close. If these prognosticators are right, the market will log a 19% gain for the full year, compared with last year’s 13.4% advance. Unperturbed by rumblings of rising interest rates or another budget brawl in Washington, some strategists see the S&P hitting 2000 or more in 18 to 24 months. (…)

The S&P currently trades for 14 times the next 12 months’ estimated earnings, up from 13 times earnings at the end of last year. That’s not dirt-cheap, but nor is it rich; the market historically has averaged a P/E of 15 times future earnings, and much more in the past 20 years.

For the record, the average and median P/E on trailing earnings have been 13.3 since 1927, 1945 and 1983 (13.5 actually). Referring to the past 20 years is, shall I say, irrational exuberance. But let the sunshine in:

Corporate-earnings growth, stalled around 5% in the year’s first half, hasn’t been a big driver of stock-market gains this year. But that could change, the strategists say, as profit growth accelerates sharply in the fourth quarter. Our forecasters look for stronger growth in U.S. gross domestic product to boost company-earnings growth to 8% toward year end. The strategists expect full-year S&P earnings to total $107.85, rising to $116.50 next year. (As usual, the consensus view of industry analysts is higher, with estimates of $110 for this year and $123 for 2014.)

Obviously, the strategists are not confused about the economy. Sun SunSun

Thumbs up The bull case


(…) Knight says consumers have “hung in,” with annual spending growth of almost 2%, despite paltry wage gains and the expiration of the 2% Bush payroll tax cut early this year. Businesses continue to hire new workers at a steady but not stellar rate of 150,000 to 200,000 per month. The fiscal head winds caused by sequestration and government contraction could ease as the government’s automatic spending reductions are lapped early in 2014, he says.

Auth looks for investment and capital expenditures to pick up, and notes the U.S. housing market has worked through excess inventory. Rising home prices will add to the wealth effect, and nonresidential construction—which hasn’t moved yet—will increase, he says. Commercial rents are stabilizing, and in prime markets such as New York City, they are rising. That is a prelude to greater construction activity, he says.

In the past, construction accounted for 9% of GDP, but it has contributed only 5.5% in the past few years. Construction is “where all the missing middle-class jobs are,” Auth says.

And the “Earnings Math”

With many companies in the S&P 500 reporting near-peak profit margins, “you need sales to come through” to propel earnings growth, Goldman’s Kostin adds.

Barclay’s Knapp is looking for S&P revenue to grow at a rate of up to 5% in the second half, possibly more than doubling the year-to-date growth rate. The drivers, he says, will be higher capital expenditures, steady consumer spending, and continued strength in the U.S. housing industry. Steady growth globally also will help.

Wait, wait,

For more, and better earnings math, read the “EARNINGS WATCH” segment of my Aug. 5 New$ & View$.

For good measure, Barron’s cites a few negatives for its thorough readers:

(…) the litany of negatives, including the widespread expectation of the Federal Reserve’s taper of its $85 billion-a-month bond-buying program, which threatens to stall the housing recovery; weaker-than-expected data, especially on the part of consumers’ income and buying; the potential for renewed upheavals in Europe once the Sept. 22 German elections are safely out of the way, including the recognition that Greece will likely need a third bailout; and the resumption of U.S. fiscal follies, including the need to pass a continuing resolution to keep the federal government from shutting down when the new fiscal year starts on Oct. 1; and yet another debt-ceiling fight when the Treasury reaches its borrowing limit in mid-October.

And add to that we’re heading into historically the worst month for stocks,  one frequently marked by currency and other financial crises (which seem to be brewing in the emerging markets), and there’s the potential for a September to remember. Or maybe one the bulls might want to forget, especially if things heat up in the Middle East.

(Bespoke Investment)


99% of S&P 500 companies have reported Q2:

  • Q2 EPS are $26.36, up 3.7% YoY.
  • Trailing 12 months EPS are $99.28, up 0.9% from 3 months ago and +0.6% YoY.
  • Estimates are now $27.04 (+12.7% YoY) for Q3 and $29.04 (+25.4%) for Q4. These estimates have essentially stopped declining in recent weeks (again, see the “EARNINGS WATCH” segment of my Aug. 5 New$ & View$ before buying these estimates).

Thomson/Reuters says that there have been 105 pre-announcements for Q3: 88 negative and 17 positive. During the past month, we have had 28 pre-announcements for Q3, 27 of which were negative. By comparison, at the same time after the Q1 earnings season, there had also been 28 pre-announcements, 24 of which were negative. Post the Q4’12 season, again comparing similar periods, we had 54 pre-announcements, 41 of which were negative.

Another way to look at pre-announcements, one month prior the end of the quarter, 78.2% of pre-announcements were negative for Q1’13, 80.6% for Q2 and 83.8% for Q3.

NoteSummer has come and passed
The innocent can never last
wake me up when September ends
(Green Day)

The objective Rule of 20 barometer, based on trailing earnings and inflation, closed August 9% undervalued from its 1787 fair value. Downside from the current level of 1633 to the Rule of 20 P/E of 16 (trailing P/E of 14 + 2% inflation)  -15% (1390). We hit these levels during the mid-2010 and mid-2012 retreats.


Technically, the S&P 500 Index is now at its 100 day m.a. (1640), a level that held in June, and downside to its 200 day m.a., last touched in December 2012, is 4.5% (1563). At that level, the upside potential would be roughly in line with the downside risk, providing a more attractive investment proposition. Importantly, both moving averages are still positively sloped, as is the 50 day m.a. for that matter.

  • Patience is bitter, but its fruit is sweet. (Aristotle)
  • Patience is power.
    Patience is not an absence of action;
    rather it is “timing”
    it waits on the right time to act,
    for the right principles
    and in the right way
    . (Fulton J. Sheen)

Just kidding  The Seven Deadly Sins of Investing Financial crisis be damned—investors are still making the same mistakes the always have. Here are their biggest blunders and how to avoid them.

Lust: Chasing Recent Performance The belief investors feel that recent performance will dictate future performance—known as “recency bias” in psychology—is one of the biggest investor pitfalls, experts say. (…)

Pride: Being Overconfident (…) Investors, especially ones new to the game, frequently believe they know far more than they actually do about a particular investment, say psychologists and financial advisers. (…)

Sloth: Overlooking Costs Investors often just don’t pay attention to details. (…) “The expenses are much more predictive of future performance because there’s so much randomness in past performance,” he says.

Envy: Wanting to Join the Club  (…) The desire to be part of an exclusive offering often drives people to throw money into an investment that doesn’t fit into the overall goals of their portfolio, against their better judgment.

Wrath: Failing to Admit Failure People hate to lose money. (…) Loss aversion, as it is called by psychologists, isn’t hard to spot. (…)

Gluttony: Living for Today Let’s face it: (…) Fifty-seven percent of U.S. workers surveyed by the Employee Benefit Research Institute earlier this year reported less than $25,000 in total household savings and investments, not counting their house or defined-benefit retirement plans. The lack of preparedness has led experts to deem it a crisis. (…)

Greed: Following the Herd (…) To battle the fear that inevitably comes with a market decline or other adverse events, financial advisers say it is crucial that investors have a detailed portfolio plan that they stick with regardless of short-term events. The plan should outline investors’ targeted holdings in bonds, stocks and other investments, and be based on their retirement goals. (…)

Don’t think investment pros are immune from the above. BTW:

According to JPMorgan’s strategists, nearly three out of five fund managers are trailing their benchmarks this year, including 32% who lag behind by 2.5 percentage points or more.



Pointing up Lessons From an Investing Giant

Filings with the SEC in March and again this month show the extraordinary gumption of Charlie Munger, Warren Buffett’s business partner and vice chairman of Berkshire Hathaway.

Mr. Munger, who will turn 90 years old next Jan. 1, is a model for individual investors who wonder how they can possibly beat the professionals at their own game. The pros have more information than you, and their trading machines are faster. But you still have an edge over them—so long as you play a different game by your own, more sensible rules.

You can be patient; the pros can’t. You don’t have to be part of the herd; they do. Above all, you can be brave; they almost never are.

What makes Mr. Munger a model for individual investors?

In the first quarter of 2009, during the most desperate days of the financial crisis, Mr. Munger took 71% of the cash at Daily Journal, a small publishing company he chairs, and poured it into the bank stocks that so many other investors were fleeing. By March 31, 2009, his bet already had gained 60%. With other purchases he made later, Mr. Munger invested $49.7 million into stocks and bonds that today are worth $128.4 million, according to financial statements Daily Journal filed on Aug. 20.

At Daily Journal’s annual meeting in February, Mr. Munger discussed the move briefly. According to an online transcript and an attendee, Alexander Rubalcava of Los Angeles-based Rubalcava Capital Management, Mr. Munger said “we behaved pretty sensibly” by moving boldly out of cash when stock prices got “ridiculously low.”

The Daily Journal investment wasn’t the only bold move Mr. Munger made during the crisis. (…)

Where does Mr. Munger get his gumption?

In the late 1980s, he recalled in a magazine interview, a guest at a dinner party asked him, “Tell me, what one quality accounts for your enormous success?”

Punch Mr. Munger’s reply: “I’m rational. That’s the answer. I’m rational.”

Trained as a meteorologist at the California Institute of Technology, Mr. Munger thinks in terms of probabilities Light bulb rather than certainties, say those who know him well. (…) Decades of voracious reading in history, science, biography and psychology have made him an acute diagnostician of human folly.

“Charlie has such a deep sense of stoicism,” says a long time friend, Christopher Davis, chairman of New York-based fund manager Davis Advisors. “He seems to be able to invert emotions, becoming uninterested when other people are euphoric and then deeply engaged when others are uncertain or fearful.”

Mr. Munger favors what he calls “sitting on your a—,” regardless of what the investing crowd is doing, until a good investment finally materializes.

In the panic that typically produces such an opportunity, Mr. Munger ruminates. If he likes what he sees, he pounces.

“Charlie knows exactly what he thinks, and the fact that other people don’t agree has no impact on him,” says his friend John Frank, managing principal at Oaktree Capital Management in Los Angeles. “He doesn’t get confused about the difference between an emotional feeling and an intellectual understanding.”

Many money managers spend their days in meetings, riffling through emails, staring at stock-quote machines with financial television flickering in the background, while they obsess about beating the market. Mr. Munger and Mr. Buffett, on the other hand, “sit in a quiet room and read and think and talk to people on the phone,” says Shane Parrish, a money manager who edits Farnam Street, a compelling blog about decision making.

Pointing up “By organizing their lives to tune out distractions and make fewer decisions,” he adds, Mr. Munger and Mr. Buffett “have tilted their odds toward making better decisions.” (…)

Mr. Buffett declined to comment other than to say, “Charlie is indeed rational.”

This unsolicited and unpaid advertising was presented to you by New$-to-Use Winking smile.

This is what NTU attempts to help us do. Be well informed with relevant, unbiased info, think rationally and independently, and act rationally based on sound probabilities.

John Mauldin “hates” this market. His latest weekly note, always a good read, shares his “reasons to head for the sidelines”. One of these is this chart with these comments:

One of the first market aphorisms I learned was that copper is the metal with a PhD in economics. While you can get into a great deal of trouble regarding that as a short-term trading axiom, it is definitely a longer-term truth. Copper is a metal that is closely associated with construction, industrial development and production, and consumer spending. One can argue that the price of copper is falling today because of a fundamental increase in supply, but for those of us of a certain age, the following chart is nervous-making. Unless the long-term correlation has disappeared, the data would indicate that either the price of copper needs to rise or the market is likely to fall.


Something inside me screeched when I read “Unless the long-term correlation has disappeared”. John is younger than me so his “long term” must differ. Here’s my “long term” which does not correlate copper with equity prices very well (sorry, I do not have John’s means to quickly combine both series on the same chart but the time frames are the same).



John’s long term seems to begin with China and QEs. It likely includes a lot of hype in copper which is now deflating thanks to China’s slowdown and the coming tapering. My sense is that copper prices, and those of most other commodities, are on their way back to their real long term trend which is dismal and little (!) correlated with other asset classes (chart from SoGen).  image_thumb[1]

One day, I will explain why I essentially never invest in commodity-related stuff but the chart above provides a good starting point.

Copper Rally Loses Steam as China Demand Falters


(…) One leading indicator of waning appetite is that stocks at metal at warehouses in Shanghai have stabilized around 400,000 tons after falling from as high as a million tons earlier this year. Manufacturers are easing up on using stocks after robust buying over the past few months depleted inventories, according to the manager of a warehouse who declined to be named as he isn’t authorized to speak to the media. (…)

Another sign is that the premium for copper in China is falling, which analysts say also bodes badly for futures. (…)

“We’re not very bullish on copper prices going forward,” said Liu Jiang, a purchasing manager at a Zhejiang-based power-cable maker that supplies China State Grid Corp., the world’s biggest utility. He sees demand from power cable producers, which account for half of copper consumption in China, remaining flat until the end of the year after a flurry of activity in the first half.

Mr. Liu said his company’s order books have been thin since July, as some urban infrastructure projects have ended, with most of the orders placed and filled in the first half.

Investment in power grids rose 19% in the first six months from the same period a year earlier to 165.9 billion yuan ($27.1 billion), far exceeding the 4% growth target set by China State Grid. That means there is little room for growth from the power sector for the rest of the year, according to Yang Changhua, chief copper analyst at state-owned metals consultancy Beijing Antaike.

“We’re unlikely to see any surprise in copper demand from China this year,” Mr. Yang said. (…)

Plus, a potential glut from rising copper supply may also add to the metal’s woes, says Barclays, who forecasts prices will fall in the fourth quarter. The U.K.-based investment bank estimates there will be a 418,000-ton global copper surplus in the second half of this year compared with a 307,000-ton market deficit in the first half. (…)

Chinese Home Prices Outpace Construction

Chinese home prices climbed 8.6% in August from last year and soared in major cities, but didn’t lift construction, or the wider economy.

Prices nationwide climbed 8.6% year-over-year in August and soared in major cities, according to data provider China Real Estate Index System on Monday. Housing prices are up 22.5% year-over-year in Beijing, CREIS said. In Guangzhou, the rate is 24.2%. Other cities are seeing more modest increases, with prices in Shanghai up 7.7%

(…) developers are sitting on a large amount of unsold inventory. With builders preferring to pare down their existing supply rather than take on new projects, housing starts are returning to life only sluggishly—up 7.1% in the first seven months of the year, according to the government. Sales rose 27.1% to 547.3 million square meters over the same period. (…)

The backlog in unsold housing is formidable. At the end of 2012, China had more than 4 billion square meters of residential property under construction, enough to satisfy demand for more than four years without a single new project started. The bloated inventory is the result of China’s last go-round with slowing growth, in 2009. To recharge the economy, Beijing unleashed bank lending and loosened its controls on the property sector. Sales and construction soared. (…)

Surprised smile Chinese workers lock out US bosses

Cooper Tire factory hit by tri-national $2.5bn M&A dispute

Chinese factory workers in eastern Shandong province have turned a traditional management weapon – the lockout – back on their American bosses, by denying them access to a tyre plant at the centre of a controversial $2.5bn cross-border deal.

The sustained Chinese industrial action that erupted in June after the deal was announced is the first to target a major offshore acquisition involving two foreign companies, and exposes a new risk for multinationals operating in China with local partners.

Ohio-based Cooper Tire, which has accepted a buyout offer from India’s Apollo Tyres, admitted for the first time on Friday that workers at its joint venture with the Chengshan Group had taken “disruptive actions”. These included “denying access to certain representatives of the company and withholding certain business and financial information”. (…)

Unlike most other high-profile disputes between foreign manufacturers and Chinese workers, Cooper’s Shandong employees are not demanding higher wages.

The workers have instead complained they were not adequately consulted over Apollo’s offer for Cooper. They also fear the deal will burden their prospective Indian owner with too much debt and result in a clash of corporate cultures.


Kerry praised the support of France—”our oldest ally,” which supported the new United States in the Revolutionary War against Britain—in a pointed barb following the vote by the House of Commons. That, of course, also was the reverse of those nations’ stances regarding the U.S. invasion in Iraq, for which former Prime Minister Tony Blair was a vociferous supporter and France was opposed. Left hug Martini glass Right hug

Note Oh, I get by with a little help from my friends
Mmm, I get high with a little help from my friends
Mmm, gonna try with a little help from my friends


NEW$ & VIEW$ (16 JULY 2013)

Sad smile  Consumers Dial Back on Spending

Retail sales grew a softer-than-expected 0.4% last month, the government said Monday, as shoppers dialed back spending on restaurant meals and gardening equipment amid higher taxes and weak growth in wages. If purchases of cars and gasoline are excluded—these purchases tend to be volatile—spending actually dropped 0.1%, the first decline in a year.

The June report, which also revised down May’s figure to a 0.5% increase from 0.6%, suggests consumers remain cautious about buying anything other than basics four years into the recovery. (…)

Pointing up In a worrying sign, food-service sales fell 1.2% in June, the biggest decline since February 2008. Restaurants and bars have been among the biggest job creators this year, accounting for 51,700 of the 195,000 increase in payrolls last month.

Control sales (non-auto less gasoline and building supplies) rose 0.1% in June and are up 2.0% annualized in Q2. Pent-up demand continues to drive car sales higher. They rose 1.8% in June and +17.9% annualized in Q2.

Here’s the chart on control sales (quarterly) from BMO Capital:


Weekly chain store sales are up 2.1% (trailing 4 weeks) YoY, a sharp slowdown from their 3% pace of early June.  image

And to repeat myself, this won’t help:


What we have all been sensing for many weeks is now transpiring into economists’ numbers:

Second Quarter Looks Uglier and Uglier

Monday brought disappointing news on retail sales and business inventories. Retail purchases increased just 0.4% in June, not the 0.8% expected, and May’s sales were revised down. The control sales group, which goes into GDP and which excludes vehicles, building materials and gasoline, rose 0.15% in June, half the gain forecasted.

In addition, businesses increased their inventories level by just 0.1% in May, and April’s increase was revised from 0.2% to 0.3%.

The list of economic shops now estimating real GDP grew by less than a 1% annual rate last quarter include Goldman Sachs (0.8% as of Monday), Macroeconomic Advisors (0.6%), Royal Bank of Scotland (0.5%) and Barclays (0.5%).

Smile Empire Manufacturing Stronger Than Expected

The Empire Manufacturing report for July was positive (9.46) and better than expected (5.00) for the second straight month.  Unlike last month’s report which had a lot of weak undertones in it, this month’s report was considerably better. 




China in the rear view mirror: not pretty.


China forward looking: not much better:

Markit’s monthly manufacturing and services PMI surveys, produced on behalf of HSBC, collectively indicated the first contraction of economic activity for ten months in June, the rate of growth having slowed over the previous two months.



CLSA’s Andy Rothman is not overly worried:

None of the data, however, signals more than a continued, gradual cooling of growth rates.  There is no reason to anticipate a sharper macro deceleration, and we do not expect the Party leadership to implement a significant stimulus.  Beijing seems comfortable with the shift to gradually slower growth, and the leadership also appears committed to further structural reforms.

This is interesting:

We do not see evidence for declining competitiveness or a serious drag from RMB appreciation.

Pointing up For example, at the end of 2004, Chinese goods accounted for 13% of total US goods imports. During the first five months of this year, Chinese goods had an 18% share of US goods imports, up from 17% during the same period last year.

Given that real appreciation of the RMB was 32% from the end of 2004 through the end of last year, and another 2% this year, the problem with China’s exports is not primarily due to its currency.  The bigger issue is weak global demand.  Therefore, while we expect the 1H13 pace of RMB appreciation (3.8% annualized) to slow, we do not expect a full year devaluation against the dollar.  As in 2009 – – when Beijing did not devalue despite an export collapse – – the trade benefits of a devaluation would be far too small to outweigh the negative political consequences.

Unless a sharp fall in exports leads to widespread unemployment, the Party will not turn to a stimulus.

The FT is not as complacent:

(…) And worse – demand for China’s exports is looking shaky.

Since it was allowed to appreciate the renminbi has been eroding Chinese exporters’ price competitiveness.

Renminbi dollar

On the plus side, productivity is rising.

China output

But that isn’t enough to preserve China’s competitive advantage in manufacturing.

China manufacturing costs

As a result, some countries are now buying less from China.

China exports

However, exports are not crucial to China’s growth:

China GDP components

On the other hand:

Perhaps more importantly for the global economy, the Chinese slowdown means it’s buying less from much of the world.

China imports

The global impact of China’s slowdown could be the most important economic story of the moment. Which countries will be hit, how badly, and what will the consequences be?

Here’s a hint:

Lost amid the sigh of relief on China’s GDP figures was the fact that the country’s industrial production slowed to a 8.9% y/y pace in June. While no doubt impressive as a standalone data point, Q2 was actually the slowest pace since 2001, aside from the 2008/09 global recession. We find that industrial output is a better driver of commodity prices than GDP and, over the past 15 years, anything south of 12% output growth has meant declining commodity prices.



Even more so when considering that IP is slowing everywhere else.

Lightning Euro-Zone Exports Slump

The European Union’s statistics agency said Tuesday that adjusted for seasonal factors, exports from the euro zone to the rest of the world fell 2.3% from April, while imports were down 2.2%. It was the second straight month in which exports fell sharply, and the largest month-to-month fall since June 2011.

The drop in exports to countries outside the European Union was particularly sharp in Germany, falling by 9% from April. By contrast, Italian exports to non-EU countries rose by 3.6%, while Spanish exports rose by 0.8%.

Auto  European Car Sales Fall Again

The number of new car registrations in the EU continued to fall in June, squelching hopes they had already reached bottom after a multiyear downturn.

Registrations fell 5.6% on the year in June to 1.13 million passenger cars, leading to a 6.6% decline in the first half of 2013, according to data published Tuesday by industry association ACEA. Registrations in June were almost 25% lower than six years ago.

Car sales fell 4.7 per cent in Germany, 8.4 per cent in France and 5.5 per cent in Italy, according to ACEA.

Annoyed  South Korea Cautions Fed on Stimulus

South Korean Finance Minister Hyun Oh-seok urged the U.S. Federal Reserve to take into account the global impact of its eventual exit from stimulus measures, warning of possible “reverse spillover” effects.

“The U.S. should consider not only its own economic conditions but also the global impact carefully to determine the timing, pace and manner of its exit from stimulus,” Mr. Hyun said in a news briefing Tuesday. (…)

Mr. Hyun warned that emerging economies could be badly hit if the Fed isn’t careful in unwinding its easy-money policy—and that could lead to what he called a reverse spillover, with the emerging economies forced to cut their imports from the U.S, so delaying the U.S economic recovery. (…)

Spillover effects:

India Joins Brazil to China in Efforts to Tighten Liquidity

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets. Bond yields and the rupee surged. (…)

Emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to aid their currencies as the prospect of reduced U.S. monetary stimulus curbs demand for emerging-market assets. Turkey’s central bank said yesterday it may raise interest rates at its meeting next week. (…)