NEW$ & VIEW$ (10 JULY 2013)



Interest rates on fixed 30-year mortgages rose for the ninth week in a row to average 4.68 percent in the week ended July 5, the Mortgage Bankers Association said. It was the highest level since July 2011 and a 10 basis point increase over the week before.

The surge in costs has been expected to push some undecided buyers into the market as they rush to lock in rates before they rise even more, but MBA’s seasonally adjusted gauge of loan requests for home purchases fell 3.1 percent, the second straight week of declines.

The Purchase Index decreased 3 percent from one week earlier.

  • And this from NBF Financial:

Mortgage refinancing activity has provided significant relief to U.S. households in the past year by reducing debt-servicing costs. We note that the drop in the effective mortgage rate between Q1 2012 and Q1 2013 was responsible for most of the $52 billion saving in interest payments. Unfortunately, the recent surge in interest rates has led to a precipitous decline in refinancing activity.

As today’s Hot Chart shows, volume applications for refis fell to a two-year low last week. We think that there is more downside potential in the weeks ahead. That’s because the recent backup in the 30-year mortgage has pushed the market rate (currently at 4.61% according to above the effective interest rate on mortgage debt currently outstanding. As shown, this is the first such occurrence in almost five years (autumn of 2008).



Surprised smile  Just a reminder!






China Trade Data Show Weakness

China posted a surprise Confused smile drop in exports in June amid slack global demand, revealing further weakness in a driver of growth for the world’s second-largest economy.

China’s key export sector shrank 3.1% in June compared with a year earlier, down from 1% year-on-year growth in May and the first contraction in a non-holiday month since the height of the financial crisis in November 2009. Imports fell 0.7% year-on-year, pointing to weak demand at home as well as abroad.

Exports to a debt-ridden Europe slumped 8.3% year-on-year in June, and sales to the U.S. were down 5.4%.

Coming after a raft of disappointing data in April and May, June’s weak trade results add to fears that economic growth in the second quarter has continued to slow. (…)

Even as growth edges perilously close to the government’s 7.5% target for the year, Mr. Li — who holds the reins on China’s economic policy – reiterated his commitment to steer clear of any fresh stimulus.


FT Alphaville has this chart:

China June 2013 trade from 2005 - SocGen

And this one from Bloomberg Briefs’ Michael McDonough:

china gdp forecast chart

IMF View Hits Emerging Markets Investor fears that the end of easy money is at hand are ricocheting around the globe. In the latest fallout, the International Monetary Fund trimmed its global-growth forecast.


China Sneezes, U.S. Shrugs From the perspective of the U.S., a slower China is arguably a good thing.

(…) America’s exposure to Chinese demand is limited. Goldman Sachs calculates that companies in the S&P 500 directly attribute a mere 5% of revenue to emerging markets, and just 1% to China.

That might understate the figure somewhat, as companies break down revenue into catch-all overseas categories such as Asia-Pacific that might include China along with Japan and others. And while China isn’t the biggest chunk of revenue, it has been an important source of revenue growth. Still, U.S. shares have mostly performed well over the past two years while China’s stumble has played out, a sign China’s influence on U.S. companies is muted, at least compared with the impact of the Fed’s stimulus.

Meanwhile, a slowing China means lower global demand and more room for the Fed to keep the monetary taps open. Import costs from China, America’s biggest supplier of overseas goods, actually fell 1% in the year ending May. (…)

And as the world’s leading importer of oil, iron ore and copper, a booming China has a way of inflating everyone else’s input costs. With China’s new leaders pushing for an end to the building boom, the opposite is true, with many key commodities, especially metals, well below their highs. ‪That’s good for U.S. consumers and companies that rely on raw materials. (…)


S&P Cuts Italy Rating

S&P lowered Italy’s rating to BBB, two levels above junk territory, from BBB+. The outlook is negative.

The ratings firm said its downgrade reflects its view of a further worsening of Italy’s economic prospects coming on top of a decade of stagnation, where real growth averaged a negative 0.04%.

S&P noted that Italy’s economic output in the first quarter was 8% lower than in the last quarter of 2007 and continues to fall.

The firm lowered its gross domestic product forecast for the year to negative 1.9%, down from a negative 1.4% forecast in March and a forecast for 0.5% growth in December 2011.

S&P expects 2013 per capita GDP will be an estimated €25,000 ($33,000), which is somewhat below 2007 levels.

S&P said Italy’s low growth stems in large part from rigidities in the country’s labor and product markets. (…)

The firm expects net general government debt—at 129% of GDP as of the end of 2013—to be among the highest of all rated sovereigns. (…)

Italy’s Industrial Output Rises Less Than Forecast in May

Production rose 0.1 percent from April, when it fell 0.3 percent, national statistics office Istat said in Rome today. In May, output fell an annual 4.2 percent on a workday-adjusted basis, Istat said. (Chart from BMO Capital)


French Industrial Output Declines Less Than Forecast: Economy

French production declined 0.4 percent after a 2.2 percent surge in April, national statistics office Insee said in Paris today.

French manufacturing output has gained 0.6 percent over the past three months, bolstered by a 5 percent increase in production of transport materials and a 8.1 percent jump in refining, Insee said.

High five That was for May. Here’s the June preview courtesy of Markit:

Latest data signalled an easing of the downturn in the French manufacturing sector during June. The headline Purchasing Managers’ Index® (PMI®) registered 48.4, up from 46.4 in May. Although remaining below the 50.0 mark for a sixteenth consecutive month, the latest index reading was the highest in this sequence.

Boosting the level of the PMI in June were slower declines in both output and new orders. The latest drop in production was only modest, reflecting a similar easing in the pace of contraction of new work to the weakest since February 2012. This was despite export sales decreasing at a slightly faster rate. Meanwhile, backlogs of work at French manufacturers remained broadly unchanged in June.



The dollar’s strength against the yen, euro and Venezuelan bolivar is contributing to a projected 1 percent decline in second-quarter earnings for nonfinancial companies in the Standard & Poor’s 500 Index, the second-worst performance since 2009. Analysts see at least three more quarters of weakening for the yen and euro, cutting the dollar value of goods from Tiffany & Co. trinkets to Delta Air Lines Inc. tickets sold overseas. (…)

The yen has weakened by about 21 percent against the dollar since Oct. 31, when Japanese Prime Minister Shinzo Abe started a campaign to lower the currency to spur the country’s economy. The euro declined 6.3 percent since Feb. 1, and Venezuela devalued the bolivar by 32 percent on Feb. 8 in its government’s fifth such move in nine years.

Companies with most of their sales outside the U.S. were hurt most, based on the estimates compiled by Bloomberg. Per-share earnings sank an average 17 percent on a 3.5 percent sales drop among about two dozen S&P 500 firms that get at least half their revenue in the Asia-Pacific region. (…)

More on that from NBF Financial:

The likeliest headwind on top-line will come from foreign markets, where sales of S&P 500 companies generate about one-third of their profits. In Q1, receipts from the rest of the world of all U.S. corporations were down 2.9% from Q4, a decline that explains much of the weakness in overall revenues. The evidence available for Q2 suggests continued softness. As today’s Hot Chart shows, two months into the quarter U.S. export prices were down 4% annualized from Q1, a weakness exacerbated by USD appreciation. Though import prices were also softer, U.S. terms of trade (the ratio of export to import prices) were still down 1% on the quarter, the weakest showing in 1½ years.


Rising rates are typically a boon for banks because they increase the amount that they can earn on their loans. They often also accompany an improving economy, raising the potential volumes. But in the run-up to second-quarter earnings, which kick off on Friday, concern has arisen about the effect that rising rates will have on banks’ securities holdings. For now at least, most investors seem to fall into the pro camp. But they would be advised to remember that there is more to banking than interest rates and securities holdings.


The Coming Arctic Boom

As the Ice Melts, the Region Heats Up. Excerpts from a July 2013 Foreign Affairs article written by Scott G. Borgerson. Good read.

The ice was never supposed to melt this quickly. (…) In 2007, the Intergovernmental Panel on Climate Change estimated that Arctic summers would become ice free beginning in 2070. Yet more recent satellite observations have moved that date to somewhere around 2035, and even more sophisticated simulations in 2012 moved the date up to 2020. Sure enough, by the end of last summer, the portion of the Arctic Ocean covered by ice had been reduced to its smallest size since record keeping began in 1979, shrinking by 350,000 square miles (an area equal to the size of Venezuela) since the previous summer. All told, in just the past three decades, Arctic sea ice has lost half its area and three quarters of its volume. 

It’s not just the ocean that is warming. In 2012, Greenland logged its hottest summer in 170 years, and its ice sheet experienced more than four times as much surface melting as it had during an average year over the previous three decades. That same year, eight of the ten permafrost-monitoring sites in northern Alaska registered their highest-ever temperatures, and the remaining two tied record highs. (…)

The region’s melting ice and thawing frontier are yielding access to troves of natural resources, including nearly a quarter of the world’s estimated undiscovered oil and gas and massive deposits of valuable minerals. Since summertime Arctic sea routes save thousands of miles during a journey between the Pacific Ocean and the Atlantic Ocean, the Arctic also stands to become a central passageway for global maritime transportation, just as it already is for aviation. (…)

Most cartographic depictions conceal the Arctic’s physical vastness. Alaska, which U.S. maps usually relegate to a box off the coast of California, is actually two and a half times as large as Texas and has more coastline than the lower 48 states combined. Greenland is larger than all of western Europe. The area inside the Arctic Circle contains eight percent of the earth’s surface and 15 percent of its land. 

It also includes massive oil and gas deposits — the main reason the region is so economically promising. (…) Initial estimates suggest that the Arctic may be home to an estimated 22 percent of the world’s undiscovered conventional oil and gas deposits, according to the U.S. Geological Survey. These riches have become newly accessible and attractive, thanks to retreating sea ice, a lengthening summer drilling season, and new exploration technologies. 

Private companies are already moving in. Despite high extraction costs and regulatory hurdles, Shell has invested $5 billion to look for oil in Alaska’s Chukchi Sea, and the Scottish company Cairn Energy has invested $1 billion do the same off the coast of Greenland. Gazprom and Rosneft are planning to invest many billions of dollars more to develop the Russian Arctic, where the state-owned companies are partnering with ConocoPhillips, ExxonMobil, Eni, and Statoil to tap remote reserves in Siberia. (…)  Moreover, [the fracking] boom has also reached the Arctic. Oil fracking exploration has already begun in northern Alaska, and this past spring, Shell and Gazprom signed a major deal to develop shale oil in the Russian Arctic.

Then there are the minerals. Now, longer summers are providing additional time to prospect mineral deposits, and retreating sea ice is opening deep-water ports for their export. The Arctic is already home to the world’s most productive zinc mine, Red Dog, in northern Alaska, and its most productive nickel mine, in Norilsk, in northern Russia. (…)

Alaska has more than 150 prospective deposits of rare-earth elements, and if the state were its own country, it would rank in the top ten in global reserves for many of these minerals. And all these assets are just the beginning. The Arctic has only begun to be surveyed. Once the digging starts, there is every reason to expect that, as often happens, even greater quantities of riches will be uncovered.

The coming Arctic boom will involve more than just mining and drilling. The region’s Boreal forests of spruces, pines, and firs account for eight percent of the earth’s total wood reserves, and its waters already produce ten percent of the world’s total fishing catch. Converted tankers may someday ship clean water from Alaskan glaciers to southern Asia and Africa. (…)

As the sea ice melts, once-fabled shipping shortcuts are becoming a reality. (…) Although the Northern Sea Route has a long way to go before it siphons off a meaningful portion of traffic from the Suez and Panama Canals, it is no longer just a mariner’s fantasy; it is an increasingly viable seaway for tankers looking to shave thousands of nautical miles off the traditional routes that go through the Strait of Malacca and the Strait of Gibraltar. It also provides a new export channel for warming farmlands and emerging mines along Russia’s northern coast, where some of the country’s largest rivers empty into the Arctic Ocean. (…)


NEW$ & VIEW$ (4 JULY 2013)

Drop in Exports Augurs Growth Slowdown

Exports fell by a seasonally adjusted 0.3% to $187.06 billion in May from a month earlier as demand from key trading partners including China faltered, while imports rose 1.9% to $232.09 billion, the Commerce Department said Wednesday. As a result, the nation’s trade gap widened 12% to $45.03 billion.

The recent weakness in exports represents a new headwind for the U.S. economy, primarily due to a prolonged recession in Europe and China’s slowdown from its previous breakneck growth rate. Exports, which helped power the early stages of the economic recovery, had supported U.S. growth until a year ago.

U.S. exports are unchanged during the last 3 months. Meanwhile, non-petroleum imports are up 1.3% or 5.3% annualized, indicating continued good domestic demand.

Confused smile The ISM index of new export orders rose from 51.0 to 54.5 in June. However, Markit’s PMI report for the same month indicated that new export orders contracted at a faster rate with the index falling from 49.8 to 46.3, the sharpest rate of contraction since August 2009. Go figure!

Given recent trends around the world, I would go with Markit’s reading.

Fingers crossed  U.S. Exports to Europe Signal Turnaround As Euro-Zone Recession Abates

Exports of U.S. goods to the European Union were down just 1.6% in May from the same month in 2012, the smallest year-over-year decline in the past 10 months, the Commerce Department said Wednesday.

Exports to the 17-nation euro zone were flat from a year earlier in May as increased shipments to Italy, Spain and the Netherlands helped offset declines in exports to Germany and France.

ISI warns that May’s worse-than-expected trade report could knock as much as –0.8% of their prior estimate of +2.0% for Q2 real GDP. Add that U.S. vehicle production and construction spending seem to be flattening and GDP expectations could decline abruptly in coming weeks. Bad news = good news?

And this:


Surprised smile  U.S. ISM Nonmanufacturing Index Deteriorates To Three-Year Low


The Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) fell to 52.2 during June from 53.7 in May. This latest level was the lowest since February 2010 and disappointed consensus expectations for 54.2. Since the series’ inception in 1997 there has been a 75% correlation between the level of the nonmanufacturing composite index and the q/q change in real GDP for the service and the construction sectors.

Haver Analytics calculates a composite index using the ISM nonmanufacturing and the ISM manufacturing sector index released Monday. The June figure fell to 52.0, the lowest level since January 2010. During the last ten years there has been a 74% correlation between the composite and the quarterly change in real GDP.

imageLast month’s decline in the nonmanufacturing index reflected lower readings of business activity (51.7), Pointing upnew orders (50.8) and supplier deliveries (51.5), suggesting quicker delivery speeds. The employment component rebounded to 54.7, its highest level since February.

The prices index also recovered modestly to 52.5, its highest level since March. An improved nineteen percent of respondents reported higher prices while a lessened 7% reported them lower.

(Bespoke Investment)

All leading to that?


Confused smile Health Law Penalties Delayed

The Obama administration said it is delaying penalties for large employers who don’t provide health-insurance coverage to workers under the federal health-care law for 2014, the first year the provision was set to take effect.

The law, passed in 2010, requires companies with the equivalent of 50 or more full-time workers to offer health benefits starting on Jan. 1—or pay a penalty of at least $2,000 per employee. The delay, announced by the Treasury Department in a blog post Tuesday, means that penalty won’t kick in until 2015. (…)

The decision follows media reports that companies had already cut back on some workers’ hours to avoid exposure to penalties under the new health-care law. Those who work fewer than 30 hours a week aren’t counted as full-time employees, according to the law.

Fed’s shift to exit gives ECB headache
Euro rate-setters see renewed signs of financial fragmentation


Among the worries specific to the currency bloc’s rate-setters are renewed signs of financial fragmentation, with the rise in borrowing costs steeper in the EU periphery than in the core.

The German government’s borrowing costs are up by less than 50 basis points since the beginning of May. The equivalent yields on 10-year Italian and Spanish debt are 75 and 70 basis points higher, though spreads with Bunds remain far narrower than at the height of the sovereign debt crisis last summer. Borrowing costs in Portugal have soared above 7 per cent for the first time this year.

Borg Raises Swedish Jobless Forecast Amid Slow Recovery

Sweden predicted higher unemployment this year while keeping estimates for economic growth little changed as the euro-area crisis weighs on a recovery in the largest Nordic economy.

The economy will expand 1.3 percent this year and 2.1 percent in 2014, compared with April forecasts of 1.2 percent and 2.2 percent, the government said in a statement handed out today in Visby, Sweden. Unemployment will rise to 8.4 percent this year, versus an 8.3 percent April forecast.

Sweden’s exports, which account for about half of its $540 billion economy, have fallen as the euro-area struggles with a recession.

Exporters have also been reeling from a strengthening currency, which rose 31 percent against the euro from the end of 2008 through the middle of March this year as investors poured funds into Sweden’s AAA rated bonds backed by one of Europe’s lowest public debt.

Poland Cuts Rates to Record as Economy Outlook Ends Easing


Poland has cut borrowing costs by 2.25 percentage points since November as the economy slowed. Since a four-year low in the first quarter, retail sales unexpectedly rose, manufacturing expanded and business confidence in Germany, Poland’s biggest export market, improved for a second month in June.

The worst is over for the Polish economy,” Belka told reporters at a news conference in Warsaw. “We are now going to see a gradual recovery and the end of the easing cycle is a certain expression of the MPC’s optimism.”



Shadow Bank Assault Backfires as Rates Lure Cash


China’s crackdown on shadow banking is backfiring as a plunge in stocks prompts individual investors to pump increasing amounts of cash into wealth management products that offer yields more than double the deposit rate.

A record 1,137 of the investment plans were sold by about 70 banks in the last two weeks, almost 50 percent more than the similar period ended June 14, according to Benefit Wealth, a Chengdu-based consulting firm tracking the industry since 2007. China Minsheng Banking Corp. (1988), the nation’s first privately owned lender, last week sold a 35-day product with an annualized yield of 7 percent. (…)

The outstanding amount of wealth management products rose by 500 billion yuan ($82 billion) to 13 trillion yuan in the first five months of this year, accounting for 16 percent of China’s deposits, according to estimates published by Fitch Ratings on June 10. This compares with a 4 trillion yuan increase for all of last year, the rating company said. Products linked to bonds and money market investments were offered at an average yield of 5.11 percent last week, up 96 basis points from a month earlier, according to Benefit Wealth. China’s one-year benchmark deposit rate is 3 percent. (…)

China Suspends PMI Data in Added Hurdle for Scrutiny of Economy

China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large number of responses.

“We now have 3,000 samples in the survey, and from a technical point of view, time is very limited — there are many industries, you know,” Cai Jin, vice president of the China Federation of Logistics & Purchasing, which compiles the data with the National Bureau of Statistics, told reporters today in Beijing.

The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. The manufacturing Purchasing Managers’ Index also omitted readings on export orders, imports and inventories without any explanation from the government.

The logistics federation increased the number of companies in its manufacturing survey to 3,000 from 820 starting with January’s reading and also regrouped the industries into 21 categories from 31.

Yesterday, a person involved in producing a set of data on the country’s steel industry said that the release was suspended after the statistics bureau decided to change how the figures are compiled.

Chinese Shipbuilder Bows to Demand Slump

A major Chinese shipbuilder has laid off about 40% of its workforce in recent months, in a sign that China Inc. is under increasing strain from the slowdown in the world’s No. 2 economy.

Lei Dong, secretary to the president of China Rongsheng Heavy Industries Group Holdings Ltd., said the company has let go of about 8,000 people, of whom more than half were subcontracted workers and the remainder full-time Rongsheng employees. He said there are currently about 12,000 employees at the shipbuilder, which is based in Rugao, Jiangsu province, north of Shanghai.

Mr. Lei said in an interview that the layoffs weren’t a sign of financial trouble at the Hong Kong-listed company but rather the result of a restructuring geared to making more-specialized vessels used in the offshore oil and gas industry. Rongsheng’s traditional business is building bulk carriers designed to carry products such as iron ore.

China’s shipbuilding industry is among a range of businesses—from autos to steel—plagued by overcapacity. (…)


China’s official unemployment level, which analysts take with a grain of salt, currently stands at 4.1%, unchanged since the third quarter of 2010.

But layoffs appear to be mounting at some of China’s smaller private-sector firms, according to labor experts, as a number of companies in the export powerhouse provinces of China’s southeast either close down or move production overseas in response to rising labor costs. In a sign of the pressures employers face, China Labour Bulletin, a Hong Kong-based labor group, recorded 201 cases of labor disputes in China during in the first four months of 2013, almost double the number of cases in the same period last year.

According to financial filings, thousands of jobs also have vanished in China’s solar-components sector, which is dominated by nonstate players. (…)

While Rongsheng isn’t state-owned, it has benefited from the sort of official support typically reserved for state companies. (…)


Here’s a good leading indicator courtesy of Ed Yardeni and updated for the latest PMI. S&P 500 revenues are not about to reaccelerate. The YoY rate of growth averaged +2.5% in the last 4 quarters. It was but +1.3% in Q1’13. Tough to raise margins in such conditions. Yet, EPS estimates are +3.8% YoY in Q2, +15.2% in Q3 and +26.7% in Q4. These estimates keep being ratcheted down but only marginally.



According to Standard & Poors, 22 companies have released Q2 (off-fiscal) results: 14 beat, 7 miss and 1 met.

Share buybacks have helped boost per share earnings in recent years as the number of o/s shares declined in 2011 and 2012. This “artificial” booster has now stalled as Factset reveals:

The first chart shows aggregate common shares outstanding in the S&P 500 using a rolling universe and a universe of only the companies that were in the index throughout the time series. The latter view is intended to isolate the trend in share count from constituent changes. The number of companies included in this fixed universe is 326.


Changes in shares o/s have varied considerably from sector to sector as per this ISI chart:


It is rather interesting to see that companies seem to have learned from their excesses of 2007, in spite of much more supportive financial conditions.



Corporations are also shy of increasing capex (look at the ex-energy data).


How can you grow EPS in a sustained fashion if you don’t reinvest in your business (capex or buybacks) and you hoard huge amount of cash which, in reality, provides a negative real rate of return and dilutes returns on equity?

Last week, CITI reported that it was “shocked” by the surge in negative earnings preannouncements for the second quarter, now running 7-to-1 versus positive preannouncements. (John Hussman)



McKinsey’s June 2013 global business survey confirms that North America (read the USA) is the only region where business conditions have improved lately. Everywhere else, conditions have deteriorated, even in the Eurozone where things seem to have stabilized at a very low level. In the U.S., 62% of respondents said that conditions improved in Q2. Could that be a prelude to positive earnings surprises?


Sarcastic smile  New Zynga CEO Don Mattrick to get pay package worth about $50-million


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NEW$ & VIEW$ (1 JULY 2013)

Manufacturing Slows Across Asia

Economies across Asia, including China, showed slowing growth or contraction in manufacturing activity, signaling the region isn’t yet feeling the benefits of renewed strength in the West

(…) In South Korea, manufacturing contracted for the first time in five months in June and exports fell for the first time since February—though an even larger fall in imports kept Seoul’s trade balance in surplus.

HSBC’s PMI for Indonesia fell to its lowest level in four months, while a gauge for Taiwan showed manufacturing contracting for the second straight month. Vietnam’s June PMI fell sharply to hit its third-lowest reading ever.

Only India and Australia bucked the trend, but with caveats: HSBC’s PMI for India rose to 50.3 from 50.1—far below readings last year that were regularly in the mid- to upper-50’s. An Australian manufacturing gauge showed improvement but remained in contractionary territory, according to data from the Australian Industry Group. (…)

(China PMI is covered separately)

China’s Cash Crunch Eases

Interbank interest rates eased in China Monday, but they are expected to stay high until later this month as Beijing tightens its grip over risky lending.

Euro-Zone Jobless Rate Hits High

The European Union’s official statistics agency Monday that the proportion of the workforce without jobs rose to 12.1% in May from 12.0% in April to reach its highest level since records began in 1995. In the U.S., the unemployment rate stood at 7.6%.

As of May, 19.2 million people were without jobs in the euro zone, up 67,000 from April and 1.344 million from May 2012. The unemployment rate among people aged 24 or under was much higher, although it fell to 23.8% from 23.9% in April.


French Car Market Shrinks Again

France’s car market shrank sharply again in June, bringing the decline in registrations of new cars to 11% for the first half of the year, with the country’s auto makers’ association warning of only a slight improvement by the end of the year.

The Comité des Constructeurs Français d’Automobiles said the French car market will likely contract 8% this year, to its lowest level since 1997, compared with an earlier forecast of a decline of roughly half that for 2013.

Euro area annual inflation up to 1.6%

Euro area annual inflation is expected to be 1.6% in June 2013, up from 1.4% in May, according to a flash estimate from Eurostat, the statistical office of the European Union.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in June (3.2%, stable compared with May), followed by energy (1.6% compared with -0.2% in May), services (1.4% compared with 1.5% in May) and non-energy industrial goods (0.7% compared with 0.8% in May).


BOJ Beat: Five Takeaways From Tankan Survey  The Bank of Japan’s closely-watched tankan survey of corporate sentiment showed that the mood among businesses improved sharply in the three months to June after the central bank introduced an aggressive easing policy in April.

Wary Investors Turn to Cash

Recent market turmoil is pushing more investors into cash. Bond and stock mutual and exchange-traded funds saw outflows of $19.96 billion in the week ended Wednesday.

That’s the biggest outflow since August 2011, as the euro-zone debt crisis was intensifying and worries about the U.S. debt ceiling were coming to a head.

Some of the money went into money-market funds, which took in $5 billion during the week, according to Lipper. It’s likely that billions more flowed into cash or directly into short-term debt, said Matthew Lemieux, a senior research analyst at Lipper. The WSJ Dollar Index rose 1.6% in the period.

The latest fund-flow data captures the tail end of what’s been the biggest quarterly selloff in U.S. Treasurys since the fourth quarter of 2010. Ten-year Treasury yields have surged from a 2013 low of about 1.6% on May 1 to a peak of 2.667%, the highest since August 2011. (…)

Over the last four weeks, about $11.4 billion have come out of high-yield corporate bond funds that report weekly. That’s the largest of any four-week period tracked by Lipper.

Investment-grade corporate bond funds saw $2.32 billion exit in the last week, the second-largest outflow on record. (…)

Number of the Week: U.S. Oil Boom Affecting Global Prices The U.S. oil boom is finally affecting global energy prices — but don’t expect cheap prices at the pump as a result.

The U.S. pumped 6.5 million barrels a day of oil last year, according to the Energy Information Administration, the most since the mid-1990s, and production has continued to surge; April’s figure of 7.4 million barrels per day marked the best month in more than two decades. (Other sources suggest an even bigger increase.) (…)

The industry wasn’t expecting the huge surge in production from North Dakota, so companies didn’t have the pipelines in place to handle all the new oil. So rather than flow into the global market, much of the oil stayed in the middle of the U.S. That pushed down the price of West Texas Intermediate (WTI), the benchmark price for mid-continent oil, but had a much smaller effect on Brent crude, the benchmark price for most oil outside North America. In late 2012 and early 2013, WTI traded for more than $20 a barrel less than Brent.

Unfortunately for American drivers, a large percentage of U.S. gasoline is refined from oil priced off of Brent, not WTI. As a result, even as American crude oil prices remained moderate, prices at the pump stayed high.

Now, however, the gap between WTI and Brent is starting to narrow, as a new report from the Energy Information Administration makes clear. The industry has expanded pipeline capacity and found other ways, such as rail cars, to get oil from the middle of the country to major demand centers on the coasts. Meanwhile, coastal refineries are shifting to use more domestic crudes, leading to lower demand for Brent. The result: The gap between the two prices has narrowed to under $10 per barrel. (…)


While I was away salmon fishing, U.S. equities rose 2.2%, feeding on Fed officials’ generally more dovish comments and mixed economic news, all suggesting that the fed would continue to supply the financial heroin investors now believe they desperately need.

Here’s the week’s recap:

Orders excluding aircraft & parts, a measure of “core” business investment, gained 1.1% (3.2% y/y), the third consecutive month of a similar increase.


New home sales increased 2.1% (29.0% y/y) last month to 476,000 (AR) from a revised 466,000 during April, initially reported as 454,000. (…)

Pointing up  Note that the recent strength is primarily in the Midwest. Sales of new houses in the three other regions, including the important South and West regions (78% of all new home sales in the last 3 years) were essentially unchanged since March:


Similar trends are seen in pending home sales which are +1.1% YoY in the West, the weakest of all regions, while PHS are strongest (+22.2% YoY) in the Midwest.

Home price strength is building throughout the country. The seasonally adjusted Case-Shiller 20 City Home Price Index rose 1.7% (12.0% y/y) during April following its upwardly revised 1.9% March jump, earlier reported as 1.1%. The 3-month annualized rate of increase of 21.5% was a record for the series which dates back to 2000. Home prices in the narrower 10 city group rose 1.8% in April (11.6% y/y). 

Home prices have risen in each metropolitan area with the strongest gains in San Francisco, Las Vegas, Phoenix, Atlanta, Detroit, Los Angeles and Minneapolis. Lagging the rest of the country have been home price gains in New York, Cleveland, Washington D.C., Dallas, Boston and Chicago.

Confused smile  Detroit?  image

The Mortgage Bankers Association reported that total applications for a home mortgage fell 3.0% w/w, extending the declines of the prior six weeks. The latest level was down by one-third since early-May. Last week’s decline reflected a 5.2% drop (-38.4% y/y) in applications to refinance an existing loan. Refinancings were down 41.8% since early May. Home purchase mortgage applications increased 2.1% last week (15.9% y/y), up 26.7% since year end.

Here’s a close up of purchase apps courtesy of BofA Merrill Lynch:


Real GDP growth for Q1’13 was revised lower to 1.8% (1.6% y/y) from last month’s estimated 2.4% rise. Expectations were for a 2.4% gain. Growth in consumer spending and business investment were significantly reduced, but residential investment growth was raised.

Personal income regained its footing in May with a 0.5% gain; April’s move, originally reported as down very marginally, was revised to a 0.1% rise. Year-on-year, income was up 3.3%, compared to the 2.8% reported last month for April. 

Wages and salaries were up 0.3% in May (3.7% y/y), following 0.1% in April, which was originally reported as flat. The stronger income total came from gains in dividend income, 1.6% on the month (8.0% y/y), interest income, 1.9% m/m (2.3% y/y) and transfer payments, which rebounded by 0.8% m/m (3.4% y/y) after April’s 0.6% decline. (…)

Personal consumption expenditures also regained their footing in May, increasing 0.3% (2.9% y/y) after April’s 0.3% fall, a revision from 0.2% reported a month ago. The result was in line with the Consensus forecast of 0.3%. Durable goods outlays picked up by 0.9% (6.7% y/y), after two monthly decreases; motor vehicle purchases in particular were up 1.0% after edging lower for three months.(…)

Pointing up  Note that while disposable income was up 0.6% during April-May and +0.8% (+3.2% a.r.) during the last 3 months,  personal expenditures were unchanged in April-May and up only 0.2% (+0.8% a.r.) during the last 3 months.


The personal saving rate rose to 3.2% in May, and April’s figure was revised to 3.0% from 2.5% in the initial report. It was 3.9% in May 2012.

The PCE chain price index increased 0.1% in May (1.0% y/y) after April’s 0.3% decline. Energy goods and services prices rose 0.2% after their drop in April of 4.5%; Gasoline prices continued lower modestly, but other energy costs rose markedly, especially natural gas for household utilities, which was up 2.4% (16.6% y/y). Elsewhere, durable goods prices were down 0.1% (-1.9% y/y) while apparel prices rose 0.2% (unchanged y/y). Food prices decreased 0.2% (+1.0% y/y) while services prices also were up 0.2% (1.8% y/y), including the natural gas item. The overall price index excluding food & energy was up 0.1% (1.0% y/y).

Adjusted for price changes, disposable income gained 0.4% in May (1.1% y/y) while real spending rose 0.2% (1.8% y/y).

  • Eurozone Retail PMI Rises 2.3 To 49.1

The eurozone retail sector continued to record falling sales in June, Markit’s retail PMI® data showed. That said, the month-on-month drop in sales revenues was the slowest since March 2012, having eased for the third month in a row. Sales continued to fall sharply on an annual basis, however, and employment in the sector was cut for the fifteenth month in succession.


Germany’s retail sector continued to recover in June, registering a second straight month of rising sales and the fastest rate of growth since February 2012. Prior to May, retail turnover had declined four times in five months.

Meanwhile the eurozone’s second-largest economy, France, posted a decline in sales for the fifteenth month in a row in June. The rate of decline slowed sharply, however, to the weakest for a year. Italy’s retailers continued to experience a steep downturn in sales, and the rate
of decline reaccelerated in June having been the slowest in eight months in May.


Retail employment in the eurozone declined for the fifteenth month running in June. The rate of job shedding was modest, and broadly in line with the trend over the current sequence. Germany continued to register growth in retail workforces, as has been the case since June 2010.


Demand for industrial commodities continue to dwindle.

Consider the chart below of the S&P GSCI Industrial Metals Index:

This index tracks the price of industrial metals like copper, zinc, aluminum, nickel, and lead. The S&P GSCI Industrial Metals Index continuously declining suggests these metals aren’t being used as much—factories are not operating at their full potential in the global economy. (Michael Lombardi at Profit Confidential)

The Chicago Fed National Diffusion Index is once again hitting the –0.35 level. Thirty-three of the 85 individual indicators made positive contributions to the CFNAI in May, while 52 made negative contributions.


The Index itself is not at the ominous –0.70 level but nevertheless signals a weak economy and not one that is showing signs of improvement like the Fed is suggesting.


BTW, Fed misses are nothing new (chart from ISI)



ISI’s Company Survey Diffusion Index is rolling over. The consumer-related surveys were particularly weak last week, including the homebuilders which was the weakest.



The MNI China Business Survey fell to 53.7, from 56.7 in May. Both new orders and production are down and both current and future conditions are down. This confirms the HSBC survey for June.


Q2 earnings season officially begins July 8. Factset reports that a record high number and percentage of S&P 500 companies issued negative EPS guidance for Q2.

For Q2 2013, 87 companies have issued negative EPS guidance while 21 companies have issued positive EPS guidance. If 87 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 86, which was recorded in Q1 2013. If 21 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing negative EPS guidance for a quarter. The current record is 25, which was also recorded in Q1 2013.

These numbers are also well above the five-year averages for the number of companies issuing negative EPS guidance (66) and positive EPS guidance (40) for a quarter.


The percentage of companies issuing negative EPS guidance is 81% (87 out of 108). If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter. The current record is 77%, which was also recorded in Q1 2013.

On average, companies have issued EPS guidance that has been 18.0% below the mean EPS estimate. However, if Peabody Energy is excluded, the average difference between EPS guidance and the mean EPS estimate would be -6.2%. This number is below the 5-year average of -8.3%.

At the sector level, the Information Technology (+6) and Consumer Discretionary (+5) sectors have witnessed the largest increases in the number of companies issuing negative EPS guidance relative to their five-year averages. The Information Technology (-8) and Consumer Discretionary (-5) have also seen the largest decreases in the number of companies issuing positive EPS guidance for the quarter relative to their five-year averages.


High Percentage (80%) of Companies Issuing Negative Revenue Guidance

For Q2 2013, 55 companies have issued negative revenue guidance for the quarter and 14 have issued positive revenue guidance. As a result, 80% (55 out 69) of the companies that have issued revenue guidance for the quarter have issued negative guidance. If this is the final percentage for the quarter, it will mark the third highest percentage since 2006. The current record is 86%, which was recorded in Q4 2008. At the sector level, more than half (39) of the companies that have issued revenue guidance for the quarter are in the Information Technology sector. In this sector, 29 of the 39 companies (or 74%) that have issued revenue guidance have issued negative guidance.

Fiscal Year Guidance: Increase in Number of Companies Issuing Positive EPS Guidance since Q1

For the current fiscal year, 164 companies have issued negative EPS guidance and 88 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 65% (164 out of 252), which is below the percentage recorded at the end of March (69%).

Since March, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by four, while the number of companies issuing positive EPS guidance has increased by eleven. The Financials (+4), Consumer Discretionary (+3), and Health Care (+3) sectors saw the largest increases in the number of companies issuing positive EPS guidance for the current fiscal year since March 31.


For the current fiscal year, 92 companies have issued negative revenue guidance and 66 companies have issued positive revenue guidance. As a result, the overall percentage of companies issuing negative revenue guidance to date for the current fiscal year stands at 58% (92 out of 158), which is above the percentage recorded at the end of March (52%). Since March, the number of companies issuing negative revenue guidance for the current fiscal year has increased by seven, while the number of companies issuing positive EPS guidance has decreased by seven.

The Health Care sector saw the largest increase in the number of companies issuing negative revenue guidance (+7) and the largest decrease in the number of companies issuing positive revenue guidance (-6) for the current fiscal year since the end of March.

At the sector level today (with a minimum of 10 companies issuing guidance), the Consumer Discretionary (61%), Industrials (61%), and Health Care (60%) sectors have the highest percentages of companies issuing negative revenue preannouncements, while the Consumer Staples (57%) sectors has the highest percentage of companies issuing positive revenue preannouncements.

In summary

The estimated earnings growth rate for the S&P 500 overall for Q2 2013 is 0.8% this week, slightly below last week’s growth rate of 0.9%. On March 31, the Q2 earnings growth rate for the index was 4.2%. Eight of the ten sectors have witnessed a decline in earnings growth rates since that date, led by the Materials, Information Technology, and Industrials sectors. Only the Financials and Utilities sectors have seen increases in expected earnings growth rates since the start of the quarter.


Grant Williams “Call my bluff” piece on Fed “communications”, etc. This image gives you an idea:



NEW$ & VIEW$ (15 MAY 2013)

Lightning  Euro-Zone Recession Drags On Economic output contracted in the euro zone for a sixth-straight quarter, as a slight recovery in Germany failed to offset recessions in France and Italy.

Gross domestic product fell 0.2% in the first quarter from the final three months of 2012, according to a report Wednesday from the European Union’s statistics office Eurostat. In annualized terms, which is how the U.S. and some other countries report output, GDP fell 0.9%.

GDP fell 2.3%, in annualized terms, in the fourth quarter. The current downturn in the euro zone has now stretched for longer than the 2008-2009 recession, though the cumulative 1.5% drop in output since the summer of 2011 isn’t yet as severe as the nearly 6% that was sliced off of GDP four years ago. (…)

French GDP fell 0.7% in annualized terms from the fourth quarter due to drops in consumer spending and exports, its second-straight contraction.

(Chart from Bloomberg via Zerohedge)

The FT adds:

Italy, the bloc’s third-largest economy, saw GDP shrink 0.5 per cent in the first quarter, after a fall of 0.9 per cent in the fourth quarter, according to its national statistics office.  (…)

Germany, by contrast, managed to return to growth, but only barely. First-quarter GDP grew 0.1 per cent, up from a downwardly revised contraction of 0.7 per cent in the fourth quarter of last year, according to a preliminary estimate by the Federal Statistics Office.

Dutch GDP shrank 0.1 per cent and Spain has already reported a 0.5 per cent contraction in the first quarter.



That sighing sound you hear from China

… is strategists everywhere cutting their GDP forecasts.

China - Freight and investment to April 2013 - StanChart

China - Electricity and construction starts - StanChart

Li Signals Reluctance on Stimulus to Boost China Growth

“To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said. (…)

Thumbs up  Li’s strategy for growth includes a call to unleash private investment by simplifying bureaucratic procedures. “Private investors have money but no place to invest; they want to enter certain areas but they can’t find the way,” Li said. A company has to spend six to 10 months seeking approvals at 27 government departments to start a new investment project, he said.

The central government will delegate more power to local governments in approving new projects, he said. “Not every matter has to come to Beijing for approval,” he said.

Malaysia’s Growth Slows to Below 5% First Time in Seven Quarters

Gross domestic product rose 4.1 percent in the three months through March from a year earlier, after a revised 6.5 percent gain in the previous quarter, the central bank said in a statement in Kuala Lumpur today. That is lower than all 22 estimates in a Bloomberg News survey. The monetary authority kept its full-year growth forecast at as much as 6 percent. (…)

Surprised smile  Malaysian exports have fallen in four out of six months through March. (…) Net exports of goods and services slumped 36.4 percent in the first quarter from a year earlier, after falling 9.3 percent in the final quarter of 2012, today’s report showed.


One of the few reliable Chinese indicators ticks up in April. Total electricity consumption came in at +6.8% YoY in April, from +2.1% in March. This is the best number this year. It is better than the 2012 average of +5.5% and the +4.2% of Q1’13. Yet, the March-April average is but +4.4%, down from the 5.3% Jan-Feb average. The trend remains weak. Northern Trust’s view that “Negative economic surprises set the stage for improving sentiment” may just be wishful thinking (see chart below).

While I’m at it”:


Yesterday’s IP stats from the Eurozone seemed to cheer markets. Markit explains why we should be careful before rejoicing:

Eurozone industrial production rose surprisingly strongly in March, but divergent trends within the region and recent weak business surveys suggests there is scant evidence to suggest that the region is staging any sort of sustained industrial-led recovery.

Official data showed Eurozone industrial production rising 1.0% in March, well above expectations of a mere 0.4% increase, according to a Reuters poll. The March rise in production was the largest since July 2011, but was in part buoyed by a 3.8% surge in energy production. The upturn also masked worryingly strong variations within the single currency area: production surged 1.7% higher in Germany but fell by 0.9% and 0.8% in France and Italy respectively.


The upturn nevertheless pushes eurozone production 0.2% higher over the first quarter as whole, which compares well with a 2.1% decline in the fourth quarter. The data therefore bode well for GDP to show a significantly weaker decline than the 0.6% contraction seen at the end of last year, and even raises the possibility of the recession having ended.

However, any improvement or respite from recession looks likely to be short-lived, as the business surveys have already started signalling a renewed weakening.

Most importantly, Markit’s PMI data had indicated a German-led easing in the industrial sector’s woes earlier in the year, but have more recently signalled that the downturn deepened again at the start of the second quarter. The PMI surveys are now once again registering contraction in all major eurozone countries. Although some easing in the rate of decline was signalled for Italy, Spain, France and Greece, Germany saw the steepest deterioration for four months in April, contrasting with the growth seen in the region’s largest economy earlier in the year.


Fingers crossed  EUROPE’S BIG HOPE:

Crude Futures Down as Inventories Soar

(…) “The body language from Brent at the moment suggests a contract ready to take another look at the territory below $100/bbl,” they wrote. Confused smile


High five  However, the language from the Saudis is that $100 is the floor.

Mug  Pay rise of 3.4% agreed for German engineering workers
Deal will avert strike in country’s manufacturing sector

The two-phase wage increase will give workers a 3.4 per cent rise in July this year, followed by a further 2.2 per cent increase in May 2014. The whole agreement will last for 20 months.

If it is followed in the rest of German industry, the agreement should provide some eagerly awaited stimulus to domestic demand in Germany, given the initial rise of more than 3 per cent, compared with an inflation figure of just 1.15 per cent.

HSBC Plans Cost Cuts

HSBC, laying out its next three-year strategy, said it plans to achieve further cost cuts of $2 billion to $3 billion by 2016, including eliminating 14,000 more jobs.


Strong U.S. Dollar Keeping Import Prices in Check

The price of goods imported to the U.S. has fallen, on annual basis, in 11 of the past 12 months. While that reflects the declining cost of oil, it also indicates that an increasing value of the dollar is improving America’s purchasing power abroad. (…)

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.

The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.

Prices from China, the second-largest trading partner, are down 0.9% from a year earlier, and import costs from the U.K. have fallen 6.1% during that time.

Actually, most commodity prices are weak, leading to slower inflation across the world (e.g. 1.2% in Germany, 1.1% in Italy, 1.4% in Spain, 4.9% in India…)


S&P’s latest update to May 9 covers 453 companies: 66.5% beat and 25.4% missed. The late comers must have been shy to disclose their results: of the 48 companies that reported in the last week, only 46% beat and 48% missed. The miss rate has seriously risen as time went by: up to March 28, the miss rate was 21%; the following week, it was 28% and last week it jumped to 48%.

Curiously, earnings estimates for Q1’13 are now $25.96, up $0.18 from the previous week. Estimates for the next 3 quarters edged down but not enough to cut 2013 estimates which are now $109.94, up $0.05 from last week’s estimate.

Trailing earnings post Q1 should come in at $98.54, up 1.8% from 3 months ago but still below the $98.69 reached post Q2’12.

Quarterly sales are up only 1.4% YoY in Q1, down from 5.6% in Q4’12.


(…) The combination of wobbly fundamentals and zippy prices has murdered short sellers. If one had bought the 30 most shorted stocks in the S&P 500 at the start of the year, as measured by the proportion of total shares shorted, one would be up 28 per cent, 11 percentage points ahead of the index itself. Much of the outperformance has come from volatile and financially unsteady companies such as First Solar, Netflix, AMD and Best Buy. (…) (FT)

FYI from Bespoke Investment:


NEW$ & VIEW$ (3 MAY 2013)


Smile April Nonfarm Payrolls: +165K vs. consensus +145K, 138K previous (revised from +88K). Unemployment rate 7.5% vs. consensus 7.6%, 7.6% previous.

Storm cloud Freight Volumes Fall in April

imageNorth American shipment volume and overall freight expenditures both slumped in April, following strong showings in March. This month’s declines are significant because once again both the number of shipments and dollars spent have fallen below same month 2012 levels, and the
number of shipments is even lower than the April 2011 level.

Freight shipment volume dropped 3.5 percent from March to April, enough to reverse much of March’s gains. April shipments were 1.3 percent below 2012 figures, and 1.2 percent below 2011 levels.

Cass Information Systems processes more than $22 billion in annual freight payables on behalf of its clients. The Cass Freight Index is based upon the shipments of hundreds of Cass clients representing a broad spectrum of industries.

ECB Eases as Downturn in Europe Spreads

(…) Mr. Draghi repeated his long-standing view that the bloc’s economy, which has been mired in recession since the fall of 2011, will return to growth in the second half of this year. (…)

Mr. Draghi offered no reprieve to governments wanting to pause their fiscal belt tightening, which many analysts think is making their recessions worse. “Don’t unravel the progress that you have achieved,” he said.

He opened the door to more dramatic measures if needed to spur private-sector lending, such as facilitating purchases of pools of small business loans and a possible reduction in the bank’s deposit rate to negative territory.

The ECB held the rate it pays on deposits parked at the central bank at zero. But Mr. Draghi said he had an “open mind” on whether to make this rate negative, meaning banks would have to pay the ECB to deposit money.

The comment was a marked shift from two months ago, when Mr. Draghi warned of “unintended consequences” of moving into such “unchartered waters.”

A negative deposit rate would encourage strong banks to lend excess funds to other banks rather than simply park them at the ECB. But the move may also weaken bank profits and lead them to pass along the cost to depositors.

EU Paints Gloomier Picture for Economy

The 27-nation European Union economy will shrink by 0.1% in 2013, the EU’s executive said. Its winter forecast published in February had projected a 0.1% growth rate. The 17-member euro area will suffer a 0.4% economic contraction this year, while the earlier forecast was a 0.3% contraction.

EU economies to breach deficit limits  France, Spain and the Netherlands to all miss EU-mandated target

China Service Industries Expand at Slower Pace

The non-manufacturing Purchasing Managers’ Index fell to 54.5 from 55.6 in March, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement today in Beijing.

Dr Copper, ‘telling us the party’s over…’

India cuts rates to boost growth
Decision driven by slowdown in the economy

The Reserve Bank of India on Friday cut the repo lending rate by 25 basis points to 7.25 per cent, the third rate reduction since January, against a backdrop of disappointing economic growth and a gradual slowdown in inflation.


Moody’s update after 76% of S&P 500 companies reported. It’s tally reveals that earnings are up 3.6% YoY (+1.7% ex-financials). Significantly,

Corporate revenues have been stagnant. As derived from the 76% of the S&P 500 companies that have released first quarter 2013 results, their sales rose by an imperceptible 0.2% year-to-year. Worse yet, after excluding the S&P 500’s financial company members, sales dipped by -0.1%.


Profit margins have risen spectacularly in recent years, in large part because revenue growth far outpaced inflation. During the last 12 months, however, revenue growth has literally stalled, causing margins to edge down. The challenge to even maintain margins is getting huge. Moody’s goes on:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by us merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.



BTW: U.S. Trade Slumps in March

U.S. trade slumped in March, with imports falling faster than exports on lower shipments of Chinese goods and foreign oil.

U.S. exports fell by nearly 1% in March after growing 4.3% in 2012. Nearly all of the major export categories saw a decline. (Chart from Haver Analytics)

U.S. exports declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.


NEW$ & VIEW$ (2 MAY 2013)

Fingers crossed  Initial Jobless Claims: -18K to 324K vs. 345K consensus, 342K prior (revised).

Sad smile  U.S. Vehicle Sales Move Lower

After several months at the highs for the economic recovery, U.S. vehicle sales have begun to decline. Unit sales of light motor vehicles during April fell 2.3% m/m (+5.7% y/y) to 14.92M (SAAR) according to the Autodata Corporation. These sales compare to the recovery peak of 15.54M in November. Sales disappointed expectations for 15.3M according to Bloomberg.

Sad smile  U.S. Construction Spending Reverses Earlier Rebound

Reversals and revisions can change the picture of an economic series. Such was the case with the latest construction put in place numbers. Building activity fell 1.7% (+4.8% y/y) in March and reversed a 1.5% February rise. Moreover, it added to a 4.0% January decline which was double the last estimated drop. As a result, the level of construction activity was 4.1% lower than at yearend 2012.

Fed Steps on Gas as Inflation Slows

The Federal Reserve said it would press forward with an $85 billion-a-month bond-buying program and hinted it might even dial it up. The move comes amid a U.S. and global inflation slowdown.

(…) the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead. (…)

“Fiscal policy is restraining economic growth,” the Fed said bluntly about U.S. tax and spending policies aimed at short-term budget-deficit reduction. Fed Chairman Ben Bernanke has called on the Obama administration and Congress to agree to a budget plan that reduces deficits in the long run without cutting much right away while the economy is weak.

The global inflation slowdown is one of the more surprising developments confronting the Fed and other central banks, and has become more apparent in recent few weeks. (…)

The U.S. Commerce Department reported Monday that consumer prices rose just 1% in the 12 months ending in March, well below the Fed’s 2% target. In the 17-member euro zone, inflation hit 1.2% in April, the lowest rate in more than three years and also well below the ECB’s target of just under 2%. (…)

Several indicators suggest inflation pressures have receded in recent weeks. Futures prices for commodities, including oil, cotton, sugar and gold, are all down from a year earlier.

Sad smile  U.S. ISM Composite Factory Sector Index & Prices Weaken Further

The April composite index of manufacturing activity from the Institute for Supply Management slipped to 50.7 from an unrevised 51.3 in March. During the last ten years, there has been a 69% correlation between the ISM index and the q/q change in real GDP.

Leading the overall index down was a lower employment reading. The sharp decline to 50.2 brought it to nearly the lowest level of the economic expansion. During the last ten years there has been an 88% correlation between the employment index and the m/m change in factory payrolls. 

Also down sharply last month was the inventories series (46.5). Offsetting these declines were gains in supplier deliveries (50.9), a rise which indicated slower delivery speeds, production (53.5) and new orders (52.3). The new export orders index (54.0) also fell m/m but remained much higher than the November low of 47.0. 



Lightning  Alcoa Battling Aluminum Surplus

Alcoa Inc. said it will consider cutting up to 11% of its current smelting capacity as the U.S. aluminum giant tries to weather low prices for the industrial metal.

Aluminum prices have fallen by more than one third since 2011 due to a prolonged slump in the raw-aluminum market.

Russia’s United Co. Rusal PLC, the world’s largest producer of aluminum by volume, has already announced plans to reduce output by 300,000 tons, or 7% of production, in 2013, and permanently close 275,000 tons of capacity by the end of 2015.

(…) it is up to big aluminum makers outside China to cut production and aim for a total reduction of 1.5 million tons over the next three years, he said. “Industrywide, it should be a common agenda,” he said. Global production of raw aluminum reached 45.2 million tons in 2012, up 33% from 33.9 million tons in 2006.

Those cuts would be in addition to 568,000 metric tons, or 13%, of smelting capacity that the company currently has idle.

U.S. Case-Shiller Home Price Index Posts Stronger Increase

Home prices are generating improved upward momentum throughout the country. The seasonally adjusted Case-Shiller 20 City Home Price Index increased 1.2% (9.4% y/y) during February and built on a 1.0% January rise. The 3-month annualized rate of increase of 13.4% was the strongest since late-2005. Home prices in the narrower 10 city group rose 1.2% (8.6% y/y) in February.

Six Months After Sandy, Small Firms Struggle

Six months after Hurricane Sandy slammed into the Eastern Seaboard, thousands of entrepreneurs and small-business owners up and down the coast are struggling to get back on their feet.


Russell 2000 Back Below 50-DMA

The Russell 2000 is having an especially bad day today with a decline of just under 2%.  This puts the index on pace for its worst day since April 15th’s 3.78% decline.  Today’s decline has put the Russell 2000 back below its 50-day moving average as well.  More importantly, though, while the S&P 500 closed at an all-time high yesterday, the Russell 2000 made its second lower high since March 15th.  Not a good sign for smallcaps and the broad economy.

Is it time to sell in May and go away?

This is from Zacks Research which clear shows its bias (my emphasis), before yesterday’s drop:

For starters, each May is different. And there have been some VERY profitable summers in years past. So it’s never wise to just take this saying at face value and truly walk away from the markets. (In fact, if things looked really bad, then it’s best to short the market).

The resilience of stocks to be pressing all-time highs after 3 straight weeks of soft economic reports (including a scary showing for Chicago PMI in contraction territory) is making it hard to say what exactly would make stocks go lower at this stage. Meaning that investors seem quite comfortable with the ebb and flow of Muddle Through Economic growth. And as long as the Fed is on the side of investors, with all that QE, then no reason to walk away.

Doug Short remains objective:

Market lore is full of monthly associations: The January Effect, Sell in May and Go Away, Summer Rallies, the September Slump, Manic-Depressive October, December Rallies, etc.

The first chart shows the average monthly gains/losses, excluding dividends, since 1928 for all twelve months. May is one of the three months with a negative average. Incidentally, the monthly average of all months lumped together is 0.59%. So May has underperformed the mean by 0.73%.

The next three charts divvy up our 85-year period into three parts: 1928-1949, 1950-1981, and 1982-present. The rationale is that the first chart includes the Crash of 1929, Great Depression, WWII, and ends around the time of the secular market bottom in 1949. The second chart covers the cycle from the beginnings of the post-war rally through the Decade of Stagflation and market bottom in 1982. The third chart begins with the great Boomer market that followed and runs to the present.

May has been a performance laggard in two of the three timeframes and the worst performer in one of the three (1950-1981).

Lest the charts above give the false impression that May is a consistently poor performer, let’s close with a distribution of performance over the past 85 years.

Across the entire 85-year timeframe, May has an average of -0.14%. But if we exclude the three negative outliers, the average jumps to 0.59%, which is spot on the overall monthly mean. Pretty amazing!

Let’s hope May 2013 behaves more like it did in 1933 and not like one of those naughty negative outliers (or any of the red markers, for that matter).


NEW$ & VIEW$ (16 APRIL 2013)


The string of softer data continues:

The Empire State’s business conditions index declined to 3.05 in April from 9.24 in March.

The New York Fed survey is the first factory report released by regional Fed banks for April. (…) The Empire subindexes were generally weak but still expansionary.

The new orders index declined to 2.20 in April from 8.18 in March. The shipments index plunged to 0.75 from 7.76.

Despite weaker output, labor conditions improved sharply this month. The employment index more than doubled to 6.82 in April from 3.23 in March, and the workweek index jumped to 5.69 from 0. (Chart from Haver Analytics)

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo declined to 42 this month following an unrevised March reading of 44. Expectations were for an index reading of 45 in April. The latest was the lowest since November. Nevertheless, the index level remained up by three quarters versus one year ago. The index of single-family home sales fell to 45 while the index of sales during the next six months improved to 53. Also down m/m was the home builders index of traffic of prospective home buyers. It fell sharply m/m to 30, its lowest level since July.

  • ISI`s economic diffusion index has declined for a second week.
  • ISI`s company surveys and their diffusion indices fell again.



Slower China Growth Signals Days of Miracles Are Waning

After three decades of annual economic growth in China averaging around 10%, many industries are now experiencing less bling and more blah.

image(…) Retail sales growth last month slid to 12.6%, year on year, down from 15.2% at the end of 2012. Industrial production growth also faded in March, evidence that a late-2012 rebound could be losing steam. (…)

Shortly before he became president, Xi Jinping set the tone for a downshift with actions that appeared to equate indulgence with corruption. During a visit to Hubei Province, he shunned trappings of high office and stayed at a small hotel. His menu at one meal included just four dishes and one soup.

Mr. Xi’s humility has struck like religious canon. To avoid appearing corrupt, lower-ranking officials suddenly shun five-star hotels, as well as such delicacies as bird’s nest soup and even fruit, according to restaurant and hotel managers.

Less indulgence by officials “may be the largest factor” in dragging down first quarter growth, according to Lu Ting, China economist at Bank of America Merrill Lynch; 10 million of them carry government-issued credit cards that, on average, rack up annual spending of about $5,800, or a total of $58 billion, according to Shanghai research firm Emerging Asia Group.

One measure of the funk is a 94% price drop for the yellow-colored dao yu, or knife fish. Two years ago, one of the Yangtze River delicacies traded wholesale for more than $220. They now cost $13.

The new austerity also is deflating luxury markets for art, liquor, entertainment and clothing. (…)

Beijing hopes higher household incomes will trigger more personal consumption to rebalance the economy away from investment and exports. Consumption contributed 4.3 percentage points to China’s first quarter growth, compared with 2.3 percentage points from investment, said Sheng Laiyun, a spokesman for the National Bureau of Statistics. “Now we can say consumption has become the major driver of growth,” he said.

New restraint by formerly free-spending government officials should eventually channel more money into improving health care, education and other underfunded segments of the economy. The government has said it would raise social spending as a share of the budget.

But the immediate impact appears to be a drag on consumer spending, particularly at the top end. For the first time in 25 years, for example, banquet revenues fell during holidays at the start of 2013 compared with a year earlier, according to the Chinese Cuisine Association.

Demand appears to be shifting from gilded restaurants—with names like Mansion and Palace—to unpretentious-sounding places like Hefei’s Jinzhai Farm House. “If you don’t reserve here, you can’t get a table,” said owner Fan Ronghua.

China’s quick wealth fed hyper-expansion by the global luxury industry, which suddenly appears vulnerable. Only about a third of luxury shoppers surveyed this year by CLSA Asia-Pacific Markets said they would spend as normal during a sustained anticorruption campaign.

A decade ago, China’s top-earners mesmerized global marketers with their embrace of new and different experiences.

Today, nearly 62% of this group wished things “would stay the same” and more than half prefer staying home rather than attending parties, according to a survey by WPP PLC’s Young & Rubicam Group. “They’re feeling a lot of the hype was actually quite fake,” said Kaiyu Li, Y&R’s head of planning in China.

NBF Financial Sees Positives:


Analyst commentaries have been largely negative with regards to China’s Q1 GDP results which showed growth decelerating to 7.7% on a year-on-year basis, or 6.6% annualized on a seasonally-adjusted quarter-on-quarter basis. While we’re not thrilled about the
overall results, we’re not as downbeat as some. For one, China saw a similar performance in the same quarter last year and that didn’t prevent overall 2012 growth from eventually topping the government’s 7.5% target. We expect a similar pick-up later this year.

Also, the results confirm that the rebalancing of the Chinese economy continues as intended by the government, i.e. growth is tilting towards consumption and away from fixed investment. That’s a step in the right direction with regards to the sustainability of growth over the coming years. Moreover, as today’s Hot Charts show, trade contributed to China’s GDP growth for the first time in two and a half years, thanks to a rebound in exports, and that despite a strengthening yuan. That, perhaps, is a sign that global demand is firming up after a soft 2012.


But CLSA points out that:

While GDP growth was slower than expected, the most disappointing data point for the first quarter was the slowdown in income growth.

Urban household disposable income rose by only 6.7% YoY in real terms, down from 9.8% in 1Q12 and the slowest pace since 2001.  To put the 1Q13 rate of 6.7% in context, the average annual growth rate for the last decade was 9.3%.  A key factor was slower nominal wage growth:  up 8.3% YoY compared to 13.8% a year ago.

While 6.7% real income growth is something that most countries can only fantasize about, this is a surprisingly low number for China and raises questions about longer-term consumption growth as investment growth continues to slow.

The monthly average income of China’s 166m migrant workers was RMB 2,436 (US$ 390), up 12.1% YoY, after having risen by 16.6% in 1Q12.  Given that the working age population has just begun to shrink, we had not been expecting a significantly slower wage growth for unskilled workers.

Real per capital rural cash income also rose at a slower pace in 1Q, 9.3% YoY compared to 12.7% a year ago, due in part to slower growth in food prices.

. . . but retail sales held up

Despite slower income growth, real retail sales growth was 10.8% YoY in 1Q13, down only 0.1ppt from the first quarter of last year.

Markit Remains Upbeat on China:

(…) It is unlikely, however, that the disappointing data for  the first quarter represent the start of a renewed trend of slower economic growth in China, and it remains likely that GDP growth should pick up again in the second quarter.

First, a lag between the official data picking up after the PMI has risen is not unprecedented: GDP lagged considerably in 2009, for example. Markit’s PMI also fell sharply in February but rose again in March,
possibly reflecting a late pick up in growth in the first quarter which has not been fully captured by the official GDP data.

Second, it is not just the Markit-produced PMI that has signalled an upturn. A government sponsored survey signalled the strongest growth of manufacturing output for ten months in March as order books growth hit an 11-month peak.

Third, the message from companies in China is that the underlying trend in the Chinese economy is improving. Markit’s Business Outlook survey showed both China’s manufacturing and service sector companies growing more optimistic about prospects for the year ahead in the first quarter. Confidence hit a two-year high in manufacturing, while a near one-year high was seen in services.

Fourth, a sharp acceleration in bank credit growth in March should also feed through to higher activity in the real economy in the coming months.

Fifth, the data for the first quarter need to be treated with particular caution in the case of China due to the extended and widespread business closures for the New Year holidays.

The Chinese authorities have retained the 7.5% growth target for 2013 despite the weakness of the first quarter data, but many private sector analysts have already begun to downgrade their outlooks. Given the
uncertainties about growth in the first quarter, a reliable indication of growth momentum in the Chinese economy may only be really known until the second quarter.

South Korea in bid to kick-start economy
Bigger-than-expected supplementary budget aims to restore confidence

The government slashed its 2013 growth target to 2.3 per cent late last month from 3 per cent, citing slowing exports and sluggish domestic spending.

Colombia launches stimulus measures
Package aimed at easing appreciation of the peso


Brent Crude Falls Below $100

The price of a barrel of Brent crude oil fell below $100 for the first time in nine months as a selloff that started Monday continued.

Still travelling with my dead laptop…