NEW$ & VIEW$ (30 JANUARY 2014)

BLAME THE FED GAME

Investors Seek Safer Options as Ground Shifts

Just one month into 2014, investors from Illinois to Istanbul are finding the tide going out fast for stocks and other riskier investments.


(…) After years of unprecedented monetary stimulus propping up the world’s financial markets, investors are now confronting the reality of an end to the Federal Reserve’s bond-buying program, which, as expected, the central bank reduced by another $10 billion on Wednesday. (…)

Less Room to Maneuver

Some even argue that the long-simmering troubles in emerging markets will draw global investors to U.S. stocks.

But the landscape seems to have shifted from one where unprecedented central-bank stimulus enabled markets to steamroll past issues that might have otherwise spooked investors. (…)

No Respite for Emerging Markets

The pullback from emerging-market currencies showed no signs of a pause, with the Hungarian forint and Russian ruble bearing the brunt of selling pressure.

Meanwhile: Fed Sticks to Script

The Federal Reserve—unfazed by recent selloffs in emerging markets or disappointing U.S. job gains in December—said it would scale back its bond-buying program for the second time in six weeks, pressing ahead with a strategy to wind down the purchases in small and steady steps.

The Fed said it would cut its purchases of Treasury bonds and mortgage-backed securities to $65 billion a month, from $75 billion, and officials suggested they would continue reducing the purchases in $10 billion increments in the months ahead. The first cut, from $85 billion, was announced in December and made in January. (…)

Though they have been watching developments in emerging markets closely, Fed officials made no mention of these trends in the statement released Wednesday after their two-day policy meeting.

U.S. economic growth “picked up” in recent months and was expected to continue at a “moderate pace,” the Fed said. Though job-market indicators were mixed, “on balance” the labor market “showed further improvement,” the Fed said. (…)

“MIND YOUR OWN BIZ”: Citigroup summarizing the Fed statement:

From the viewpoint of domestic US economic conditions the Statement is completely anodyne. From the point of view of EM, the Fed has just said “hasta la vista, baby

FED UP?

Confused smile Confused? Here’s a great read that puts things into their proper perspective: Emerging Markets – Emerging Crisis or Media Hysteria?

Here’s the conclusion but the whole post is well worth reading:

Currently the financial press is working investors into a hysteria surrounding building stress in emerging markets. Stress in emerging markets is nothing new and pops up in specific countries on a yearly basis; however, there is always a risk that country-specific stress can spill over into a global contagion similar to what occurred in 1997-1998. The best way to determine when the risk spills over into something more dangerous is to monitor CDS readings globally as well as the price action in gold. If CDS readings remain muted then we are dealing with country-specific flare ups, but if they spike to levels higher than what has occurred over the last few years and gold surges we need to become more defensive.

With all that said, there is a bright side to the weakness in emerging markets and commodities for developed markets: a disinflationary stimulus similar to what occurred in the late 1990s and, more recently, since 2011…with the caveat that contagion does not result.

Dr. Ed explains the disinflationary stimulus:

The Fed, the Dollar, and Deflation

The woes of emerging economies could temper the Fed’s tapering in coming months by strengthening the dollar, which could push US inflation closer to zero. The JP Morgan Trade-Weighted Dollar Index has been trending higher since mid-2011. A strong dollar tends to depress inflation.

Indeed, the US import price index excluding petroleum has been falling over the past 10 months on a y/y basis through December, when it was down 1.3%. A stronger dollar would be bad news for commodity producers, especially in the emerging economies. When the dollar is rising, commodity prices tend to fall. Weak commodity prices have depressed the currencies of commodity-producers Canada and Australia over the past year.

The latest FOMC statement noted that near-zero inflation could be a problem for the US economy: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

The emerging markets crisis, strength in the dollar, and weakness in commodity prices could frustrate the Fed’s expectations that inflation will rise back closer to 2%.

WHAT NOW?

The S&P 500 hast retreated 4% and is now right on its 100 day m.a. from which it has bounced back three times since June 2013 and which is still rising. If that fails to hold, the next major support is the 200 day m.a. at 1705, another 4% decline.

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The Rule of 20 P/E is back into undervalue territory but, at 18.2, is not screaming “buy”. At the 200 day m.a., it would be 17.6, right in the middle of the range between “deep undervalue (15) and fair value (20). This is all about shifting sentiment. Let’s wait for the earnings season to end in a couple of weeks. We also might have a better view of a possible soft patch.

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HOUSING WATCH: BEAZER HOMES FEELS THE HOUSING SLOWDOWN IN ITS LAST QUARTER

Total home closings were flat at 1,038 closings, with the average sales price from closings up 19%. New orders dropped 4%.

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The 4-week average of the purchase index is now down about 12% from a year ago. (CalculatedRisk)

Spain’s Economy Picks Up Pace

In its preliminary GDP estimate for the quarter, statistics institute INE said Thursday that Spain’s GDP rose 0.3% in the fourth quarter from the third. This is in line with a previous estimate by the country’s central bank, and statements made by Finance Minister Luis de Guindos.

GDP was down 0.1% in the fourth quarter from the same period of 2012, INE said, with a better contribution from internal demand offset by a smaller contribution from the export sector.

For the whole of 2013, the Spanish economy—the euro zone’s fourth-largest—contracted 1.2%, INE added.

The fourth-quarter reading compares with 0.1% growth in the third quarter from the second, and a 1.1% contraction in the third quarter from the same quarter of 2012.

THE (MIDDLE) CLASS OF 2001 VS THE (NOT SO MIDDLE) CLASS OF 2011

From BloombergBriefs: The latest tax data from the IRS (2011) illustrates the fairly grim reality the American middle class faces.image

And this telling, and warning, chart:

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TRY NOT TO LAUGH!

 

Winking smile  President Obama: If You Like Your Retirement Plan, You Can Keep It Fingers crossed

 
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NEW$ & VIEW$ (15 JANUARY 2014)

Consumers Spent Solidly in December

Just kidding This is the WSJ’s headline today. Below is the reality:

U.S. Retail Sales Post Moderate Year-End Increase

Retail spending increased 0.2% (4.1% y/y) during December after a 0.4% November gain, revised down from 0.7%. For all of last year retail sales increased 4.3%, the weakest increase of the economic recovery.

A 1.8% reduction (+5.9% y/y) in sales of motor vehicles & parts held back the increase in overall December sales. Nonauto retail sales rose 0.7% (3.7% y/y) after a 0.1% November uptick. Nonauto sales rose 3.4% during all of 2013, also the weakest gain of the recovery.

Higher sales of food & beverages led last month’s sales with a 2.0% gain (4.2% y/y) following two months of slippage. Clothing & accessory sales increased 1.8% (5.2% y/y) after a 0.5% November dip and gasoline service station sales rose 1.6% (0.6% y/y), after two months of decline. Sales of nonstore retailers showed continued strength with a 1.4% jump (9.9% y/y) following a 1.6% November gain. Furniture store sales dropped 0.4% (+4.5% y/y) after a 0.2% decline and building materials & garden equipment store sales slipped 0.4% (+2.1% y/y), down for the third month in the last five.

Not easy to get a clear measure of retail sales given the calendar quirks and bad weather. It is best to look at average sales growth for November and December.

  • Total retail sales: +0.3% (Nov.-Dec. avg) vs +0.5% in October.
  • Autos and Parts:  +0.1% vs +1.0%.
  • Non Autos ex Gas and Building Supplies: +0.5% vs +0.6%

Surprised smile Total sales for the October through December 2013 period were up 1.0% YoY.

Note that these figures are subject to big revisions. November’s surprising 0.7% original gain was revised down to 0.4%.

Pointing up U.S. Business Inventories Increase Slows

Total business inventories increased 0.4% in November (4.0% y/y), the slowest increase in three months. This inventory rise accompanied a 0.8% jump (4.0% y/y) in business sales after October’s 0.5% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

Pointing up In the retail sector, inventories advanced 0.8% (7.3% y/y) in November, including a 1.3% jump (13.7% y/y) in motor vehicles. Inventories excluding autos rose 0.6% (4.4% y/y).

Sad smile Taking the 3 months to November, retail inventories rose 2.9% sequentially while sales advanced only 0.7%. Ex-Autos: +1.3% vs +0.5%.

As I have been warning, there is clearly an inventory problem entering Q114. If you don’t believe me, read this:

Auto AutoNation CEO Calls U.S. Vehicle Inventories Too High

AutoNation Chief Executive Mike Jackson says new-car supplies in the U.S. are rising rapidly, putting pressure on auto companies as they try to avoid a profit-sapping price war.

(…) U.S. dealers have about $100 billion worth of unsold cars and trucks sitting on their lots, Mr. Jackson said. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run-up to the financial crisis and the auto-sales collapse of 2008-2009, Mr. Jackson said. Auto makers book revenue when a car is shipped, not when it is sold at the dealership.

At the end of 2013, auto dealers had 3.45 million cars and trucks in stock, enough to last 63 days at the current selling rate, according to research firm Autodata Corp. A 60-day supply of cars is typically considered as healthy by the industry.

High five But Mr. Jackson said the inventory levels are much higher than that—closer to 90 to 120 days of supply—if cars sold to fleets are excluded from the selling rate. (…)

AutoNation’s Mr. Jackson said discounts are starting to rise across the industry already, even if they aren’t as obvious to consumers.

Among them are “stair-step programs” where car companies give money directly to dealers in exchange for hitting monthly sales targets.

“What worries me is if the industry was as disciplined as it says it is we would have stopped before 3.5 million” vehicles at dealerships, Mr. Jackson said. He sees about a 50-50 chance the industry will resort to an all-out discount war.

“What I’m saying is you’re on the edge of a slippery slope and even sliding down it a bit,” he said. “It’s a risk.”

Auto Makers Dare to Boost Output

A string of new factories in the region will start cranking out a million or more cars over the next several years.

A large increase in production capacity poses a serious risk for auto makers. They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%. (…)

Some auto makers are already concerned about overcapacity.

“The last thing we need is to get bricks-and-mortar capacity increased,” Sergio Marchionne, chief executive of Chrysler Group LLC and Fiat SpA, said this week. Building new plants isn’t the only trend to watch, he added, because increasing the use of automated production lines can boost output at existing factories. (…)

Magna warns 2014 sales likely below analysts’ estimates

Canadian auto-parts giant Magna International Inc. is forecasting 2014 sales that are below analysts’ estimates.

Aurora, Ont.-based Magna said on Wednesday in its financial outlook that it anticipates total sales of between $33.8-billion (U.S.) and $35.5-billion in 2014, lower than the consensus analysts’ estimate of $35.8-billion.

Jobs Deal Collapses in Senate

(…) After more than a week of talks, lawmakers failed to reach agreement to revive benefits for the roughly 1.4 million people who have lost aid since last month. Senate Democrats rejected the latest proposal from a group of eight Republicans, while GOP lawmakers dismissed an overture from Senate Majority Leader Harry Reid (D., Nev.) to allow votes on a handful of Republican amendments.

The law that expired in December dates from the financial crisis and provided federal aid to supplement the 26 weeks of unemployment benefits provided by most states, giving up to 47 weeks of additional payments. The latest proposals from both Democrats and Republicans would scale that back to a maximum of 31 weeks. (…)

Several lawmakers said they hope to continue negotiations, but the Senate isn’t expected to return to the issue until late January after next week’s congressional recess. The Senate is shifting its focus on Wednesday to consider the short-term stopgap spending bill to prevent a partial government shutdown and the $1.012 trillion bill to fund the federal government through Sept. 30, the end of the current fiscal year. (…)

HOUSING WATCH

From Raymond James:

  • California’s November existing single-family home sales fell 3.4%, on a seasonally-adjusted basis relative to October as rising home prices and higher mortgage rates reduced affordability. Closed sales stood at the lowest level since July 2010, falling to an annual run rate of 387,520 units (down 12.0% y/y). We note on a sequential basis, sales fell for the fourth consecutive month in November and have now declined on a year-over-year basis in ten of the last eleven months. California’s non-seasonally-adjusted pending home sales index (PHSI) fell 9.4% y/y (versus -10.4% y/y in October), and declined 13.6% m/m as Golden State buyers’ sensitivity to interest rate swings becomes increasingly apparent.
  • Florida existing home sales fell 1.2% y/y in November, the first negative y/y comp since March 2012 and down from a +6.5% y/y comp in October. Sequentially, sales decreased 11.3% from October, fueled by the combined increase in prices and mortgage rates outpacing household income growth. According to November data from RealtyTrac, 62.7% of Florida homes sold were all-cash transactions, the highest level of any state and well ahead of the next closest state (Georgia, 51.3%).

German GDP Disappoints

German economic growth failed to gain momentum in the fourth quarter of 2013, but economists predict stronger growth this year

Germany’s gross domestic product expanded 0.4% in 2013, following growth of 0.7% in 2012, the Federal Statistics Office said on Wednesday. The economy grew 0.5% when taking account of the number of working days each year.

Based on the full-year figures, GDP increased around 0.25% in the three months through December—about the same rate as the third quarter—according to the statistics office, which is due to publish fourth-quarter national accounts in mid-February.

Productivity crisis haunts global economy
Report shows most countries failed to improve overall efficiency

A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades.

In a sign that innovation might be stalling in the face of weak demand, the Conference Board, a think-tank, said a “dramatic” result of the 2013 figures was a decline in the world’s ability to turn labour and capital resources into goods and services.

Productivity growth is the most important ingredient for raising prosperity in rich and poor countries alike. If overall productivity growth disappears in the years ahead, it will dash hopes that rich countries can improve their population’s living standards and that emerging economies can catch up with the advanced world.

The Conference Board said: “This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation.”

The failure of overall efficiency – known to economists as total factor productivity – to grow in 2013 results from slower economic growth in emerging economies alongside continued rapid increases in capital used and labour inputs. Labour productivity growth also slowed for the third consecutive year.

The decline in total factor productivity continues a trend of recent years in which the remarkable rise in the efficiency of emerging markets has slowed and in advanced economies it has declined. (…)

The Conference Board’s annual analysis of productivity uses the latest data to estimate economic growth in all countries, the increase in hours worked and the deployment of additional capital to estimate the efficiency of individual economies.

Globally, it found that labour productivity growth declined from 1.8 per cent in 2012 to 1.7 per cent in 2013, having been as high as 3.9 per cent in 2010. Total factor productivity dipped 0.1 per cent.

For the US it found that productivity gains of the early years of the crisis continued to be elusive in 2013, with labour productivity growth stable at 0.9 per cent in 2013.

The US trends were, however, better than those in Europe, which has seen extremely weak productivity growth alongside relatively muted unemployment in most large economies with the exception of Spain, where joblessness soared. Labour productivity grew 0.4 per cent in 2013, having fallen 0.1 per cent in 2012.

Mr van Ark said Europe’s problem in achieving more efficiency from its labour force stemmed from structural rigidities.(…)

Emerging economies saw rates of growth of productivity fall from extraordinarily rapid rates, even though the rate of growth at 3.3 per cent was still much higher than in advanced economies.

For China, the Conference Board said that, while “the statistical information for the latest years is sketchy, the indications are that sustained investment growth in China has not been accompanied by the efficiency gains (measured by total factor productivity growth) similar to those of the previous decade”. (…)

World Bank warns of emerging market risk
Capital flows could fall 80% if central banks move too abruptly

An abrupt unwinding of central bank support for advanced world economies could cause capital flows to emerging markets to contract by as much as 80 per cent, inflicting significant economic damage and throwing some countries into crises, the World Bank has warned.

Capital flows into emerging markets are influenced more by global than domestic forces, leaving them vulnerable to disorderly changes in policy by the US Federal Reserve, concludes a study by World Bank economists.

SENTIMENT WATCH

 

The Year-Two Curse

In a world full of January barometers, Super Bowl indicators and sell-in-May-and-go mantras, Jeffrey Kleintop, chief market strategist at LPL Financial, thinks he’s found an indicator that actually works: the “year-two curse.”

“Year two” refers to the second year of a presidential cycle, which is what we’re in right now. Per the chart below, courtesy of LPL, the middle of the year tends to be fairly volatile for investors.

“The start of the second quarter to the end of the third quarter of year two has consistently marked the biggest peak-to-trough decline of any year of the four-year presidential term,” Mr. Kleintop wrote in a note to clients.Since 1960, nine of the 13 presidential terms have suffered from the dreaded curse, as the S&P 500 fell in the second and third quarters of those years, he says. (…)

Still, Mr. Kleintop maintains a relatively bullish stance about the rest of the year. “We may again see some seasonal weakness, but there is no need to fear the curse,” he says. “In fact, the curse may be a blessing for some, allowing those who have been awaiting a long-overdue pullback a chance to buy. It is important to keep in mind that history shows that, on average, year two posts a solid gain for stocks, and the year-two curse is reversed by the end of the year.”

 
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NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:

 

  • Auto Makers Rebound as Buyers Go Big 

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

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

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

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

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

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

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

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

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

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

ZeroHedge zeroes in on domestic car sales:

 

Via SMRA,

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

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

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

The times, they are a-changing:

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Hmmm…

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

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Girl “Daddy, is this a cyclical peak?”

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

 

From my Nov. 20 post:

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

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

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

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

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

Truth is that cars do last longer.

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

Cases in point:

Office-Rental Market Is Gaining Strength

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

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

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

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

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

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

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

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

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

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

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

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

China Shows Signs of Slowdown

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

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

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

GUIDANCE ON GUIDANCE

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

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

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

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

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

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

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

Under-promise to over-deliver!

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

Now this:

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

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

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

As a result:

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

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

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

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

  • I have done my job:

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

  • Politicians have not:

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

  • So get to it now:

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

  • That’s for you bankers as well:

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

  • Get ready for higher rates:

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

Need more warning?

 

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

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

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

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

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

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

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

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

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

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

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

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

Stock Buybacks’ Allure Likely to Fade

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

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

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

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

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

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

BANKS

 

Biggest Lenders Keep On Growing

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

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

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

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

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

Meanwhile.

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

 
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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.

EARNINGS WATCH

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.

image_thumb[1]

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.

SENTIMENT WATCH

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: (http://breakfastwithdave.newspaperdirect.com/epaper/viewer.aspx)

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. (…)

Call me   HAPPY AND HEALTHY 2014 TO ALL!

 
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NEW$ & VIEW$ (26 DECEMBER 2013)

Signs Point to Stronger Economy

A pickup in business investment and robust new-home sales point to an economy on stronger footing as the year winds to a close.

(…) Orders for U.S. durable goods rose 3.5% last month, reversing a decline in October, the Commerce Department said Tuesday. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May.

Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the Commerce Department said in a separate report this week, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October’s upwardly revised annual rate of 474,000. October and November marked the two strongest months of new-home sales since mid-2008.

The pair of reports showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of the economy, and led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

The overall durable-goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October. (Chart and table from Haver Analytics)

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large image large image

 

U.S. Consumer Spending Up 0.5% in November

Americans stepped up their spending in November, boding well for holiday sales and offering the latest sign the U.S. recovery is gaining momentum.

Personal consumption, reflecting what consumers spend on everything from televisions to health care, climbed 0.5% in November from a month earlier, the fastest pace since June, the Commerce Department said Monday. The gain was driven by a boost in spending on big-ticket items, more than half of which came from automobile and parts buying, and on services.

But tepid income growth could limit future gains. Personal income increased 0.2% in November after falling 0.1% in October. As a result, consumers dipped into their savings to maintain their spending. (…)

cat

The price index for personal consumption expenditures, the Federal Reserve’s preferred gauge for inflation, was flat in November from a month earlier, the second consecutive month prices went unchanged. From a year earlier, prices were up 0.9% in November, after being up 0.7% in October.

Core prices, which exclude volatile food and energy costs, rose 0.1% from October and 1.1% from a year prior.

Nerd smile What’s wrong with this chart?

large image

Personal income gained a disappointing 0.2% (2.3% y/y) after a minimal dip in October. Disposable personal income increased just 0.1% (1.5% y/y), held back by a 0.8% rise (9.0% y/y) in tax payments. Wages & salaries increased 0.4% but the 2.2% year-to-year increase was the weakest since mid-2010.

Real disposable income rose 0.3% during the last 3 months, a very weak 1.2% annualized rate that lead to a very low 0.6% YoY increase in November. Meanwhile, real expenditures rose 1.1%, a 4.5% annualized rate. November real spending was up 2.6% YoY. Americans just keep dissaving to sustain their living standard. For how long?

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Meanwhile, Christmas sales are fuzzy:

This chart plots weekly chain store sales which have been in a narrow +2.0-2.3% YoY gain channel since the spring. Weak!

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But Online Sales Jumped 37% During Weekend

(…) After mall-traffic tracker ShopperTrak on Monday reported a 3.1% decline in holiday in-store sales and a 21% plunge in store traffic in the crucial shopping week ended Sunday, additional data again suggest a much brighter picture online. Total online sales from Friday through Sunday surged 37% year-to-year, with mobile traffic representing two-fifths of all online traffic, according to IBM Digital Analytics. Consumers buying from their mobile devices sent mobile sales up 53%, accounting for 21.5% of all online sales, IBM said. (…)

Sad smile With what looks to be a disappointing holiday season, Retail Metrics’ Ken Perkins said Tuesday that fourth-quarter retail sales for the 120 chains it tracks is now expected to rise just an average of 1.9%, the weakest since third-quarter 2009. Profit growth is expected to be just 1.3%, also the weakest since third-quarter 2009, “when retailers were still clawing their way out of the Great Recession.”

Fourth-quarter same-store sales are expected to rise an unimpressive 1.1%.

“It has been a very disappointing holiday season to date for most of retail,” said Mr. Perkins.

Late Surge in Web Buying Blindsides UPS, Retailers A surge in online shopping this holiday season left stores breaking promises to deliver packages by Christmas, suggesting that retailers and shipping companies still haven’t fully figured out consumers’ buying patterns in the Internet era.

(…) E-commerce accounts for about 6% of overall U.S. retail sales, according to the Commerce Department. This holiday season, online purchases will be nearly 14% of sales, estimates the National Retail Federation.

During the last shopping weekend before Christmas, Web sales jumped 37% from the year before, according to IBM Digital Analytics. Market research firm Forrester Research expects online sales to increase 15% this holiday season amid slow mall traffic and weak sales at brick-and-mortar retailers.

Coming back to the slow income growth trends:

 

Mortgage Applications Drop to 13-Year Low

The average number of mortgage applications slipped 6.3% to a 13-year low on a seasonally adjusted basis as interest rates rose from the previous week, the Mortgage Bankers Association said.

Following last week’s 6.1% drop, applications for purchase mortgages were down another 3.5% w/w to the lowest level since February 2012. The purchase index is currently tracking down 11.5% y/y. (…)  Application activity remains below both the recently reported y/y growth in new home sales (+22% in October) and existing home sales (-1.2% in November), led by a declining mix of first-time buyers within both segments. Recent data also suggests mortgage credit availability has tightened slightly more. (…)

The average contract rate on 30-year fixed conforming mortgages increased 2 bp w/w to 4.64%, matching the highest level since September, and is now up 105 bp since bottoming during the week ended May 3. Overall mortgage rates are up 113 bp y/y, as the spread relative to the 10-year Treasury note has now expanded 1 bp y/y to 175 bp.

BTW, FYI:

image

Calm returns to China’s money markets Central bank skips open market operations

China Expects 7.6% Growth in 2013 China’s economy will post growth of 7.6% for all of 2013, a top planning official said, indicating that the world’s second-largest economy will exceed Beijing’s 7.5% target but that it also lost momentum in the final months of the year.

(…) China’s economy posted year-over-year growth of 7.8% in the third quarter after expanding at 7.7% in the first quarter and 7.5% in the second quarter amid a still sluggish global economy. A “mini-stimulus” of government investment in rail and subway construction coupled with tax and other business incentives helped boost growth in the July-September period. (…)

Ninja I suspect the Chinese are spying on NTU which revealed the Q4 slowdown on Dec. 18.

Christmas spirit does little for Spain
Subdued domestic demand weighs on the economy

(…) Retail sales are still a quarter lower than they were before Spain slid into economic crisis more than five years ago, and some shop owners say they have seen little change in consumer behaviour so far. (…)

Until now, the recovery has been driven almost exclusively by rising exports, with domestic demand acting as a drag on growth. The surge in shipments to foreign markets was sufficiently strong to lift Spain out of recession in the third quarter this year, and has given companies the confidence to start investing in plants and machinery. But economists warn that Spain will be stuck with anaemic growth at best as long as domestic demand remains as subdued as it is now.

There are some signs of hope. According to the Bank of Spain, the decline in overall household consumption slowed in the third quarter. Spanish retail sales actually rose 2.1 per cent on an annual basis in September, the first such increase in more than three years, but fell back into negative territory the next month. Consumer confidence has risen sharply and car sales – helped by a government subsidy programme – are also up.

Javier Millán-Astray, director-general of Spain’s association of department stores and retail chains, notes that sales on the first big shopping weekend of the holiday season were up 8 per cent compared with last year, and predicts an overall rise in Christmas sales of 6-7 per cent compared with 2012. “We have seen a change in the trend since August. Sales have still been falling but the drops are much smaller than before. And the truth is that the first weekend of the Christmas season was much better than the year before.” (…)

 
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NEW$ & VIEW$ (16 DECEMBER 2013)

U.S. Producer Prices Fall 0.1%

The producer-price index, which measures what firms pay for everything from lumber to light trucks, fell 0.1% from October, the Labor Department said Friday. That marked the third straight monthly decline, owing largely to a fall in gasoline costs from the summer. Excluding food and energy, “core” prices rose 0.1% in November after climbing 0.2% in October.

Compared with a year earlier, overall prices were up 0.7% in November, more than double the pace of the prior two months. Core prices climbed 1.3% in November from a year earlier after rising 1.4% year-over-year in October.

Half of U.S. Lives in Household Getting Benefits  The share of Americans living with someone receiving government benefits continued to rise well into the economic recovery, reflecting a weak labor market that pushed more families onto food stamps, Medicaid or other programs.

Nearly half of the U.S., or 49.2% of the population, live in a household that received government benefits in the fourth quarter of 2011, up from 45.3% three years earlier, the Census Bureau said.

Government benefits as defined by Census include Medicaid, Medicare, Social Security, food stamps, unemployment insurance, disability pay, workers’ compensation and other programs.

Part of the increase comes from an aging population, with the 16.4% of the population living in a household where someone gets Social Security and 15.1% where someone receives Medicare. That was up from 15.3% and 14%, respectively, at the end of 2008.

But the biggest increases were in benefits aimed at helping the poor. The program experiencing the sharpest rise in participation was food stamps, officially known as the Supplemental Nutrition Assistance Program. About 16% of people lived in a household where someone was receiving SNAP benefits, up from just 11.4% at the end of 2008.

Participation in Medicaid, the government health-insurance program for the poor and disabled, also climbed. At the end of 2011, 26.9% of the population was living in a household where at least one member was receiving Medicaid benefits, up from 23.7% three years earlier.

(…) unemployment compensation is one of the smaller pieces of the safety net. The Census report showed 1.7% of people lived in households where someone was collecting unemployment compensation in the final quarter of 2011 up a bit from 1.4% in 2008.

Canadian Housing: The Bubble Debate

It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view: Canada Housing Bubble

  • Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.
  • Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.
  • Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.
  • High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.
  • Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.

The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.

EARNINGS WATCH 

This Thomson Reuters chart has been around a lot lately, generally on its own, being apparently self-explicit.

ER_1209

The chart deserves some explanations, however:

  • The reason the ratio is so high currently is not really because many more companies have decreased guidance but rather because very few have raised it.

Over the past four quarters (Q412 – Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up only 3% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 54% compared to the one-year average. (Factset)

  • The chart uses Thomson Reuters data which seems to be the most negative among aggregators. Factset data show a negative/positive ratio of 7.8x. The ratio has deteriorated from 7.4x the previous week, however, as 5 more companies have issued negative guidance against zero positive.

(…) a record-high 94 companies in the S&P 500 index already have done so for the current quarter. Conversely, a record-low 12 have said they would do better. That ratio of 7.83 negative-to-positive warnings dwarfs any quarter going back to 2006, when FactSet began tracking such data.

  • So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.
  • In small and mid-cap stocks, the trend appears much less gloomy. Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The bulk of negative preannouncements is in IT and Consumer Discretionary sectors which have also recorded the largest increase in negative preannouncements in recent weeks.image

In spite of the above, earnings estimates are not cut. Q4 estimates (as per S&P) are now $28.41 ($28.45 last week) while 2014 estimates have been shaved $0.13 to $122.42, up 13.8% YoY. Actually, 2014 estimates have increased 0.4% since September 30.

THE CHRISTMAS RALLY

This is December over the past ten years (Ryan Detrick, Senior Technical Strategist, Shaeffer’s Investment Research)

Is Santa Coming This Year?

Wait, wait!

Bespoke Investment suggests the market is oversold:

(…) Below is a one-year trading range chart of the S&P 500.  The blue shading represents between one standard deviation above and below its 50-day moving average (white line).  The red zone is between one and two standard deviations above the 50-day, and moves into or above this area are considered overbought.  As shown, after trading in overbought territory since October, the S&P has finally pulled back into its “normal” trading range this week.  Technicians will be looking for the 50-day to act as support in the near term if the index trades down to it.  A break below means we’ll potentially see a close in oversold territory for the first time since June.  

While the S&P 500 is just above its 50-day in terms of price, its 10-day advance/decline line is indeed oversold.  The 10-day A/D line measures the average number of daily advancers minus decliners in the index over the last 10 trading days.  This provides a good reading on short-term breadth levels.  The oversold reading in place right now means the last ten days have not been kind to market bulls.  Over the last year, however, moves into the green zone have been good buying opportunities.

Gift with a bow  And here’s your Christmas present:

The Santa Claus Rally Season Is About To Begin (crossingwallstreet.com/)

I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.)

Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)

Here’s a look at the Dow’s average performance in December and January (December 21st is based at 100):

You should note how small the vertical axis is. Ultimately, we’re not talking about a very large move.

May I remind you that you can get all the dope on monthly stock returns in the “MARKET SMARTS” section of my sidebar. Here are the two charts that matter:

This is the simplified chart from RBC Capital Markets

image

Here is Doug Short’s:

WANT MORE?

Buy The “December Triple Witching” Dip (BofAML via ZeroHedge),

This Friday is December Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options). Consistently the week of December Triple Witching is one strongest of the year for the S&P500. In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years. With equity volatility fast approaching a buy signal, the conditions are growing ripe for an end to the month long range trade and resumption of the larger bull trend (we target 1840/1850 into year-end).

 
SENTIMENT WATCH
 

General Electric to raise dividend 16%  Largest increase by US manufacturing group since 2010

Hunger Grows for U.S. Corporate Bonds

Investors are buying new U.S. corporate bonds at a record pace, and demanding the smallest interest-rate premium to comparable government bonds since 2007.

imageDemand has also put sales of new junk-rated corporate bonds in the U.S. on pace to surpass last year’s record. Sales of investment-grade bonds in the U.S. this year are already at the highest ever, according to data provider Dealogic. (…)

The narrowest reading for investment-grade corporate-bond spreads in recent years came in 2005, when the gap hit 0.75 percentage point. (…)

According to Moody’s Investors Service, the default rate for below-investment-grade companies in the U.S. was 2.4% in November, down from 3.1% a year earlier. (…)

Meanwhile:

U.S. Rate Rise Sends High-Dividend Stocks Lower

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6 percentage points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88 percent from 1.67 percent. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.

BARRON’S COVER

An Upbeat View of 2014 Wall Street strategists expect stocks to rise 10%, boosted by a stronger economy and fatter corporate profits. Bullish on tech, industrials.

THE 10 STRATEGISTS Barron’s consulted about the outlook for 2014 have year-end targets for the S&P of 1900 to 2100, well above Friday’s close of 1775.32; their mean prediction is 1977.

(…) the strategists expect earnings growth to do the heavy lifting, with S&P profits climbing 9%, compared with subpar gains of 5% in the past few years.

Specifically, the strategists eye S&P profits of $118, up from this year’s estimated $108 to $109. Industry analysts typically have higher forecasts; their 2014 consensus is $122, according to Yardeni Research.

The consensus view is that yields on 10-year Treasury bonds will climb to 3.4% next year from a current 2.8%. Our panel’s predictions on year-end yields for the 10-year bond range widely, from 2.9% to 3.75%.

(…) corporations are sitting on $1 trillion of cash, and there is pent-up demand for investment around the world. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase, notes that U.S. gross fixed investment has fallen to 13% of GDP, on par with Greece and well below the 16% to 21% range that obtained from 1950 to 2007. Just getting back to the midpoint of that range would require additional spending of $600 billion, he observes. (…)

The calendar, too, is a help. Addition will come from subtraction as the U.S. begins to lap some of the government’s automatic spending cuts tied to the sequestration that began last spring, and the expiration of the Obama administration’s 2% payroll-tax cut early this year. The government cost the economy perhaps 1.5 percentage points of GDP growth in 2013, but “government drag will be a lot less in 2014,” predicts Auth.

Both people and companies will start to spend more in 2014, he adds.

How to be right, whatever happens;

Time to Brace for a 20% Correction Ned Davis Research expects a 2014 buying opportunity. How to play the decline-and-recovery scenario.

Davis: Right now, about 78% of industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish. However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] — a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was about 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.

We also looked at midterm-election years — the second year of a presidential term, like the one coming up in 2014 — going back to 1934, and the average decline in those years was 21%. But after the low was hit in those years, the market, on average, gained 60% over two years. So, a correction should be followed by a great buying opportunity. (…)

Hedge Funds Underperform The S&P For The 5th Year In A Row

The $2.5 trillion hedge-fund industry is headed for its worst annual performance relative to U.S. stocks since at least 2005. As Bloomberg Brief reports, the funds returned 7.1% in 2013 through November; that’s 22 percentage points less than the 29.1% return of the S&P 500, with reinvested dividends, as markets rallied to records. Hedge funds are underperforming the benchmark U.S. index for the fifth year in a row as the Fed’s inexorable liquidity pushes equity markets higher (and the only way to outperform is throw every risk model out the window). Hedge funds (in aggregate) have underperformed the S&P 500 by 97 percentage points since the end of 2008.

Light bulb  Hence the new marketing stance:

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.” (FT)

Winking smile  NEXT JOB FOR BERNANKE  China’s Smog Forces Pilots to Train for Blind Landings

 
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NEW$ & VIEW$ (11 DECEMBER 2013)

Pointing up Pointing up Pointing up The Fed Plan to Revive High-Powered Money

By Alan Blinder
Don’t only drop the interest paid rate paid on banks’ excess reserves, charge them.

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before. (…)

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. (…)

At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. (…)

Deal Brings Stability to U.S. Budget

House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs.

Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term jobless benefits, sought by Democrats, wasn’t included.

The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a “grand bargain” to restructure the tax code and federal entitlement programs. But in a year and an institution characterized by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement. (…)

The Murray-Ryan deal will likely need considerable Democratic support to pass the GOP-controlled House. Many Republicans, as well as a large number of conservative activists off Capitol Hill, argue that the sequester cuts have brought fiscal austerity to the federal budget and that they should not be eased. (…)

The depth of conservative opposition will become apparent as lawmakers absorb the details, which were released to the public Tuesday night. To draw support from the GOP’s fiscal conservatives, the deal includes additional deficit-reduction measures: While the agreement calls for a $63 billion increase in spending in 2014 and 2015, it is coupled with $85 billion in deficit reductions over the next 10 years, for a net deficit reduction of $22.5 billion.

The deal achieves some of those savings by extending an element of the 2011 budget law that was due to expire in 2021. The sequester currently cuts 2% from Medicare payments to health-care providers from 2013 through 2021. The new deal extends those cuts to 2022 and 2023. (…)

A Least Bad Budget Deal

The best that can be said about the House-Senate budget deal announced late Tuesday is that it includes no tax increases, no new incentives for not working, and some modest entitlement reforms. Oh, and it will avoid another shutdown fiasco, assuming enough Republicans refuse to attempt suicide a second time.

The worst part of the two-year deal is that it breaks the 2011 Budget Control Act’s discretionary spending caps for fiscal years 2014 and 2015. The deal breaks the caps by some $63 billion over the two years and then re-establishes the caps starting in 2016 where they are in current law at $1.016 trillion. Half of the increase will go to defense and half to the domestic accounts prized by Democrats. (…)

The deal means overall federal spending will not decline in 2014 as it has the last two years. (…)

All of this doesn’t begin to match the magnitude of America’s fiscal challenges, but it is probably the best that the GOP could get considering Washington’s current array of political forces. (…)

Four Signs the Job Market Is Getting Better 

Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels.

Quits are rising: (…)  2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier. Quits are still below normal levels, but they’re finally showing a clear upward trend.

And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. (…) There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.

Hiring is finally rebounding: (…) Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.(…)

But don’t get too excited: (…)The three-to-one ratio of jobseekers to openings is nearly double its prerecession level, and would be higher if so many unemployed workers hadn’t abandoned their job searches. Companies remain reluctant to hire, and many of the jobs that are getting created are in low-wage sectors — nearly a third of October’s hiring came in the low-paying hospitality and retail sectors. The epidemic of long-term unemployment has shown little sign of easing. Despite signs of healing, in other words, a healthy job market remains a long way off.

Wells Fargo Chief Sees Healing Economy

Wells Fargo& Co. Chief Executive John Stumpf said Tuesday the economy is healing, five years after the bank purchased Wachovia Corp. in the midst of a global financial meltdown.

He said government progress on a budget deal, lower unemployment and signs businesses are looking to expand give him reason to be optimistic. “As I’m talking with our customers, especially our small business and middle-market customers, I’m starting to hear a little more about expanding businesses,” he said.

Now, go back to Alan Blinder’s op-ed above.

European carmakers: speeding up

(…) Consultants at LMC Automotive reckon that November saw a 0.7 per cent rise year on year. That follows increases of over 4 per cent and almost 5.5 per cent in October and September respectively – so, at long last, a sustained upward trend for Europe’s crisis-hit sector. 

High five In three of the big markets – Germany, France and Italy – the November sales pace was lacklustre at best and down by over 4 per cent at worst. Spain, which saw a strong advance, benefited from a very easy year-on-year comparison and scrappage incentives. Pricing, too, remains weak across the sector. Last week, Fiat detailed transaction (as opposed to listed) price trends, in segments ranging from economy to basic luxury models for both the German and Italian markets. As of September, these were barely above 2007 levels and, after allowing for inflation in the intervening period, well down in real terms.

Above all, given the small number of plant closures since 2008, Europe still has massive overcapacity on the production side. If 2013 ends with under 12m cars sold in western Europe and 4.5m in eastern Europe, the total will be down by a fifth on 2007 levels. Europe’s light vehicle production, meanwhile, will probably top 19m units – just two-thirds of estimated plant capacity. Sales rises of 2-3 per cent, say, in 2014 will make only modest inroads on that gap so pricing pressures may persist.

China New Yuan Loans Higher Than Expected

Chinese financial institutions issued 624.6 billion yuan ($103 billion) worth of new yuan loans in November, up from 506.1 billion yuan in October and above economists’ expectations.

Total social financing, a broader measurement of credit in the economy, came to 1.23 trillion yuan in November, up from 856.4 billion yuan in October.

China’s broadest measure of money supply, M2, was up 14.2% at the end of November compared with a year earlier, slightly lower than the 14.3% rise at the end of October, data from the People’s Bank of China showed Wednesday.

IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery

The IEA estimated today in its monthly oil market report that demand will increase by 1.2 million barrels a day, or 1.3 percent, to 92.4 million a day next year, raising its projection from last month by 240,000 a day. U.S. fuel use rose above 20 million barrels a day in November for the first time since 2008, according to preliminary data. While the agency boosted its forecast for the crude volume OPEC will need to supply, “making room” for the potential return of Iranian exports “could be a challenge for other producers” in the group, it said.

“The geopoliticals are now bearish, while the fundamentals are bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said before the IEA published its report. “This is quite a change from just recently. People are anticipating tighter supplies as we go into next year. Demand will be higher.”

The agency raised estimates for supplies required next year from the Organization of Petroleum Exporting Countries by about 200,000 barrels a day, to 29.3 million a day. That’s still about 400,000 a day less than the group’s 12 members pumped in November, according to the report.

OPEC’s output fell for a fourth month, by 160,000 barrels a day, to 29.7 million a day in November, as a result of disruptions in Libya and smaller declines in Nigeria, Kuwait, the United Arab Emirates and Venezuela. The group decided to maintain its production target of 30 million barrels a day when it met on Dec. 4 in Vienna.

Saudi Arabia, the organization’s biggest member and de facto leader, kept production unchanged last month at 9.75 million barrels a day, the report showed.

This chart via FT Alphaville reveals how OPEC is effectively managing supply.

SENTIMENT WATCH

Can We Finally All Agree That This Is Not a Bubble?  All the bubble chatter over the past few months is increasingly looking like just a bunch of hot air.

A look at the IPO and M&A markets also point to caution rather than exuberance. “A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses,” said Jeffrey Kleintop, chief market strategist at Boston-based brokerage firm LPL Financial. While M&A activity is trending higher, it remains far below the peak 2007 levels, and 2000 for that matter, he pointed out.

RBC Capital has the chart:

image

 

Media bubble?

It seems to me that most media have been giving a positive spin to the not so great economic news of the past few months. This RBC Capital chart carries no emotion:

image

 

High Yield Spreads Hit a Six Year Low

(…) At a current reading of 411 basis points (bps) over treasuries, spreads are at their lowest level in more than six years (October 2007)!

With high yield spreads at their lowest levels since October 2007, skeptics will argue that the last time spreads were at these levels marked the peak of the bull market.  There’s no denying that, but we would note that in October 2007, spreads had already been at comparably low levels for more than three and a half years before the bear market started.  Additionally, back in the late 1990s we also saw a prolonged period where spreads were at comparably low levels before the market began to falter.

Another reason why the low level of spreads is of little concern is because default rates are also at historically low levels.  According to Moody’s, the default rate for junk rated American companies dropped to 2.4% in November, which according to Barron’s, “is barely more than half its long-term historic average and down from 3.1% a year ago.”

Not really bubbly, but getting closer…

Here’s an interesting chart:

Performance of Stocks vs Bonds

(…)  With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  (…)

While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon.  In the chart below, anything above the green line indicates a performance spread of more than 30 percentage points.  As you can see, the only other periods where we saw the spread exceed 30 were in 1999, 2003, 2009, and 2011.

What makes the current period somewhat different, though, is the period of time that the spread has been at elevated levels.  With the spread first exceeding 30 percentage points back in March, we are now going on nine months that the spread has been at elevated levels.  At some point you would expect the two to revert back to their long-term historical average.

Hedge funds attract billions in new money
Investor inflows jump sharply even as performance lags stocks

Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to figures from the data provider Preqin.(…)

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.”

With the same humongous fees…

Yesterday, I posted on this:

 

Fatter Wallets May Rev Up Recovery

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, according to the Fed.

Which deserves two more dots to explain the feeble transmission pattern of the past several years:

The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Click to View

  • And these charts from RBC Capital:

imageimage

image

 
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NEW$ & VIEW$ (10 DECEMBER 2013)

Small Businesses Optimism Up Slightly

Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has
been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.

Small business optimism report data through November 2013

The net percent of all owners (seasonally adjusted) reporting higher
nominal sales in the past 3 months compared to the prior 3 months was
unchanged at a negative 8 percent. Fifteen percent still cite weak sales as
their top business problem, but is the lowest reading since June 2008. The
net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.

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The pace of inventory reduction continued with a seasonally adjusted net
negative 7 percent of all owners reporting growth in inventories, 1 point
worse than in October. The negative outlook for the economy and real
sales prospects adversely impacted inventory satisfaction. The net percent
of owners viewing current stocks as too low improved only 1 point, to
negative 4 percent in November. Inventories are too large, especially given the poor outlook for sales improvements. The net percent of owners
planning to add to inventory stocks was a net 0 percent (up 1 point), no
new orders for inventory when stocks are excessive compared to expected
sales.

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WEEKLY CHAIN STORE SALES SHOW NO HOLIDAY CHEERS

Sales dropped 1.6% last week after the 2.8% decline the previous week. The growth in the 4-week m.a. is 2.2% YoY. It was 3.0% at the same time last year when the Christmas season sales finished up 3.3% by this measure.

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Smile Americans Regain Some Wealth

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, the highest on record, according to the Federal Reserve.

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The value of stocks and mutual funds owned by households jumped $917 billion last quarter, while the value of residential real estate grew about $428 billion, according to the Fed. (…)

Sad smile Wealthy Go Frugal This Holiday Amid Uneven U.S. Recovery

(…) Coach Inc. has said customers plan to spend less on gifts and that mall traffic fell sharply last month. Analysts predict Nordstrom Inc.’s fourth-quarter sales may grow less than half the year-ago pace of 6.1 percent. Tiffany & Co.’s third-quarter comparable sales in the Americas were barely higher. Even before Black Friday, Saks Inc., Neiman Marcus Group Inc. and Nordstrom offered 40 percent off on many brands. (…)

In early October, Unity Marketing conducted an online survey of 1,200 affluent shoppers. Twenty five percent said they’ll spend less on holiday gifts this year than they did in 2012, while 60 percent said they plan to spend the same. Just 13 percent said they would spend more.

Half the respondents said the financial health of the country is worse now than it was three months ago. (…)

First rise in US mortgage debt since 2008
Consumer spending may support economic growth next year

The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008.

After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. (…)

Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. (…)

Canada’s top 1% take home 10.6% of its income

A first glimpse of how top earners fared in 2011 shows their share of income peaked in 2006 at 12.1 per cent, before the recession walloped the wealthy as investment income and bonuses dried up. However, the share is still higher than when Statistics Canada began tracking incomes in 1982, when it stood at 7.1 per cent. (…)

In the U.S., the income share of the top 1 per cent of earners was 19.7 per cent in 2011, according to economists Emmanuel Saez and Thomas Piketty. By last year, it had grown to about 22.5 per cent – a similar level to both before the recession and the Great Depression. The economists found that incomes for the top 1 per cent grew by nearly a third between 2009 and 2012, compared with 0.4-per-cent growth for the bottom 99 per cent.

In Canada, the threshold to be in the top percentile of earners rose to $209,600 in 2011, up from $207,300 a year earlier in constant dollars. It requires $108,300 to be part of the top 5 per cent, while it takes $84,100 to be in the top decile of earners.

The rich typically pay a higher share of taxes in Canada, although that share has declined in recent years. The top 1 per cent of earners paid 20.8 per cent of the total share of federal and provincial or territorial income taxes, down from 23.3 per cent five years earlier. (…)

The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent. The report is based on 2011 tax-file data, which includes incomes from earnings and investments, but is not a measure of total wealth, which includes assets such as housing.

Signs Investment Slowing in China

(…) retail sales beat expectations, while investment lost momentum, a sign of progress toward the consumption-led growth policy makers have sought. Retail sales posted 13.7% annual growth in November, up from 13.3% in October, and auto sales hit a record high. (…)

Overall investment showed signs of slowing in November, though real-estate sales and construction starts were strong. Fixed-asset investment was up 19.9% in the first 11 months of the year, compared with the same period of 2012, just below expectations and lower than the figure for the January-to-October period. (…)

Growth in industrial production, the most closely watched monthly indicator of economic performance, slipped back to 10% on a year-to-year basis in November from 10.3% the previous month. (…)

Auto  China Auto Sales Gain 16% as Japan Automakers Extend Recovery

China’s passenger-vehicle sales rose 16 percent in November as Japanese automakers extended their recovery in the world’s largest auto market.

Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed to 1.7 million units last month, the state-backed China Association of Automobile Manufacturers said today. (…)

Industrywide, total sales of vehicles — including buses and trucks — reached 19.9 million units this year through November, putting China on course to be the first country to ever see 20 million units in annual vehicle sales. (…)

By contrast, Indian passenger-vehicle sales fell 10 percent last month, the third-straight decline, according to data released by the Society of Indian Automobile Manufacturers today.

Ghost  France’s Industrial Production fell 0.3% in October, following a 0.3% decline in September.

SENTIMENT WATCH

over the past 3 weeks a cumulative ~15B flowed into equity mutual funds while-$17B flowed out of Bond Mutual funds. (ISI)

 
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