NEW$ & VIEW$ (31 JANUARY 2014)

U.S. Banks Loosen Loan Standards Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook.

(…) In both the U.S. and Europe, new reports released Thursday show banks are slowly starting to increase their appetite for risk. The U.S. Office of the Comptroller of the Currency said banks relaxed the criteria for businesses and consumers to obtain credit during the 18 months leading up to June 30, 2013, while the European Central Bank said fewer banks in the euro zone were reporting tightened lending standards to nonfinancial businesses in the fourth quarter of 2013.

(…)  The comptroller’s report said it would still classify most banks’ standards as “good or satisfactory” but did strike a cautionary tone. (…)

An upturn in bank lending, if taken too far, could also lead to inflation. The Fed has flooded banks with trillions of dollars in cash in its efforts to boost the economy. In theory, the printing of that money would cause consumer price inflation to take off, but it hasn’t, largely because banks haven’t aggressively lent out the money. (…)

John G. Stumpf, CEO of Wells Fargo & Co., said on a Jan. 14 conference call with analysts that he is “hearing more, when I talk with customers, about their interest in building something, adding something, investing in something.”

Kelly King, chief executive of BB&T Corp., told analysts two days later, “we really believe that we are at a pivotal point in the economy…admittedly that’s substantially intuitive.” (…)

The comptroller’s survey found more banks loosening standards than tightening. The regulator said that in the 18 months leading up to June 30, 2013, its examiners saw more banks offering more attractive loans.

The trend extended to credit-card, auto and large corporate loans but not to residential mortgages and home-equity loans. (…)

The OCC’s findings are consistent with more recent surveys: The Fed’s October survey of senior U.S. loan officers found a growing number loosening standards for commercial and industrial loans, often by narrowing the spread between the interest rate on the loan and the cost of funds to the bank.

The ECB’s quarterly survey, which covered 133 banks, showed that the net percentage of euro-zone banks reporting higher lending standards to nonfinancial businesses was 2% in the fourth quarter, compared with 5% in the third quarter. (…)

 

U.S. Starts to Hit Growth Stride

A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.

Gross domestic product, the broadest measure of goods and services churned out by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department said. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving.

Growth Story

A big driver of growth in the fourth quarter was a rise in consumer spending, which grew 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity.

The spike in Q4 consumer spending is very surprising, and suspicious. Let’s se how it gets revised.

Consider these nest 2 items:

(…) For the 14-week period ending Jan. 31, Wal-Mart expects both Wal-Mart U.S. and Sam’s Club same-store sales, without fuel, to be slightly negative, compared with prior guidance. It previously estimated Wal-Mart U.S. guidance for same-store sales to be relatively flat, and Sam’s expected same-store sales to be between flat and 2%.

A number of U.S. retail and restaurant companies have lamented poor winter weather and aggressive discounts, resulting in fewer store visits and lower sales. Many of those companies either lowered their full-year expectations or offered preliminary fourth-quarter targets that missed Wall Street’s expectations.

Wal-Mart warned the sales impact from the reduction in the U.S. government Supplemental Nutrition Assistance Program benefits that went into effect Nov. 1 was greater than expected. The retailer also said that eight named winter storms resulted in store closures that hurt traffic throughout the quarter.

Wal-Mart Stores Inc. warned that it expects fourth-quarter earnings to meet or fall below the low end of its prior forecast, citing government cuts to assistance programs and the harsh winter weather.

Amazon earned $239 million, or 51 cents a share, on sales that were up 20% at $25.59 billion. The 51 cents a share were far below Street consensus of 74 cents, and the $239 million profit on $25 billion in sales illustrates just how thin the company’s margins are.

A year ago, Amazon earned $97 million, or 21 cents a share, on sales of $21.29 billion.

The company also forecast first-quarter sales of $18.2-$19.9 billion; Street consensus was for $19.67 billion. In other words, most of that projection is below Street consensus.

It projected its net in a range of an operating loss of $200 million to an operating profit of $200 million.

Surprised smile AMZN earned $239M in 2013 and projects 2014 between –$200M and +$200M. You can drive a truck in that range. But how about the revenue range for Q1’14:

Net sales grew 20 percent to $25.6 billion in the fourth quarter, versus expectations for just above $26 billion and slowing from the 24 percent of the previous three months.

North American net sales in particular grew 26 percent to $15.3 billion, from 30 percent or more in the past two quarters.

Amazon also forecast revenue growth of between 13 and 24 per cent in the next quarter, compared to the first quarter 2013.

Notwithstanding what that means for AMZN investors, one must be concerned for what that means for U.S. consumer spending. Brick-and-mortar store sales have been pretty weak in Q4 and many thought that online sales would save the day for the economy. Amazon is the largest online retailer, by far, and its growth is slowing fast and its sales visibility is disappearing just as fast.

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Back to AMZN itself, our own experience at Christmas revealed that Amazon prices were no longer systematically the lowest. We bought many items elsewhere last year, sometimes with a pretty large price gap with Amazon. Also, Amazon customers are now paying sales taxes in just about every states, closing the price gap further. And now this:

To cover rising fuel and transport costs, the company is considering a $20 to $40 increase in the annual $79 fee it charges users of its “Prime” two-day shipping and online media service, considered instrumental to driving online purchases of both goods and digital media.

“Customers like the service, they’re using it a lot more, and so that’s the reason why we’re looking at the increase.” Confused smile

U.S. Pending Home Sales Hit By Winter Storms

The National Association of Realtors (NAR) reported that December pending sales of single-family homes plunged 8.7% m/m following a 0.3% slip in November, revised from a 0.2 rise. It was the seventh consecutive month of decline.

Home sales fell hard across the country last month. In the Northeast a 10.3% decline (-5.5% y/y) was logged but strength earlier in the year lifted the full year average by 6.2%. Sales out West declined 9.8% (-16.0% y/y) and for the full year fell 4.1%. Sales down South posted an 8.8% (-6.9 y/y) falloff but for all of 2013 were up 5.4%. In the Midwest, December sales were off 6.8% (6.9% y/y) yet surged 10.4% for the year.

Punch Haver’s headline suggests that weather was the main factor but sales were weak across the U.S. and have been weak for since the May taper announcement.

Mortgage Volumes Hit Five Year Low The volume of home mortgages originated during the fourth quarter fell to its lowest level in five years, according to an analysis published Thursday by Inside Mortgage Finance, an industry newsletter.

(…) Volumes tumbled by 19% in the third quarter, fell by another 34% in the fourth quarter, according to the tally. (…)

Overall originations in 2013 stood at nearly $1.9 trillion, down nearly 11% from 2012 but still the second best year for the industry since the mortgage bust deepened in 2008. The Mortgage Bankers Association forecasts originations will fall to $1.1 trillion, the lowest level in 14 years.

The report also showed that the nation’s largest lenders continued to account for a shrinking share of mortgage originations, at around 65.3% of all loans, down from over 90% in 2008.

Euro-Zone Inflation Returns to Record Low

Annual inflation rate falls to a record low in January, a development that will increase pressure on the ECB to act more decisively to head off the threat of falling prices.

The European Union’s statistics agency said Friday consumer prices rose by just 0.7% in the 12 months to January, down from an 0.8% annual rate of inflation in December, and further below the ECB’s target of just under 2.0%.

Excluding energy, prices rose 1.0%, while prices of food, alcohol and tobacco increased 1.7% and prices of services were 1.1% higher.

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Pointing up Figures also released Friday showed retail sales fell 2.5% in Germany during December. The result was far worse than the unchanged reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales fell 2.4%, the data showed. It was the first annual decline in German sales since June.

Consumer spending also fell in France as households cut purchases of clothes and accessories, although by a more modest 0.1%.

Benchmark Japan inflation rate hits 1.3%
December figure brings Bank of Japan closer to 2% goal

Average core inflation for all of 2013, a measure that excludes the volatile price of fresh food, was 0.4 per cent, according to the interior ministry. (…)

Much of the inflation so far has been the result of the precipitous fall in the yen that took hold in late 2012, making imports more expensive. Energy prices, in particular, have risen sharply: Japan buys virtually all of its oil and gas abroad, and the post-Fukushima shutdown of the country’s nuclear industry has further increased the need for fossil fuels.

So-called “core-core” consumer prices, which strip out the cost of both food and energy, rose by 0.7 per cent in December.

SENTIMENT WATCH

Individual Investors Head For the Hills

(…) In this week’s poll, bullish sentiment declined from 38.12% down to 32.18%.  This represents the fourth weekly decline in the five weeks since bullish sentiment peaked on 12/26/13 at 55.06%.  While bullish sentiment declined, the bearish camp became more crowded rising from 23.76% to 32.76%.  

With this week’s increase, bearish sentiment is now greater than bullish sentiment for the first time since mid-August.  The most interesting aspect about these two periods is what provoked the increase in cautiousness.  Back then it was concerns over Syria that were weighing on investor sentiment.  Fast forwarding to today, the big issue weighing on investors’ minds is now centered on Syria’s neighbor to the North (Turkey).  For such a small area of the world, this region continues to garners a lot of attention.

THE JANUARY BAROMETER (Contn’d) Sleepy smile

January Slump Is Nothing to Fret Over

The old Wall Street adage — as January goes, so goes the rest of the year – needs to be put to rest.

Since 1950, there have been 24 years in which the S&P 500 fell in January, according to Jonathan Krinsky, chief market technician at MKM Partners. While the S&P 500 finished 14 of those years in the red, a look at the performance from February through the end of the year provides evidence to buoy investors. In 13 of those 24 years, stocks rose over the final 11 months.

“All else being equal, a down January is less than 50% predictive that the rest of the year will close lower than where it closed in January,” Mr. Krinsky said. (…)

Long time reader Don M. sent me even better stuff on the January Barometer. Hanlon Investment Management must have had many clients asking about that since they made a thorough analysis of the “phenomenon”. Here it is for your Super Bowl conversation:

(…) What was found is that from 1950 until 1984, years where the month of January saw a positive return were predictive of a positive return for the entire year with approximately 90% probability.  The years with a negative return in January were predictive of a negative return for the year approximately 70% of the time. 

In the intervening time since 1984, market action has caused the predictive power of negative returns in January to fall to around 50%, which is nothing more than chance.  However, positive returns in January have still retained their predictive power for positive returns for the year.

Yet still, there is another group of people who advocate that just the first five trading days of January are predictive of the rest of the year.  We took data from 1950 through 2013 for the S&P 500 Index and then calculated both positive and negative results on a weekly and monthly basis.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time.  A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time.  A negative return in January was predictive of a negative return for the year 54.2% of the time-basically not predictive at all.  A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

But what if we filter the results by requiring both a positive return during the first five trading days of January and a positive return in January for a positive signal?  Conversely, we may require a negative return during the first five trading days of January and a negative return for January to generate a negative signal.   When the first week and the month of January both have positive returns, then the signal is predictive 93.5% of the time for a positive year: a slight improvement over 92.5%.

Even more interesting is that when you require both a negative return in the first week and a negative return in January to give a signal.  Though the number of signals is reduced from 24 to 15, the success ratio improves from 54.2% to 73.3%.  The median and average returns for predicted years are listed in the summary statistics table, along with their respective success percentages, on the following page.  This will give you a something to ponder as we begin 2014.

How about negative first week and positive month? And what’s wrong with the last five days of January? Then insert the result of the Super Bowl. There you go!

Thanks Don.

Investors pull billions from EM stocks Dedicated EM funds hit as equity outflows reach highest since 2011 (Via FT Alphaville)

SocGen’s cross-asset research team believes that when it comes to EM outflows they may have only just begun:

As the team notes on Friday, this is especially so given the Fed doesn’t appear to care about the EM sell-off:

Since cumulative inflows into EM equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere. Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity (see chart below). EM bond funds face a similar fate. For reasons discussed in our latest Multi Asset Snapshot (EM assets still at risk – don’t catch the falling knife), we see no early end to EM asset de-rating. Furthermore, the Fed remains assertive on execution of tapering despite recent turmoil within the EM world, which spells more turbulence ahead.

And if it keeps going, balance of payments issues could emerge as a result:

A close look at Global EM funds indicates that all EM markets are suffering outflows Mutual fund and ETF investors in EMs both favour global EM funds. Regional or country specialisation is less common (less than 47% of global EM assets). The implication is that all EM markets face outflows currently, with little discrimination between the countries that are most exposed and those which are more defensive. We think Balance of Payment issues may emerge as an important factor going forward.

Though, what is EM’s loss seems to be Europe’s gain at the moment:

Europe reaps the benefits While current EM volatility is impacting developed markets as well, some of the flows are being redirected toward Europe, notably into Italy, Spain and the UK.

The notable difference with taper tantrum V.2, of course, is that US yields are compressing:

Which might suggest that what the market got really wrong during taper tantrum V.1, was that a reduction in QE would cause a US bond apocalypse. This was a major misreading of the underlying fundamentals and tantamount to some in the market giving away top-quality yield to those who knew better.

Taper at its heart is disinflationary for the US economy, and any yield sell-off makes the relative real returns associated with US bonds more appealing.

That taper V.2 incentivises capital back into the US, at the cost of riskier EM yields, consequently makes a lot of sense.

Though, this will become a problem for the US if the disinflationary pressure gets too big.

 

NEW$ & VIEW$ (22 JANUARY 2014)

COLD PATCH = SOFT PATCH COMING?

Chain store sales continue very weak, partly because of the weather. Whatever the reason, that may exacerbate the inventory problem at retail and lead to a soft patch in the spring as reorder rates are cut.

Frigid weather pulled chain-store sales steeply lower in the January 18 week, down 1.9 percent on ICSC-Goldman’s same-store sales index for a year-on-year rate of only plus 0.9 percent which is the lowest reading of the whole recovery. The report warns that cold weather in the ongoing week is likely to depress readings in this report for next week.

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IMF Raises Global Growth Outlook

The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October. (…)

The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid the fights in Congress over the federal balance sheet and spending. (…)

For Europe, however, officials warned that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said, “Southern Europe continues to be the more worrisome part of the world economy.”

Exports are strengthening in the Southern euro-zone countries. But demand is slack, with weakness among banks and businesses. More budget tightening is needed as well, the IMF said, and unemployment remains at dangerously high levels, especially among youth. (…)

For Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan’s government will continue to face the challenge of trimming its budget enough to reassure investors, while not slowing the recovery.

The fund also raised the growth forecast for the world’s No. 2 economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that China’s need to contain escalating risks in the financial sector without excessively slowing growth will be a major challenge “and a delicate balancing act.”

with weak economic policies are likely to be most affected, he said. (…)

INFLATION/DEFLATION

 

Late Tuesday, a panel created by Reserve Bank of India Governor Raghuram Rajan advised the central bank to make significantly lower consumer prices the central target of its monetary policy.

The Consumer-price index is currently hovering near 10%, compared with about 6% for wholesale prices. The panel suggested the central bank aim to reduce CPI to 8% by 2015 and 6% within two years before adopting a target range around a 4% anchor.

Surprised smile Inflation Jumps in Australia Australian consumer prices rose 0.8% in the December quarter and climbed 2.7% from a year earlier, numbers that were significantly higher than expected.

Core inflation, which attempts to strip out extraordinary events such as extreme weather or new taxes, rose by an average of 0.9% in the quarter from the preceding one, compared with the 0.6% expected by 15 economists surveyed by The Wall Street Journal. Core inflation climbed 2.6% in the fourth quarter from a year earlier.

Aussies Stunned By Inflation Surprise Australia’s central bank can no longer assume the country’s inflation outlook will remain pleasantly benign, a revelation that will dramatically complicate the setting of interest rates in 2014.

(…)So how is it that a weak economy like Australia, which is weighed by a severe slowdown in mining investment, low confidence and weak commodity prices, can have an inflation problem?

There are a few contributing factors.

The first is the fall in the Australian dollar. The Aussie was the worst-performing major currency over the last 12 months, falling around 17% against the U.S. dollar. Drops of that magnitude must be reflected in higher import prices at some point. Tradable, or imported inflation, rose 0.7% in the fourth quarter from the third, building on a 1.2% rise in the third quarter from the second. (…)

The second component of the inflation riddle in Australia is homegrown. So-called non-tradable inflation, or that generated by goods and services produced locally, has been running hot for years. Some economists call it a structural problem, fearing it will take a long time to be weeded out of the consumer price index.

Non-tradable inflation rose 0.8% in the fourth quarter, adding to a long string of elevated results that date back over years.

Adam Boyton, the chief economist at Deutsche Bank, based in Sydney, says rising government charges are at the heart of the domestic inflation problem. What he terms as “government inflation” is running at annual rate of 5.7%. Inflation elsewhere in the economy is running at just 1.8%.

The list of government price hikes is long and range from environmental taxes to electricity, water and sewerage costs, coupled with higher levies on alcohol and tobacco. (…)

Floating Notes Debut in U.S as More Cash Chases Fewer Securities

The U.S. Treasury Department’s floating-rate notes may generate strong investor demand given a scarcity of money-market securities and a looming debt limit that’s accelerating a decline in bill supply.

Floaters would be the Treasury’s first new security in 17 years. Details of the inaugural sale of the two-year notes Jan. 29 will be announced tomorrow even as legislation on the nation’s borrowing limit causes the Treasury to scale back on bill sales and as dealers reduce activity in the repurchase agreement market.

WHATEVER IT TAKES

Italian Bad Loans Hit Record High – Up 23% YoY

(…) Having risen at a stunning 23% year-over-year – its fastest in 2 years, Italian gross non-performing loans (EUR149.6 billion) as a proportion of total lending rose to 7.8% in November (up from 6.1% a year earlier). As the Italian Banking Association admits in a statement today, deposits are declining (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.

Italian bad loans continue to soar – entirely ignored by the nation’s bond market participants (why worry!?)

EARNINGS WATCH

While just eight companies have provided outlooks for their first-quarter profits so far, the six that had disappointing outlooks saw shares fall an average of 3.1%, according to FactSet, a steeper drop than usual. Over the past five years, companies’ stock prices have lost an average of 0.8% after providing disappointing forecasts. (WSJ)

Ed Yardeni:

It’s not over yet, but this is turning out to be a very unusual earnings season. During each of the previous three earnings seasons last year, analysts lowered their estimates as the season approached. That set up investors to be pleasantly surprised as actual earnings turned out to be a bit better than expected.

So far, there has been no similar curve ball. Instead, during the week of 1/16, the blended actual/estimate for Q4 fell to a new low for the weekly series. The current projected growth rate for the quarter is just 6.6% y/y.

Verizon Dials Up a Big Pension Boost

Verizon Communications Inc.’s earnings got a big lift Tuesday from a change it made in its pension accounting a few years ago, and some other companies could see similar gains in the days to come.

Verizon recorded a $6 billion pretax gain in its fourth-quarter earnings for “severance, pension and benefit” credits – largely due to a gain from “mark-to-market” accounting for its pension plan, the method to which Verizon switched in 2011. After taxes, that amounted to $3.7 billion, or $1.29 a share – the biggest contributor to Verizon’s fourth-quarter earnings of $1.76 a share under official accounting rules.

That was a major turnaround from the fourth quarter of 2012, when Verizon reported a severance, pension and benefit loss of $7.2 billion pretax, or $1.55 a share after taxes, that weighed down its earnings.

Verizon is one of a handful of big companies that have made an optional switch to mark-to-market accounting, to make the results of their pension plans easier for investors to understand. They follow market prices for their pension assets, and they no longer “smooth” the impact of pension gains and losses into their earnings over a period of years.

Those companies recognize the impact of their switch through a fourth-quarter adjustment to their earnings each year, to account for the difference between their expectations for their pension plans’ performance and the year’s actual results. For 2011 and 2012, that meant losses, largely because interest rates were falling – that increased the current value of pension obligations, which affected the plans’ expenses.

But with some rates rising in 2013, and the stock market turning in a particularly strong performance for the year, the value of pension obligations fell, benefitting Verizon and other mark-to-market companies. The Wall Street Journal reported earlier this month that accounting observers expected some of them to report significant fourth-quarter gains. (…)

Among the other companies that could see similar fourth-quarter gains in coming days: AT&T Inc., which reports earnings on Jan. 28, and Kellogg Co., which reports on Feb. 6. Both have made the mark-to-market switch; AT&T reported a $10 billion mark-to-market loss in the fourth quarter of 2012, while Kellogg reported a $401 million loss in that period. (…)

Poor Start to European Earnings

Europe’s first earnings season of the year is off to a rough start, with a number of typically reliable blue-chip companies surprising markets with profit warnings and other bad news.

In recent days, Royal Dutch Shell PLC, Deutsche Bank AG, SAP AG, Unilever PLC and Alstom SA all warned about slowing profit at the tail end of last year or lower expectations for the near future. Executives have cited an array of industry-specific reasons. (…)

German business-software supplier SAP said Tuesday that it would take longer than expected to get to its 35% operating-profit margin target. It forecast €5.8 billion to €6 billion ($7.8 billion to $8.1 billion) in operating profit this year, below analysts’ expectations.

Alstom, a French maker of natural-gas turbines and high-speed trains, said its operating profit margins will fall in this fiscal year and next, having previously said the margins would improve, as its cash flow turns negative. Chief Executive Patrick Kron has recommended the company pay no dividend this year.

Over the weekend, Deutsche Bank warned that it would set aside a bigger chunk of money to absorb loan losses and said revenue from trading bonds and currencies fell.

And on Friday, Shell stunned investors by saying profit for the fourth quarter would be sharply lower than in previous periods, partly because of higher costs and lower production.

While challenges are different for each company, one weak spot has been that European economic growth continues to be sluggish. (…)

That has lowered expectations among executives. Unilever Chief Executive Paul Polman said having merely a “stable business” in Europe these days “is pretty good.”

The Anglo-Dutch consumer-products group said Tuesday that competition in developed markets and uncertainty in emerging economies would hold back growth during the year ahead.

Emerging markets are another challenge for European companies, many of which have diversified aggressively into developing economies amid flagging sales during the economic crisis at home. Today, growth in the biggest emerging markets—Brazil, Russia, India and China—isn’t accelerating as it has in previous years. (…)

RISING INEQUALITIES…

Two-Track Future Imperils Global Growth

Will wealth and income disparities become defining issues for the coming decade?

Concentrated cash pile puts recovery in hands of the few
A third of non-financial companies sits on $2.8tn hoard
 

(…) About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.

This will have a big influence on whether 2014 will bring a revival in capital expenditure or dealmaking, warned Iain Macmillan, head of mergers and acquisitions at Deloitte. “Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many,” he said.

Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year.

Such concentration has increased since 2007 when companies that held more than $2.5bn in cash or “near cash” items – not including debt – accounted for 76 per cent of the aggregate cash pile in 2007.

The study focused on gross cash holdings rather than subtracting their debt in an effort to simplify comparisons over time and identify how much money companies have to hand.

The study comes amid increasing investor calls for companies to step up capital spending. An influential survey of fund managers conducted by Bank of America Merrill Lynch released on Tuesday showed a record 58 per cent of investors polled want companies’ cash piles spent on capex.

A record 67 per cent said companies were “underinvesting” and less than a third of asset managers surveyed want companies to return more money to shareholders – the usual complaint of investors. (…)

Deloitte’s study reveals though that hoarding cash has hit companies’ share prices and revenue growth in recent years, as companies with low cash balances have done better on both measures than companies with large cash reserves.

Mr Macmillan at Deloitte said: “Small cash holding companies which have been more aggressive in their pursuit of growth have seen their revenue growth and share price performance outperform their richer counterparts.” (…)

Corporate cash may not all flow back with recovery

(…) According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 – more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. (…)

Examining quarterly Duke University survey responses from some 550 chief financial officers over the past two years, the paper said companies are far less sensitive to interest rate changes than investment theory suggests and CFOs cite ample cash and historically low rates among the reasons for that.

Less than a third of firms said moves of up to 200 basis points in key borrowing rates up or down would affect their investment plans at all.

So what would get companies to hoard or invest these days? The two most commonly chosen drivers in the survey cited in the paper were “ability to maintain margins” and the “cost of health care.” (…)

And now there:

The rally against the Valley
Showdown between tech companies and protesters in San Francisco

(…) Ostensibly a dispute about the hundreds of commuter shuttles that transport tech workers down to Silicon Valley – and how little they pay to park – the battle of the buses actually centres on complaints that the community has not shared in the spoils of the tech boom.

Speaker after speaker declared the coaches a symbol of “filthy rich corporations that could afford to pay more”, “class warfare” and “manifest destiny”. Earlier in the day a bus for Facebook employees and one heading to Google were blockaded in the latest in a series of irate protests, one of which led to a bus window being smashed.

The committee room, complete with the flags and blonde wood panelling of a courtroom, was shaken by cheers for anyone who criticised “Big Tech” with an anger which has in the past been reserved for Wall Street.

As young technology workers prefer to live in San Francisco rather than the suburban sprawl of Silicon Valley, rents have risen more than 20 per cent and evictions are up almost 40 per cent since 2010.(…)

The transportation board voted in favour of the tech companies, legalising the ferrying of almost 35,000 workers in private buses to and from public bus stops. Google said it was “excited” to work with them on the pilot programme towards a “shared goal of efficient transportation”.

But the board said the buses – with their blacked-out windows and teched-up interiors – were the “physical manifestation of a lot of larger issues” that they were not able to solve.

And there:

Vatican’s “Monsignor 500” Re-Arrested Amid Money Laundering Allegations

Monsignor Nunzio Scarano – dubbed “Monsignor 500” after his favorite bank-notewho is already on trial for allegedly plotting to smuggle 20 million euros from Switzerland to Italy, was arrested Tuesday in a separate case for allegedly using his Vatican accounts to launder a further 7 million euros. As AP reports, police said they seized 6.5 million euros in real estate and bank accounts Tuesday, including Scarano’s luxurious Salerno apartment, filled with gilt-framed oil paintings, ceramic vases and other fancy antiques. A local priest was also placed under house arrest and a notary public was suspended for alleged involvement in the money-laundering plot. Police said in all, 52 people were under investigation. Have no fear though, for his lawyer, “has good faith that the money came from legitimate donations.”

Via AP,

Scarano’s lawyer, Silverio Sica, said his client merely took donations from people he thought were acting in good faith to fund a home for the terminally ill. He conceded, however, that Scarano used the money to pay off a mortgage. (…)

GOOD SHOT: (From FT)

The Davos World Economic Forum 2014

 

NEW$ & VIEW$ (21 JANUARY 2014)

Pointing up Pointing up Pointing up U.S. bankers voice new optimism as businesses line up for loans Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.

JPMorgan Chase & Co Chief Executive Jamie Dimon, who has long described himself as “cautiously optimistic” about the economy, recently dropped the modifier “cautiously,” he said on a conference call with investors last week.

“We’re using the word optimistic because we are actually optimistic,” he added.

“The sun and moon and stars are lined up for a very successful year” in the U.S., he said the next day at a conference in San Francisco.

Pointing upI don’t see any weak spots in America,” Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.

Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.

Bankers say that anecdotally, business customers are more hopeful than they had been.

“I am hearing more when I talk with customers about their interest in building something, adding something, investing in something,” Wells Fargo & Co (WFC.N) CEO John Stumpf said on a conference call with investors last week. “There is more activity going on.” (…)

“We have seen some moderate strength in the U.S.,” GE Chief Financial Officer Jeff Bornstein said in an interview, even if he cautioned that the company has not yet seen “the breakout broadly across the economy.” (…)

“We see solid demand for loans as we head into 2014” from businesses, particularly large corporations and healthcare companies, along with owners of commercial real estate, Bank of America (BAC.N) CFO Bruce Thompson said on a conference call with analysts on Wednesday. (…)

If you missed yesterday’s New$ & View$ you have missed this from the latest NFIB report which neatly complements the above:

Small firms capex is also brightening:

The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005.

Of those making expenditures, 43 percent reported spending on new equipment (up 5 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 6 points).The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy.

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And to confirm what bankers are saying, this chart of weekly loans up-to-date as of Jan. 8, 2014:

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So:

Fed on Track For Next Cut In Bond Buys

The Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year.

A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke.

Punch Read this next piece carefully, as it confirms that the U.S. industrial sector is perking up:

US oil demand growth outstrips China
Abundant energy supplies drive US resurgence, IEA report shows

US demand for oil grew by more than China’s last year for the first time since 1999 according to the International Energy Agency, in a startling indication of how abundant energy supplies are driving an economic resurgence in the US.

The IEA – the rich world’s energy club whose forecasts are the gold standard for the energy market – said US oil demand grew by 390,000 barrels a day or 2 per cent last year, reversing years of steady decline. Chinese demand grew by 295,000 b/d, the weakest in at least six years. (…)

“It is clear that the US economy is rebounding very strongly thanks to its energy supplies,” said Antoine Halff, head of oil market research at the IEA.

“Sometimes oil is a lagging indicator, but sometimes it is the opposite and shows that an economy is growing faster than thought,” he added.

Pointing up The IEA said that US demand growth was driven by fuels such as propane, which is used in petrochemical plants, and indicated a pick-up in industrial activity in the US. 

The rapid growth in US consumption has taken many analysts by surprise. As recently as last month the IEA was forecasting US demand would fall in 2014, but it is now forecasting a second consecutive year of growth. 

Pointing up US consumption also appears to be accelerating. The IEA said the latest estimate of 2013 consumption was based on “exceptionally strong US monthly data for October and robust weekly data since then”.

Surging US consumption may reduce pressure on US politicians to lift an effective ban on the export of US crude oil beyond Canada. 

The IEA has been among the most vocal advocates of allowing foreign sales of US oil, arguing that domestic US oil prices would fall sharply, discouraging production, if US producers were denied a foreign outlet for their crude.

But in its monthly report the IEA acknowledged that thanks to fast-growing domestic demand and exports of refined oil products such as diesel, “challenges to [US production] growth are not imminent”.

European oil demand is also showing signs of growth for the first time since the financial crisis and the IEA said that industrialised economies as a whole are likely seeing oil demand rise for the first time since 2010. 

As a result, oil inventories in OECD countries fell by 50m barrels in November, the most since December 2011, pushing stocks 100m barrels beneath their five-year average.

The IEA also raised its estimate for total oil demand in 2014, helping push Brent crude oil prices up almost 1 per cent to just over $107 per barrel.

EU energy costs widen over trade partners
Industry paying up to four times more than in US and Russia

The gap in energy costs between Europe and its leading trading partners is widening, according to an official paper to be released by Brussels that shows industrial electricity prices in the region are more than double those in the US and 20 per cent higher than China’s.

Industrial gas prices are three to four times higher in the EU than comparable US and Russian prices, and 12 per cent higher than in China, says the European Commission paper, based on the most comprehensive official analysis of EU energy prices and costs to date. (…)

“If we paid US energy prices at our EU facilities, our costs would drop by more than $1bn a year,” said Mr Mittal, noting the US shale gas boom and more industry-friendly policies had led to much lower costs for industrial energy users in that country.

Separately, Paolo Scaroni, chief executive of the Italian oil and gas company, Eni, said in a speech at the weekend that lower American energy costs had created a “massive competitive advantage for the US” that was driving investors and businesses to that country at a rapid pace. “This is a real emergency for Europe,” he said. (…)

California Declares Drought Emergency

Governor’s move frees state resources to cope with the growing economic and environmental threat from some of the driest conditions on record.

(…) The economic fallout is beginning to spread. The U.S. Agriculture Department on Wednesday declared parts of 11 mostly Western states to be natural-disaster areas, making farmers in places including California, Arizona and Nevada eligible for low-interest assistance loans.

In California, with its huge economy, the financial impacts are likely to ripple beyond the farmers. Growers in the Central Valley’s Westlands Water District, for instance, are expected to fallow 200,000 of their 600,000 acres this year, resulting in job losses in surrounding communities, according to a statement by the agency. Other businesses that stand to suffer include landscapers, nurseries and orchards. (…)

Euro-Zone House Prices Improve

House prices rose at the fastest quarterly pace in over two years in the third quarter of 2013, a sign that the slow economic recovery continued in the second half of last year.

Eurostat said house prices across the 17 country euro zone were 0.6% higher in the third quarter of 2013 compared with the second quarter, and fell 1.3% in annual terms.

The quarterly gain was the strongest since a 1.1% increase in the second quarter of 2011, while the annual drop was the smallest since the fourth quarter of 2011.

In the second quarter of 2013 house prices in the euro zone rose 0.2% from the previous quarter and declined 2.4% in annual terms. (…)

House prices in France also bolstered the gain, rising 1.2% in the third quarter from the second. Although Eurostat doesn’t chart official data for German house prices, the estimate they use is based on European Central Bank statistics that showed house prices in the largest euro-area economy grew around 1.0% over the same period.

In Spain Eurostat said house prices grew 0.8% on the quarter in the third quarter after a 0.8% decline in the second quarter while in the Netherlands house prices grew 0.6% after a 2.0% drop in the second quarter.

Just five of the 17 countries saw house prices fall between July and September last year, according to the data—Italy, Cyprus, Malta, Slovenia and Finland.

Thailand Seen Cutting Rates as Unrest Continues

Thailand’s central bank is expected to cut interest rates at its meeting Wednesday as political unrest continues to engulf the exporter of automobiles and electronics.

Almost daily antigovernment protests, many of them violent, have destabilized the country since late last year. Prime Minister Yingluck Shinawatra has called elections for Feb. 2 but the opposition says they will boycott the polls, meaning a likely protracted battle.

At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%. (…)

Even before the instability, the outlook for Thailand’s economy was shaky. Exports, which account for around two-thirds of the economy, have performed poorly, declining 4.1% on the year in November, the latest month for which data are available.

The automobile industry is suffering because of weak demand in other Asian markets. Exports from the nation’s electronics industry, which supplies parts for personal computers—but not the fast-growing smartphone market—also have been disappointing.

The turmoil is taking its toll on the economy. Tourism, which accounts for 7% of national output, has been hard hit as foreign travelers postpone journeys. Plans to build multibillion-dollar infrastructure, including high-speed rail lines, look likely to face delays amid the political gridlock.

The Finance Ministry last week slashed its growth forecast for 2014 to 3.1%, compared with an earlier projection of 3.5% to 4.0%. Failure to push ahead this year with the 2.2 trillion baht ($66.6 billion) infrastructure plan could push growth as low as 2%, the ministry estimated. (…)

Such monetary easing, though, might have little direct effect in the current environment. The previous rate cut failed to filter through into higher bank lending because Thai banks are currently trying to reduce debt exposure.

Thai household debt stands at 80% of gross domestic product, one of the highest ratios in Asia, reflecting years of aggressive lending to finance house purchases and auto loans. A government tax rebate two years ago for first-time car owners also helped boost debt levels. (…)

China’s Working Population Fell Again in 2013

China’s working-age population continued to shrink in 2013, suggesting that labor shortages would further drive up wages in the years to come.

The nation’s working-age population—those between the ages of 16 and 59—was 920 million in 2013, down 2.4 million from a year earlier and accounting for 67.6% of the total population, the National Bureau of Statistics said Monday. The country’s workforce dropped in 2012 for the first time in decades, raising concerns about a shrinking labor force and economic growth prospects.

Last year, the statistics bureau said the population between the ages of 15 and 59 was 937 million in 2012, down 3.45 million from a year earlier, accounting for 69.2% of the total population. The bureau didn’t explain why it began using a different starting age of 16 to measure the working-age population in 2013.

The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.

Labor shortages are still common in several regions throughout the country, and many employers reported an increase of between 10% and 15% in labor costs last year, Ma Jiantang, chief of the National Statistics Bureau, said at a news conference Monday. (…)

But what’s even more significant than the shrinking working-age population was a notable decrease in the labor-participation rate, or the share of the working-age population that is actually working, Professor Li Lilin at Renmin University of China said.

“The labor-participation rate has been dropping, especially among females in the cities,” Ms. Li said.

Rising household income amid decades-long market reforms has made it possible for some who previously would have needed to work to choose to stay at home, she added.

After adjusting for inflation, actual disposable income of Chinese in urban areas grew 7% last year, while the net income of those living in rural areas rose 9.3%, the statistics bureau said. The average monthly salary of the nation’s 268 million migrant workers was 2,609 yuan ($431), up 13.9%, it said. The rise in wages means workers are likely to benefit more from the nation’s economic growth, though rising labor costs are a growing challenge for manufacturers.

SENTIMENT WATCH

 

Stock Values Worry Analysts

(…) Ned Davis Research in Venice, Fla., has reached similar conclusions. Ned Davis, the firm’s founder, published two reports titled “Overweighted, Over-Believed and Overvalued.” He looked at an array of measures including the percentage of U.S. financial assets held in stocks, margin-debt levels and how much money managers and mutual funds have allocated to stocks.

His conclusion: Investors are overexposed to stocks, but they haven’t gone to bubblelike extremes.

Vincent Deluard, a Ned Davis investment strategist, agrees that the P/E based on forecast earnings is above average. Because forecasts are unreliable, he also tracks earnings for the past 12 months, adjusted for inflation, interest rates and economic growth. All these measures yield a similar conclusion.

“We have a market that is getting a little frothy,” Mr. Deluard says. His team expects a pullback of 10% to 20% in the next six months, but perhaps not right away. Then they expect stocks to rise, maybe for years.

“This is not 2008. This is not 2000. This is more like 1998, where you have some of the signs that you see at tops, but not at extremes,” he says. (…)

High five But some people disagree. James Paulsen, chief investment strategist at Wells Capital Management, which oversees $340 billion, notes that P/E ratios in the past have moved even higher than they are today before running into real trouble.

As long as inflation stays moderate and the Federal Reserve doesn’t raise interest rates sharply, he says, the P/E ratio on earnings for the past 12 months can hit the 20s from its current level of around 16 or 17.

High five Yet Mr. Paulsen, too, is worried that 2014 could be a volatile year and that stocks could finish with little or no gain. His concern isn’t valuation; It is that the economy could warm up. Inflation fears could spread, he says, even if actual inflation stays modest. The worries could limit stock gains.

These things are so hard to predict that he and many other money managers are urging clients not to change their holdings or try to time the market.

This is so beautiful. In just a few words, Paulsen says everything we should know, makes all possible forecasts and none at all. And the article concludes saying that things are so uncertain and unpredictable that investors just just freeze sitting on their hands. Disappointed smile

 

NEW$ & VIEW$ (3 JANUARY 2014)

Global Manufacturing Improves At Fastest Pace Since February 2011

The end of 2013 saw growth of the global manufacturing sector accelerate to a 32-month high. The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by JPMorgan and Markit in association with ISM and IFPSM – rose to 53.3 in December, up from 53.1 in November, to signal expansion for the twelfth month in a row.

imageThe average reading of the headline PMI through 2013 as a whole (51.5) was better than the stagnation signalled over 2012 (PMI: 50.0). The rate
of expansion registered for the final quarter of 2013 was the best since Q2 2011.

Global manufacturing production expanded for the fourteenth straight month in December. Moreover, the pace of increase was the fastest since February 2011, as the growth rate of new orders held broadly steady at November’s 33-month record. New export orders rose for the sixth month running.

Output growth was again led by the G7 developed nations in December, as robust expansions in the US, Japan, Germany, the UK (which registered the highest Output PMI reading of all countries) and Italy
offset the ongoing contraction in France and a sharp growth slowdown in Canada.

Among the larger emerging nations covered by the survey, already muted rates of increase for production eased in China, India and Russia, and remained similarly modest in Brazil and South Korea despite slight  accelerations. Taiwan was a brighter spot, with output growth hitting a 32-month high.

December PMI data signalled an increase in global manufacturing employment for the sixth consecutive month. Although the rate of jobs growth was again only moderate, it was nonetheless the fastest for
almost two-and-a-half years. Payroll numbers were raised in the majority of the nations covered, including the US, Japan, Germany,
the UK, India, Taiwan and South Korea. Job losses were recorded in China, France, Spain, Brazil, Russia, Austria and Greece.

Input price inflation accelerated to a 20-month peak in December, and was slightly above the survey average. Part of the increase in costs was passed on to clients, reflected in the pace of output price inflation reaching a near two-and-a-half year peak.

U.S. Construction Spending Advances Further

The value of construction put-in-place gained 1.0% in November (5.9% y/y) following a little-revised 0.9% October rise. The September increase of 1.4% was revised up substantially from the initially-estimated 0.3% slip.

Private sector construction activity jumped 2.2% (8.6% y/y) in November after no change in October. Residential building surged 1.9% (16.6% y/y) as spending on improvements recovered 2.2% (10.2% y/y). Single-family home building activity gained 1.8% (18.4% y/y) while multi-family building rose 0.9%, up by more than one-third y/y. Nonresidential building activity surged 2.7% (1.0% y/y) paced by an 8.8% gain (37.7% y/y) in multi-retail and a 4.6% rise (11.5% y/y) in office building.

Offsetting these November gains was a 1.8% decline (-0.2% y/y) in the value of public sector building activity. (…)

Surprised smile Euro-Zone Private Lending Plunges

Lending to the private sector in the euro zone plunged in November at the sharpest annual rate since records began over 20 years ago, data from the European Central Bank showed Friday, suggesting that the region will struggle to get its anticipated economic recovery in full gear.

Private sector lending in the euro zone declined by 2.3% on the year, after a 2.2% decline in October, the ECB said. (…)

On the month, lending to households declined by 3 billion euros ($4.1 billion) reversing the €3 billion increase in October, while lending to firms fell by €13 billion, following a €15 billion drop in the previous month. Loans to firms were down by 3.9% on the year. (…)

The ECB’s broad gauge of money supply, or M3, grew by only 1.5% in November in annual terms, above the 1.4% rise in October, while the three-month average grew by 1.7%, after 1.9% in the previous month. The monetary growth data remain well below the ECB’s “reference value” of 4.5%, which it considers consistent with its price stability mandate.

Auto Decline in German car sales accelerated in 2013: KBA

The decline in German car sales accelerated last year, falling below 3 million vehicles for the first time since 2010, reflecting troubles in Europe that have sent auto demand close to a two-decade low.

New car registrations in Germany fell 4.2 percent to 2.95 million last year, the German Federal Motor Transport Authority (KBA) said, after a decline of 2.9 percent in 2012.

Germany’s premium carmakers BMW (BMWG.DE), Mercedes-Benz (DAIGn.DE) and Audi (NSUG.DE) each lost market share, suffering sales declines of 5.8 percent, 1.4 percent and 5.5 percent respectively. (…)

German mass market brand Opel, owned by General Motors (GM.N), lost 2.9 percent market share last year while Volkswagen (VOWG_p.DE) sales fell by 4.6 percent in its home market. (…)

Imported volume brands fared worse than their German rivals, with Citroen (PEUP.PA) registrations down 20.6 percent, Chevrolet dropping 17.7 percent and Peugeot down 23.4 percent.

The gainers were South Korean value brands such as Hyundai (005380.KS), which achieved a 0.7 percent increase, and Kia (000270.KS), which boosted sales by 1.6 percent. (…)

Fingers crossed The blow of the overall annual decline was softened by December’s sales figures, with registrations up 5.4 percent on the same month last year, in line with a trend seen in other European countries.

EARNINGS WATCH

 

The Morning Ledger: Rising Rates Buoy Pension Plans

Pension-funding levels surged last year and we could see more gains in 2014. Towers Watson estimates levels last year rose by 16 percentage points to an aggregate 93% for 418 Fortune 1000 companies. That’s still below the 106% reached in 2007, but companies could see triple digits this year if long-term interest rates continue to rise and the stock market remains strong, Alan Glickstein, senior retirement consultant for Towers Watson, tells CFOJ’s Vipal Monga. (…)

Towers Watson said that the discount rate rose to an estimated 4.8% in 2013 from 3.96% in 2012. Meanwhile, the S&P 500 index rose 26% last year, the biggest gain since 1997, which boosted the asset values of the pension funds and helped to further shrink the funding gap. Towers Watson said that pension-plan assets rose an estimated 9% in 2013 to $1.41 trillion, from $1.29 trillion at the end of 2012, while companies cut the amount they contributed to the plans last year by 23% to $48.8 billion.

Heard on the Street’s David Reilly says that the discount rate should keep rising in 2014, even if not briskly as last year. The U.S. economic recovery is gaining strength, and the Fed is tapering its bond purchases. Higher rates should chip away at pensions’ overall liabilities.  “Improvement on both the asset and liability fronts means many companies may be able to begin lowering their pension expense, supporting earnings,” Reilly writes.

Pointing up The report noted that the higher funding levels caused many companies to reduce the amounts they contributed to the plans last year to $48.8 billion. That was 23% less than in 2012.

For example, Ford Motor Co. said in December that the improved environment could help the automaker halve its expected pension contributions to an average annual range between $1 billion to $2 billion over the next three years. That’s down from an earlier outlook of $2 billion to $3 billion.

SENTIMENT WATCH

We are seeing more and more of these thesis “explaining” that markets are expensive but they can carry on. For almost 5 years, most of the “bull” was produced by the bears. Funny how things just never change Crying face. This FT piece tells us all the “uneasy truths”. Well, some of it is not really truth, which is perhaps what makes it uneasy. Sounds like capitulation is very near.

Running with the bulls
Uneasy truths about the US market rally

US stocks may be overpriced and profit margins at a high but even bears say the rally has room to run

(…) Why is there such belief in a long-lived bull market? First, bond yields remain historically low, with 10-year Treasury bills yielding barely 3 per cent. When yields are low it is justifiable to pay a higher multiple for stocks because cheaper credit makes it easier for companies to make profits. Paying more for stocks also seems more palatable when bond yields are low.

Further, there is no evidence that investors are growing overexcited, as they usually do towards the end of a bubble. The American Association of Individual Investors’ weekly poll of its members has long been a reliable contrarian indicator. When large numbers say they are bullish it is generally a good time to sell. When the majority are bearish (the record for this indicator came in the second week of March 2009 when despair was total and the current bull market began) it is a good time to buy. Today, 47 per cent consider themselves bulls and 25 per cent bears, numbers a long way from an extreme of optimism.

However, stocks are unquestionably overpriced. Robert Shiller’s cyclically adjusted price/earnings multiple (Cape), long regarded as a reliable indicator of long-term value, is now at a level at which the market peaked before bear markets several times in the past. However, it remains below the levels it reached during true “bubbles” such as the dotcom mania. The same is true of “Tobin’s q”, which compares share prices with the total replacement value of corporate assets.

Further, profit margins are at a historic high and over time have shown a strong tendency to revert to the historic mean. The combination of high valuations being put on profits benefiting from cyclically high margins suggests markets are overvalued.

Why, then, are brokers calling for rising prices in 2014 or even a melt-up?

First, markets have their own momentum. On all previous occasions when earnings multiples have expanded this far this quickly, research by Morgan Stanley’s Adam Parker shows that they have carried on expanding for at least another year. And while the extent of US stocks’ rise since March 2009 is impressive, the duration of this rally is not unusual. Typically, bull markets carry on for longer. Also, this market has low levels of volatility and has not had a correction in a while. The approaching end of a bull market is generally marked by corrections and rising volatility.

Another reason to believe the bull market could eventually become a bubble lies in the record amounts of cash resting in money market funds, even though these funds pay negligible interest. The bull run is unlikely to peak until some of this money has found its way into stocks.

Finally, and most importantly, there is the role of monetary policy. The Federal Reserve’s programme of “quantitative easing” , in which it has bought mortgage-backed and government bonds in an attempt to force up asset values and push down yields, has had a huge impact on market sentiment.

Although the Fed said in December it would start tapering off its monthly bond purchases, it also says interest rates will stay at virtually zero until well into 2015. The S&P hit a record after the taper announcement. (…)

How can a “melt-up” be averted? Mr Parker of Morgan Stanley suggests that a significant correction would require fear that earnings will come in well below current projections – so the season when companies announce their earnings for the full year, which starts late in January, could be important. But with the US economy exceeding recent forecasts for growth, a serious earnings disappointment seems unlikely without a catalyst from outside the US – such as a big slowdown in China or a renewed crisis in Europe.

Failing these things, it could be left to the Fed itself to do the job by raising rates or removing stimulus faster than the market had expected.

Chris Watling of Longview Economics in London says US equity valuations are undoubtedly “full” – but are no more expensive than when Alan Greenspan, then Fed chairman, tried to talk down the stock market by warning of “irrational exuberance” in December 1996. On that occasion the bull market carried on for three more years and turned into an epic bubble before finally going into reverse.

“They’ll become more expensive,” says Mr Watling. “It’s not until we see tight money that we talk about the end of this valuation uplift in the US.”

This last comment comes from a fellow working at Longview Economics…Winking smile

Ritholtz Chart: Why ‘Wildly Overvalued’ Stocks May Keep Rising

(…) somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding.

Further P/E inflation is what BCA (Bank Credit Analyst) is expecting. They point out “a clear link between equity multiples and the yield curve [with] a steeper yield curve indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity  multiples.”

If we are entering a rising rate environment, a steeper yield curve is a likely stay. BCA notes that “the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed.”

image
 
High five Return of inflation is inevitable
Fund manager Michael Aronstein bets on the lessons of history

Markets are underestimating a coming rout in bond prices, and missing early signs of the return of inflation, according to the US mutual fund manager who has raised more money than any other in the past year. (…)

He and his team pore over price data from hundreds upon hundreds of commodities and manufactured goods, and he highlights proteins – shrimp, beef, chicken – and US lumber among the areas where price spikes are already developing. It is outwards from these pressure points, he says, that the world will finally move from asset price inflation to real consumer price rises.

And as that happens, bonds will tumble and investors will reassess the safety of emerging markets that till now have been fuelled by unprecedentedly cheap money. There are profits to be made buying the companies with pricing power and betting against those without, he says, and from concentrating investment in developed economies and staying cautious beyond.

Party smile Hey! Who invited this Aronstein guy to the party?

OIL AND SHALE OIL

TheTradersWire.com posted this from hedge fund manager Andy Hall earlier this week with the following intro:

Phibro’s (currently Astenback Capital Management) Andy Hall knows a thing or two about the oil market – and even if he doesn’t (and it was all luck), his views are sufficiently respected to influence the industrial groupthink. Which is why for anyone interested in where one of the foremost oil market movers sees oil supply over the next decade, here are his full thoughts from his latest letter to Astenback investors. Of particular note: Hall’s warning to all the shale oil optimists: “According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month… Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.”

Here’s Hall’s very interesting note but FYI, Reuters’ had this piece on Dec. 6: Andy Hall’s fund losses deepen after wrong bet on U.S.-Brent crude

From Astenback Capital Management

The speed with which an interim agreement was reached with Iran was unexpected. Equally unexpected was the immediate relaxation of sanctions relating to access to banking and insurance coverage. This will potentially result in an increase in Iranian exports of perhaps 400,000 bpd. Beyond that it is hard to predict what might happen. The next set of negotiations will certainly be much more difficult. The fundamental differences of view that were papered over in the recent talks need to be fully resolved and that will be extremely difficult to do. Also, Iran’s physical capacity to export much more additional oil is in doubt because its aging oil fields have been starved of investment.

As to Libya, it seems unlikely that things will get better there anytime soon. The unrest and political discontent seems to be worsening. Whilst some oil exports are likely to resume – particularly from the western part of the country (Tripolitania), overall levels of oil exports from Libya in 2014 will be well below those of 2013.

Iraqi exports should rise by about 300,000 bpd in 2014 as new export facilities come into operation. But there is a meaningful risk of interruptions due to the sectarian strife in Iraq that increasingly borders on civil war. Saudi Arabia’s displeasure at the West’s quasi rapprochement with Iran is likely to add fuel to the fire in the Sunni-Shia fight for supremacy throughout the region.

If gains in 2014 of exports from Iran are assumed to offset losses from Libya, potential net additional exports from OPEC would amount to whatever increment materializes from Iraq. Saudi Arabia has been pumping oil at close to its practical (if not hypothetical) maximum capacity of 10.5 million bpd for much of 2013. It could therefore easily accommodate any additional output from Iraq in order to maintain a Brent price of $ 100 – assuming it wants to do so and that it becomes necessary to do so. Still, $ 100 is meaningfully lower than $ 110+ which is where the benchmark grade has on average been trading for the past three years.

So much for OPEC, what about non-OPEC supply? Most forecasters predict this to grow by about 1.4 million bpd with the largest contribution – about 1.1 million bpd – coming from the U.S. and Canada and the balance primarily from Brazil and Kazakhstan. Brazil’s oil production has been forecast to grow every year for the past four or five years and each time it has disappointed. Indeed Petrobras has struggled to prevent output declining. Perhaps 2014 is the year they finally turn things around but also, perhaps not. The Kashagan field in Kazakhstan briefly came on stream last September – almost a decade behind schedule. It was shut down again almost immediately because of technical problems. The assumption is that the consortium of companies operating the field will finally achieve full production in 2014.

Canada’s contribution to supply growth is perhaps the most predictable as it comes from additions to tar sands capacity whose technology is tried and tested. Provided planned production additions come on stream according to schedule in 2014, these should amount to about 200,000 bpd.

Most forecasters expect the U.S. to add 900,000 bpd to oil supplies in 2014, largely driven by the continuing boom in shale oil. That would be lower than the increment seen this year or in 2012 but market sentiment seems to be discounting a surprise to the upside. As mentioned above, many companies have been creating a stir with talk of exciting new prospects beyond Bakken and Eagle Ford which so far have accounted for nearly all the growth in shale oil production. Indeed at first blush there seem to be so many potential prospects it is hard to keep track of them all. Even within the Bakken and Eagle Ford, talk of down-spacing, faster well completions through pad drilling and “super wells” with very high initial rates of production resulting from the use of new completion techniques have created an impression of a cornucopia of unending growth and that impression weighs on forward WTI prices.

But part of what is going on here is the industry’s desire to maintain a level of buzz consistent with rising equity valuations and capital inflows to the sector.

The hot play now is one of the oldest in America; the Permian basin. A handful of companies with large acreage in the region are making very optimistic assessments of their prospects there. These are based on making long term projections based on a few months’ production data from a handful of wells. We wonder whether data gets cherry picked for investor presentations. We hear about the great wells but not about the disappointing ones. Furthermore, many companies are pointing to higher initial rates of production without taking into account the higher depletion rates which go hand in hand with these higher start-up rates. EOG, the biggest and the best of the shale oil players recently asserted that the Permian – a play in which it is actively investing – will be much more difficult to develop than were either the Bakken or Eagle Ford. EOG figures horizontal oil wells in the Permian have productivity little more than a third of those in Eagle Ford. EOG has further stated on various occasions that the rapid growth in shale oil production is already behind us.

In part this is simple math. The DOE recently started publishing short term production forecasts for each of the major shale plays. They project monthly production increments based on rig counts and observed rig productivity (new wells per rig per month multiplied by production per rig) and subtracting from it the decline in production from legacy wells. According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.

Others have made the same analysis. A couple of weeks ago the IEA expressed concern that shale oil euphoria was discouraging investment in longer term projects elsewhere in the world that will be needed to sustain supply when U.S. shale oil production starts to decline.

Decelerating shale oil production growth is also reflected in the forecasts of independent analysts ITG. They have undertaken the most thorough analysis of U.S. shale plays and use a rigorous and granular approach in forecasting future shale and non-shale oil production in the U.S. Of course their forecast like any other is dependent on the underlying assumptions. But ITG can hardly be branded shale oil skeptics – to the contrary. Yet their forecast for U.S. production growth also calls for a dramatic slowing in the rate of growth. Their most recent forecast is for U.S. production excluding Alaska to grow by about 700,000 bpd in 2014. With Alaskan production continuing to decline, that implies growth of under 700,000 bpd in overall U.S. oil production, or 200,000 bpd less than consensus.

The final element of supply is represented by the change in inventory levels. The major OECD countries will end 2013 with oil inventories some 100 million barrels lower than they were at the beginning of the year. That stock drawdown is equivalent to nearly 300,000 bpd of supply that will not be available in 2014. Data outside the OECD countries is notoriously sparse but the evidence strongly suggests there was also massive destocking in China during 2013.

U.S. Warns on Bakken Shale Oil

The federal government issued a rare safety alert on Thursday, warning that crude oil from the Bakken Shale in North Dakota may be more flammable than other types of crude.

The warning comes after two federal agencies spent months inspecting Bakken crude, including oil carried in recent train accidents that resulted in explosions. The latest blast occurred earlier this week in Casselton, N.D., 25 miles west of Fargo. (…)

North Dakota statistics shows about three-quarters of Bakken crude produced in the state is shipped out by rail.

Manhattan apartment sales hit record high
Figures boosted as overseas buyers compete with New Yorkers

(…) The number of purchases rose 27 per cent compared with the same period the year before to 3,297, according to new data released on Friday. Although down from 3,837 in the third quarter, this was the highest fourth-quarter tally since records began 25 years ago, according to appraiser Miller Samuel and brokerage Douglas Elliman Real Estate.

Limited supply has led to buyers often making immediate all-cash offers, participating in bidding wars and making decisions based on floor plans alone, in an echo of the previous property boom. The number of days a property was on the market in the fourth quarter almost halved from the previous year to 95 days.

“Demand from foreign buyers has never been stronger. Those from the Middle East, Russia, South America, China have been on an incredible buying spree and it is these sales that are driving prices,” said Pamela Liebman, chief executive of property broker The Corcoran Group.

The median price of a luxury apartment – usually above $3m – jumped 10 per cent from a year ago to $4.9m. (…)

The pool of homes for sale is shrinking as many owners wait for prices to rise further before they list. The number of homes on the market at the end of December fell 12.3 per cent from a year earlier to 4,164, near all-time lows.

And new supply is limited – developers hit by the financial crisis have only recently revived projects, which are often luxury residences sought by deep-pocketed local and foreign buyers.

The overall median sales price in the fourth quarter rose 2.1 per cent from the previous year to $855,000. The increase was led by condominiums – largely accounting for the new developments that are the preferred choice of international buyers – which had a record median price of $1.3m.

MILLENNIALS SHUN CREDIT

(…) the 80 million Americans between the ages of 18 and 30 spend around $600 billion annually, but the proportion of that cohort that doesn’t even own a credit card rose from 9 percent in 2005 to 16 percent in 2012. According to credit-reporting firm Experian, Millennials own an average of 1.6 credit cards, while the 30- to 46-year-olds of Generation X own 2.1, and Baby Boomers 2.7. And they don’t even overload those cards they do carry: the average card balance for 19- to 29-year-olds is $2,682, around half that of older age groups. (…)

Most consumers dialed back on credit during the recession. But consumer credit has been rebounding since—except among Millennials. Student loans are one reason for that divergence. In the past 20 years, the cost of tuition and room and board at both private and public colleges has skyrocketed (60 percent and 83 percent, respectively) to $40,917 and $18,391, according to the College Board.  Outstanding student loan balances were more than $1 trillion in September—up 327 percent in just a single decade–according to the New York Federal Reserve Board. The result: Education loans now account for the second largest chunk of outstanding consumer debt after mortgages. Students who graduated from private colleges in 2012 carried $29,900 in debt, up 24 percent in ten years, and public school graduates weren’t far behind, with $25,000 (up 22 percent). With that kind of luggage to carry around, it’s understandable that young people aren’t crazy about adding to their burdens.

There’s also the fact that it’s simply more difficult for young people to get credit cards than it used to be.  (…) (Credit Suisse)

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

The government’s main gauge of retail sales, encompassing spending on everything from cars to drinks at bars, rose a healthy 0.4% from September, despite the partial government shutdown that sent consumer confidence tumbling early in the month. Sales climbed in most categories, with gains in big-ticket items as well as daily purchases such as groceries. (…)

Wednesday’s report showed some clear pockets of strength: Sales of cars rose at the fastest pace since the early summer. Sales in electronics and appliance stores also rose robustly. Stores selling sporting goods, books, and music items saw business grow at the fastest pace in more than a year.

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High five Let’s not get carried away. Car sales have been slowing sequentially lately and are near their past cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis) (next 2 charts from CalculatedRisk):

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Meanwhile, core sales ex-cars remain on the weak side as this Doug Short chart shows:

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Consumer Prices Ease Amid Lower Fuel Costs

The consumer-price index rose only 1% in October from the same month last year, the smallest 12-month increase since October 2009, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, rose 1.7% from a year ago, similar to the modest gains seen in recent months. The Fed targets an annual inflation rate of 2%.

Prices fell 0.1% last month from September, the first drop since April. Core prices increased 0.1%.

Last month, the overall decrease reflected gasoline prices, which were down 2.9% for the month. (Chart from Haver Analytics)

High five Let’s not get carried away. Core inflation remains surprisingly resilient given the weakness of the economy and the large output gap. On a YoY basis, core CPI is stuck within 1.6% and 1.8% and the Cleveland Fed median CPI just won’t slip below 2.0%. Looking at monthly trends, core CPI has slowed to 0.1% over the last 3 months from 0.2% in the previous 3 months. Yet, the median CPI only slowed to 0.1% MoM last month after a long string of 0.2% monthly gains. The inflation jury is still out.

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Pointing up No Renaissance for U.S. Factory Workers as Pay Stagnates

(…) The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.

Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics. (…)

Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolina workers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.

Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman. (…)

In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paidas little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased. (…)

General Electric Co. says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.

The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees. (…)

Existing Home Sales Fall 3.2%

Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are cooling the housing recovery.

Existing-home sales declined 3.2% in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results marked the slowest sales pace since June.

The federal government shutdown last month pushed some transactions into November, Realtors economist Lawrence Yun said. The Realtors group reported that 13% of closings in October were delayed either because buyers couldn’t obtain a government-backed loan or the Internal Revenue Service couldn’t verify income.

The number of homes for sale declined 1.8% from a month earlier to 2.13 million at the end of October. The inventory level represents a five-month supply at the current sales pace. Economists consider a six-month supply a healthy level.

Americans Recover Home Equity at Record Pace

The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. (…)

Fingers crossed“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.” (…)

About 10.8 million homeowners were underwater on their mortgages in the third quarter, down from 12.2 million in the second quarter, Zillow said. About 20 million people had negative equity or less than 20 percent equity, down from 21.5 million in the prior three months. Las Vegas, Atlanta, and Orlando, Florida, led major metropolitan areas with the highest rates of borrowers with less than 20 percent equity. (…)

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs.

Minutes of the Oct. 29-30 policy meeting, released Wednesday, showed officials continued to look toward ending the bond-buying program “in coming months.” But they spent hours game-planning how to handle unexpected developments and tailoring a message to the public to soften the impact of the program’s end. (…)

Fed officials are hoping their policies will play out like this: The economy will improve enough in the months ahead to justify pulling back on the program, which has been in place since last year and has boosted the central bank’s bondholdings to more than $3.5 trillion. After the program ends, they will continue to hold short-term interest rates near zero as the unemployment rate—which was 7.3% last month—slowly declines over the next few years. (…)

One scenario getting increased attention at the Fed: What if the job market doesn’t improve according to plan and the bond program becomes ineffective for addressing the economy’s woes? The minutes showed their solution might be to replace the program with some other form of monetary stimulus. That could include a stronger commitment to keep short-term interest rates low far into the future, a communications strategy known as “forward guidance.”

Top Fed officials have been signaling in recent weeks that their emphasis is shifting away from the controversial bond-buying program and toward these verbal commitments to keep rates down. (…)

Punch The reality is that, do what you want, say what you want, market rates are market rates.

Millennials Wary of Borrowing, Struggling With Debt Management

Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.

(…) Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.

And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.

Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.

Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.

Pointing upMillennials have “the worst credit habits,” and are “struggling the most with debt management,” Experian said in a report.

(…) A study by the Federal Reserve Bank of New York recently suggested high student-loan balances may have encouraged young adults to reduce their credit-card balances between 2005 and 2012.

Other young adults may be less willing to take risksin a weak economy, whether by splurging on furniture for a new apartment, moving geographically or starting businesses — things that often require debt.

What Experian’s data suggest is that the Millennials who are in fact borrowing are struggling to do so responsibly, at least partly because of the nation’s 7.3% jobless rate, sub-3% growth and $1 trillion student-loan tab — all things that are weighing disproportionately on young people, especially those without college degrees.

As the Journal reported last week, the share of student-loan balances that were 90 or more days overdue in the third quarter rose to 11.8% from 10.9%, even as late payments on other debts dropped. While the incidence of late payments on Millennials’ overall debts isn’t alarming yet, it’s big enough to drag down their credit scores, Experian said. (…)

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

In December 2010, I wrote INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!, warning people not to give much weight to bullish sentiment readings:

I have analyzed 30 years of data plotting the II bull-bear % difference against the DJ Total Stock Market Index of 5000 US stocks. Extreme readings are above +/-25%. However, I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme +30% level which were followed by strongly rising markets. Obviously not useful on that side of the ledger. (…)

Overall, never mind the extreme positives, they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

My analysis was based on relative bullishness, bulls minus bears like in the chart below, but Barclays here takes another angle looking at the absolute level of bears:

According to the US Investors’ Intelligence Survey there are currently 40% more bulls than bears. At the end of August, the same survey indicated just 13.4% more bulls that bears. Global equities have rallied by 9% since then. Other measures also confirm this bullish hue, but none have displayed anything close to the relationship that the Investors’ Intelligence Survey has had recently with forward returns.

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Here’s the more interesting part:

Closer examination reveals that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

CLSA’s Andy Rothman is one of the most astute analyst living in China:

China’s leaders have issued strong statements in support of private enterprise and the rights of migrant workers and farmers which, if implemented effectively, will facilitate continued economic growth and social stability.  By announcing relaxation of the one-child policy and the abolishment of ‘re-education through labor’, the Party acknowledged it needs to curb human rights abuses and re-establish trust.  The creation of new groups to coordinate economic and national security policy signal that Xi Jinping has quickly consolidated his power as Party chief, raising the odds that the decisions announced Friday will be implemented quickly.

The brief, initial communique issued when the Party Plenum closed last Tuesday was dense, obtuse and packed with outdated political slogans.  But the more detailed ‘decision document’ published Friday was, for a Communist Party report, unusually clear, particularly in its support for private enterprise and markets.

Strong support for entrepreneurs

The most important signal from the Party leadership was strong support for the private sector and markets. Private firms already account for 80% of urban employment and 90% of new job creation, as well as two-thirds of investment in China, so improving the operating environment for entrepreneurs is key to our relatively positive outlook for the country’s economic future.  Friday’s document did not disappoint in this respect.

Although the Party still cannot rise to the challenge of actually using the Chinese characters for ‘private’ sector’, continuing to refer to it as ‘non-public’, they did pledge to ‘unwaveringly encourage, support and guide the development of the non-public economy’, and declared that ‘property rights in the non-public economy may equally [with the state sector] not be violated.’

In Friday’s document, the Party said it would ‘reduce central government management over micro-level matters to the broadest extent’, called for an end to ‘excessive government intervention’, and said that ‘resource allocation [should be] based on market principles, market prices and market competition.’  The world’s largest Communist Party declared that ‘property rights are the core of ownership systems’, and called for ‘fair competition, free consumer choice, autonomous consumption, [and] free circulation of products and production factors.’  The document also says China will ‘accelerate pricing reform of natural resources’ to ‘completely reflect market supply and demand’, as well as the costs of environmental damage.

The Party also pledged to reduce red tape and administrative hurdles to doing business.  Zhang Mao, the head of the State Administration for Industry and Commerce, explained that ‘registering a business will become much more convenient in the near future.’  And Miao Wei, minister for industry and information technology, announced that implementation of the plenum decision would lead his agency to eliminate at least 30% of administrative approval procedures by the end of 2015.

Friday’s document called for better protection of intellectual property rights, as well as the ‘lawful rights and interests of investors, especially small and mid-sized investors.’  The Party said it would create a ‘marketized withdrawal system where the fittest survive’, and a better bankruptcy process.

Party leaders did say that public ownership would remain ‘dominant’, but they clearly didn’t mean it.  Repeating this language, especially in light of the fact that private firms are already dominant, is, in our view, just a rhetorical bone thrown to officials whose political or financial fortunes are tied to state-owned enterprises. (…)

 

The Party did, however, raise the share of SOE income that has to be paid into the national security fund to 30% by 2020, up from 10-20% now.

In what may be a warning that serious SOE reform is likely down the road, the Party did call for the elimination of ‘all sorts of sector monopolies, and an end to ‘preferential policies . . . local protection . . . monopolies and unfair competition.’

Hukou reform coming

If the most important message from the plenum is renewed support for the private sector, a close second is the decision to reform the hukou, or household registration system.  This is important because there are more than 230m urban residents without an urban hukou, accounting for one-third of the entire urban population.

According to the official news agency, Xinhua, ‘Friday’s document promised to gradually allow eligible rural migrants to become official city residents, accelerate reform in the hukou system to fully remove restrictions in towns and small cities, gradually ease restriction in mid-sized cities, setting reasonable conditions for settling in big cities while strictly controlling the population in megacities.’ (…)

Hukou reform will be expensive, but the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services.  In cases where local governments cannot afford these services, the central government will transfer the necessary funds.  Hukou reform will be rolled out gradually, and in our view:

Will reduce the risk of social instability from the 234m people living in cities who face de jure discrimination on a daily basis, particularly in eligibility for social services.

May increase the supply of migrant workers in cities at a time when the overall labour force is shrinking.

Should improve consumption by strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.

Should result in higher productivity in manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. (…)

The one-child policy will be relaxed by ‘implementation of a policy where it is permitted to have two children if either a husband or a wife is an only child,’ a change from the current rules which require both the husband and wife to be only-children in order to qualify to have a second child.

Wang Peian, the deputy director of the national health and family planning committee, said that the Party will allow each province to decide when to switch to the new policy, but Friday’s announcement, in our view, spells the rapid end of the one-child policy.

Wang Feng, one of China’s leading demographers, told us over the weekend that Friday’s announcement was a ‘decisive turning point.’  But he also reminded us that in a May CLSA U report, he explained why ending the one-child policy is likely to result in a temporary uptick in the number of births, but is unlikely to change the longer-term trend towards a lower fertility rate.  The current fertility rate of 1.5 could drop even lower in the future, closer to Japan and South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. (…)

Xi consolidates power

The plenum decided to create two new groups within the government, a National Security Council and the Leading Small Group for the Comprehensive Deepening of Reform.  This signals that Party chief Xi Jinping has quickly and effectively consolidated his political power, far beyond, apparently, what his predecessor Hu Jintao was able to achieve.  This bodes well for Xi’s ability to implement the reform decisions announced Friday. (…)

 

NEW$ & VIEW$ (18 NOVEMBER 2013)

OECD Economic Growth Stalls

(…) The Organization for Economic Cooperation and Development Monday said the combined gross domestic product of its 34 developing-country members rose by 0.5% from the second quarter, the same rate of expansion recorded in the three months through June. (…)

The OECD will release new forecasts for economic growth in its 34 members and a number of large developing economies Tuesday. The International Monetary Fund last month cut its growth forecast for the world economy in 2013 to 2.9% from 3.2%, but expects output to rise 3.6% in 2014. (…)

OECD leading indicators released last week suggested growth is set to pick up in the euro zone, China and the U.K. in coming months, while remaining sluggish in India, Brazil and Russia.

Among the Group of Seven largest developed economies, the U.K. recorded the strongest growth in the third quarter, with an expansion of 0.8%, while France and Italy saw their economies contract by 0.1% each.

Euro zone rebound weaker than hoped: ECB’s Nowotny

The economic situation in the euro zone has started to improve but is still weaker than the European Central Bank had hoped, ECB Governing Council member Ewald Nowotny said on Monday. (…)

But “one has to say that this improvement is not as strong as we would have expected it perhaps some time ago, and at the same time inflation rates are clearly below the price stability level that we set at the ECB.” (…)

Spain’s bad loans ratio rises to 12.7 percent in Sept

Spanish banks’ bad loans as a percentage of total lending rose to 12.7 percent in September from 12.1 percent in August, marking a new high, Bank of Spain data showed on Monday.

The ratio has been steadily climbing as households and small companies struggle with debts and as banks, fighting to improve their own capital quality ahead of new stress tests, rein in lending. (…)

Bad debts rose by 6.9 billion euros ($9.3 billion) to 187.8 billion euros in September, while total credit fell by 8.9 billion euros to 1.5 trillion euros, the data showed.

Italian Tax Model Thwarts Recovery

(…) Italy’s tax model stands out in Europe for relying heavily on payroll taxes, which are paid by companies and employees, to fund the country’s state pension system. Payouts for old-age pensions alone are nearly 13% of GDP—a rate that is a third higher than in Germany and twice the U.S. percentage, according to the OECD.

(…)  “The absurdity is that an Italian worker costs more than a Spanish worker, but has a lower income,” said Riccardo Illy, owner of the eponymous coffee brand.

Economists say that the high mandatory contributions—33% of Italian salaries, compared with 13% in the U.S.—are particularly painful for younger workers in lower-income, entry-level jobs. (…)

Other European countries with even bigger welfare states have started to tackle the problem, at least in part. Germany puts more of the onus for pension contributions on the workers’ tab, which crimps income but not jobs.

French President François Hollande last year pushed through measures to reduce the country’s notoriously high labor costs, which help fund a broader array of social services. But he opted for tax breaks instead of direct payroll-tax cuts.

(…) the task facing Italy is daunting. Paolo Manasse, an economist at the University of Bologna, estimates that Italy would need to cut a further €30 billion in employment taxes to bring it in line with average employment taxes among OECD members.

Once pensions and interest on government debt are stripped out, Italy spends only 32% of gross domestic product on core services compared with 43% for Germany, meaning there is less budgetary fat to trim in other areas.

Some countries, such as Denmark, which has one of Europe’s highest overall tax rates, fund a bigger welfare state than Rome provides with a broader array of taxes covering income, investments and wealth.

Thus, Danish companies pay only a 10th of what their Italian peers do for social-security programs. Denmark’s total employment rate—the percentage of the working-age population with jobs—is 75% compared with Italy’s 61%. (…)

However, given the fragile nature of his two-party coalition, the prime minister has so far avoided bigger tax overhauls. He has criticized generational inequities in Italy but has been reluctant to trim current pension benefits.

Since future pensions in Italy will eventually be tied to actual contributions over a lifetime of working, the dearth of new jobs due to hefty payroll levies will have repercussions well into the future.

Younger generations are “at risk of being excluded from both work and, as a result, a main form of welfare,” said Marco Maniscalco, a partner at the Bonelli Erede Pappalardo law firm in Milan. (…)

Riskier loans hit record levels
‘Cov-lite’ proportion within CLOs surges in US markets

The amount of riskier loans offering fewer protections to lenders contained in packages of debt sold to investors have hit record levels, amid resurgent lending markets and a continued thirst for higher returns.

Managers of collateralised loan obligations, which buy up corporate loans then package and slice them into different pieces, have increased the proportion of riskier loans that their investment vehicles are allowed to buy to the highest levels on record. (…)

Already, 55 per cent of new leveraged loans come in “cov-lite” form, eclipsing the 29 per cent reached at the height of the leveraged buyout boom just before the financial crisis.

“The increased prevalence of cov-lite in the primary market has quickly translated into a similar market-wide increase,” Brad Rogoff, head of US credit strategy at Barclays, said in a recent note. (…)

While the majority of CLOs sold last year had a 40 per cent limit on the amount of cov-lite loans that could be bought by the vehicles, a 50 per cent cap has become the industry standard in 2013, according to data from S&P Capital IQ.

At least three deals have come to market this year with a 70 per cent limit.

In 2011 – the earliest data available from S&P – about 67 per cent of new CLOs came with a 30-40 per cent limit on the amount of cov-lite loans that were allowed to be placed into the deals. Limits of 70 per cent were completely unheard of. (…)

In addition to officially increasing the percentage of cov-lite loans allowed into their deals, some CLO managers have also been easing their definition of cov-lite in deal documentation, thereby allowing more of the loans into their products. (…)

Thai growth slips in third quarter Growth falls to 2.7% as investment and consumption dip

Thailand Cuts Economic Growth Forecast as Exports Falter

Gross domestic product rose 1.3 percent in the three months through September from the previous quarter, the National Economic & Social Development Board said in Bangkok today. It revised a contraction in the second quarter to no growth from the previous three months.

The state agency cut its full-year expansion forecast to 3 percent from a range of 3.8 percent to 4.3 percent projected in August, and said the economy may grow 4 percent to 5 percent in 2014. It said it expected no export growth this year, from an earlier estimate of 5 percent.

Household consumption fell 1.2 percent last quarter from a year earlier, the NESDB said. Public investment slumped 16.2 percent from a year ago as both government construction and investment in machinery and equipment declined, it said.

EARNINGS WATCH

Thomson Reuters:

Third quarter earnings are expected to grow 5.6% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.3%.

Of the 463 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.

54% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.

For Q4 2013, there have been 83 negative EPS preannouncements issued by S&P 500 corporations compared to 9 positive EPS preannouncements. By dividing 83 by 9, one arrives at an N/P ratio of 9.2 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Factset

At this stage of Q3 2013 earnings season, 94 companies in the index have issued EPS guidance for the fourth quarter. Of these 94 companies, 82 have issued negative EPS guidance and 12 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 87%. This percentage is well above the 5-year average of 63%.

Since the start of the fourth quarter, analysts have reduced earnings growth expectations for Q4 2013 (to 6.9% from 9.6%). However, they still expect a significant improvement in earnings growth in the fourth quarter of 2013 relative to recent quarters.

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GOOD READS
 
Up and Down Wall Street  Flacks Are People, Too

By RANDALL W. FORSYTH 

Spare, if you will, a moment of pity for the PR people. That may sound surprising coming from these quarters, given journos’ near-universal disdain for public-relations folks, many of whom see their function as obstructing or obfuscating on behalf of their bosses. But after the terrible, horrible, no-good, very bad week the spinmeisters had, even we stone-hearted, ink-stained wretches must have some sympathy.

Consider the PR genius at JPMorgan Chase (ticker: JPM) who came up with the idea of a Twitter (TWTR) Q&A with the bank’s vice chairman, Jimmy Lee, a week after it helped underwrite Twitter’s much-ballyhooed initial public offering. The idea presumably was to connect with the younger, social media-hip crowd. But instead of seeking career advice from the legendary deal-maker, the exchanges at #AskJPM quickly became an outlet for the public’s ire about banks and JPM in particular.

Starting with mock questions about whales, an allusion to the infamous London Whale trading fiasco, the queries became more acerbic about the alleged misdeeds by the nation’s largest bank by assets. It descended into what one wag dubbed “snarkalypse,” but not before he tweeted: “I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending. AM I DIVERSIFIED?” Not surprisingly, JPM cut short the “conversation,” but nobody was sacked over what a spokesman e-mailed the New York Times’ Dealbook blog as “#Badidea!”

Peggy Noonan:

(…) More and more it seems obvious that the vast majority of the politicians who pushed the [ObamaCare] bill in the House and Senate never read it. They didn’t know what was in it. They had no idea. They don’t understand insurance—they’re in politics, a branch of showbiz. (…)

 

NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.

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Shoppers Can’t Shake the Blues

 

Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.

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We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.

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Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.

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EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.

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Core inflation was +0.8% in October, down from 1.0% in September.

 

Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as Pets.com have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.

 

NEW$ & VIEW$ (5 NOVEMBER 2013)

WEAK HALLOWEEN SALES

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

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Nobody should be surprised as BloombergBriefs explains:

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

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

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TAPER WATCH

Three Fed Policy Voters Signal Prolonged Easing to Stoke Growth

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

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

SAME SURVEY DATA, SEVERAL ACCOUNTS:

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

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

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

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

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

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

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

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

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

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

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

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EU Lowers Euro-Area Growth Outlook as Debt Crisis Lingers

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

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

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

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

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

 

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Li Says China Needs 7.2% Expansion to Maintain Job Growth

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

Kellogg to Cut 7% of Workforce by 2017

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

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