NEW$ & VIEW$ (11 OCTOBER 2013)

September Retail Sales Disappoint Retailers posted disappointing sales gains in September, even as they stepped up promotions. The back-to-school period ended on a sour note, raising some concerns about the key holiday season.

The nine retailers tracked by Thomson Reuters posted 1.6% growth in September same-store sales, or sales at stores open at least a year, versus the 3.1% consensus estimate and the 5.5% increase posted a year earlier.

The above is from the WSJ. Here’s Thomson Reuters actual release which reflects an even weaker picture:

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 0.4% comp for September, missing its 3.1% final estimate. The 0.4% result is the weakest showing since the recession, when the Index registered a -2.4% SSS result in August 2009. Including the Drug Store sector, SSS growth rises to 2.4%, below its final estimate of 4.5%. Retailers were hurt by weak mall traffic, decrease in store transactions, and weak consumer spending in the face of the government shutdown.

Weak traffic, low transactions, while inventories are rising:

Freight Hint for Retail Boost

(…) Container cargo volume rose 6% in August from a year earlier at the ports of Los Angeles and Long Beach, Calif., the main gateway for Asian imports. Container traffic at Long Beach alone surged 16% in August to 630,292 standard container boxes, marking the busiest month for the port since October 2007.

Shipping operators reported strong growth in cargo shipments between Asia and North America in the third quarter, while demand on Asia-to-Europe routes continued to reel from a slow economic recovery in Europe.


The Transpacific Stabilization Agreement, an industry group of 15 major container-shipping lines that carry cargo from Asia to North American ports, said its members handled 4.8% more cargo from the beginning of July through the third week of September than a year earlier. The growth accelerated in September, the group said. (…)

However, the Shanghai Container Freight Index (tks Fred), which rose 6% sequentially for the 3 months to 13-Sep-13 declined 9% MoM during the last month and 6% WoW during the last week. Shipments to Europe were particularly weak but U.S.bound traffic was also negative during the 4 weeks to 13-Sep-13.


Normally, a weak back-to-school leads a weak holiday season in retailing. Surprised? Maybe the resilient U.S. is near the end of its resiliency. Read on:

Storm cloud  U.S.: Consumer revolving credit contracts in Q3

According to data released earlier this week, consumer credit rose an annualized 5.4% in August. That was the third reading above 5% in four months. (…)

Pointing up Revolving credit (credit cards for the most part) actually contracted for the third time in as many months. As today’s Hot Chart shows, Q3 2013 is on track to deliver the first quarterly contraction in over two years.

So what’s driving the growth consumer credit? Student debt backed by the federal government has accounted for 70% of the overall increase in consumer credit in the past year. As shown, students accounted for 23.3% of total consumer credit outstanding in August, a new record high. (NBF)


And this important stuff from BMO Capital, understanding that young adults are the driving force in GDP growth:

The Changing Face of the U.S. Workforce

It is hard to exaggerate how rapidly the U.S. working population is changing. Just to pick on one stark example, there are now more employees who are 55 or older than there are those with a job in the 25-34 year grouping (prime home-buying age). This is the first time we have seen this in the 65 years of data, and most likely the first time it has ever happened. Note how the run-up in the 55+ category almost precisely maps the surge in 25-34 group 30 years earlier, as the baby boom ages. This also suggests that the tally of 55+ may also peak in 2020, or soon after.image

China Car Sales Drive Onward

China’s passenger-car sales rose 21% from a year earlier in September—the fastest growth in eight months—thanks to increased demand ahead of a weeklong public holiday and a rebound in sales of Japanese cars.

Sales of passenger cars including sedans, sport-utility-vehicles and minivans totaled 1.59 million units last month—up from 1.31 million a year earlier, the China Association of Automobile Manufacturers, a semiofficial industry group, said on Friday.

Sales of motor-vehicles including both passenger and commercial vehicles grew 20% to 1.94 million units, the association said.

September is a good month for car sales because consumers tend to increase spending ahead of the weeklong National Day holiday. The government suspended highway tolls for passenger cars and motorcycles during the past holiday, leading to a sharp increase in the number of self-driving travelers, according to the China National Tourism Administration.

The September year-over-year sales gains also reflect weakness in the year-earlier month when China’s territorial spat with Japan took a toll on the world’s No. 1 motor-vehicle market.

In September 2012 the nationwide sales of passenger vehicles fell 0.3%.

Opec oil output at lowest in two years
Disruptions in Nigeria, Libya and Iraq put pressure on Saudi Arabia

(…) Opec said output fell by 400,000 barrels a day from August levels to 30.05m barrels a day in September, its lowest estimate for production since 2011.

As well as continued disruption in Nigeria and Libya – where the prime minister’s shortlived kidnapping on Thursday morning provided a reminder of insecurity in the country – Iraqi production fell below 3m b/d for the first time since June 2012. Maintenance work on southern ports has restricted exports from Opec’s second-largest producer.

Reduced supply from Africa’s Opec members, has been particularly hard felt in Europe, where many refineries rely on Libya’s high quality crude. European refineries have cut runs to their lowest levels in decades, according to estimates from JBC Energy and Energy Aspects, in the face of reduced crude supplies and competition from US refineries.

But refineries across the world are expected to return from seasonal maintenance periods by the end of the year, creating renewed demand for oil.

“In September and October high levels of refinery maintenance reduces pressure on the market, but as refineries return there is a question about where supply will come from,” said Richard Mallinson, an analyst at Energy Aspects in London.

Saudi Arabia, the de facto leader of Opec, has shown a willingness to meet any additional demand, however.

Saudi officials told the Vienna-based organisation the country had pumped crude at more than 10m b/d for a third consecutive month in September. Customers have turned to the world’s largest exporter to meet shortfalls elsewhere, and the country has a policy of raising production to meet its customers’ requests for more exports.

The fall in output from Libya, Nigeria and Iraq has brought Opec production in line with the cartel’s target of 30m b/d, which has been routinely exceeded in recent years.

But even at 30m b/d, the cartel is pumping more oil than the world needs, according to its own estimates. Surging supplies from North America will reduce the “call on Opec” to 29.7m b/d this year, a fall of 400,000 b/d from last year, it says.

As Credit Ratings Change, So Do Markets (Moody’s)

(…) For now, the latest trend of high yield credit rating revisions not only warns of a limited scope for any narrowing by credit spreads, it also menaces the outlook for equities. Ghost

Preliminary results show that US high yield companies were subject to 83 downgrades and 68 upgrades during 2013’s third quarter. During the six-months-ended September 2013, net high yield downgrades, or the numerical difference between downgrades less upgrades, averaged 2.1% of the number of US high yield issuers.

As derived from the relatively strong coincident correlation of 0.80 between the high yield bond spread and the moving two-quarter ratio of net high yield downgrades to the number of high yield issuers, the latest net high yield downgrade ratio favors a high yield bond spread that is closer to 500 bp, as opposed to 400 bp. (Figure 3.)


Recently, the high yield spread approximated 449 bp. Setting aside a significant margin for forecasting errors, the high yield spread predicted by the net high yield downgrades exceeds the actual spread of 449 bp by 45 bp. Nevertheless, not only is the actual spread within the margin of error, but the current under-compensation for high yield credit risk is far less severe than the 239 bp average gap between the predicted and actual high yield bond spreads of 2007’s first half. (Figure 4)


(…) Though net high yield downgrades do not yet alarm, they warn of a limited scope for a further narrowing by the high yield bond spread, unless profits accelerate convincingly. For the S&P 500’s non-financial company members, profits from continuing operations are expected to grow by 2.4% annually in Q3-2013 and then somehow accelerate to 7.9% by 2013’s final quarter. However, as recently as June 2013, Q3-2013’s operating profits were projected to grow by a much faster 7.4% annually compared to the latest call for 2.4% growth. (…)

The equity market is not immune to a prolonged deterioration of high yield credit rating revisions. In 2007, the market value of US common stock mistakenly set new highs as late as October despite what had become a long-lived and deepening shortfall of high yield upgrades relative to downgrades. (Figure 5.)


The same phenomenon was even more evident when equities soared during 1999-2000 notwithstanding a high yield upgrade ratio that had sunk to a distressing 30% for yearlong 1999. Ultimately, share prices would plunge after cresting in March 2000. Prior to that, equities ignored 1989’s dreadfully low high yield upgrade ratio of 25% and climbed higher throughout much of 1989 before entering a slide that lasted until the final quarter of 1990. The longer share prices climb higher amid an especially weak distribution of high yield credit rating revisions, the more likely is a perilous overvaluation of equities.

Given the relationship between net high yield upgrades and the equity market, it’s not surprising that the high yield bond spread tends to bottom before the market value of common stock forms a major peak. For example, May 2007’s bottoming by the high yield spread was well before October 2007’s top for equities. And, though the high yield spread troughed in March 1998, equities did not crest until March 2000.(Figure 7.)



The Yellen put
Markets dance to the tune of easy money

(…)  The markets have now accepted the circular logic of the Fed, which is that a whisper of the prospect of tapering leads to financial conditions tightening which the Fed then cites as the excuse not to taper. Indeed, this week Goldman Sachs put out a report reiterating its belief that the Fed won’t raise rates until 2016, suggesting well over two more years of liquidity and rising asset prices.

And of course, it isn’t just the Fed that is doing its bit for asset price rallies. There is talk of another round of easing in Europe, the BOJ continues on its aggressive easing and Australia has just cut rates.

(…) Who wants to fight the Fed under these circumstances?

“The Fed is always there,” says one Hong Kong-based hedge fund on the sidelines of the Goldman Sachs hedge fund conference in Singapore earlier this week. “It is clear that it will not tolerate a decline in asset values. If you sell in the face of QE, you look like an idiot.” (…)

Right on cue, not to be outdone:

Draghi Says ECB Guidance Allows Rate Cuts on Volatility

“The Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions, should the volatility in money market conditions return to the levels observed in early summer,” Draghi said at the Economic Club of New York yesterday. (…)

Draghi said at a press conference that the central bank is ready to use “all available” tools to contain market rates, a comment reiterated yesterday in its monthly bulletin.

So, with all this financial heroin:

In Latest IPOs, Profits Aren’t the Point

No profits? No problem. Investors are showing increasing hunger for initial public offerings of unprofitable technology companies and the potential for big gains that they bring.

Sixty-eight percent of U.S.-listed technology debuts this year, or 19 out of 28 deals, have been companies that lost money in the prior fiscal year or past 12 months, according to Jay Ritter , professor of finance at the University of Florida. That is the highest percentage since 2007, and 2001 before that. (…)

Unprofitable U.S.-listed technology companies that went public from 1990 to 2011 returned an average of 21.5% in their first three years, while profitable companies returned an average of 55.2% in that period, according to research by Mr. Ritter on companies with more than $50 million in revenues. (…)

In the dot-com boom years of 1999 and 2000, when many investors lost money after snapping up highflying shares, 86% of tech IPOs were of companies that lost money.

At the same time, when it comes to public offerings, some investors aren’t focused on averages. They are looking for home runs. Profitability even can be seen as a negative because it sometimes suggests maturity. (…)


NEW$ & VIEW$ (8 OCTOBER 2013)

Small Businesses Skeptical About Future; Optimism Dips

The Optimism Index was basically unchanged, giving up two-tenths of a
point, statistical noise. The only interesting change in the components was
an 8 point deterioration in expectations for business conditions over the
next six months.





U.S. Consumers Falling Behind on Bills after Years of Improvement

Consumer delinquency rates rose for the first time in two years in the second quarter, possibly showing that the broad household deleveraging seen since the recession concluded in 2009 may be coming to an end.

The American Bankers Association’s composite delinquency ratio, which tracks eight types of debt including auto and home-equity loans, increased to 1.76% in the second quarter from 1.70% the prior period. Similarly, the delinquency rate on credit cards issued by banks inched up 0.1 percentage point to 2.42%. (…)

Consumer delinquency rates peaked near the end of the recession when many Americans were out of work. The composite index reached 3.35% in the second quarter of 2009. (…)

Delinquency rates are now well below historic levels. Bank credit-card delinquency is 37% below its 15-year average, the association said. (…)

A Federal Reserve report Monday showed consumers’ credit-card balances declined for the third consecutive month in August but total debt increased thanks to increased auto lending and student loans. (…)



…EVENTUALLY, because it ain’t helping just yet


The back-to-school season has been weak throughout with chain store sales barely ahead of inflation. Does not bode well for Thanksgiving and Christmas. And now this:

Weekly Drop in U.S. Economic Confidence Largest Since ’08

Gallup Economic Confidence Index -- Weekly Averages, January 2008-October 6, 2013

German Factory Orders Unexpectedly Fall on Weak Recovery

Orders, adjusted for seasonal swings and inflation, dropped 0.3 percent from July, when they fell a revised 1.9 percent, the Economy Ministry said today in an e-mailed statement. Economists forecast an increase of 1.1 percent in August, according to the median of 40 estimates in a Bloomberg News survey. Orders climbed 3.1 percent from a year ago, when adjusted for the number of working days.

Domestic factory orders rose 2.2 percent in August from the previous month, while foreign demand fell 2.1 percent, today’s report showed. Basic-goods orders increased 0.5 percent from July, while demand for consumer goods dropped 0.4 percent. Investment-goods orders decreased 0.7 percent, with domestic demand rising 4.7 percent and orders from the euro area declining 9.2 percent.

German Exports Increased in August on Euro-Area Recovery

Exports, adjusted for working days and seasonal changes, increased 1 percent from July, when they decreased a revised 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 1.1 percent, according to the median of 16 estimates in a Bloomberg News survey. Imports rose 0.4 percent from July.


From Thomson Reuters:

A total of 21 companies have already reported Q3 earnings. Of these, 62% exceeded their consensus analyst earnings estimates. This is slightly below the 63% that beat estimates in a typical full earnings season and the 67% that beat in a typical earnings “preseason”.

Pointing up Historically, when a higher-than-average percentage of companies beat their estimates in the preseason, more companies than average beat their estimates throughout the full earnings season 70% of the time, and vice versa. This suggests that third-quarter earnings results are unlikely to exceed expectations at an abnormally high rate. However, the fact that the preseason beat rate is very close to the average suggests that results will probably not be much worse than average either.

Exhibit 2. S&P 500: Earnings Estimate Beat Rates, Preseason and Final
Source: Thomson Reuters I/B/E/S

36 Years Of Over-Optimistic Earnings Growth

Since 1976, Morgan Stanley shows the average consensus EPS growth rate trajectory among the consensus… doesn’t seem to be so “accurate”…

But it remains assured that this time will be different if we look ahead yet again…

Charts: Morgan Stanley (via ZeroHedge)

Hence the use of trailing earnings.



What Happened The Last 2 Times IPOs Were Outperforming The Market By This Much?

When the momentum chasing public greatly rotates to the IPO-du-jour, it would appear that bad things happen in the market. The last two times Bloomberg’s IPO index doubled the market’s performance (in 2007 and again in 2011) it seems it marked a euphoric top. Of course, based on 1998/99’s IPO performance there is plenty more room to run since this time is different. Nevertheless, the volume of coverage allotted to this IPO or that IPO (and not just Twitter) is awfully reminiscent of the go-go days of yore (and we all know how that ends) – though you’ll never be the bag-holder again right?

100% Interactive Brokers Margin Hike

The massive outperformance of the smallest and most trashy companies over the past year, month, week, day etc… stalled this afternoon. No news; no macro data; no change in the situation in DC. So what was it? We suspect the answer lies in the all-time record levels of margin that we recently discussed holding up the US equity market. Interactive Brokers, it would appear, have seen the light and over the next week or so will be increasing maintenance margin to 100% – effectively squeezing the leveraged momentum chasing muppets out of the market (or at the very least halving their risk-taking abilities).

As we warned previously,

Margin Debt still contrarian bearish

Using closing basis monthly data, peaks in NYSE margin debt preceded peaks in the S&P 500 in 2007 and 2000. The March 2000 peak in NYSE margin debt of $278.5m preceded the August 2000 monthly closing price peak in the S&P 500 at 1517.68. The July 2007 margin debt peak of $381.4m preceded the October 2007 monthly closing price peak of 1549.38 for the S&P 500. Margin debt reached a record high of $384.4m in April and the S&P 500 continued to rally into July, August, and September. This is a similar set up to 2007 and 2000.


Société Générale’s quant team screens equity markets with well-­known value investment filters.

Despite the weakness in the latter part of last month, equity markets enjoyed one of their best Septembers on record. Low quality companies led the market showing strong returns in all regions and with double-­digit returns in the Eurozone and Japan.

Companies with weak balance sheets, as defined using the Merton model, were up 10% on a global basis in September, outperforming the market by 3.5% and outperforming companies with good balance sheets by 5.3%. The performance was wider in the Eurozone and Japan where low quality companies outperformed high quality by 8.9% and 9.9% respectively. Our second quality factor, the Piotroski model, showed similar performance with low quality outperforming as much as 5% in the Eurozone and 18% in Japan!

Nerd smile As a result of the strong market performance, we see a further reduction in the number of names that pass our screens. We can now find only 21 deep value and 25 quality income names, so a total of 46 companies down from 53 last month and 200 names a year ago!




Credit Suisse: “Il Cavaliere’s Final Bow

Is Italy ready for life without Silvio Berlusconi? After dominating Italian politics for the past two decades, even as he faced scandals and corruption allegations that would have sunk most political careers, the former prime minister’s influence appears to be on the wane. His failed attempt to topple Prime Minister Enrico Letta’s government last week, after several key members of his own party threatened to revolt, was a serious blow to the billionaire media mogul’s image as a political force. (…)

So far, the reaction to the latest political upheaval on financial markets has been relatively subdued, suggesting investors have either grown accustomed to Italian political turmoil or that they’re focused on the glimmer of order emerging from the chaos of recent weeks. (…)

Still, the political uncertainty has become an unwanted distraction at a difficult point for Italy, as the country seems to be on the verge of recovery from the longest recession since World War II. Relentless bickering between the left- and right-wing coalition partners have hampered efforts to reverse eight consecutive quarters of economic contraction and tackle the country’s public debt of more than €2 trillion and record-high youth unemployment.

Credit Suisse analysts have said that though the Italian economy will contract about 1.7 percent in 2013, next year could see positive growth of 0.7 percent. That’s nothing to write home about, but after such a long period of negative numbers, it would be a welcome change. The analysts also noted that the government has started to pay €40 billion in long-outstanding bills to its own contractors, which should provide a boost to small and medium-sized businesses. But political uncertainty, they noted, is a definite risk to that relatively rosy forecast. (…)

Gavekal explains Italy’s paradox:

(…) One paradox is that the renewed political instability implies automatic fiscal tightening. If, for instance, new elections were called, the government would be on “automatic pilot”: meaning the multi-year fiscal consolidation program that the previous technocratic government put in place would continue.

This should be set against another interesting paradox. When Mario
Monti was chosen to form a technical government in November 2011,
everyone in Europe cheered the replacement of the buffoon by the
reformer—but rating agencies continued to downgrade Italy by several
notches as the economy slid into recession amid fiscal tightening. Italy’s
political uncertainties have risen dangerously since February’s elections,
but the economy has gotten stronger. Consumer and business confidence
has rebounded, and the latest consensus estimates show Italy should run a current account surplus of 0.7% of GDP this year, and a fiscal deficit of 3-3.5% of GDP.

This is much improved from the current account deficit of 3.5%, and fiscal deficit of 4-4.5% of GDP, when Monti came into power. In other words, Italy’s twin deficits are considerably lower today (below -3% of GDP) than they were in 2011 (almost -8% of GDP). Italy’s average
(or five-year) bond yield stood Friday at 3.25%, well below 6% at the end
of 2011. The main determinants of fiscal stability – growth, interest rates,
the primary surplus, etc – are thus incomparably improved. That is why
neither investors nor even the International Monetary Fund really want to see Italy commit to further belt-tightening.

Pointing up  Still, given the return of political chaos, the risks of a new rating
downgrade cannot be overlooked, as public debt is high (130% of GDP)
and still rising. Standard and Poor’s could downgrade Italy closer to junk
status. But the lesser known Canadian agency DBRS holds a more
important key. Among the four reference agencies used by the ECB in its
refinancing operations, DBRS has the highest rating of A– for Italy. Since
the ECB takes the best rating of the four, this allows Italian banks to pay the same rate as German banks on its collateral. If DBRS downgrades Italy, as it did just after the February elections, then the haircut on a 5-year Italian bond would rise from 1.5% to 9%, with a large impact on Italian banks, and thus on other parts of the euro financial markets.

With such uncertainties, we think that Italy will continue to
underperform on credit markets (vs. Spain in particular), as it has done
since the February elections. A contagion effect is also possible if markets
are too literal in their reading of the euro rhetoric that Berlusconi is likely
going to use in the coming weeks, infuriated as he is about the looming
decadenza vote.

OECD: Low Skills to Hamper Spain, Italy

In the most extensive report on skill levels across a wide range of countries to date, the OECD found that workers in Spain and Italy are the least skilled among 24 developed countries.

(…) Both economies have suffered from a loss of competitiveness over the last decade, resulting in large trade deficits and high levels of borrowing. In order to return to strong growth while generating trade surpluses and paying off their debts, their competitive position will have to improve.

But according to the OECD, Italy ranks bottom, and Spain second-to-last among the 24 countries in literacy skills. Over one in five adults in both countries can’t read as well as a 10-year-old child would be expected to in most education systems. In a ranking of numeracy skills, the positions are reversed, with Spain bottom, and Italy second-to-last. That means one in three adults have only the most basic numeracy skills, a fate shared by their U.S. counterparts. (…)

Italy faces an even greater challenge. Not only does it have fewer highly-skilled workers than most other economies, it also uses them badly—or in the case of many highly-skilled women, not at all. (…)

Young Americans Fare Poorly on Skills

U.S. baby boomers held their own against workers’ skills in other industrial nations but younger people fell behind their peers, according to a study, painting a gloomy picture of the nation’s competitiveness and education system.

The study, conducted by the Organization for Economic Cooperation and Development, tested 166,000 of people ages 16 to 65 and found that Americans ranked 16 out of 23 industrialized countries in literacy and 21 out of 23 in numeracy. Both those tests have been given periodically and while U.S. results have held steady for literacy, they have dropped for numeracy. In a new test of “problem solving in technology rich environments,” the U.S. ranked 17 out of 19. (…)

The results show a marked drop in competitiveness of U.S. workers of younger generations vis a vis their peers. U.S. workers aged 45 to 65 outperformed the international average on the literacy scale against others their age, but workers aged 16 to 34 trail the average of their global counterparts. On the numeracy exam, only the oldest cohort of baby boomers, ages 55 to 65, matched the international average, while everyone younger lagged behind their peers—in some cases by significant margins.

In most cases, younger American employees outperformed their older co-workers—but their skills were weaker compared with those of other young people in OECD countries. By contrast, some countries are improving with each generation. Koreans aged 55 to 65 ranked in the bottom three against their peers in other countries. But Koreans aged 16-24 were second only to the Japanese.

The results show that the U.S. has lost the edge it held over the rest of the industrial world over the course of baby boomers’ work lives, said Joseph Fuller, a senior lecturer at Harvard Business School who studies competitiveness. “We had a lead and we blew it,” he said, adding that the generation of workers who have fallen behind their peers would have a difficult time catching up. (…)

Americans with the most cerebral jobs—those that demanded high levels of literacy, numeracy and problem-solving skills—fared the best against the rest of the world. The potential problem lies in the growing complexity of traditional middle-class jobs in fields like manufacturing and health care. Workers unable to grow into those jobs will lose their positions or be stranded with stagnant wages. The result: an economy that continues to bifurcate. (…)

By contrast, Japanese workers are the most skilled in the 24-nation survey, but don’t fully employ many of those skills, particularly because they are denied the opportunity to use their problem solving abilities in what the OECD calls a “technology environment.” The OECD attributes that to the relative inflexibility of Japan’s jobs markets. It does suggest that if Japan were able to fully use its workers skills, it could generate higher rates of economic growth, having long stagnated.


NEW$ & VIEW$ (7 OCTOBER 2013)



Delayed Data Put Forecasters in a Bind

With a key monthly jobs report delayed by the government shutdown, Fed officials and investors were left unsure whether they would get enough reliable data in coming weeks to assess the recovery’s progress.

(…) If the shutdown ends soon, the jobs and government economic reports on income, spending, inflation and other activity could be released with only minor delay.

But a prolonged shutdown could muddy the figures. The employment report relies on surveys taken around the middle of each month. Labor’s household survey for October, which is used to determine the unemployment rate, would normally begin the week of Oct. 14 and ask about a worker’s employment status the prior week.

If the government remains closed through the next two weeks, the October report, scheduled to be released on the first Friday of November, also wouldn’t happen on time.

Keith Hall, a former Bureau of Labor Statistics commissioner, said a delayed survey would still likely ask about the same time period to maintain consistency, but that might result in less accurate responses because people might not remember details clearly from a few weeks earlier. Those who say they were furloughed would be counted as unemployed, even though they might have returned to their jobs and received back pay by the time of the survey. (…)

Fed officials hold their next policy meeting Oct. 29-30. Their next meeting after that, and their final one for the year, is Dec. 17-18. If they don’t decide to start winding down the bond program by then, the debate would continue into next year. The first meeting of 2014, and likely Mr. Bernanke’s last as Fed chairman, is at the end of January. (…)

US policy makers fear flying blind

Ripple effects of uncollected data could run for years

(…) A missing or degraded jobs report would mean a cascade of damage to other economic statistics. For example, it is taken into data on personal incomes, which in turn feed into gross domestic product. At worst, there could be a permanent hole in the record that every future study of the economy has to allow for.

Several other statistics will also degrade the longer the shutdown continues. For example, the consumer price index relies on researchers visiting shops, so it cannot be calculated in retrospect. Mr Hall said that in 2011 the estimate was a two week shutdown could cost 50 per cent of the data underlying CPI. (…)

Pig Sales Fly Blind as Data Cut by Shutdown Hampers Firms

This is not a trivial situation for investors. We are all driving blind on a treacherous narrow road filled with potholes and weak shoulders as these two charts from Doug Short illustrate:

Click to View

Click to View

And this chart on biz activity:


(As an aside, here’s what’s happening in Europe, from Michael Levitt’s Credit Strategist)


U.S. banks are also not keen on consumer loans:

The net percentage of financial institutions reporting increased willingness to make installment loans, which include credit cards, has averaged 15.4 percent in three surveys of senior loan officers released this year by the Federal Reserve. That compares with 18.9 percent during the same period last year and almost 25.4 percent in 2011.

This gauge of lending practices fell to 13 percent for responses collected between July 2 and July 16, the most recent available, from 22.2 percent in April. The net figure represents the percentage of banks more willing to lend minus the share less willing to lend. (Bloomberg)

Add that ISI’s company surveys remain weakish. So, the PMIs look good but the economic momentum is weak and fragile.

(…) hitting the ceiling would force the government to immediately balance the budget. The government would have to cut spending some 20% for the federal budget deficit is around 4% of N-GDP. The deficit is expected to reach $750 billion in 2013. This is scary for it would certainly push the US economy into a recession. Goldman Sachs estimates that a one week shutdown would reduce real economic growth at the annualized rate of 0.3% and Morgan Stanley is suggesting 0.15%. (Hubert Marleau, Palos Management)

Given all the above, political and/or policy mistakes can be very costly.

New American Economy Leaves Behind World Consumer

(…) As the U.S. looks set to accelerate, economists from Bank of America Corp. to Morgan Stanley predict it will provide less oomph abroad than it once did, partly because of changes wrought by the financial crisis and recession. The new-look America is focused on greater demand and production at home and taps more of its own energy, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999. (…)

A 1 percentage point pickup in U.S. GDP growth typically meant a 0.4 point spillover for the rest of the world, according to Reis. The pulse now may be moving toward 0.3 point, which if reached, would amount to a 25 percent drop in America’s overseas clout. (…)

A study of spillovers published by the IMF last week found that although economies aren’t correlated as much as they were during the crisis, the U.S. “still matters most from a global perspective.” A 1 percent positive surprise in its growth rate increases output elsewhere by 0.2 percent after two years, twice the effect of similar accelerations in China and Japan, it said. (…)

One explanation why the U.S. engine may be slowing overseas is that its share of worldwide GDP shrank to 22 percent this year from 31 percent in 2000, according to IMF data. In the meantime other sources of demand have emerged, including China, which now accounts for 12 percent of global output, up from 4 percent in the same period.

Bank of America’s Reis argues that the “quality” of U.S. growth is changing from the consumption-led boom of a decade ago that aided manufacturers abroad, especially in Asia. While consumption will edge up 2.5 percent next year compared with 2 percent in 2013, Reis says the driver this time will be an 18 percent jump in spending on homes — good for Canadian lumber producers but not for many other foreign businesses.

The U.S. also is now less in need of foreign energy thanks to increased domestic output amid the development of fracking, which draws on reserves in shale-rock formations. America churned out an average 7.2 million barrels a day of crude since the start of January, the highest since about 1991, and Credit Suisse Group AG estimates the inflation-adjusted petroleum trade deficit has fallen 54 percent since 2006. (…)

Another theme is that U.S. companies are increasingly repatriating production from China and other emerging markets, which lured it with cheaper labor costs.

Fifty-four percent of U.S. manufacturers with sales topping $1 billion are planning to or considering bringing back factory-lines from China, up from 37 percent in February, the Boston Consulting Group said Sept. 24, citing a survey of 200 executives. It projects that with Chinese wages and benefits rising 15 percent to 20 percent a year, the cost of operating in China will be the same as staying in the U.S. by 2015. (…)

World Bank Cuts Developing East Asia GDP Forecasts on China

Developing East Asia will probably expand 7.1 percent in 2013 and 7.2 percent in 2014, the Washington-based lender said in a report today, down from April predictions of 7.8 percent and 7.6 percent respectively. China may grow 7.5 percent in 2013, lower than an April forecast of 8.3 percent, it said.


(…) The relationship between corporate debt growth and profits growth has changed in a manner that is inimical to credit quality. During the year-ended June 2012, the 6.4% annual increase by debt trailed the 11.1% growth of profits. However, for the year-ended June 2013, the 8.6% annual growth of debt sped past the 3.6% rise by profits.


After bottoming at the 700% of Q2-2011 through Q2-2012, the ratio of corporate debt to profits recently rose to Q2-2013’s 735%. During the previous credit cycle upturn, the ratio of debt to profits troughed at the significantly lower 568% of Q3-2006 and did not reach 735% until Q3-2007, which coincided with the end of the previous upturn.


Though the now elevated ratio of debt to profits does not yet signal the nearness of a credit cycle downturn, it strongly suggests that the recent high yield bond spread of 460 bp is unlikely to approach its 341 bp leverage of the three-years-ended June 2007, or when debt approximated 647% of profits, on average. We hasten to add that investors were probably undercompensated for default risk during the three-years-ended June 2007, which makes it all the more unlikely that the high yield spread might break well under 400 bp absent an extended and substantial quickening of profits growth.


The outlook for credit actually worsens if the focus switches from “profits from current production” to “internal funds”. For starters, the ratio of internal funds to nonfinancial-corporate debt sank to 17.9% in the second quarter. The last two times this occurred in Q3-2007 and Q3-2000, recessions arrived within 12 months.


Moreover, after last bottoming at Q2-2011’s 490%, the ratio of corporate debt to internal funds has since jumped up to Q2-2013’s 559%. If this ratio extends its current climb, a widening by the high-yield bond spread may be unavoidable.


The containment of interest expense by very low borrowing costs mitigates only part of the latest rise by corporate leverage. However, though the ratio of net interest expense to internal funds merely edged up from a Q4-2011 bottom of 17.5% to Q2-2013’s 19.6%, the latter was significantly above its 14.8% average of the three-years-ended June 2007. Worse yet, it was in Q3-2007 that the ratio of net interest expense to internal funds last rose to 19.6%. Accordingly, a meaningful narrowing by the high-yield bond spread probably requires a lower ratio of net interest expense to internal funds.



As derived from Federal Reserve data, the ratio of debt to nonfinancial-corporate cash also has been rising. For Q2-2013, a still laudable 8.0% yearly increase by corporate cash was outpaced by the 9.5% growth of debt, which lifted debt up to 501% of cash. The latter was exceeded Q4-2010’s current cycle low of 446%. Moreover, even the current cycle low compared unfavorably with the 421% of debt to cash during the three-years-ended June 2007.


Also consider that a substantial portion of the large corporate cash is hoarded by only a few of the largest companies, which distort the overall picture:

U.S. nonfinancial companies held $1.48 trillion in cash as of June 30, according to Moody’s review of the more than 1,000 companies it rates. Cash stockpiles have grown by about 2% from $1.45 trillion at the end of last year, and up 81% from $820 billion at the end of 2006.

Corporate cash is still concentrated in just a few hands, with the top 50 holders accounting for 62% of the total.  The companies with the five largest cash holdings – Apple, Microsoft Corp., Google Inc. , Cisco Systems Inc. and Pfizer Inc. – held more than one quarter of the cash. (WSJ)

Ghost  How to Play the Halloween Indicator

There are zillions of equity market stats around, most of which i don’t care much about. This one I respect, however. I actually posted about that on October 31, 2009 (BUY HALLOWEEN? SEASONALITY OF EQUITY MARKETS) and updated this RBC Capital chart last spring:


(…) This “six-months-on, six-months-off” seasonal pattern, also called the “Halloween Indicator,” refers to the tendency for the stock market to deliver the bulk of its gains between Oct. 31 and the subsequent May 1.

Over the past 50 years, for example, the S&P 500 has gained an average of 6.6% during those months. Between May 1 and Oct. 31, by contrast, its average gain has been just 0.8%.


This stark difference isn’t a fluke, according to Ben Jacobsen, a finance professor at Massey University in New Zealand. He found strong evidence of the Halloween Indicator after analyzing the stock-market histories of 108 countries for as far back as data were available.

Prof. Jacobsen says that the Halloween Indicator also is quite strong in Europe, and in the United Kingdom and France in particular. (…)

It isn’t unprecedented for the stock market to fly in the face of the poor seasonal odds and rise during the summer months, of course. But it doesn’t happen very often: There have been 13 occasions over the past 50 years when the S&P 500 gained as much during the summer as it has this year.

Yet in those years when it has done so, that strength has tended to persist into the subsequent winter period—resulting in an average S&P 500 gain of 8.6% between Halloween and May Day six months later. That is higher than the winter gains following losing summers: Over the past 50 years, the S&P 500’s average gain in such periods was 5.3%. (…)

Investors who precisely follow the Halloween Indicator will, of course, wait until Oct. 31 to reinvest the cash they raised this past May Day. But several of the investment advisers monitored by the Hulbert Financial Digest believe you can improve on the indicator’s returns by searching for a different day during October or November on which to do so.

The adviser who has had the greatest success doing this is Sy Harding, who edits a service called Sy Harding’s Street Smart Report. He follows precise rules for when to get back into stocks using a short-term-momentum technical indicator known as the Moving Average Convergence Divergence, or MACD. It is based on a complicated formula relating the 12-day and 26-day moving averages of the market and is widely available at most financial websites, including The Wall Street Journal and MarketWatch.

According to Mr. Harding’s rules, in no event should investors get back into stocks before Oct. 16, since he has found through back-testing that, before mid-October, the unfavorable seasonal tendencies usually are so powerful that they outweigh even an MACD buy signal.

If the stock market is in the midst of a strong short-term rally on that date—and the MACD is therefore showing a buy signal—Mr. Harding will get back into stocks immediately. Otherwise, he waits until that indicator triggers a subsequent buy signal. He uses the inverse of this approach when getting out of stocks in the spring. (…)

I also use the MACD indicator to optimize timing:


Why such seasonality?

Though researchers aren’t sure why this pattern exists, Prof. Jacobsen suspects it can be traced to the summer vacations of traders and investors in the Northern hemisphere.

I don’t buy that. The only valid explanation I have is that October is Q3 earnings season which crucially resets the current year earnings estimates and, necessarily the following year’s. Given analysts’ tendency to overestimate earnings, October is often the month of reckoning that sparks readjustments in expectations and valuations.


Earnings season starts next week, but things don’t really pick up until the middle of October.  As shown in the chart below, just 32 companies are set to report third quarter numbers next week.  On October 24th alone, we’ll see nearly nine times that amount report in a single day. 


From Thomson Reuters:

  • Of the 21 companies in the S&P 500 that have reported earnings to date for Q3 2013, 62% have reported earnings above analyst expectations. This is lower than the long-term average of 63% and is below the average over the past four quarters of 66%.
  • 62% of companies have reported Q3 2013 revenue above analyst expectations. This is higher than the long-term average of 61% and higher than the average over the past four quarters of 49%.
  • For Q3 2013, there have been 94 negative EPS preannouncements issued by S&P 500 corporations compared to 18 positive EPS preannouncements.

Zacks Research adds:

(…) estimates have come down sharply as the quarter unfolded. The current expected Q3 total earnings growth for the S&P 500 of +1.1% is down from +5.1% in early July, with estimates for the Technology, Retail, Consumer Discretionary, and Basic Materials sectors revised down.

Excluding Finance, total earnings growth for the S&P 500 would be flat (up +0.0%) in Q3, which is better than Q2’s ex-Finance growth of -2.6%.

Unlike the downtrend in Q3 estimates over the recent past, expectations for Q4 and beyond have held up fairly well and represent a material acceleration in the growth pace. Total earnings growth is expected to ramp up to +8.9% from the roughly +2.6% growth in the first half of the year and the current expected +1.1% growth in Q3. More than half of this Q4 growth is expected to come from sectors outside of Finance. But given what we saw from these sectors in Q2 and in the run up to the current reporting cycle, it seems like a tall order to achieve this level of growth. My sense is that Q4 estimates need to come down materially.

Which I have been saying for a while. Happy Halloween!

IPOs: flotation devices
A queue of companies are coming to the stock market

(…) Funnily enough, 2013 has not been a vintage year for IPOs so far. The year-to-date global total of just over $100bn of new listings is a long way behind the peak of 2010 and 2011, according to Dealogic. But the proof of the importance of Fed largesse came in the middle of the year, when it indicated that it might ease up on QE. This led to some emerging-market listings being postponed. Now that this prospect has dimmed somewhat, the pick-up in activity has begun, and it coincides with renewed strength in the equity markets. The pipeline suggests that last year’s total of $124bn in IPOs may well be overtaken.

With the S&P 500 near its all-time high, it looks like a great time to sell. And look who has noticed! A swath of the deal volume this year represents good old-fashioned privatisations – the £3bn Royal Mail sell-off in the UK and Meridian Energy from New Zealand among them. Private equity is even more tempted. Friday’s announcement of a proposed listing of Tarkett, a French maker of floor coverings, by co-owner Kohlberg Kravis Roberts is the latest. Nearly a third of all IPOs this year are financial sponsor-related, Dealogic data show. (…)


NEW$ & VIEW$ (10 SEPTEMBER 2013)

Poll: Support Fades
For Syria Attack

Obama’s push for military action in Syria faces headwinds from an American public that increasingly is wary of overseas entanglements and doubtful that an attack would benefit the U.S.

Advanced economies growing again but some emerging economies slowing, says OECD

Economic growth in the major advanced economies is expected to continue at a similar pace in the second half of 2013 as in the second quarter.  In the three largest OECD economies, the US, Japan and Germany, activity is expected to expand by about 2 ½ per cent annualised in the third andfourth quarters. France is forecast to grow by about 1½ per cent annualised in the second half of the year, while in Italy growth is expected to remain mildly negative.

GDP growth in China is forecast to pick up to about 8% by the final quarter, after a slowdown in the first half of 2013. Even that would represent a slower rate than in recent years, however.





China data point to economic rebound
Industrial output and investment both strengthening

The national statistics bureau said on Tuesday that industrial output grew 10.4 per cent year on year in August, up from a 9.7 per cent pace in July and beating market forecasts. Retail sales were up 13.4 per cent year on year, accelerating from 13.2 per cent growth in July. Fixed-asset investment, expressed in year-to-date terms, rose 20.3 per cent in August, up from 20.1 per cent in July. (…)

The good economic news is also being reflected in China’s asset markets, with property prices growing at more than 10 per cent a year and stocks rallying over the past two months. (…)

Consumer prices rose 2.6 per cent from a year earlier, just a touch below July’s 2.7 per cent pace, the statistics bureau said on Monday.

Taiwan Export Growth Quickens

Taiwan’s exports grew more quickly in August, another sign that Asian exporters are starting to feel the pull from the gradual strengthening of demand in the U.S. and other major markets.

The island’s exports rose 3.6% last month from a year earlier to $25.64 billion, picking up from July’s 1.6% rise, Taiwan’s Ministry of Finance said Monday.


In August, Taiwan’s exports to China, its biggest export destination, rose 3.6% from a year earlier, accelerating from 1.1% on-year growth in July.

Exports to the U.S., another major export market, grew 0.9% from the same period last year, tapering from the 1.4% on-year growth in the previous month, while those to Europe were up 4%, slowing from 6% growth in July.

Taiwan’s imports in August unexpectedly fell 1.2% to $21.06 billion, compared with 2.89% growth forecast by economists in the survey but improving from July’s 7.6% decline.

The ministry said imports of capital-generating equipment fell 7.7%, while that of consumer goods such as smartphones also dropped 9.1%.

In addition, Taiwan’s industrial production rose 2.1% on-year in July, following five straight months of decline, propelled by basic metals and chemicals.

Asia’s more export-oriented economies have seen some reason for optimism lately. July industrial production numbers from South Korea, Singapore and Thailand—all countries that depend heavily on trade—suggested that export-oriented sectors such as high-tech performed solidly, despite disappointing headline numbers, according to J.P. Morgan.

Americans’ Credit-Card Debt Declines

Consumers’ revolving credit, which primarily reflects money owed on credit cards, fell by $1.84 billion, or at a 2.6% annual rate, in July from a month earlier, the Federal Reserve reported Monday. That came after a 5.2% drop in revolving credit in June.

The report showed that Americans stepped up other types of borrowing, namely to buy cars and go to school. Nonrevolving credit, which reflects mostly auto and student loans, rose by $12.28 billion, or 7.4%, in July. That caused overall consumer debt, excluding mortgages, to grow at a 4.4% annual rate in July from June.






Rising demand adds to evidence world growth is picking up

Global manufacturing growth edges higher

The growth rate of the global manufacturing sector continued to edge higher in August. Although the overall pace of expansion remained only moderate at best, it was nonetheless the fastest signalled since June 2011.

At 51.7 in August, up from 50.8 in July, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – signalled growth for the eighth month running.


Manufacturing production rose for the tenth successive month, with the rate of growth accelerating to the highest since January. The main drag came from broad-based weakness in a number of emerging markets, with India, Taiwan, South Korea, Indonesia, Vietnam and Brazil were among the countries to report lower output volumes.


US manufacturers reported a slowdown in production growth to a ten-month low in August, which offset some of the momentum gained through a return to growth in China and faster expansions in Japan and the UK. The rate of increase in UK manufacturing output surged to its highest since 1994 and in Japan hit a two-and-a-half year high. The recovery in the euro area also gained traction.

Pointing up The rate of growth in global manufacturing new orders rose to a 30-month high in August. The acceleration was also firmer than that seen for production, raising the possibility that output may continue to rise in the months ahead. Moreover, the ratio of new orders to stocks of finished goods – which acts as a bellwether for the near-term trend in output – also hit a 30-month high. Holdings of pre- and postproduction inventories both fell over the month.

Manufacturing employment ticked higher in August. The latest data point to a slight increase in payroll numbers, with job creation reported by the US, Japan, the UK, Canada, Mexico, India, Taiwan, Turkey, Vietnam, Poland, Czech Republic and Ireland.

August saw average input prices rise at the fastest pace since January. On a regional basis, rates of increase accelerated in Asia and eased slightly in North America. Cost inflation was recorded for the first time in seven months in the European Union.

Euro-Zone Recovery Broadens

Data provider Markit said its poll of executives in euro-zone services and manufacturing companies showed the highest reading for business activity in over two years. The composite purchasing managers index rose to 51.5 in August from 50.5 in July. (…)

Wednesday’s survey results suggest growth, albeit still modest, is spreading to some of the bloc’s weaker countries, said Chris Williams, Markit’s chief economist.

“The euro-zone recovery is looking increasingly broad-based, with more sectors and more countries emerging from recession,” he said.

What’s Behind Manufacturing’s Rebound?

(…) From all of which, a couple of themes seem to be emerging. One, the euro zone looks to be bottoming out. Two, China and Germany are once again proving to be the engines driving other economies. And three, the U.S. seems to be offering support, but without being a significant driver of global growth.

The question now is how sustainable and strong are these boosts likely to be. There’s every reason to believe that although the euro zone is getting a little better, it’s still a long way from health. Car sales remain weak across major euro-zone markets, with France, Italy and Spain reporting big year-on-year declines in the summer. This squares with data showing household credit continues to contract across the single currency area.

German manufacturers are likely to be sucking in regional manufactured imports–components and the like. But a lot of this is likely to be re-exported. The International Monetary Fund continues to point to strong German current-account surpluses for the coming years. If its euro-zone neighbors aren’t importing because their economies are too weak, this implies exports elsewhere.

China has been a strong source of demand for German manufactured goods. Chinese manufacturers seem to be benefiting from recent government efforts to restimulate their economy, as well as from restocking.

So as long as Chinese stimulus continues, the global economy will look better. (…)


Volume of retail trade up by 0.1% in euro area

Core retail sales declined 0.4% in July after a 0.6% drop in June and a combined 1.8% gain in April-May which itself followed a 1.4% decline in Feb-March. Very volatile. In total, however, core sales are down 0.6% during the last 6 months.

Confused smile German retail sales declined 1.4% in July after a 0.8% drop in June. German sales are off 2.2% since February. France sales jumped 2.0% in July after a 1.4% decline in June. They are up 2.0% since February. Should we believe these stats?



Why are German retail sales so soft? The FT may have the answer in this article (Germany’s gold standard jobs record masks hidden flaws).

(…) But the German “jobwunder” has come at a cost – the big increase in low paid, precarious types of employment such as part-time work, temporary contracts, so-called “minijobs” and outsourcing. (…)

The number of temporary workers in Germany has almost trebled in Germany over the past 10 years to about 822,000, according to the Federal Employment Agency.

Meanwhile, more than 7.4m Germans have a ‘minijob’ – a relatively new type of German contract that permits an employee to earn up to €450 a month tax free.

Popular with middle class housewives and students, minijobs have become widespread in service industries such as retail, hotels and restaurants.

However, for the majority of recipients, the minijob is their primary form of employment and hourly wages can be extremely low.

Minijobbers are commonly unable to set aside enough money for retirement and minijobs also have not proved the stepping stone to regular employment that many had hoped. (…)

Rings an American bell?

Weekly chain store sales remain slow in the U.S. indicating a pretty sluggish back-to-school season. The 4-week moving average is up 2.2% as of August 31.


ISI’s consumer surveys, including homebuilders, continue soft.

Mortgage applications rise first time in four weeks: MBA

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 1.3 percent in the week ended August 30, after sliding 2.5 percent the prior week. (…)

The refinance index rose 2.4 percent last week. (…)

Pointing up The gauge of loan requests for home purchases, a leading indicator of home sales, fared worse, dipping 0.4 percent. (…)


Smile  U.S. small business borrowing rises to six-year high

The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 11 percent in July to 117.7, the highest level since August 2007. (…)

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

The stronger reading in July, up 12 percent from a year earlier, came as the Federal Reserve signaled it is prepared to begin reducing its massive stimulus program as soon as this month. (…)

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

Low financial stress at small businesses, with more of them paying back loans on time, could also bode well for future borrowing.

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

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

Support for U.S. Strike on Syria Builds

Obama’s drive to build support for an attack against Syria gained significant momentum. Leaders of a Senate committee reached agreement on a resolution authorizing military strikes against Syria that adds restrictions.


John Hussman has been a very vocal and much quoted bear all along this bull market. His latest weekly note seems to warn of a possible change in his narrative:

(…) One result of this discipline is that even though I expect that the present cycle will be completed by a market loss on the order of 40-55%, conditions can certainly emerge over the course of this cycle that could warrant a more constructive stance than we have presently, though possibly less extended than we’d like. The most likely constructive opportunity would emerge from a moderate retreat in market valuations, ideally to “oversold” conditions from an intermediate-term perspective, coupled with an early firming in measures of market internals. Though larger cyclical risks here will probably make some line of defense important in any event, our outlook certainly has room to be more constructive as conditions change. We would expect such opportunities regardless of whether bull or bear market outcomes unfold ahead.

Light bulb  “A New Way to Deal With Telemarketing Calls,” (The Freakonomics Blog)

A man in the U.K. is charging telemarketers for calling him. From BBC News:

A man targeted by marketing companies is making money from cold calls with his own higher-rate phone number.

In November 2011 Lee Beaumont paid £10 plus VAT to set up his personal 0871 line – so to call him now costs 10p, from which he receives 7p.

The Leeds businessman told BBC Radio 4′s You and Yours programme that the line had so far made £300.

Phone Pay Plus, which regulates premium numbers, said it strongly discouraged people from adopting the idea.


NEW$ & VIEW$ (23 AUGUST 2013)


Flash PMIs hint at improving global manufacturing economy

Flash PMI data from Markit covering the eurozone, China and the US showed an across-the-board improvement in manufacturing business conditions in August. This was for the first time since June 2011 and suggested that the global manufacturing economy has picked up growth momentum.


The Markit-produced HSBC flash manufacturing PMI for China rose sharply in August, up from a near postcrisis low of 47.7 in July to a four-month high of 50.1. Although barely above the no-change level of 50.0, the improvement in the China PMI was significant in signalling an end of a three-month sequence of contraction. The data therefore add to hopes that the Chinese economy reached a low in the second quarter, when GDP growth slowed to 7.5%.

A flash Markit Eurozone PMI reading of 51.3 signalled an improvement in manufacturing business conditions for the second month running in August. An increase in the index from 50.3 in July also pointed to an
acceleration in the pace of growth to the fastest since June 2011. A concomitant improvement in the regions’ services PMI – which registered an upturn in business activity for the first time since January 2012 – left the composite Eurozone PMI at its highest for two years.

Manufacturing growth in the single currency area was led by Germany, where the PMI was the highest for over two years, while the French manufacturing sector more or less stagnated. Particularly encouraging news came from the rest of the region, where business conditions showed the largest monthly improvement since June 2011.

Moving further west, the Markit US manufacturing PMI came in at 53.9 according to the flash August reading, up from 53.7 in July and recording the fastest pace of expansion since March. With the US PMI up for a second successive month from June’s eight-month low, the survey data suggest that the economy has gained momentum again after a spring lull.

The upturns in the flash PMIs for three of the world’s largest manufacturing economies bode well for global growth. The JPMorgan Global Manufacturing PMI signalled that a near-stagnation of the world’s factories in the second quarter continued into July, but the flash data for August suggest that growth could lift higher.

Interestingly, new orders and new export orders were strong in the U.S. and rose marginally in Europe. In China, however, total new orders rose just above 50 but new export orders declined well below 50, meaning that domestic new orders rose strongly. Since exports are only a small part of China’s economy, we might be seeing the beginning of a strengthening in the Big Three economies.

[image]That would be a big surprise. How positive would that be for financial markets? Coming tug-of-war between taper fears, inflation fears and earnings expectations.

For clues as to what might really happen, Nouriel Roubini conveniently just wrote one of his long, rear-view-mirror article for Institutional Investor in which he forecasts that

  • world economic growth will remain anemic for many more years to come;
  • unemployment rates will stay high;
  • inflation will remain subdued for a long time;
  • aggressive monetary policy will continue for a little while longer;
  • long term interest rates in advanced economies will remain low and rise only slowly

If, like me, you have been following Dr. Doom’s crystal ball since 2009, your inclination would be to bet on the other side of Roubini’s trades. Winking smile

(…) The market appears to be accepting that though yields are moving up, they remain low by historical standards and can be better absorbed if seen in conjunction with an improving economic backdrop.

And further evidence of that more optimistic scenario was provided on Thursday, when manufacturing surveys from China to the eurozone and the US came in better than expected. US house prices were also shown to have risen 7.7 per cent in the year to June, while weekly initial jobless claims remain near multiyear lows. (…)

  • German GDP Growth Gains Steam 

    Germany’s economy rebounded sharply in the second quarter from a weak start to the year, gaining steam from a pickup in investment and robust consumption, official data showed.

Gross domestic product swelled 0.7%, corresponding to an annualized rate of 2.9%, the national statistics office said. The figures confirm official estimates issued last week.

That makes Germany the fastest growing of the world’s largest industrialized economies in the second quarter.

(…) some of the activity recorded in the three months to June had been postponed from the first quarter, when a severe cold spell depressed industrial activity and construction.

German GDP data for the second quarter showed a healthy pickup in investment: construction spending jumped 2.6% from the first quarter, “partly due to weather-related catch-up effects,” the office said.

Investment in machinery and equipment increased 0.9% after six consecutive quarters of declines, indicating companies have healthy cash positions or access to favorable financing conditions.

Private consumption in Germany increased 0.5% from the first quarter, supported by low unemployment and rising wages. Public consumption increased 0.6%.

Exports rose 2.2% on the quarter, while imports increased 2.0%. The data is adjusted for inflation and accounts for seasonal swings as well as the number of working days in each quarter.


There is a high level of hope that the housing market will keep lifting the economy. Existing home sales have been stronger lately and expectations are that they will keep rising, boosting prices and pulling along new construction. Charts like this one (CalculatedRisk) feed the hope:

But we forget that the early 2000’s were bubble years. BMO Capital puts things into their proper perspective. Warning: this may deflate some of your expectations.

U.S. Resale Market Feeling Normal Again

The 6.5% jump in existing home sales to more than three-year highs of 5.39 million annualized in July has taken the level above long-term averages, normalized for the growing number of households. This compares with the market for new homes, where sales and starts are both well below normal despite solid gains in the past year. The role of investors, who account for one-in-six resale transactions, likely explains the difference.


Note that first-time buyers were 29% of July sales, unchanged from June, and down from 34% a year ago and the historical norm of 40%. Not a healthy market just yet.

Raymond James adds:

Interestingly, there may be some evidence that the surge of demand from rental-home investors may have begun to wind down, as the NAR reported 16% of homes purchased in July were bought by investors down from 17% last month and 22% in February (the cyclical peak). That said, we note that 31% of all sales in June were still “all-cash” transactions (normally less than 10%), indicating that investors and other affluent households still remain a critical component of current housing demand. With rising home prices, distressed sales continued to dwindle to just 15% of sales (the lowest level on record since tracking began in October 2008).

Listed inventory in July rose by 120,000 units from June to 2.28 million for-sale homes. Total listings are still down 5.0% y/y and months’ supply still registers at a very low 5.1 months (down from 6.3 months last year). Nevertheless, the sequential inventory increase (+5.6%) was larger than typical June-July patterns, as listings are typically flat between June and July (dating back to 1990).

Inventory increases have now exceeded historical patterns in five of the last six months. Given the recent pace of double-digit y/y price increases
in many markets across the country, it’s not terribly surprising that more sellers would begin to emerge.

Consumers Skip Dining for Cars as Sales Slow

Restaurant sales contracted in June and July, even as spending on other discretionary categories such as automobiles and homes grew, a sign some Americans remain budget conscious.

Results at casual-dining establishments fell 3.5 percent last month, following a 2 percent drop in June, according to the Knapp-Track Index. This marked the first two consecutive declines in the monthly index of restaurant sales after the industry was rocked by its worst streak in almost three years between December and February.

Preliminary data suggest that August sales still are weak, though “better than July,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970.

“Consumers’ priorities change every month based on what they can afford,” Knapp said. Many Americans don’t eat out as often as they would like, and they’ve had to cut back “very begrudgingly” on meals away from home to help subsidize other purchases.

Pointing up Restaurants and retailers have been among the most active employers in recent months.

Leading Index Signals U.S. Growth to Pick Up Into 2014


The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent after no change in June.

Eight of the 10 indicators in the leading index strengthened in July, led by a widening gap between long- and short-term interest rates, higher stocks and more building permits. Fewer jobless claims and gains in factory orders also propelled the leading index last month.

Click to View

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

Click to View(charts from Doug Short)

On the other hand:

This rise, however, was spearheaded by the three financial components (equities, credit spreads and yield curve). The steepening of the yield curve alone was responsible for half of the monthly increase in the LEI in July.

Excluding financial components, the gauge of future economic activity was only up 0.1% on the month. As today’s Hot Chart shows, the
behaviour of the LEI in this economic recovery has been very peculiar with little to no contribution from its non-financial components (there are seven of them). Four years into a recovery, it remains difficult to have strong convictions about the underlying strength of the U.S. economy. Under these circumstances, we believe that QE tapering by the Federal Reserve will proceed in slow increments. (NBF)



Hot smile  Central-Bank Moves Blur The View

The escalating role policy makers are playing in the foreign-exchange market is injecting new uncertainty into financial markets.

Central banks from Indonesia to Turkey to Brazil are stepping up efforts to fight steep declines in their currencies and protect vulnerable economies as investors pull cash from emerging markets.

These measures to support local markets are a sharp reversal from much of the past two years, when some of these same emerging-market central banks were trying to tame excessive currency appreciation.

On Thursday, Turkey’s central bank auctioned $350 million out of its reserves, making good on its promise to hold daily sales to support the lira.

Brazil’s central bank on Thursday said it would provide at least $60 billion more in dollar liquidity through the end of the year. Under the plan, the bank will offer $3 billion of dollar loans and swaps per week in regular auctions starting Friday.

Indonesian President Susilo Bambang Yudhoyono is expected on Friday to announce a “policy package” to stabilize the economy. (…)

The Fed released minutes Wednesday from its last policy meeting that did little to change investors’ expectations. The Philippines PSE Composite share index dropped 6% after markets reopened for the first time since Friday, while Indonesian stocks have shed 9% this week and Turkey’s are down 8%.

As money flows back to rich economies, developing countries face questions about how they will continue to fund economic growth and pay off their debts. A weaker currency can help on that front, spurring growth by boosting exports. But it also can trigger inflation, already viewed as too high in countries such as Brazil and India.

Some countries already have burned through foreign-exchange reserves with little to show for it. Turkey has spent about 15% of its reserves since May, while Nomura estimates Indonesia’s reserves are down 26% from their 2013 peak. Reserves in 21 emerging economies tracked by Nomura are down $153 billion from their peak this spring, a level of spending that hasn’t been seen since 2008, the bank said. (…)

Fed Burned Once Over Taper Now Twice Shy on QE3

U.S. central bankers have $3 trillion of losses reminding them they had better get their communications right should they decide to taper their bond purchases.

That’s how much global equity markets declined in the five days after Federal Reserve Chairman Ben S. Bernanke’s June 19 remarks that he may reduce his $85 billion in monthly securities buying this year and halt it altogether by mid-2014. His comments pushed the yield on the benchmark 10-year Treasury to a 22-month high.

Gillian Tett
Central bank chiefs must master art of storytelling

(…) Rather than operating the controls, moreover, central bankers also try to control economic outcomes by using words, not merely to influence price and interest rate expectations but to shape the mood. Thus the seemingly dry ritualistic texts that are issued each month – and supplemented by sober speeches – no longer merely describe policy; they are creating it too. Words are the weapon. (…)

At the European Central Bank, Mario Draghi has been masterful at delivering economic outcomes through words, as much as deeds. Indeed, what is most striking is that Mr Draghi has managed to reframe public discourse about the euro not so much by what he has said but what he implicitly persuaded us to assume. (…)

“[This] is about the creation of a monetary regime – a regime impelled by a series of communicative experiments … in which we are all participants, knowingly or not,” Prof Holmes argues. It is, he says, now defined “by the concept of a ‘public currency’, a term used in passing by Mervyn King, [former] governor of the Bank of England.” Central bankers now operate in an area where linguists, psychologists – and even anthropologists – know as much as economists. (…)

Narratives, narratives…(see EPSILON THEORY)

Clock  Coming soon at a theater near you: Lew warns Congress to strike debt deal US Treasury secretary fears risk of damage to economy

On a visit to Mountain View, California, in the heart of Silicon Valley, Mr Lew did not offer an exact deadline by when US lawmakers will need to strike a deal to raise America’s borrowing limit or face default. But analysts at the Bipartisan Policy Center, a think-tank, believe it will be somewhere between mid-October and mid-November, depending on the government’s cash flow.


Much has been written about current high profit margins and the risk of mean-reversion. BMO Capital takes another approach that I find interesting:

(…) regarding profit margins – it is extremely difficult for corporations to improve margins for long periods of time. Sooner or later organic growth is required to deliver results. Based on historical data the market
appears to be at an inflection point. For instance, using corporate profits as a percentage of nominal GDP as a broad proxy for US profit margins there have been only four other periods since 1950 where profit margins expanded for four or more consecutive years (Exhibit 1, left).

Interestingly, only two periods reached five years of profit margin expansion (market is currently in its fifth consecutive year of profit margin expansion). Following each of those periods, profit margins deteriorated quite significantly. In addition, current profit margins are at
all-time highs and well above one standard deviation from its average since 1950. As Exhibit 1 (right) shows, similar profit margin levels have proved to be short lived.


Given recent productivity and labor cost trends, we believe history is likely to repeat itself with profit margins having already peaked. This is important because following similar peak levels, market performance, EPS growth, and P/E levels tend to suffer in the period that follows. As
imageExhibit 2 illustrates, in the calendar year following an extreme peak in profit margins, market performance is slightly negative, price multiples contract while profits are roughly flat.

We believe this is explained by subdued productivity growth and increased labor costs during these periods (trends that are occurring now). What compounds matters is the fact that the current economic backdrop has been much weaker compared with those other periods where margins expanded significantly, yet market performance and valuation trends have been stronger. Whether or not the market is correctly anticipating stronger economic growth remains to be seen. Nonetheless, stronger economic growth is exactly what we believe will be required to keep EPS and market momentum intact.

Chart of the day: from Morgan Stanley’s Viktor Hjort via ZeroHedge


My good friend I. Bernobul wrote last week about a FT front page piece by James W. Paulsen, chief investment strategist at Wells Capital Management who was arguing that rising consumer confidence would more than offset slower earnings growth and rising bond yields as it apparently did in previous “remarkably similar cycles”.

Unfortunately, Paulsen provided no evidence of his assertions. However, it just happens that BMO Capital’s strategist published a chart correlating the equity risk premium with consumer confidence over the years. Nice of him to include the regression line to the scattergram; if this is what Paulsen means…how confident can you be?



The media are clearly in a positive mood these days.

U.S. Small-Business Owners Most Optimistic Since 2008

U.S. small-business owners are more optimistic now than at any time since late 2008. The Wells Fargo/Gallup Small Business Index improved to +25 in July, from +16 in the second quarter. The latest result, while not as high as pre-recession levels, is the highest index score since the third quarter of 2008.


Pointing up  Prior to the recession and financial crisis of 2008-2009, Small Business Index scores were generally in the triple digits. The Wells Fargo/Gallup Small Business Index was initiated in August 2003, reached its peak at 114 in December 2006, and hit its low point of -28 in July 2010.

The latest results are based on a national random sample of 603 small-business owners having $20 million or less of sales or revenues, conducted July 22-26.

Small-business owners’ ratings of their current operating environment are mostly flat compared with April. The Present Situation Dimension of the index was +4 in July, essentially the same as the +2 in the previous quarter. But, this is only the second time the Present Situation Dimension has been in positive — if still broadly neutral — territory since December 2008.


I’d say they’re just barely out of misery. But they are good spirited…

Fingers crossed  The increase in the overall index score comes more from owners’ improving future outlook than from their views of present conditions.

The Future Expectations Dimension of the index, which measures owners’ expectations for their business’ operating environment over the next 12 months, increased to +21 in July, up from +14 in April. Small-business owners are modestly more optimistic about their future operating environment compared with one year ago, when this dimension stood at +18.


…although really not that much more.

But here’s the real thing:

Small-business owners’ increased overall optimism correlates with their more positive views toward the ease of obtaining credit. Fewer business owners say they have experienced difficulty in the last 12 months obtaining credit, at 25%, than did so last quarter, at 30%.


My reading of the above chart is that “% easy” is flat but “% difficult” is down a little. Simple math suggests that “% unchanged” must be up, and this is unchanged from poor. Nothing “more positive” here.

FYI: Disruptive technologies: Advances that will transform life, business, and the global economy

The McKinsey Global Institute set out to identify which of these technologies could have massive, economically disruptive impact between now and 2025.



NEW$ & VIEW$ (15 AUGUST 2013)

Storm cloud  Wal-Mart U.S. same-store sales slip 0.3 percent

Wal-Mart Stores Inc posted disappointing quarterly U.S. sales on Thursday as shoppers pinched by higher payroll taxes and gas prices made fewer trips to its stores.

In addition to missing analyst estimates, Wal-Mart also showed a jump in inventory levels in Q2 and warned on emerging markets.

Storm cloud  Macy’s Shoppers Remain Cautious

Second-quarter transactions, which the company considers a proxy for traffic, declined 1.6%, a development that Chief Financial Officer Karen Hoguet said was a concern. Customers remain stretched and may have decided to spend their money on other goods, she said on a conference call with analysts.

Macy’s CEO Terry Lundgren blamed disappointing sales on “consumers’ continuing uncertainty about spending on discretionary items in the current economic environment.” Like other retailers, it said it had to discount to clear merchandise after a cool spring hurt summer merchandise sales. Inventory growing faster than sales also was a cause for concern.

Same-store sales slipped 0.8%.

Pointing up  Many large retailers posted tepid sales recently and complained of a generally cautious consumer. Yet, retail sales data were pretty good in the last 3 months, contrary to the trend displayed by consumer spending in the national accounts as this chart from Pictet shows. Hmmm…Driving blind indeed!


Fingers crossed Consumers Step Up Borrowing

After years of struggling to shed debt, Americans are finally gaining enough confidence in their finances to step up borrowing for autos, homes and other goods—a shift that could boost the economic recovery.

Auto lending increased by $20 billion in the second quarter from the previous quarter, the largest gain in seven years, Federal Reserve Bank of New York figures showed Wednesday. Americans also increased their credit-card balances, reversing a first-quarter decline, and took out more mortgages.

At the same time, total consumer debt declined by $78 billion last quarter to $11.15 trillion, putting it 12% lower than its peak in the fall of 2008 during the recession and at its lowest level since 2006.

Most of the adjustment was due to a decline in the amount of debt tied to outstanding home loans, likely due to lenders’ write-offs from foreclosures and recent gains in home prices that helped owners sell.

One exception is student debt. The amount of education loans outstanding has increased every quarter since the New York Fed began tracking the figure in 2003. They now account for almost 9% of all consumer debt, up from 3% a decade ago.

Debt Load

The New York Fed data also showed that Americans are doing a better job keeping up with their bills.

Only 5.7% of all consumer debt is 90 days or more late, the lowest level since 2008. The delinquency rate fell in every category measured last quarter, including mortgages and credit cards. (…)

The 90-day delinquency rate nearly tripled from the start of the recession to the first quarter of 2010, when it peaked at 8.7%. (…)

Lenders now appear to be loosening their standards. The total number of credit-card accounts, which fell sharply in the recession’s wake, posted the strongest gain in two years last quarter. (…)

But Macy’s said yesterday

that new banking regulations implemented after the financial crisis is making it harder for Macy’s to sign up new credit-card customers, which also contributed to weaker sales.

More Car Loans Than Mortgages in U.S.

There are now more auto loans than mortgages in the U.S., but most of them are going to older Americans, according to new data from the Federal Reserve Bank of New York.

(…) Americans were holding 84 million auto loans in the second quarter of 2013, compared with 80.6 million mortgages, the New York Fed’s Household Debt and Credit Report showed. (…)

Most auto loans go to older borrowers, with the greatest share going to people aged 30 to 49. That trend predated the recession, but the recovery has come faster for older Americans. The only group originating more loans than before the recession are people over 50, likely a result of aging Baby Boomers.

But 18 to 29 year olds haven’t seen much of a recovery. (…) People aged 18 to 29 are taking out 24% fewer loans than they did prior to the recession, compared to about 10% fewer loans for 30 to 49 year olds. (…)

Auto  The reality is that many young people are trying to avoid having to buy a car while the growing number of older folks are traveling less. (Chart from The Liscio Report)


Producer Price Index: No Change in Headline Inflation, Core Rises 0.1%

(…) the July Producer Price Index (PPI) for finished goods shows no change month-over-month, seasonally adjusted. Core PPI rose 0.1% (which the BLS rounded up from 0.05%).

Year-over-year Headline PPI is at 2.12% (rounded to 2.1% by the BLS), down from last month’s 2.5%, which was the highest since March 2012. In contrast, Core PPI at 1.20% is at its lowest YoY since June 2010.

Click to View


(Ed Yardini)

image(Scotia Capital)

(Ed Yardini)


With Exports At 4-Year Low, Is Japan Missing Boat to China? New figures released by Japan’s government-affiliated trade promotion body show that not only is trade with China falling, officials expect the downturn to be prolonged.

(…) But even as emotions have calmed, Jetro officials say China’s suddenly weaker economy has led to continued reductions in exports. Lackluster private consumption in China contributed to a 47.7% drop in exports of digital cameras and other audio-visual equipment, the figures showed.

(…) Jetro predicts Japanese exports to China will stay keep declining, and deficits will widen further.

China’s slowdown and the ongoing diplomatic tensions have made more and more Japanese companies wary of investing in China. According to Jetro, Japan’s direct investment in China for January-June fell 31.1% from a year earlier to $4.9 billion.

This compares with a 55.4% increase to a record $10.3 billion for the Association of Southeast Asian Nations.

Pointing up The shift is likely to continue, as Japanese companies seek a safer political environment and lower labor and business costs, said Jetro Chairman Hiroyuki Ishige.

Chinese Banks Feel Strains After Long Credit Binge

China’s banking sector is showing some cracks, as years of rapid credit growth in the country has led to serious debt problems for local governments and companies and numerous white-elephant projects.

In a bid to beef up their capital base, the country’s four largest state-owned banks by assets—Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd.—recently won board approval to issue up to a total of 270 billion yuan ($44.1 billion) in securities in the next two years. The figure is bigger than the total amount of issuance by the Big Four in the past two years.

A recent analysis by ChinaScope Financial, a research firm partly owned by Moody’s Corp., shows that China’s banks would have to raise between $50 billion and $100 billion through equity sales in the next two years to maintain their current capital-adequacy levels.


Assets in China’s banking sector jumped 126.5% to about $21 trillion as of the end of last year from four years earlier, making it the fastest-rising banking system among emerging economies, according to Fitch Ratings Inc. But it also is the most thinly capitalized among those economies, with the amount of equity representing only 6.5% of total assets in China’s banking system. By contrast, equity represents an average of 11.2% among 48 emerging economies.

Chinese regulators are taking note. In a rare interview with state broadcaster China Central Television on Aug. 2, Shang Fulin, chairman of the China Banking Regulatory Commission, acknowledged that important risks stem from loans to local governments and those created outside banks’ balance sheets.

FT Alphaville adds this:

Gavyn Davies looked at China’s fiscal space to address another financial crisis last week, and said it appeared the country’s government could cover bad debts equivalent to 20 per cent of GDP (similar to the amount that was “bad-banked” in 1999) by taking its public debt ratio to 100 per cent – not out of the ballpark terrible, compared to other countries. However, he points out that the rapid rise in debt ratios mean that this must be addressed quickly.


From The Short Side of Long:

  • AAII survey readings came in at 40% bulls and 27% bears. Bullish readings fell by 4% while bearish readings rose by 2%. The AAII bull ratio (4 week average) currently stands at 64%, which indicates very high optimism amongst the retail investment community.  For referencing, AAII bull ratio survey chart can been seen by clicking here, while AAII Cash Allocation survey chart can be seen by clicking clicking here.

Chart 1: Bearish sentiment is almost non existent these days…

Source: Short Side of Long

  • Investor Intelligence survey levels came in at 52% bulls and 19% bears. Bullish readings increased by 3%, while bearish readings fell by 1%. Bearish readings have now fallen to the lowest level since early 2011 as equity market was in the process of a major top and a 20% sell off. Furthermore, II bull ratio remains above 73% a serious “sell signal” territory that traders and investors alike should consider. For referencing, II bull ratio survey chart can been seen by clicking here.
  • NAAIM survey levels came in at 76% net long exposure, while the intensity fell to 130%. the recovery in sentiment by fund managers, seen in this survey, now lines up with the mood of the remain survey indicators. For referencing, recent NAAIM survey chart can been seen by clicking here.
  • Other sentiment surveys continue to rise towards extreme optimism. However, the movement  has been rather mute in recent weeks. Consensus Inc survey is still rising towards extreme territory, while Market Vane survey is on a cusp of it too. All in all, nothing new to report here.

Chart 2: Retail investment community continues to pile into stocks

Source: Short Side of Long

  • Last weeks ICI fund flows report showed “equity funds had estimated inflows of $714 million for the week, compared to estimated inflows of $4.20 billion in the previous week. Domestic equity funds had estimated outflows of $926 million, while estimated inflows to world equity funds were $1.64 billion.”The chart above shows that retail investment community continues to pile into stocks this late in the rally (S&P is up over 55% from October 11 lows). Rydex fund flows are also rising too. Recent data showed that leveraged funds (usually not featured here) showed 6 times more bullish inflows relative to bearish funds. That is the highest reading for the bull market since it began in March 09. For referencing, recent Rydex fund flow chart can be seen by clicking clicking here.

High five  You may want to read this before acting on the above: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!


NEW$ & VIEW$ (8 AUGUST 2013)

Jobless Claims in U.S. Fall Over Month to Lowest Since 2007

The number of claims in the four weeks ended Aug. 3 declined to 335,500 on average, the least since November 2007, a Labor Department report showed today in Washington. They rose to 333,000 last week, in line with the median forecast of 50 economists surveyed by Bloomberg, from 328,000 the prior week.

Auto Loans Drive Consumer Lending Increase

Nonrevolving credit, which consists primarily of student loans and auto financing, rose by $12.6 billion in June to a nonseasonally adjusted $1.987 trillion, according to Federal Reserve data released Wednesday.

Within this category, student loans from the federal government rose $3.3 billion, indicating that auto loans were responsible for the bulk of the $12.6 billion overall increase. The Fed doesn’t break out precise data on auto financing.

The Fed data also showed that revolving credit, primarily credit cards, rose by $300 million in June to $816.7 billion. Growth of revolving credit, which is usually used for smaller discretionary purchases and carries higher interest rates than nonrevolving credit, has been largely flat in the aftermath of the Great Recession.

Total consumer credit, defined as household borrowing excluding mortgages, rose by $13 billion in June to $2.803 trillion. On a seasonally adjusted basis, consumer credit rose by $13.82 billion in June to $2.848 trillion.

But these Haver Analytics charts show a topping pattern:


Million-Dollar Home Sales Jump in U.S. as Wealthy Return

Sales of homes priced at more than $1 million jumped an average 37 percent in 2013’s first half from a year earlier to the highest level since 2007, according to DataQuick. Transactions priced at less than $1 million rose 11 percent in the same period to the highest since 2009, data from the National Association of Realtors show.

Homes priced at more than $1 million lost about 46 percent of their value during the housing crash, according to a Bloomberg survey of sales in the top four cities, based on valuation data from Since then, their value has more than doubled. Home prices in the broader market fell to $154,600 in early 2012 and increased to $214,200 in June, according to the Realtor’s group.

This Haver chart also reveals a topping, sorry, a negative trend in mortgage demand.

Cass Freight Index Report™ ‐ July 2013

In addition to falling from June, shipment volume was also lower than in the same month last year, as it has been in five of the first seven months of 2013 (volumes were 3.1 percent lower than July 2012). Both June and July shipment volumes were lower than in the same months in both 2011 and 2012. Despite this, cumulative shipment volume year‐to‐date through July is still 3.4 percent above the same seven‐month period last year. (But the July decrease hurt: at the end of June, year‐to‐date shipments were up 5.8 percent from the year before.)

Railroads led the way in declines with drops in both carloadings and intermodal shipments in the last four weeks. Carloadings were up two weeks and down the other two, resulting in a 3.6 percent decline, while
intermodal loadings fell sharply for the first two weeks and surged in the third, ending with a 2.5 percent drop.

The decrease in intermodal rail is consistent with the decline in imports and weak exports, which limited the number of trailers to be moved. The trucking sector showed some signs of capacity constriction, but it is too
early to determine if or to what extent this is being caused by the new Hours of Service Rules. At this point, most shippers are still reporting adequate capacity. The American Trucking Association’s Truck Tonnage Index rose only 0.1 percent in June after posting a revised 2.1 percent increase in May.


OECD Points to Growth Shift

The Paris-based think tank said its leading indicator of economic activity in its 34 developed-country members rose to 100.7 in June from 100.6 in May.

Released Thursday, the composite leading indicators for June suggest Germany will lead the euro zone out of its longest postwar contraction, with Italy poised for a pickup in growth after almost two years of declining activity. The leading indicator for the U.K. also points to a rise in growth following a number of years of near-stagnation.

The leading indicators continue to point to firming growth in the U.S. and Japan, the two largest developed economies.

However, just as the euro zone appears set to return to modest growth, there are signs expansion in a number of large developing economies is set to weaken, with the leading indicators for June pointing to continued slowdowns in China, Brazil and Russia.



French government hails signs of recovery Unemployment remains a challenge after rising towards 11%

A welcome new indicator appeared on Wednesday with figures showing that the trade deficit shrank by a third in June to €4.4bn compared with the same period last year, reducing the deficit in the first half below €30bn for the first time since 2010.

Much of the improvement was due to a drop in imports as French consumers tightened their belts. But there was a small uptick in exports in June that signalled some hope for recovery from an alarming slide in competitiveness in recent years. (…)

A survey for Les Echos, the financial newspaper, of 31 of the top 40 companies in the CAC 40 stock market index to have reported first-half results so far, showed that although profits were down overall by 1.4 per cent on the same period last year, almost 70 per cent exceeded analysts’ expectations and many had seen improved performance in the second quarter. The CAC 40 itself has surged recently above 4,000 from a low of 3,341 last November.


China Shows More Signs of Stabilizing

China’s economy is showing signs of stabilizing after a six-month slowdown, a prospect that could boost the outlook for world growth as the U.S. steadily improves and Europe edges out of recession

Exports beat expectations, rising 5.1% year-over-year in July after a 3.1% fall in June. Imports were also strong, up 10.9% year-over-year compared with a fall of 0.7% the previous month.

Unlike previous figures this year, China’s trade data didn’t appear to be affected by companies attempting to channel funds illegally into the country. Exports to Hong Kong, the main channel for exaggerating sales, were up just 2.3% year-over-year. Chinese authorities cracked down on over-invoicing earlier this year.

Behind the improvement in exports: stronger demand from the U.S. and Europe. Shipments to the U.S. rose 5.3% year-over-year, while sales to the European Union managed a 2.8% increase—a turnaround after several months of contraction.


High five  From FT Alphaville:

SocGen’s Wei Yao has some interesting observations. The year-on-year export growth rate, she says, benefits from a base effect — the July 2012 data displayed an unusual decline from the previous month.

The import data, however, has no such obvious issues (apart from the little matter of Taiwan). Emphasis ours:

In comparison, the bounce of import growth from -0.9% yoy to +10.9% yoy without any base effect was much more surprising and difficult to explain. By origin, there was improvement across the board and the major contributors were the euro area, Taiwan, Korea and Australia. Imports from the euro area rose 8.3% yoy in July, improving for two months in a row. However, we noticed that the difference between China’s data and Taiwan’s diverged again. Chinese imports from Taiwan grew 16.6% yoy in July (vs. 6.7% in June) using the mainland’s data, but increased only 1.1% yoy (vs. 8.6% in June) using Taiwan’s data.

(…) However, the import strength is not necessarily a good indicator for the Q3 GDP growth numbers. Yao points out that the stronger relative performance of imports vs exports means the trade surplus is narrowing — something that is likely continue in the coming months due to the base effect, she says. And this shows up on national accounts as a negative for GDP growth. (…)

One last point: remember how the HSBC/Markit manufacturing PMI diverged rather sharply (again) from the official one? Both of them showed growth in new export orders continuing to contract, albeit at a reduced pace from June.

And From Zerohedge:

What better way to capture the data discrepancy – as in someone here is lying – than the following chart showing the reported China trade surplus to the US and the reported US trade deficit with China. Just a $10 billion/month recurring “difference”…

Pointing up Also consider this: CEBM Research surveys reveal that

(…)  industrial demand remained weak among most sectors. (…) weak demand has not significantly changed, it also suggests that enterprises do not expect fundamentals will deteriorate further in the next month.

Exports Outlook Worsened in July. Container exports remained weak in July, weaker than respondents’ expectations. 

Sales in the consumer sector remained weak in July.  New property sales were in-line with developers’ expectations, but the inventory-to-sales ratio has increased and developers have become more cautious in their view towards 2H13. Property prices continued rising in July, and property developers remained concerned about the possibility of further tightening measures in the property sector in the second half. Banks have continued to raise lending rates, particularly rates offered to small and medium-size enterprises.