NEW$ & VIEW$ (30 JANUARY 2014)

BLAME THE FED GAME

Investors Seek Safer Options as Ground Shifts

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


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

Less Room to Maneuver

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

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

No Respite for Emerging Markets

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

Meanwhile: Fed Sticks to Script

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

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

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

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

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

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

FED UP?

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

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

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

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

Dr. Ed explains the disinflationary stimulus:

The Fed, the Dollar, and Deflation

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

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

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

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

WHAT NOW?

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

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

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

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

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

Spain’s Economy Picks Up Pace

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

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

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

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

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

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

And this telling, and warning, chart:

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TRY NOT TO LAUGH!

 

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

 

NEW$ & VIEW$ (27 JANUARY 2014)

Emerging markets turmoil intensifies
Turkish central bank calls emergency meeting to tackle falling lira

The emerging markets sell-off intensified on Monday with stocks heading for their worst day in almost six months even before Latin American bourses opened, and currencies weakened further until the Turkish central bank prompted speculation it might raise rates by calling an emergency meeting. (…)

The FTSE Emerging Markets index was 1.4 per cent down in early afternoon London trading on Monday – and is more than 6.2 per cent weaker for the year. Hong Kong’s stock market fell 2.1 per cent, Taiwan’s tumbled 1.6 per cent and Indonesia’s dropped 2.6 per cent. (…)

U.S. Markets Tumble as Fear Spreads

U.S. stocks tumbled Friday to their biggest loss in more than seven months, extending a global selloff that investors fear signals turmoil to come as financial markets adjust to a pullback in central-bank stimulus.

The Dow Jones Industrial Average fell 318.24 points, or 2%, to 15879.11. The Stoxx Europe 600 lost 2.39%, and Germany’s DAX, down 2.48%, had its sharpest fall in months. The Nikkei also fell 1.94%.

While those drops were dramatic, much of the pain of investors’ readjustment is landing on developing economies, from Brazil and India to Thailand and South Africa. (…)

Friday’s swoon was notable for its breadth—nearly all major equity markets were in the red. In foreign-exchange markets, the selloff began with currencies such as the South African rand and Turkish lira that have been viewed as vulnerable because of sluggish domestic growth. But it soon spread to currencies of countries with relatively solid fundamentals, such as Mexico’s peso and South Korea’s won. Currencies also slid in Eastern Europe. (…)

WHAT NOW?

When equity markets foray into not-so-cheap territory, investors get nervous and edgy, ready to jump ship at the first alarm bell, justified or not. Even more so if the Fed is off the gas pedal. Argentina, South Africa and Turkey cannot wag the U.S. economic dog, but they can wag its financial dog for a while. Here’s Ben Hunt’s take on this latest EM rout:

For 20+ years there has been a coherent growth story around Emerging Markets, where the label “Emerging Market” had real meaning within a common knowledge perspective. Today .. not so much. Today the story is that it was easy money from the Fed that drove global growth, EM or otherwise. Today the story is that Emerging Markets are just the levered beneficiaries or victims of Fed monetary policy, no different than anyone else.

In my note, (It Was Barzini All Along), I’m not asking whether the growth rate in this EM country or that EM country will meet expectations, or whether the currency in this EM country or that EM country will come under more or less pressure. I’m asking if the WHY of EM growth and currency valuation has changed. The WHY is the dominant Narrative of a market, the set of tectonic plates on which investment terra firma rests. When any WHY is questioned and challenged – as it certainly is in the case of EM markets today – you get a tremor. But if the WHY changes you get an earthquake.

What are the investments that such an earthquake would challenge? You don’t want to be short the yen if this earthquake hits. You don’t want to be long growth or anything that’s geared to global growth, like energy or commodities. You don’t want to be overweight equities and underweight bonds. You don’t want to be overweight Europe. There .. did I cover one of your favorite investment themes? Bet I did. You can run from EM’s with US equities, but with S&P 500 earnings driven by non-US revenues you cannot hide. If you think that your dividend-paying large-cap US equities are immune to what happens in China and Brazil and Turkey .. well, good luck with that. My point is not to sell everything and run for the hills. My point is that your risk antennae should be quivering, too.

The U.S. “investment terra firma”, for now, is in Q4 earnings:

EARNINGS WATCH

Factset gives us a good rundown after the first quarter:

Overall, 123 companies have reported earnings to date for the third quarter. Of these 123 companies, 68% have reported actual EPS above the mean EPS estimate and 32% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (71%) average and the 4-year (73%) average.

Note that S&P’s tally shows 66% beats and 24% misses.

In aggregate, companies are reporting earnings that are 2.7% above expectations. This surprise percentage is below the 1-year (3.3%) average and the 4-year (5.8%) average. Companies in the Information Technology (+6.6%) are reporting the largest upside aggregate differences between actual earnings and estimated earnings. On the other hand, companies in the Industrials (+0.7%) sector are reporting the smallest upside aggregate differences between actual earnings and estimated earnings.

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In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the average percentage recorded over the last four quarters (54%) and above the average percentage recorded over the previous four years (59%).

In aggregate, companies are reporting sales that are 0.7% above expectations. This percentage is above the 1-year (0.4%) average and above the 4-year (0.6%) average.

The blended earnings growth rate for Q4 2013 of 6.4% is slightly above the estimate of 6.3% at the end of the quarter (December 31). Four of the  sectors have recorded an increase in earnings growth during this time frame, led by the Information Technology (to 5.9% from 3.3%) sector. Five of the ten sectors have seen a decline in earnings growth since the end of the quarter, led by the Energy (to -10.9% from -8.0%) and Consumer Discretionary (to 3.7% from 6.2%) sectors.

The Financials sector has the highest earnings growth rate (23.5%) of all ten sectors. It is also the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 3.1%.

Other than Energy and Consumer Discretionary, the earnings season is going pretty smooth so far.

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In fact, earnings estimates for Q4’13 have been rising in recent weeks from their low point of $28.14 on Jan. 9 to their current $28.77, a not insignificant 2.2% creep up. As a result, trailing 12 months EPS would reach $107.82 after Q4.

But there is this new variable:

Multinationals Start Warning on Q1 Currency Impacts

As currencies in emerging markets tumbled this week, Procter & Gamble Co. and Stanley Black & Decker Inc. warned investors Friday their earnings could take a hit. (…)

Procter & Gamble’s cautioned investors that foreign-exchange swings in the fourth quarter shaved 11 cents a share off earnings, which came in at $1.18 a share. And there’s not much, the company can do to offset the damage, said Jon Moeller, chief financial officer, according to a transcript of a conference call provided by FactSet.

(…) And though the company is still looking for ways to hedge financially, much of its currency woes stem from countries like Egypt, Venezuela, Argentina and Ukraine, “where there really isn’t a financial hedging option.” And even in countries where hedging is possible, “the cost of forward hedging gets pretty prohibitive.” (…)

Stanley Black & Decker CFO Donald Allan said currencies, including the Canadian dollar, Brazilian real and Argentine peso, dragged down earnings and would continue to do so this year. While the euro showed strength over the course of 2013, he said the Canadian dollar fell 11% against the dollar last year, the real lost 15% and the peso plunged 40%.

“We saw about $60 million of negative currency effects in 2013, primarily in the back half of the year,” Mr. Allen said on a conference call. “We would expect a very similar number to occur in the first half of the 2014, which would equate to about a 30-cent negative to in [earnings per share].”

The toolmaker reiterated its guidance for earnings of 2014 earnings of $5.18 to $5.38.

That said, Factset finds little panic among companies, so far:

Q1 Guidance: At this point in time, 25 companies in the index have issued EPS guidance for the first quarter. Of these 25 companies, 18 have issued negative EPS guidance and 7 have issued positive EPS guidance. Thus, the
percentage of companies issuing negative EPS guidance to date for the first quarter is 72% (18 out of 25). This percentage is above the 5-year average of 64%, but below the percentage at this same point in time for Q4 2013 (86%).

Nine of the 18 companies with negative guidance are in IT, 5 in Consumer Disc. and 3 in Health Care.

Analysts are paring down their expectations for Q1 however:

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Using S&P numbers, Q1’14 estimates are now $28.30, down 0.6% from their level of 2 weeks ago. Trailing 12-month EPS would thus reach $110.35, up 2.3% from their expected Q4’13 level. Full year 2014 estimates have been shaved 0.3% to $121.09, up 12.3% YoY.

For the third time since 2009, the S&P 500 Index failed to cross the “20” line on the Rule of 20 barometer. If it were to retreat to the 15-16 Rule of 20 P/E range like it did in 2010 and 2012, the S&P 500 Index would decline to between 1435 (another -20%) and 1540 (-14%), assuming inflation is 1.7%. Given the current state of the world economy (good in the U.S., better in Europe and OK in China), it seems doubtful that we would revisit such deep undervaluation territory. Central banks would no doubt intervene and keep the financial heroin plentiful.

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Given that trailing earnings remain in an uptrend and that inflation is stable, my sense is that the still rising 200-day (1700) moving average will hold the rout to another 5%. The Rule of 20 P/E would then be 17.5, right in the middle of the 15 (deep undervalue) and the 20 (fair value) range. In both the 2010 and 2012 corrections, the Rule of 20 Fair Index Value (yellow line on chart) was declining as inflation picked up temporarily, conditions not currently present.

Also consider that for most global investors, the U.S. must currently be seen as the only trustworthy terra firma from economic, financial and political points of view.

That said, volatility and caution will likely remain for a while. Furthermore, as Lance Roberts’ chart shows, investors are highly leveraged at this time, pretty dangerous if the rout continues.  image

I see no rush to step back in following my Jan. 13 post TAPERING…EQUITIES.

Moody’s Affirms France Rating

The ratings firm, which rates France Aa1, said it kept the negative outlook due to continuing reduced competitiveness in the nation’s economy, as well as the risk of further deterioration in the financial strength of the government.

“Although the French government has introduced or announced a number of measures intended to address these competitiveness and growth issues, the implementation and efficacy of these policy initiatives are complicated by the persistence of long-standing rigidities in labor, goods and services markets as well as the social and political tensions the government is facing,” Moody’s said. (…)

France’s fiscal policy flexibility is limited, which, together with the policy challenges noted above, imply a continued risk of missing fiscal targets,” the firm added. (…)

Markit adds that France official data overstate the reality:

image[A recent Markit] analysis suggests France official GDP data may have overstated growth in the French economy since 2012.

A divergence between the PMI and GDP has been evident since the third quarter of 2012. (…) Up to the third quarter of 2013 (the latest available data point), GDP has risen 0.3%. This growth has helped bring the French economy to within 0.2% of its precrisis peak reached in the first quarter of 2008.

However, the PMI has painted a far weaker picture of the French economy. The composite PMI, which is a GDP-weighted average of the PMI surveys’ manufacturing and services output measures, has been below 50 (thereby signalling falling output) in every month since March 2012 with the exceptions of September and October 2013. Furthermore, the rates of decline signalled by the PMI have been strong over much of this period – exceeding those seen in the prior survey history with the exception of the height of the financial crisis in 2008-9.

Importantly, much of this discrepancy can be accounted for by the fact that PMIs only cover private sector activity. The output of the government sector, which accounts for 25% of GDP, has grown 2.1%
since the second quarter of 2012. Excluding the government sector, GDP is in fact 0.2% lower than the second quarter of 2012 and still some 3.2% below its pre-crisis peak. Stripping out government spend brings the GDP data more into line with the PMI. (…)

The recent (weaker) trends signalled by the PMI survey are confirmed by INSEE’s own surveys of manufacturing and services. (…) Chart 4, which plots the INSEE survey results against growth of non-government GDP, adds confirmation to the PMI message that the official data may have overstated growth in recent quarters. (…)

The PMI exhibits a much higher correlation with official data than both INSEE and Banque de France surveys, whether we look at manufacturing, services or a weighted combination of the two sectors. The track record of the surveys therefore adds weight to the suggestion that the GDP data have been overstating the health of the economy since mid-2012.

imageThe possible overstatement of economic growth by the official data and Banque de France surveys is also something which is indicated by the employment data. Chart 7 shows that a clear divergence between the
official data on output and employment has become evident. Between mid-2012 and mid-2013, nongovernment GDP was flat but private sector
employment dropped by 153k (0.9%). To put this in context, the fall in employment was the steepest seen over such a period in recent history (since 1999) with the exception of the height of the 2008-9 financial crisis.

Rather than concluding that the French economy has undergone a period of rapid productivity growth, it is possible that the fall in employment over this period is another indication that GDP data have overstated output. To investigate this more closely, we look at the survey data on employment. Here we can see that the survey that has corresponded most closely with the upbeat GDP data over the past two years – namely the Banque de France survey – appears to have overstated employment growth.

Importantly, the PMI survey data on employment have not diverged from the official data. The PMI has in fact exhibited a correlation of some 89% with private sector employment excluding agriculture since the survey data were first available in 1998, outperforming the INSEE and Banque de France surveys. (…)

European banks have 84 billion euro capital shortfall, OECD estimates: report

European banks have a combined capital shortfall of about 84 billion euros ($115 billion), German weekly WirtschaftsWoche reported, citing a new study by the Organisation for Economic Cooperation and Development (OECD).

French bank Credit Agricole has the deepest capital shortfall at 31.5 billion euros, while Deutsche Bank and Commerzbank have gaps of 19 billion and 7.7 billion respectively, the magazine reported in a pre-release of its Monday publication. (…)

Confused smile STRANGE QUOTES

Marc Faber: What I recommend to clients and what I do with my own portfolio aren’t always the same. (…) About 20% of my net worth is in gold. I don’t even value it in my portfolio. What goes down, I don’t value. (…) I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don’t own it. I own physical gold because the old system will implode. Those who own paper assets are doomed. (Barron’s)

 

NEW$ & VIEW$ (24 JANUARY 2014)

No Recession In Sight:Conference Board Leading Economic Index Edged Up in December

The index rose to 0.1 percent to 99.4 percent from the previous month’s 99.3 (2004 = 100). This month’s gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.

Click to View

Chicago Fed: Economic Growth Moderated in December

Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.

The index’s three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions.

Click to View

HOUSING WATCH

Existing Home Sales Approach a New Normal

Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million.

But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data.

A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist.

CalculatedRisk adds:

The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).

 

Pointing up All-cash sales jump as “normal” buyers go on strike. RealtyTrac reports:

All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012.

States where all-cash sales accounted for more than 50 percent of all residential sales in December included Florida (62.5 percent), Wisconsin (59.8 percent), Alabama (55.7 percent), South Carolina (51.3 percent), and Georgia (51.3 percent).

Institutional investor purchases (comprised of entities that purchased at least 10 properties in a year) accounted for 7.9 percent of all U.S. residential sales in December, up from 7.2 percent the previous month and up from 7.8 percent in December 2012.

Metro areas with the highest percentages of institutional investor purchases in December included Jacksonville, Fla., (38.7 percent), Knoxville, Tenn., (31.9 percent), Atlanta (25.2 percent), Cape Coral-Fort Myers, Fla. (24.9 percent), Cincinnati (19.3 percent), and Las Vegas (18.2 percent).

For all of 2013, institutional investor purchases accounted for 7.3 percent of all U.S. residential property purchases, up from 5.8 percent in 2012 and 5.1 percent in 2011.

 

Not a sign of a healthy market, is it? Meanwhile,

Framing Lumber Prices: Moving on Up

 

 

The faith may well be strong, the means are simply not there:image image

Also: Gundlach Counting Rotting Homes Makes Subprime Bear

 

GE’s Rice Sees Global Growth

General Electric vice chairman John G. Rice said that the global economy “was getting better, not worse,” and that beneath lower growth expectations for emerging markets “there was tremendous underlying demand for infrastructure.”

Investors Flee Developing Countries

Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. (…)

Countries with similar current-account deficits considered especially fragile by investors include Brazil, South Africa, India and Indonesia. But the emerging-markets tumult hasn’t hit the “contagion” stage of across-the-board, fear-driven selling of all emerging economies. Indonesia’s rupiah and India’s rupee, for example, advanced against the dollar Thursday, benefiting from those countries’ efforts to adjust their policies to support their currencies.

And this little nugget:

Art Cashin, who runs UBS’s operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. “China Beige Book has a sentence that translates into English as ‘credit transmission is broken,’ ” he wrote. “That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns.” (WSJ)

BOE’s Carney Suggests Falling Unemployment Doesn’t Mean Rates Will Rise Bank of England Gov. Carney said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

imageBoE signals scrapping of forward guidance Carney flags dropping of 7% jobless threshold

(…) Mr Carney made it clear in the interview that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance. Then, he said, the concern was that the UK economy was stagnating and might contract again: now the concern is that rapid growth might need action by the BoE to make it more sustainable. (…)

Punch If this is not clear guidance, what is? FYI, here’s the situation in the U.S.:

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Google chief warns of IT threat
Range of jobs in danger of being wiped out, says Schmidt

 

(…) Mr Schmidt’s comments follow warnings from some economists that the spread of information technology is starting to have a deeper impact than previous periods of technological change and may have a permanent impact on employment levels.

Google itself, which has 46,000 employees, has placed big bets on automation over some existing forms of human labour, with a series of acquisitions of robot start-ups late last year. Its high-profile work on driverless cars has also led to a race in the automobile industry to create vehicles that can operate without humans, adding to concerns that some classes of manual labour once thought to be beyond the reach of machines might eventually be automated.

Recent advances in artificial intelligence and mobile communications have also fuelled fears that whole classes of clerical and research jobs may also be replaced by machines. While such upheaval has been made up for in the past by new types of work created by advancing technology, some economists have warned that the current pace of change is too fast for employment levels to adapt. (…)

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” he said. The auto industry was an example of robots being able to produce higher quality products, he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . . [but] the problem is that the middle class jobs are being replaced by service jobs,” the Google chairman said. (…)

Shale Boom Forces Pemex’s Hand

For decades, Mexico’s state oil company, Petróleos Mexicanos, had the best customer an oil company could want: the U.S. But now the U.S. energy boom is curtailing the country’s demand for imported oil, and Pemex is being forced to look farther afield.

For the first time, the company is negotiating to sell its extra-light Olmeca crude oil in Europe, according to Pemex officials. The first shipment will go out in the second half of February to the Cressier refinery in Switzerland, the company said.

The change is one of many in the North American energy landscape affecting Pemex, which also faces competition in exploration and production as Mexico prepares to allow foreign oil companies back into the country for the first time in 75 years. (…)

 

NEW$ & VIEW$ (23 JANUARY 2014)

EMPLOYMENT SUPPLY/DEMAND (Cont’d)

Lance Roberts points out the jump in the Quits/Layoffs ratio which also suggests un tight supply/demand balance.

“Quits are generally voluntary separations initiated by employees. Quits are procyclical, rising with an improving economy and falling with a faltering economy. Layoffs and discharges are generally involuntary separations initiated by an employer and are countercyclical, moving in the opposite direction of quits. The ratio of the number of quits to the number of layoffs and discharges provides insight into churn in the labor market over the business cycle.

 
Boost for Spain as unemployment dips
Latest sign pointing to a nascent economic recovery

The number of unemployed people in Spain dropped slightly in the final quarter of last year, the first such fall in a decade and the latest in a series of broadly encouraging signs that point towards a nascent economic recovery in the country.

The data, contained in a labour market survey released on Thursday, are likely to bolster confidence in the Spanish economy at a time when investors are piling into the country’s sovereign debt and other assets on a scale not seen since the start of the crisis.

S Korea records fastest growth in 3 years
Robust domestic demand powers strong growth

Gross domestic product rose by 3.9 per cent in the last three months of 2013 from a year earlier, broadly in line with economists’ forecasts. In a break from the trend of recent years, the contribution to growth of domestic demand – or total purchases of goods and services – outstripped that of exports, the Bank of Korea said on Thursday.

However, confidence in South Korea is tightly linked to exports, which account for more than half of GDP, and economists said the improved domestic demand was based on growing faith in the strength of the global recovery, with South Korean exports growing 4.3 per cent last year. (…)

Companies’ investment in machinery and transport equipment fell heavily over most of the past two years, reflecting nervousness among manufacturers about overseas demand. But it rose by an annual 9.9 per cent in the fourth quarter, and this rebound was set to continue into the new year, said Kwon Young-sun, an economist at Nomura. (…)

Dollar sinks below 90¢ as Poloz ‘declares open season on loonie’

(…) Yesterday, it plunged below 91 cents U.S. after the Bank of Canada released its rate decision and monetary policy report that, over all, suggests interest rates aren’t going anywhere at any time soon because of its focus on stubbornly low inflation.

Pointing up Coupled with that was a line in the report that warned the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports” even with its stunning loss over the past year.

“Until today, the Bank of Canada had been careful not to open talk down the loonie,” chief economist Douglas Porter of BMO Nesbitt Burns said late yesterday in a research note titled “BoC declares open season on loonie.”

“They effectively gave sellers the green light in today’s monetary policy report by stating that even with the big drop in recent weeks, it remained high and would still ‘pose a competitiveness challenge for Canada’s non-commodity exports,” he added. (…)

Some observers also believe that this is a deliberate move by Canadian policy makers to devalue the currency in a bid to boost the country’s exports, as a weaker loonie lowers the cost of Canadian goods in the United States.

The Bank of Canada denies any such thing, but everyone agrees that Mr. Poloz, while not driving down the dollar, is pleased with the outcome. (…)

THE BoC DOES NOT NEED TO CUT RATES
 

In Canada, low inflation and disappointing job creation have prompted many to ask whether the Bank of Canada (BoC) will need to ease in 2014. At this writing the OIS market is putting the odds of a rate cut by September at 33%. The question is legitimate, but we think the depreciation of the Canadian dollar is doing the job for the Bank.

An old rule of thumb was that a 10% depreciation of the Canadian dollar would add 1.5% to GDP over time. That was when the penetration of
Canadian exports in the U.S. market was stronger. Our share of U.S. imports has been declining since even before the last recession. Moreover, Canadian manufacturing capacity has shrunk as producers have restructured their operations in the wake of the Great Recession. So that rule of thumb is surely too optimistic by now.

Yet even if the impact of the exchange rate on the economy were only a third of what it used to be, the 9.5% drop in the effective exchange rate since January 2013, if sustained, would over time add 0.4% to GDP. As
today’s Hot Chart shows, that is probably as large a boost to the economy as would be expected from a BoC rate cut of 50 to 75 basis points. (NBF)

image
 
Rouhani outlines growth plan for Iran
President calls for greater engagement with rest of the world

Hassan Rouhani, president of Iran, on Thursday predicted that his country had the potential to be one of the world’s top 10 economies in the next three decades if sanctions were lifted and economic ties normalised.

In an upbeat and conciliatory speech at the World Economic Forum in Davos, Mr Rouhani reiterated that developing nuclear weapons “has no place in Iran‘s security strategy” and forecast that ties with Europe would be “normalised” as the interim nuclear agreement is implemented.

Mr Rouhani said he intended to remove “all political and economic impediments to growth” in Iran and that one of his priorities was “constructive engagement with the world”. (…)

For its part, Iran intends to “reopen trade, industrial and economic relations with all of our neighbours”, he said, naming Turkey, Iraq, Russia, Pakistan, Afghanistan and Central Asia. (…)

Iran’s economy shrank more than 5 per cent in the last fiscal year as international sanctions imposed in response to the country’s nuclear programme took their toll. (…)

Benjamin Netanyahu, the Israeli prime minister, who is due to address the forum later on Thursday, described the speech as a continuation of “the Iranian campaign of deception”.

In a long post on his Facebook page he warned: “The international community mustn’t fall for this deception once again, and it must prevent Iran from being capable of manufacturing nuclear weapons.” (…)

SMALL IS BEAUTIFUL?

Chart from Citi Research (via ZeroHedge)

BUYBACKS BACK PRICE GAINS

Investing in the 100 stocks with the highest buyback ratios had a 49 percent total return for 2013. The S&P 500 Index gained 32 percent, and the CDX High Yield Index returned about 14 percent, including the 5 percent coupon. (BloombergBriefs)

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EARNINGS WATCH

Bespoke give us its tally of all NYSE companies:

Earnings and Revenue Beat Rates Decent So Far

Of the 121 companies that have released earnings since the Q4 2013 reporting period began, 68% have beaten bottom-line EPS estimates.  As you can see, 68% would be a strong reading if it holds. Keep in mind that it’s still very early, though.  More than 1,000 companies are set to report over the next few weeks, so the beat rate could fluctuate a lot.

Top-line sales numbers have been a little less rosy than the more-easily manipulated bottom-line numbers.  As shown in the second chart below, 57% of companies have beaten revenue estimates so far this season.  While this isn’t a stellar reading, it is better than all but one of the earnings seasons we’ve had since the start of 2012. 


CFOs Warn Investors on Impact of Expired R&D Tax Credit

Companies are flagging investors they may face higher tax rates this year because the U.S. tax credit they use to offset some research and development expenses expired at the end of last year.

As first quarter conference calls get going, companies ranging from Johnson & Johnson to Textron Inc. are providing detailed information about the missing credit. While chief financial officers widely expect Congress to reinstate the credit, companies cannot factor in the tax credit into their financial results unless it is current law.

Companies, including Johnson & Johnson, are warning the lapsed tax credit for research and development could boost their tax rate.

The impact for many companies could be significant. Because the credit was retroactively extended for 2012 at the beginning of 2013, many companies recognized five quarters of tax credits in the first quarter of last year, but will recognize zero in the first quarter of 2014. (…)

While the credit often expires and is retroactively enacted, Congress has only once allowed it to lapse completely in 33 years. Some companies are confident enough to continue giving financial guidance with the assumption it will be extended, while others are hedging their bets. (…)

 

NEW$ & VIEW$ (8 JANUARY 2014)

Companies in U.S. Added 238,000 Jobs in December, ADP Says

The 238,000 increase in employment was the biggest since November 2012 and followed a revised 229,000 gain in November that was stronger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The December tally exceeded the most optimistic forecast in a Bloomberg survey in which the median projection called for a 200,000 advance.

Discounts drive U.S. holiday retail growth: ShopperTrak

Promotions and discounts offered by U.S. retailers drove a 2.7 percent rise in holiday season sales despite six fewer days and a cold snap that kept shoppers from stores, retail industry tracker ShopperTrak said. (…)

U.S. online retail spending rose 10 percent to $46.5 billion in the November-December 2013 holiday season, according to comScore (SCOR.O). This was below the 14 percent growth that the data firm had forecast.

ShopperTrak said shoppers spent $265.9 billion during the latest holiday period. The increase was slightly ahead of the 2.4 percent jump it had forecast in September.

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

Both retail sales and foot traffic rose 2.5 percent in the 2012 holiday season. (…)

ShopperTrak estimated on Wednesday that U.S. retail sales would rise 2.8 percent in the first quarter of 2014, while shopper traffic would fall 9 percent.

Growth Picture Brightens as Exports Hit Record

A booming U.S. energy sector and rising overseas demand brightened the nation’s trade picture in November, sharply boosting estimates for economic growth in late 2013 and raising hopes for a stronger expansion this year.

U.S. exports rose to their highest level on record in November, a seasonally adjusted $194.86 billion, the Commerce Department said Tuesday. A drop in imports narrowed the trade gap to $34.25 billion, the smallest since late 2009.

Pointing up The trade figures led many economists to sharply raise their forecasts for economic growth in the final quarter. Morgan Stanley economists raised their estimate to an annualized 3.3% from an earlier forecast of a 2.4% pace. Macroeconomic Advisers boosted its fourth-quarter projection to a 3.5% rate from 2.6%.

Fourth-quarter growth at that pace, following a 4.1% annualized increase in the third quarter, would mark the fastest half-year growth stretch since the fourth quarter of 2011 and the first quarter of 2012.

The falling U.S. trade deficit in large part reflects rising domestic energy production. U.S. crude output has increased about 64% from five years ago, according to the U.S. Energy Information Administration.

At the same time, the U.S.’s thirst for petroleum fuels has stalled as vehicles become more efficient. As a result, refiners are shipping increasing quantities of diesel, gasoline and jet fuel to Europe and Latin America.

Petroleum exports, not adjusted for inflation, rose to the highest level on record in November while imports fell to the lowest level since November 2010.

If recent trade trends continue, Mr. Bryson said net exports could add one percentage point to the pace of GDP growth in the fourth quarter. That would be the biggest contribution since the final quarter of 2010.

Rising domestic energy production also helps in other ways, by creating jobs, keeping a lid on gasoline costs and lowering production costs for energy-intensive firms. As a result, consumers have more to spend elsewhere and businesses are more competitive internationally. (…)

U.S. exports are up 5.2% from a year earlier, led by rising sales to China, Mexico and Canada. U.S. exports to China from January through November rose 8.7% compared with the same period a year earlier. Exports to Canada, the nation’s largest trading partner, were up 2.5% in the same period. (…)

US inflation expectations hit 4-month high
Sales of Treasury inflation protected securities rise

Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.25 per cent from a low of around 2.10 a month ago.

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

(…) As the boomers get older, many will move out of the houses where they raised families and move into cozier apartments, condominiums and townhouses (known as multifamily units in industry argot). A normal transition for individuals, but a huge shift in the country’s housing demand.

Based on demographic trends, the country should see a stronger rebound in multifamily construction than in single-family construction, Kansas City Fed senior economist Jordan Rappaport wrote in the most recent issue of the bank’s Economic Review. (Though he also notes slowing U.S. population growth “will put significant downward pressure on both single-family and multifamily construction.”)

Construction of multifamily buildings is expected to pick up strongly by early 2014, and single-family-home construction should regain strength by early 2015. “The longer term outlook is especially positive for multifamily construction, reflecting the aging of the baby boomers and an associated shift in demand from single-family to multifamily housing. By the end of the decade, multifamily construction is likely to peak at a level nearly two-thirds higher than its highest annual level during the 1990s and 2000s,” Mr. Rappaport wrote.

In contrast, when construction of single-family homes peaks at the end of the decade or beginning of the 2020s, he wrote, it’ll be “at a level comparable to what prevailed just prior to the housing boom.” (…)

“More generally,” Mr. Rappaport wrote, “the projected shift from single-family to multifamily living will likely have many large, long-lasting effects on the U.S. economy. It will put downward pressure on single-family relative to multifamily house prices. It will shift consumer demand away from goods and services that complement large indoor space and a backyard toward goods and services more oriented toward living in an apartment. Similarly, the possible shift toward city living may dampen demand for automobiles, highways, and gasoline but increase demand for restaurants, city parks, and high-quality public transit. Households, firms, and governments that correctly anticipate these changes are likely to especially benefit.”

Euro-Zone Retail Sales Surge

A surprise jump in retail sales across the euro zone boosts hopes that consumers may aid the hoped-for recovery.

The European Union’s statistics agency Wednesday said retail sales rose by 1.4% from October and were 1.6% higher than in November 2012. That was the largest rise in a single month since November 2001, and a major surprise. Nine economists surveyed by The Wall Street Journal last week had expected sales to rise by just 0.1%.

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The pickup was spread across the currency area, with sales up 1.5% in low-unemployment Germany, but up an even stronger 2.1% in France, where the unemployment rate is much higher and the economy weaker.

The rise in sales was also broadly based across different products, with sales of food and drink up 1.1% from October, while sales of other items were up 1.9%.

The surge in sales during November follows a long period of weakness, with sales having fallen in September and October. Consumer spending rose by just 0.1% on the quarter in the three months to September, having increased by a slightly less feeble 0.2% in the three months to June.

High five Let’s not get carried away. Sales often rebound after two weak months. Taking the last 3 months to November, totals sales rose only 0.4% or 1.6% annualized, only slightly better than the 0.8% annualized gain in the previous 3 months. Core sales did a little better with  annualized gains of 3.6% and 0.4% for the same respective periods. The most recent numbers can be revised, however.image

Markit’s Retail PMI for December was not conducive to much hoopla!

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

Record-Low Core Inflation May Soon Push ECB to Ease Policy (Bloomberg Briefs)image

Meanwhile:

image

 

Auto U.K. Car Sales Top Pre-Crisis Levels

U.K. registrations of new cars rose 11% in 2013 to their highest level since before the 2008 financial crisis, reflecting the country’s relatively strong economic recovery in contrast with the rest of Europe, where car demand has revived only recently from a prolonged slump.

The outlook is nonetheless for more sedate growth in the U.K. this year and next as the impact of pent-up demand for new cars fades, the U.K. Society of Motor Manufacturers and Traders, or SMMT, said on Tuesday.

Much of the increase in sales last year stemmed from the generous provision of cheap financing from the car manufacturers.

The SMMT said registrations, which mirror sales, rose to 2.26 million vehicles from 2.04 million in 2012, with registrations in December jumping 24% to 152,918, a 22nd consecutive monthly rise.

As a result, the U.K. has entrenched its position as Europe’s biggest car market after Germany and ahead of France. Germany registrations of new cars fell 4.2% to 2.95 million in 2013, despite a 5.4% gain in December. French registrations fell 5.7% last year to 1.79 million cars, although they rose 9.4% in December. The German and French data were released by the countries’ auto-making associations last week. (…)

Eurozone periphery borrowing costs fall
Yields in Spain, Portugal and Greece down after Irish bond sale

(…) The strength of demand for eurozone “periphery” debt reflected increased investor appetite for higher-yielding government bonds as well as rising confidence in the creditworthiness of eurozone economies. It improved significantly the chances of Portugal following Ireland’s example and exiting its bailout programme later this year – and of Greece also soon being able to tap international debt markets. (…)

EARNINGS WATCH

Currency Swings Hit Earnings Currency swings are still taking a toll on corporate earnings despite efforts to manage the risk. Large U.S. multinational companies reported about $4.2 billion in hits to earnings and revenue in Q3, driven mostly by swings in the Brazilian real, Japanese yen, Indian rupee and Australian dollar, CFOJ’s Emily Chasan reports. The real declined 10% against the U.S. dollar during the quarter, while the rupee hit a record low.

A total of 205 companies said currency moves had negatively affected their results in the third quarter of 2013, according to FiREapps, a foreign exchange risk-management company. “More companies are trying to manage risk…but companies are still seeing highly uncorrelated moves [against the dollar] based on swings in one currency,” said FiREapps CEO Wolfgang Koester. Companies have spent much of the year insulating themselves against big moves in the euro or the yen, but swings in the Australian dollar, rupee and real dominated discussions because they were often surprises, Mr. Koester said.

Only 78 companies quantified the impact of currencies, which translated to about 3 cents a share on average. The total was up slightly from the second quarter when 95 companies reported a total impact of $4.1 billion.

On an industry basis, car makers suddenly started disclosing more currency moves during the quarter, with 16 companies mentioning their results had been affected. Ford, for example, warned last month of the potential impact from an expected Venezuelan currency devaluation in 2014.

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

Wall Street analysts have gotten back to work in the new year with a flurry of ratings changes, and they have been more bearish than bullish.  As shown in the first chart below, there have been 226 total ratings changes over the first four trading days of 2014, which is the highest reading seen since the bull market began in 2009.  We have seen 134 analyst downgrades since the start of the year, which is also the highest level seen over the first four trading days since 2009.  

In percentage terms, 2014 is starting with fewer downgrades than in 2011 or 2012 (62.7% and 60.0% respectively vs. 59.2% in 2014), but these years both had very quiet starts in terms of the total number of ratings changes.  

Record-Setting Cold Hits Eastern U.S.

A record-setting cold snap in the Midwest enveloped the eastern half of the country Tuesday, with brutally cold temperatures recorded from the deep South up to New England.

Pointing up Is China About to Let the Yuan Rise? Don’t Bank on It  China’s central bankers are beginning to think the country’s huge pile of reserves – which is still growing as authorities intervene to keep the yuan from rising too fast — is excessive. Curbing its growth could even help the economy’s transition from an export-led model to one based on domestic consumption. But the top leadership’s fear of social unrest means things are unlikely to change soon.

(…) In an effort to hold down the value of its currency and keep Chinese exports competitive, the PBOC wades into markets, buying up foreign exchange and pumping out yuan on a massive scale. The PBOC probably bought $73 billion dollars of foreign exchange in October, the most in three years, and a similar amount in November, according to Capital Economics.

Even before that, official figures showed China’s reserves had hit a record $3.66 trillion by the end of the third quarter, the bulk of it invested in U.S. dollar securities like Treasury bonds. Policymakers are beginning to wonder if that hoard is too big.

Sitting on $4 trillion might not seem like a bad position to be in, but it can make a mess of domestic monetary policy if those reserves result from the central bank’s attempts to deal with capital inflows.

To prevent the yuan from appreciating, the PBOC buys up foreign exchange using newly created domestic currency. But that can fuel domestic inflation, so the central bank “sterilizes” the new money by selling central bank bills to domestic financial institutions. That leaves these institutions with less cash for lending, pushing up domestic interest rates (and ultimately leaving the central bank with a loss on its balance sheet).

Interest rates in China already are significantly higher than in many other countries, making it a tempting target for speculative “hot money” flows, which tend to find a way in despite the country’s capital controls.

“Monetary policy gets into a conundrum,” said Louis Kuijs, an economist at RBS. “If the central bank is intervening because there are huge capital inflows, the domestic interest rate in the market will go up. The more that interest rate goes up, the more capital will be attracted. It becomes difficult for the central bank to manage.”

Yi Gang, head of the State Administration of Foreign Exchange and guardian of the treasure trove, thinks the reserves are so large they’re becoming more of a burden than an asset. In an interview last month, he told financial magazine Caixin that a further build-up would bring “fewer and fewer benefits coupled with higher and higher costs.”

Those costs include not just losses on sterilization operations but also the impact of a huge export sector on the environment, he said.

But Mr. Yi does not make the decisions, any more than his boss, PBOC Gov. Zhou Xiaochuan, has the final say on interest rates. Monetary policy in China is too big a deal to be left to the central bank; the State Council, headed by Premier Li Keqiang, has to sign off on its decisions.

The technocrats at the PBOC, financial professionals who have as much faith in markets as anyone in China’s government, might want to dial back foreign-exchange intervention. But the top leaders are leery of any move that could pose a risk to employment. If factories go out of business and jobless migrants flood the streets of Guangdong, a market-determined exchange rate will be little comfort.

To be sure, China is allowing the yuan to appreciate — just not by much. The yuan has risen nearly 13% against the U.S. dollar since authorities relaxed the currency peg in June 2010, including 3% appreciation last year. But that’s far less than it would likely rise if the market were allowed to operate freely.

Never mind that a cheap currency makes it more expensive for Chinese households and businesses to buy things from the outside world, depressing standards of living and hampering the transition to a consumer society that China’s leaders ostensibly want. The policy amounts to forced saving on a huge scale — even as the officials who manage those savings say they already have more than enough for any contingency.

Some experts think the pace of China’s FX accumulation will even increase. Capital Economics says the PBOC could amass another $500 billion over the next year. That’s what they think it will take to keep the yuan from rising to more than 5.90 to the dollar, compared with 6.10 now.

“The PBOC will have to choose between allowing significant currency appreciation and continuing to accumulate foreign assets,” Mark Williams, the firm’s chief Asia economist, wrote in a research note Monday. “We expect policymakers to opt primarily for the latter.”

Emerging Markets See Selloff

The declines come amid concerns about faltering economies and political unrest.

Investors are bailing out of emerging markets from Turkey and Brazil to Thailand and Indonesia, extending a selloff that began last year, amid concerns about faltering economies and political unrest.

The MSCI Emerging Markets Index, a gauge of stocks in 21 developing markets, slipped 3.1% in the first four trading days of 2014, building on a 5% loss in 2013. This compares with double-digit-percentage rallies in stock markets in the U.S., Japan and Europe last year.

Indonesia’s currency on Tuesday hit its lowest level against the dollar since the financial crisis in Asia trading. Meanwhile, the Turkish lira plumbed record lows against the greenback this week. (…)

In the first three trading days of the year, investors yanked $1.2 billion from the Vanguard FTSE Emerging Markets ETF, VFEM.LN +0.07% the biggest emerging-markets exchange-traded fund listed in the U.S., according to data provider IndexUniverse. That is among the biggest year-to-date outflows among all ETFs. Shares of the ETF itself are down 4.2% in 2014.

Last year, money managers pulled $6 billion from emerging-market stocks, the most since 2011, according to data tracker EPFR Global. Outflows from bond markets totaled $13.1 billion, the biggest since the financial crisis of 2008. (…)

The stocks in the MSCI Emerging Markets Index on average are trading at 10.2 times next year’s earnings, compared with a P/E of 15.2 for the S&P 500, FactSet noted. (…)

In the Philippines, an inflation reading on Tuesday reached a two-year high and provided another sell signal to currency traders given officials and economists had expected the impact from the typhoon in November to be mild on inflation. The Philippine peso has weakened 1% against the dollar since the start of the year. (…)

Mohamed El-Erian
Do not bet on a broad emerging market recovery

(…) To shed more light on what happened in 2013 and what is likely to occur in 2014, we need to look at three factors that many had assumed were relics of the “old EM”.

First, and after several years of large inflows, emerging markets suffered a dramatic dislocation in technical conditions in the second quarter of 2013.

The trigger was Fed talk of “tapering” the unconventional support the US central bank provides to markets. The resulting price and liquidity disruptions were amplified by structural weaknesses associated with a narrow EM dedicated investor base and skittish cross-over investors. Simply put, “tourist dollars” fleeing emerging markets could not be compensated for quickly enough by “locals”.

Second, 2013 saw stumbles on the part of EM corporate leaders and policy makers. Perhaps overconfident due to all the talk of an emerging market age – itself encouraged by the extent to which the emerging world had economically and financially outperformed advanced countries after the 2008 global financial crisis – they underestimated exogenous technical shocks, overestimated their resilience, and under-delivered on the needed responses at both corporate and sovereign levels. Pending elections also damped enthusiasm for policy changes.

Finally, the extent of internal policy incoherence was accentuated by the currency depreciations caused by the sudden midyear reversal in cross-border capital flows. Companies scrambled to deal with their foreign exchange mismatches while central bank interest rate policies were torn between battling currency-induced inflation and countering declining economic growth.

Absent a major hiccup in the global economy – due, for example, to a policy mistake on the part of G3 central banks and/or a market accident as some asset prices are quite disconnected from fundamentals – the influence of these three factors is likely to diminish in 2014. This would alleviate pressure on emerging market assets at a time when their valuations have become more attractive on both a relative and absolute basis.

Yet the answer is not for investors to rush and position their portfolios for an emerging market recovery that is broad in scope and large in scale. Instead, they should differentiate by favouring companies commanding premium profitability and benefiting from healthy long-run consumer growth dynamics, residing in countries with strong balance sheets and a high degree of policy flexibility, and benefiting from a rising dedicated investor base.

 

NEW$ & VIEW$ (13 DECEMBER 2013)

U.S. Retail Sales Rose 0.7%

Consumers spent more freely in November, buoying hopes that economic growth could accelerate in the months ahead.

Retail sales rose a seasonally adjusted 0.7% in November from October, marking the biggest gain since June, the Commerce Department said Thursday. The prior month’s gain was revised up to 0.6% from 0.4%. (…)

In addition to strong auto sales, the report also showed that consumers spent freely last month on furniture, electronics and building materials. Retail sales were up 4.7% from the same period last year, the largest annual gain since July.

The improvement prompted several forecasters to upgrade their predictions for economic growth in the final three months of the year. Economists at Barclays raised their estimate to a 2.2% annual rate from 2%, while J.P. Morgan Chase economists boosted their forecast to 2% from 1.5%. (…)

 

It Wasn’t Holiday Spending That Boosted Retail Sales

When you just look at categories where people buy gifts, such as electronics, clothing and department stores and even add in online retailers, and exclude car dealers, gas stations and restaurants, sales were up just 2.8% in November from a year earlier. That represents the weakest nonrecession November in at least 20 tears and compares to a 4.7% gain for total retail sales.

(…)  maybe it just means that more people decided to get their holiday shopping done in December. And if that holds true, it means December’s retail sales could be a blockbuster.

Sales of motor vehicles & parts led the increase with a 1.8% gain (10.2% y/y). Furniture & electronics/appliance store sales jumped 1.1% (8.2% y/y) following a 2.2% October surge.

Is The Consumer Slowing Down?

Written by Lance Roberts

(…) The problem with any single data point is that it obscures the trend of the data, as shown in the chart below, which is more telling of the overall strength or weakness of the consumer.  

The chart above is the 12-month average of non-seasonally adjusted retail sales data.  This eliminates all of the questionable gimmickry of the seasonal adjustments to reveal the underlying trend of actual retail sales data.  Surging asset prices have done little to boost retail sales which have stagnated in recent months just above the level which has normally been indicative of recessionary drags in the economy.  (…)

But that helps:image

U.S. Business Inventories Continue to Climb

Total business inventories increased 0.7% in October (3.6% y/y) following a 0.6% September gain. These inventories accompanied a 0.5% rise in business sales (3.9% y/y) after September’s 0.3% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

In the retail sector, inventories advanced 0.8% (6.1% y/y) in October, including a 2.1% jump (11.5% y/y) in motor vehicles. Inventories excluding autos rose 0.2% (3.6% y/y) in October. Inventories of furniture, electronics and appliances rose 0.4% (-1.5% y/y) while building materials slipped 0.2% (+2.7% y/y).

Euro-Zone Jobs Market Stabilizes

The euro-zone jobs market stabilized in the six months to September, according to employment figures, bringing an end to a long decline in the number of people at work in the 17 countries that use the euro.

The European Union’s statistics agency said that on a seasonally adjusted basis, 145 million people were in work across the currency area during the third quarter, a figure unchanged from the previous period. Eurostat also revised its figures for the second quarter, and now calculates that there was no change in employment levels, having previously estimated there was a 0.1% decline.

In Germany, employment levels were up 0.6% on the same period last year, while in Greece they were down 2.9%. Indeed, seven of the euro zone’s members were still experiencing a decline in employment during the three months to September.

Saudi Arabia Exposes OPEC’s Fissures

(…) As The Wall Street Journal’s crack OPEC team reports, Saudi Arabia has essentially promised to steady markets for the past two years. But now, with pressure growing over a possible output cut to steady markets, the Saudis are signaling they are no longer willing to go it alone. (…)

Riyadh sees no reason why it and it alone should have to shoulder the burden of trimming and this week’s apparent withdrawal from its role as swing producer is the clearest sign yet of its deep concern.

This month’s OPEC meeting in Vienna was, on the face of it, a cut-and-dried affair. For reporters, the focus was on Iran more than the collective, as the decision to stand pat on overall production was widely expected.

But behind closed doors great rifts are opening up, with Saudi and its Gulf neighbors in one camp, Iran in another and Iraq in a third. Each has issues, both oil-related and political, with the others. (…)

House Approves Budget Pact

The House passed a budget bill designed to avoid a government shutdown next month and relax spending limits in the next two years.

The bill passed with a wide bipartisan margin, on a vote of 332-94. Voting for the measure were 169 Republicans and 163 Democrats, while 62 Republicans and 32 Democrats voted against.

Approval of the bill, which is expected to pass the Senate next week, clears the way for a less-glamorous stage of budgeting as lawmakers set out to make line-by-line spending decisions before current funding runs out Jan. 15. (…)

“Elections have consequences,”‘ said Mr. Ryan, who was his party’s 2012 vice-presidential nominee.  (…)

There is no guarantee that the bipartisan deal signals the end of brinkmanship or that this episode of bipartisanship will reach into other areas. The most immediate test will be the next month’s work on appropriations legislation, which must be enacted before Jan. 15.

The agreement sets only the overall spending targets for domestic and defense programs: $1.012 trillion in the current fiscal year, which is more than the $986 billion provided in 2013. Spending this year would have been even lower—$967 billion—had the sequester cuts taken effect. Under the deal, it would increase to $1.014 trillion in the year starting next Oct. 1. (…)

Goldman Sachs Goes Against Consensus in Dollar Call

Goldman Sachs Group Inc.’s Thomas Stolper, who correctly predicted the dollar’s slide against the euro this year, is deviating from the consensus that the greenback will be among the best currencies to own in 2014.

The dollar will weaken through 2014, reaching $1.40 per euro for the first time since October 2011, Goldman’s London-based chief currency strategist said. The mean estimate in a Bloomberg survey of 46 contributors is for a 7 percent rally to $1.28 per euro from $1.3758 today.

 

NEW$ & VIEW$ (28 NOVEMBER 2013)

Chicago PMI Stronger Than Expected

Following last month’s surge, economists were expecting some giveback in this month’s Chicago PMI report, and that is exactly what we saw today.  While economists were expecting to 60.0 from last month’s reading of 65.9, the actual decline was considerably less as the headline reading came in at 63.0.  (…)

Pointing up Beware! Inventories jumped.

German Unemployment Rises Fourth Month in Uneven Recovery

The number of people out of work climbed a seasonally-adjusted 10,000 to 2.985 million, after gaining by a revised 3,000 in October, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 33 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Spain Household Spending Snaps Declines Amid Recovery

Spanish household spending grew in the three months through September for the first time in six quarters, helping end a two-year recession amid continued export growth.

Household spending increased 0.4 percent from the three months through June, when it declined 0.1 percent, while exports rose 2.2 percent after a 6.4 percent gain in the previous quarter, the Madrid-based National Statistics Institute said today.

Gross domestic product rose 0.1 percent in the third quarter, the office said, confirming an Oct. 30 estimate. The economy contracted 1.1 percent from a year earlier. (…)

ECB warns of risks posed by Fed tapering

The European Central Bank on Wednesday issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve “tapering”.

In its latest financial stability report, the ECB said the risks to the eurozone’s financial system from outside the currency bloc had grown since May due to the Fed’s talk of scaling back its $85bn of monthly bond purchases – despite a general improvement in market conditions.

“Starting in May, there was a significant repricing in global bond markets, which took place largely because of changing monetary policy expectations in the United States – with increased foreign exchange market volatility and stress borne largely by emerging market economies,” the ECB said. (…)

The ECB said the eurozone’s institutional investors were more exposed to bond markets than the region’s banks, but that it was difficult to know where the risks of ultimate losses were greatest.

“It cannot be ruled out that ultimate exposures are concentrated among a limited number of entities which may now be more vulnerable to any further severe market shock,” the ECB said.

It added that the recent turbulence meant that policy makers needed to ensure banks, insurers and pension funds could cope with a “normalisation” of yields from their current historically low levels. (…)

The ECB said weak bank profitability and persistent financial fragmentation still presented a threat to stability. Banking union would be “an important contribution” to resolving these hurdles. (…)

Unforeseen bank recapitalisations also posed a threat. “Although provisioning is increasing, it has barely kept pace with the deterioration in asset quality, on average, highlighting a potential further need for additional reserves to strengthen bank balance sheet resilience in case asset quality deteriorates further.” (…)

Euro-Zone Private-Sector Lending Declines

Private-sector lending fell by 2.1% in October from the previous year, the ECB said Thursday, following a 2% drop in September. A broad measure of money supply slowed sharply to just 1.4% year-over-year growth, suggesting inflationary pressures remain absent in the euro bloc.

Loans to firms declined by €12 billion ($16.3 billion) on the month in adjusted terms in October, after a decline of €10 billion in the previous month. Loans to households rose by €1 billion on the month after an increase of €6 billion in the previous month.

Eurozone Inflation Rises

Annual inflation in Spain rose to 0.3% in November from no change the previous month. Belgium’s rate also increased slightly. Data from German states suggest that annual consumer-price growth in Europe’s largest economy increased to 1.5% this month from 1.2% in October, according to BNP Paribas.

As a result, economists say annual euro-zone inflation likely increased slightly in November from October’s four-year low reading of 0.7%—a figure that prompted the ECB to reduce its key lending rate earlier this month to 0.25%. The ECB targets annual inflation of just below 2% over the medium term.

Canada Emerging From Biggest Slowdown Since Recession

The Bank of Canada estimates that over the past two years the economy’s output gap — a measure of unused capacity — has grown from about zero to 1.5 percent of gross domestic product, and that gap won’t close for another two years because of weak global demand for the nation’s exports.

“We’re slowly crawling our way out,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit. “I would still venture to say we’re vulnerable to a host of downside surprises.”

GDP probably grew at an annualized pace of 2.5 percent in the three months ended September, the biggest gain since the third quarter of 2011, according to the median estimate of 18 economists surveyed by Bloomberg. That’s up from 1.7 percent growth in the second quarter, when the economy was hurt by flooding in Alberta and a construction strike in Quebec.

Economists project a temporary slowdown to 2 percent in the fourth-quarter before the economy accelerates to average quarterly growth of 2.5 percent in 2014, according to separate estimates compiled monthly by Bloomberg.

After an initial burst following the recession, Canada’s economy began to slow last year amid weak global demand for its goods, a slump in business investment and temporary factors such as maintenance shutdowns in the oil industry, flooding and strikes. Canada has averaged annualized quarterly growth rates of 1.3 percent since the start of 2012, less than half the pace seen over 2010 and 2011.

The country’s benchmark stock index has risen 7.6 percent this year, trailing the 26.7 percent advance in the U.S. Standard & Poor’s 500 Index. The Canadian dollar has lost 6.4 percent against its U.S. counterpart in that period. The nation’s government bonds are down 1.5 percent in 2013, compared with a 2.2 percent drop for U.S. Treasuries, according to Bank of America Merrill Lynch indexes.

A 126,300 rise in employment this year puts the country’s labor market on pace for its third worst annual result in the past 12 years. Inflation has been below the Bank of Canada’s 2 percent target for 18 consecutive months, the longest stretch outside of recessions since the late 1990s. Weak inflation has assumed “increasing importance,” the Bank of Canada said in its last statement on Oct. 23 when it left its 1 percent benchmark rate unchanged.

The slowdown prompted Governor Stephen Poloz last month to drop language about the need for future interest rate increases.

Whether the economy can tighten economic slack will depend on a recovery in trade. Net exports — the difference between shipments abroad and imports — has been a drag on the economy every year since 2009, according to Bank of Canada reports.

Trade was probably also the biggest factor restraining third-quarter growth, economists estimate, with Canada averaging trade deficits of C$920 million ($868 million) in the three months ended September, the highest quarterly gap in a year. (…)

Bank of Canada Senior Deputy Governor Tiff Macklem said in a speech last month the economy will need to expand by at least 2.5 percent in order to begin absorbing the “current material degree” of slack.

To get there, business investment and net exports will need to contribute at least 1 percentage point to growth, he said. The central bank is confident Canada is on that path.

It projects Canada’s expansion will accelerate to 2.6 percent in 2015, of which 1.1 percentage points will come from exports and business investment, closing the output gap by year-end.

“The Bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining,” Poloz told lawmakers on Oct. 29 in Toronto. “This will take longer than previously projected.”

Why Goldman Sachs recommends shorting the loonie

As The Globe and Mail’s Scott Barlow reports, the Wall Street giant forecasts the Canadian dollar will sink to 88 cents U.S. One of its reasons is that Canada has been running a current account deficit.

There are other reasons, but that one tops the list.

“Since the global financial crisis, significant external imbalances have built up in the Canadian economy,” Goldman said.

“In 2008, the current account balance fell from a surplus of 1 per cent of GDP to a deficit of 3 per cent – and it has remained stable at this level since then,” the bank said in its report.

“The main reason for this has been a decline in manufacturing exports, which fell by about 30 per cent during the crisis.”

Over the past several quarters, Goldman added, money flowing into Canada has slowed markedly, and interest rates are low, and expected to stay there.

“It is also important to highlight that the Canadian dollar remains clearly overvalued on our … fair value model,” the bank said.

“Combined with the weak current account position, there are therefore good fundamental reasons for a weaker CAD,” it added, referring to the currency by its symbol.

Goldman’s forecast for the loonie, as Canada’s dollar coin is known, is lower than most. Chief currency strategist Camilla Sutton of Bank of Nova Scotia, for example, projects the dollar, which has been hovering just below 95 cents U.S. of late, will sink to 93 cents by mid-2014, and then pick up again. (…)

“Canada’s current account gap of just over 3 per cent of GDP is manageable, but continues to suggest the Canadian dollar is overvalued,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“A stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”

 

NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

The U.S. job market showed surprising resilience in October, rekindling debate about whether the economy is strong enough for the Federal Reserve to rein in its signature easy-money program.

The Labor Department reported that U.S. employers added 204,000 jobs last month, defying expectations for weaker hiring amid the shutdown and a debt-ceiling fight that knocked down consumer and business confidence.

Among the most encouraging revelations in the jobs report were upward revisions to government estimates of job growth in August and September, before the government shutdown, easing worries about a renewed slowdown in the labor market.

The 204,000 jump in nonfarm payrolls came on top of upward revisions of 60,000 for the two previous months.

With the revisions, the trend in job creation looks notably better than it did just a few weeks ago. The latest report showed that payroll employment grew by an average of just less than 202,000 jobs per month in the past three months. The previous jobs report, released Oct. 22, showed job growth had averaged 143,000 per month over the prior three-month period.

See the impact before and after the revisions. The “summer lull” was shallower and employment growth could be turning up:

image  image

However,

The latest figures included a number of statistical quirks that will likely lead Fed officials to be even more cautious than usual about inferring too much from a single month’s jobs report. For example, the timing of the delayed monthly hiring survey might have skewed the data.

And these peculiar stats:

Retail boom coming to a store near you?

Pointing up CalculatedRisk writes that according to the BLS, retailers hired seasonal workers in October at the highest level since 1999. This may have to do with these announcements posted here on Oct. 1st.:

Amazon to Hire 70,000 Workers For Holiday Selling Season

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

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

Punch But, out there, in Real-Land, this is what’s happening:

Personal spending, a broad measure of consumer outlays on items from refrigerators to health care, rose 0.2% in September from a month earlier, the Commerce Department said Friday. While that was in line with economists’ forecast of a 0.2% increase and matched the average rise over the July-through-September period, it is still a tepid reading when taken in broader context.

This is in nominal dollars. In real terms, growth is +0.1% for the month and +0.3% over 3 months. While the rolling 3-month real expenditures are still showing 1.8% YoY growth, the annualized growth rate over the last 3 and 6 months has been a tepid 1.2%.

image

Here’s the trend in PDI and “department store type merchandise” sales. Hard to see any reason for retailers’ enthusiasm.image

Confused smile More quirks:

The weirdness was in the household survey, which showed a 735,000 plunge in employment, mainly 507,000 workers who were kept home by the federal government’s partial shutdown. But private employment was down 9,000, while the Bureau of Labor Statistics counted a massive exodus of 720,000 folks from the workforce.

Accordingly, the six-month average through October now comes to an increase of 174,000, basically the same as the six-month average through September of 173,000.

From the GDP report:

Consumer spending rose at an annualised rate of just 1.5%, down from 1.8% in the second quarter and 2.3% in the first three months of the year. The increase was the smallest for just over three years and considerably
below the 3.6% average seen in the 15 years prior to the financial crisis.

 

image

 

In a nutshell, the BLS reports a surge in jobs thanks largely to accelerating retail employment that is not supported by actual trends in consumer expenditures nor by their ability to spend.

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

October Housing Traffic Weakest In Two Years On “Broad-Based” Housing Market Slowdown

In case the world needed any additional proof that the latest housing bubble (not our words, Fitch’s) was on its last legs, it came earlier today from Credit Suisse’ Dan Oppenheim who in his monthly survey of real estate agents observed that October was “another weak month” for traffic, with “pricing power fading as sluggish demand persists.” (…)

Oppenheim notes that the “weakness was again broad-based, and particularly acute in Seattle, Orlando, Baltimore and Sacramento…. Our buyer traffic index fell to 28 in October from 36 in September, indicating weaker levels below agents’ expectations (any reading below 50). This is the lowest level since September 2011.”

Other notable findings:

  • The Price appreciation is continuing to moderate: while many markets saw home prices rising if at a far slower pace, 7 of the 40 markets saw sequential declines (vs. no markets seeing declines in each of the past 8 months). Agents also noted increased use of incentives. Tight inventory levels remain supportive, but are being outweighed by lower demand.
  • Longer time needed to sell: it took longer to sell a home in October as our time to sell index dropped to 42 from 57 (below a neutral 50). This is  typically a negative indicator for near-term home price trends.

Nonetheless:

U.S. Stocks Rise as Jobs Data Offset Fed Stimulus Concern

U.S. stocks rose, pushing the Dow Jones Industrial Average to a record close, as a better-than-forecast jobs report added to signs growth is strong enough for the economy to withstand a stimulus reduction.

Nerd smile  Ray Dalio warns, echoing one of my points in Blind Thrust:

Ray Dalio’s Bridgewater On The Fed’s Dilemma: “We’re Worried That There’s No Gas Left In The QE Tank”

(…) As shown in the charts below, the marginal effects of wealth increases on economic activity have been declining significantly. The Fed’s dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing. If it were targeting asset prices, it would tighten monetary policy to curtail the emerging bubble, whereas if it were targeting economic conditions, it would have a slight easing bias. In other words, 1) the Fed is faced with a difficult choice, and 2) it is losing its effectiveness.

We expect this limit to worsen. As the Fed pushes asset prices higher and prospective asset returns lower, and cash yields can’t decline, the spread between the prospective returns of risky assets and those of safe assets (i.e. risk premia) will shrink at the same time as the riskiness of risky assets will not decline, changing the reward-to-risk ratio in a way that will make it more difficult to push asset prices higher and create a wealth effect.

Said differently, at higher prices and lower expected returns the compensation for taking risk will be too small to get investors to bid prices up and drive prospective returns down further. If that were to happen, it would become difficult for the Fed to produce much more of a wealth effect. If that were the case at the same time as the trickling down of the wealth effect to spending continues to diminish, which seems likely, the Fed’s power to affect the economy would be greatly reduced. (…)

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed.  So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation.  So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won’t matter that much.  What will matter much more is the efficacy of Fed stimulation going forward. 

In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.

Elsewhere:

S&P Cuts France’s Credit Rating

The firm cut France’s rating by one notch to double-A, sharply criticizing the president’s strategy for repairing the economy.

“We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects,” S&P said. “Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.”

S&P’s is the third downgrade of France by a major ratings firm since Mr. Hollande was elected. (…)

The political situation leaves the government with little room to raise taxes, S&P said. On the spending side, the agency said the government’s current steps and future plans to cut spending will have only a modest impact, leaving the country with limited levers to reduce its deficit.

Smile with tongue out  French Credit Swaps Fall as Investors Shun Debt Downgrade

The cost of insuring against a French default fell to the lowest in more than three years, as investors ignored a sovereign-credit rating downgrade by Standard & Poor’s.

Credit-default swaps on France fell for a sixth day, declining 1 basis point to about 51 basis points at 1:45 p.m. That would be the lowest closing price since April 20, 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012 when France lost its top rating at S&P.

“You need to ignore the S&P downgrade of France,” saidHarvinder Sian, fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It is behind the market.”

Surprise Jump in China Exports

Exports rebounded sharply in October from a September slump as demand improved in the U.S. and Europe, a potentially positive sign for the global economic outlook.

Exports in October were up 5.6% from a year earlier, after registering a 0.3% fall in September. The median forecast of economists surveyed by The Wall Street Journal was for an expansion of just 1.5%.

The news from China follows reports of a strong October performance from South Korea’s exports, up 7.3% from a year earlier, and suggests the recovery in the U.S. and elsewhere, though slow, is feeding through into increased demand for Asia’s export machine.

Shipments from China to the European Union were up 12.7% from a year earlier, while those to the U.S. were up 8.1%. But exports to Japan lagged behind, against a background of continued political tensions and a weakening of the Japanese yen.

China’s good export performance is even more striking given that last year’s figures were widely thought to have been overreported, so that growth looks weaker by comparison. Excluding that effect, real export growth could be as high as 7.6%, Mr. Kuijs estimated.

Imports to China also showed strength in October, up 7.6% from a year earlier, accelerating a bit from September’s 7.4% pace.

Surprised smile  China Auto Sales Climb at Fastest Pace in Nine Months

Wholesale deliveries of cars, multipurpose and sport utility vehicles rose 24 percent to 1.61 million units in October, according to the state-backed China Association of Automobile Manufacturers today. That compares with the median estimate of 1.5 million units by three analysts surveyed by Bloomberg News. (…)

Total sales of vehicles, including buses and trucks, rose 20 percent to 1.93 million units last month, the association said. In the first 10 months of the year, 17.8 million vehicles were delivered, with 14.5 million being automobiles.

Commercial vehicles sales increased 7.4 percent in the first 10 months of the year to 3.36 million units.

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

The consumer price index rose to 3.2% on a year-on-year basis in October, up from 3.1% in September. The rise was largely due to mounting food prices, which climbed 6.5%, and rising rents, according to government data released on Saturday. But it was still well within the government’s ceiling of 3.5% for the year.

Producer prices were down 1.5% year on year after moderating to a fall of 1.3% in September. This was the 20th month in a row of falling factory prices.

On a month-on-month basis, prices were even less of a concern, gaining only 0.1%.

CPI/non-food rose 1.6% YoY (same as September and vs. 1.7% a year ago), and was +0.3% MoM (+0.4% in September). Last 2 months annualized: +4.3%.

Data also showed China’s factory output rose 10.3% YoY in October. Fixed-asset investment, a key driver of economic growth, climbed 20.1% in the first 10 months. Real estate investment growth rose 19.2%, while property sales rose 32.3%.

Power production rode 8.4% YoY in October, compared to 8.2% in September and 6.4% a year earlier.

Retail sales were up 13.3%. Nominal retail sales growth has been stable at about 13% YoY for the past five months.

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

A day after the European Central Bank unexpectedly halved its benchmark interest rate to a record-low 0.25 percent and Peru cut its main rate for the first time in four years, the Czech central bank yesterday intervened in currency markets. The Reserve Bank of Australiayesterday left open the chance of cheaper borrowing costs by forecasting below-trend economic growth. (…)

Other central banks also held their fire this week. The Bank of England on Nov. 7 kept its benchmark at 0.5 percent and its bond purchase program at 375 billion pounds ($600 billion).

Malaysia held its main rate at 3 percent for a 15th straight meeting to support economic growth, rather than take on inflation that reached a 20-month high in September.

image

The Economist agrees (tks Jean):

The perils of falling inflation In both America and Europe central bankers should be pushing prices upwards

(…) The most obvious danger of too-low inflation is the risk of slipping into outright deflation, when prices persistently fall. As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. There is a real danger that this may happen in southern Europe. Greece’s consumer prices are now falling, as are Spain’s if you exclude the effect of one-off tax increases. (…)

Race to Bottom Resumes as Central Bankers Ease Anew

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

Canada’s housing market teeters precariously
Analysts warn nation is on verge of ‘prolonged correction’

(…) Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce. (…)

Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says. (…)

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

Among 449 S&P 500 companies that have announced results during the earnings season, 75 percent beat analysts’ estimates for profits, data compiled by Bloomberg show. Growth in fourth-quarter earnings will accelerate to 6.2 percent from 4.7 percent in the previous three months, analysts’ projections show.

  • Thomson Reuters:
  • Third quarter earnings are expected to grow 5.5% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.2%.
  • Of the 447 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.
  • 53% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.
  • For Q4 2013, there have been 78 negative EPS preannouncements issued by S&P 500 corporations compared to 8 positive EPS preannouncements. By dividing 78 by 8, one arrives at an N/P ratio of 9.8 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.
  • Zacks:

Total earnings for the 440  S&P 500 companies that have reported results already, as of Thursday morning November 7th, are up +4.6% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 51.4% beating revenue expectations with a median surprise of +0.1%.

The charts below show how the results from these 440 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates, which looked materially weaker in the earlier phase of the Q3 reporting cycle, have improved.

The earnings beat ratio looks more normal now than was the case earlier in this reporting cycle. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.


The composite earnings growth rate for Q3, combining the results from the 440 that have come out with the 60 still to come, currently remains at +4.6% on +2.9% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.

We may not have had much growth in recent quarters, but the expectation is for material growth acceleration in Q4 and beyond. The chart below shows total earnings growth on a trailing 4-quarter basis. The +3.1% growth rate in the chart means that total earnings in the four quarters through 2013 2Q were up by that much from the four quarters through 2012 2Q. As you can see, the expectation is for strong uptrend in the growth momentum from Q4 onwards.

Guidance has been overwhelmingly negative over the last few quarters and is not much different in Q3 either, a few notable exceptions aside.

Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

Mom-and-pop investors are returning to stocks, but their renewed optimism is considered by many professionals to be a warning sign, thanks to a long history of Main Street arriving late to market rallies.

(…) “Frankly, from 2009 until recently, I wanted to stay very conservative,” said Chris Rouk, a technology sales manager in Irvine, Calif. Now, he said, “I want to get more aggressive.” (…)

More investors are saying they are bullish about the stock market, according to the latest poll from the American Association of Individual Investors, which found that 45% of individuals are bullish on stocks, above the long-term average of 39%. Last month, the same survey said the number of investors who said they were bearish on stocks fell to the lowest level since the first week of 2012. (…)

Flurry of Stock, Bond Issuance Is a Danger Sign for Markets

Just as financial markets were recovering from the Washington turmoil, a new danger signal has started blinking, in the form of a flood of stock and bond issues.

So far this year, U.S. companies have put out $51 billion in first-time stock issues, known as initial public offerings or IPOs, based on data from Dealogic. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped.

Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.

It isn’t just stock. U.S. corporate-bond issues have exceeded $911 billion, also the most in Dealogic’s database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever. (…)

Small stocks with weak finances are outperforming bigger, safer stocks. And the risky payment-in-kind bond, which can pay interest in new bonds rather than money, is popular again. (…)