NEW$ & VIEW$ (17 JANUARY 2014)

Philly Fed Stronger Than Expected

Following on the heels of yesterday’s stronger than expected Empire Manufacturing report, today’s release of the Philly Fed Manufacturing report for January also came in stronger than expected.  While economists were looking for the headline index to come in at a level of 8.7, the actual reading was slightly higher at 9.4, which was three 3 points higher than the reading for December.

As shown, the majority (5) of components increased this month, while just three declined.  The biggest increases this month came from Number of Employees and Unfilled Orders.  The fact that Number of Employees increased seems to provide more evidence that last Friday’s employment report was an outlier.  On the downside, the biggest declines were seen in Inventories, Average Workweek, and New Orders.  Believe it or not , the 35.6 decline in the Inventories index was the largest month to month drop in the history of the survey (since 1980).  While that drop is large for one month, it takes that index back to levels seen as recently as April.

Homebuilder Sentiment Slips

Homebuilder sentiment for the month of January slipped from a revised reading of 57 down to 56 (expectations were for 58).  While sentiment slipped, it is important to note that any reading above 50 indicates optimism among homebuilders.

The table to the right breaks out this month’s report by components and region.  As shown, Present Sales, Future Sales, and Traffic all declined this month, with the biggest drop coming in traffic.  (…)

The chart below shows the historical levels of the NAHB Sentiment survey going back to 1985 with recessions highlighted in gray.  The current level of 56 is down slightly from the post-recession high of 58 reached in August.  While the index has seen a remarkable improvement since the lows from the recession, optimism still has some work to do on the upside before getting back to the highs from the prior expansion.

INFLATION WATCH

So while everybody is talking deflation risk:

  • Core CPI rose at a 1.8% annualized rate in Nov-Dec. and is up 1.7% YoY.
  • Same with the Cleveland Fed’s 16% trimmed-mean Consumer Price Index .
  • The median CPI has accelerated from +0.1% MoM in October to +0.2% in November and to +0.3% in December. The median CPI is up 2.1% YoY in December, unchanged for 6 months.

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The WSJ recently polled economists on a number of items. The tilt towards faster growth is clear:image

Even more interesting is that the WSJ did not bother to enquire about inflation and interest rates. Bernanke really did a fine job!

Shopping Spree Ends in Retail Stocks

A disappointing holiday shopping season has investors dialing back expectations for retail stocks after last year’s big runup in the sector.

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Stores Confront New World With Less Foot Traffic

A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.

(…) Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.

Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows. (…)

On Wednesday, J.C. Penney said it planned to close 33 underperforming stores and trim 2,000 positions to focus on locations that generate the strongest profits.

Such closings could accelerate: Leases for big retailers typically last between 10 and 25 years, meaning many were negotiated before e-commerce really took off.

Only 44 million square feet of retail space opened in the 54 largest U.S. markets last year, down 87% from 325 million in 2006, according to CoStar Group, Inc., a real-estate research firm. (…)

NMHC Survey: Apartment Market Conditions Softer in Q4 (CalculatedRisk)

Apartment market conditions weakened a bit in January compared with three months earlier. The market tightness (41), sales volume (41) and debt financing (42) indexes were all a little below the breakeven level of 50, although the equity financing index rebounded to 50. (…)

Although markets are a little looser than in October, this is largely seasonal; overall markets remain fairly tight.

“New supply is finally starting to arrive at levels that will more closely match overall demand. In a few markets, we are seeing completions a little higher than absorptions, but this is likely to be short term in nature. Fundamentally, demand for apartment homes should be strong for the rest of the decade (and beyond) – provided only that the economy remains on track.”

CORPORATE DELEVERAGING

From SocGen via ZeroHedge:

US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers.

Don’t forget that corporate cash is heavily concentrated in just a few companies.

SHELL WOES

 

Shell Warns On Profit

The company said profit would be significantly weaker partly because of higher exploration costs. The warning is rare for an oil major, and marks an inauspicious start to energy earnings reports.

The oil major said it expects to post fourth-quarter earnings of $2.2 billion on a current-cost-of-supplies basis—a figure that factors out the impact of inventories, making it equivalent to the net profit reported by U.S. oil companies—down from $7.3 billion a year earlier. Full-year earnings on a CCS basis are expected to be about $16.8 billion, down from $27.2 billion last year.

Shell blames refining woes for warning Oil group issues first profits warning in 10 years

And the wrap up:

Shell warns of ‘significant’ profit miss

Royal Dutch Shell issued a “significant” profit warning on Friday, detailing across-the-board problems and the extent of the challenges facing the oil major’s new boss Ben van Beurden, who took over two weeks ago.

Now you know! Winking smile

 

NEW$ & VIEW$ (3 JANUARY 2014)

Global Manufacturing Improves At Fastest Pace Since February 2011

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

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

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

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

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

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

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

U.S. Construction Spending Advances Further

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

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

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

Surprised smile Euro-Zone Private Lending Plunges

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

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

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

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

Auto Decline in German car sales accelerated in 2013: KBA

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

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

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

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

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

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

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

EARNINGS WATCH

 

The Morning Ledger: Rising Rates Buoy Pension Plans

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

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

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

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

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

SENTIMENT WATCH

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

Running with the bulls
Uneasy truths about the US market rally

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OIL AND SHALE OIL

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

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

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

From Astenback Capital Management

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

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

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

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

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

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

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

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

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

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

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

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

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

U.S. Warns on Bakken Shale Oil

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

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

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

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

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

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

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

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

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

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

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

MILLENNIALS SHUN CREDIT

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

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

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

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

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

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

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

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

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Consumer Prices Ease Amid Lower Fuel Costs

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

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

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

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

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

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

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

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

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

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

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

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

Existing Home Sales Fall 3.2%

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

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

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

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

Americans Recover Home Equity at Record Pace

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

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

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

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

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

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

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

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

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

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

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

Millennials Wary of Borrowing, Struggling With Debt Management

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

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

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

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

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

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

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

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

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

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

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

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

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

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

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

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

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Here’s the more interesting part:

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

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

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

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

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

Strong support for entrepreneurs

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

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

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

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

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

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

 

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

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

Hukou reform coming

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

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

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

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

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

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

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

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

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

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

Xi consolidates power

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

 

NEW$ & VIEW$ (8 OCTOBER 2013)

Small Businesses Skeptical About Future; Optimism Dips

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

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

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

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

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

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

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

THAT SHOULD HELP…

(WSJ)

…EVENTUALLY, because it ain’t helping just yet

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

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

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

German Factory Orders Unexpectedly Fall on Weak Recovery

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

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

German Exports Increased in August on Euro-Area Recovery

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

EARNINGS WATCH

From Thomson Reuters:

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

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

Exhibit 2. S&P 500: Earnings Estimate Beat Rates, Preseason and Final
ER_1007_2
Source: Thomson Reuters I/B/E/S

36 Years Of Over-Optimistic Earnings Growth

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

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

Charts: Morgan Stanley (via ZeroHedge)

Hence the use of trailing earnings.

SENTIMENT WATCH

 

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

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

100% Interactive Brokers Margin Hike

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

As we warned previously,

Margin Debt still contrarian bearish

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

LOW QUALITY STOCKS OUTPERFORMING

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

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

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

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

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Hmmm…

ITALY

Credit Suisse: “Il Cavaliere’s Final Bow

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

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

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

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

Gavekal explains Italy’s paradox:

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

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

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

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

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

OECD: Low Skills to Hamper Spain, Italy

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

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

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

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

Young Americans Fare Poorly on Skills

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

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

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

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

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

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

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

 

NEW$ & VIEW$ (7 OCTOBER 2013)

DRIVING BLIND… IN THE DARK…

 

Delayed Data Put Forecasters in a Bind

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

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

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

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

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

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

US policy makers fear flying blind

Ripple effects of uncollected data could run for years

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

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

Pig Sales Fly Blind as Data Cut by Shutdown Hampers Firms
 

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

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And this chart on biz activity:

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

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

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

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

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

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

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

New American Economy Leaves Behind World Consumer

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

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

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

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

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

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

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

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

World Bank Cuts Developing East Asia GDP Forecasts on China

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

MEANWHILE, CORPORATE LEVERAGE IS RISING (Moody’s analysis)

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

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

WATCH YOUR SPREADS

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

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

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

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

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BUT WHAT ABOUT ALL THAT CORPORATE CASH?

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

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

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

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

Ghost  How to Play the Halloween Indicator

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

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

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

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

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

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

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

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

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

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

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

I also use the MACD indicator to optimize timing:

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Why such seasonality?

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

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

BTW:
 

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

EARNINGS WATCH

From Thomson Reuters:

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

Zacks Research adds:

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


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

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

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

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

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

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

 

NEW$ & VIEW$ (15 MARCH 2013)

Employment. Deleveraging. Beware the retail sales numbers. Housing watch. Europe turning pro-growth. China labor costs. Sentiment watch.

Layoffs Drop, but Hiring Still Languishes  Pushing businesses to add new staff positions may be a bigger challenge for the Fed than creating financial conditions that stop layoffs.

The Labor Department said Thursday that new filings for jobless benefits last week unexpectedly dropped 10,000 to 332,000, the fourth drop in five weeks. The four-week moving average, which smooths out volatility, is at its lowest level in five years.

The claims drop follows other layoff news in this week’s job openings and labor turnover summary. The Jolts report showed layoffs and other discharges in January were at their lowest readings since Labor started tracking the data in 2000.

Americans’ Debt Payments Hit Three-Decade Low

U.S. households spent 10.4% of their after-tax income on debt payments in the final three months of 2012 compared with 10.6% a quarter earlier, the 15th straight decrease and the lowest level since government tracking started in 1980, according to recently released Federal Reserve figures. Families’ debt obligations are well below their average since 1980 of 11.9%. If you include other payments that aren’t classified as debt — like rent and auto leases — the figure rises to 15.5%, but that’s still the lowest since 1981.

MORE ON RETAIL SALES

Last Tuesday, posting on the weekly chain store data, I warned that even though sales were hanging in sequentially, the Y/Y trend was very weak due to the strong 2012 base:

Weekly chain store sales have increased in each of the last 4 weeks after their 6-week collapse early this year. The Y/Y growth rate keeps falling, however, due to the strong 2012 base. Retailers are likely to report pretty weak results for Q1 but the weekly trends are suggesting that American consumption is not collapsing.

The monthly retail sales data released Wednesday have a similar complexion as Moody’s explains:

The meaning of February’s 1.1% monthly jump by seasonally-adjusted retail sales was brought into question by unadjusted retail sales’ meager 1.2% increase rise from February 2012. For January-February 2013, seasonally-adjusted retail sales grew by a very lively 6.1% annualized from November-December 2012, but rose by a lackluster 3.6% from January-February 2012 before seasonal adjustment.

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Pointing up  The oft-cited leaked e-mail from an executive at a leading discount chain that warned of especially weak February sales was hardly baseless. February’s nasty -4.7% yearly drop by general merchandise store sales included sales setbacks of an excruciatingly deep -7.8% for department stores and of -3.5% for general merchandise stores excluding department stores, where the latter includes the major discount chains.

Remember that public companies report Y/Y. Mmmm…Good thing we’re having an early Easter.

HOUSING WATCH

Spring Home Buying Season Starts Early According to realtor.com®’s February Trend Data

(…) The median age of inventory was down by 9.26 percent month over month and total listings are up 1.15 percent month over month, suggesting that many reluctant home sellers are starting to take an early advantage of the recent improvements in housing prices. Annual inventory decreases of -15.97 percent are consistent with a gradual, yet persistent downward trend that has been occurring over the last two years. (…)

There continue to be pronounced regional differences in the strength of the housing market. Several areas in California are experiencing the highest increases in list prices coupled with the largest inventory declines. Phoenix, Seattle and Denver are also among the top performers across the U.S. However, many smaller industrialized markets in the Midwest and the Northeast registered year-over-year price declines, as did Philadelphia, Chicago and New York City. While the number of markets experiencing year-over-year list price declines had been increasing, this pattern appears to be turning around as home list prices increased in 78 markets last month on a year-over-year basis and declined in 39. (…)

EUROZONE: THE NEW PRO-GROWTH DANCE

European Union leaders endorsed “structural” budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits. (…)

European leaders are cloaking the easing up on the fiscal reins in language designed to reassure investors who have driven bond yields lower since mid-2012. They labelled the policy “differentiated growth-friendly fiscal consolidation,” with deficit targets set on a country-by-country basis.

“I can offer no solutions. I can say that this question is a part of our discussions, and we are conscious about this problem,” he said. (…)

“There should be a certain intellectual and practical flexibility.” (…)

German officials have backed the commission’s approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far. A “pro-growth” bias may even play to Merkel’s advantage, enabling her to siphon votes away from the opposition Social Democrats— and potentially forge a coalition with them if dictated by the election outcome in September.

High five  ECB Holds Back on Stimulus Possibility

While the extra liquidity offered by the ECB in the past year has eased banks’ funding constraints, many small and medium-size companies still face funding difficulties, especially in the countries hit hardest by the debt crisis, Bank of Finland Governor and ECB Governing Council member Erkki Liikanen said in a press briefing in Helsinki.

Remember this chart in the Feb. 28 New$ & View$?

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My comments then:

Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!

And this from ZeroHedge:

The Chart That Draghi Should Be Worried About

Given the increasingly tight coupling between European financials and their domestic sovereign credit – thanks to OMT promises and LTRO funding – one could be forgiven for thinking that the most important thing to watch in Europe is the financials. Indeed, year-to-date, European financial stocks have surged over 7% (driven mostly by a global pump in the first few days of January) while at the same time, European senior financial credits (the other ‘safer’ end of the spectrum in terms of capital structure support from stocks) are 1bps wider on the year… we suggest Mr. Draghi quickly come up with another solution to save the banks (cough Commerzbank cough) before stock markets catch on.

2013 has been a year of concern for European financials among credit traders – but the central bank spice must flow and equities ignored such silliness (for now)…

Prodi Says Europe Hurt by Too Much Austerity Amid Very High Euro

“The euro has a very high rate of exchange,” Prodi, a former European Commission president, said in an interview with Sara Eisen airing on Bloomberg Television today. “I do think that it’s stronger than needed.”

China Labors On  China’s job markets are heating up. Strong demand for labor show factories are humming, but rising wages are a reminder that China can no longer count on a growing workforce to buoy growth.

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(…) Online recruitment firm 51job.com reports that 62.4% of the 24,254 firms it surveyed in the first quarter planned to increase recruitment compared with a year earlier. Human-resources consultancy Manpower’s survey of 4,200 firms also found that hiring intentions had strengthened.

Strong demand for workers is pushing wages up. A survey of more than 300 factories in the Pearl River Delta by Standard Chartered found an average increase of 9.2% in 2013, after 7.6% in 2012. The head of the recruitment website at 58.com, an online advertising portal, says the going rate for a waitress in Beijing has risen to 3,000 yuan ($482) a month in 2013, up from 2,000 yuan in 2012. (…)

The World Bank estimates China’s labor productivity growth at about 8.3% a year – broadly in line with wage increases. Standard Chartered’s survey found that for the majority of factories, productivity gains were outpacing increases in wages. (…)

SENTIMENT WATCH

JPMorgan Sees Home Prices Up 14% as BofA Touts Party

JPMorgan Chase & Co. more than doubled its forecast for U.S. home price gains in 2013 to 7 percent this week, and predicts a more than 14 percent increase through 2015. Bank of America Corp. said last week property values will jump 8 percent this year, up from a prior estimate of 4.7 percent in a report titled “Someone say house party?” (…)

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

 

NEW$ & VIEW$ (8 MARCH 2013)

U.S. employment explodes. Consumer deleveraging done. Government deleveraging, none. Unit labor cost rises. Transport biz ok. China economy remains slow. Cash flows. U.S. bank unstressed. Eurozone economy stressful, leading to instability. Sentiment watch.

 

Surprised smile  February Nonfarm Payrolls: +236K vs. consensus +160K, 119K previous (revised from +157K). Unemployment rate 7.7% vs. consensus 7.9%, 7.9% previous.

 

Weekly Unemployment Claims: 4-Week Moving Average at a Five Year Low

Click to View

Money  Freshly Flush, the Consumer Is Back  Fresh data suggest a growing number of Americans are becoming more comfortable borrowing—a development that could fuel more spending and give the sluggish recovery a lift.

imageU.S. households ramped up their borrowing at an annualized rate of 2.4% in the final three months of 2012, the biggest jump since the beginning of 2008, according to a Federal Reserve report released Thursday. Mortgage borrowings outstanding dropped only 0.8%—the lowest percentage drop since early 2009. Meantime, other kinds of consumer borrowing expanded at the fastest pace since the third quarter of 2007. (…)

The net worth of U.S. households—the value of homes, stocks and other investments minus debts and other liabilities—rose 1.8% in the fourth quarter of 2012 to $66.07 trillion, the highest level since the final quarter of 2007, when the recession began, the Fed said. Americans continued to borrow in January, mostly for education and cars, another Fed report Thursday showed. And a separate report by the Federal Reserve Bank of New York last week showed Americans late last year took on more debt for the first time since the throes of the recession as households took out more mortgages and far fewer fell into foreclosure. (…)

The nascent recovery of the housing market is playing a key role in making Americans more confident about the economy by raising the value of their homes, often their most valuable asset. The value of real estate owned by households climbed nearly $450 billion in the fourth quarter of 2012, the Fed said. Americans also have much more equity in their homes: a measure of owners’ equity as a percentage of household real estate hit 46.6%, the highest since the first quarter of 2008.

Meanwhile, the stock-market recovery is also making some Americans feel more flush. The value of stocks owned by households rose over $150 billion in the fourth quarter, even as the Dow Jones Industrial Average dropped 2.5% during the period—reflecting rising prices of foreign stocks and more investors moving into stocks in general after shying away. The stock market has seen substantial gains since then—the Dow is up over 9% this year, at a record high—suggesting household balance sheets have improved further.

imageMoody’s

High five   U.S. Deleveraging? Not So Fast

In the private sector (nonfinancial businesses and households) deleveraging has been substantial. In the financial sector, it has been even more substantial and continues.

In the public sector, most notably federal, there has been a substantial buildup in debt. Taken altogether, total U.S. debt today is higher as a percentage of gross domestic product than ever before, due to federal borrowing.

Pointing up  Slower Productivity Creates Risk for Stock Bulls

(…) After depending on productivity to fuel growth, however, companies have nearing the end of doing more with less.

Businesses are recognizing their existing staff are hitting their limits. According to a survey of manufacturers done by the New York Fed, 40% of respondents who plan in hire this year said the first or second most important reason was that their current employees are overworked. (…)

 

Charts from Haver Analytics

CASS FREIGHT INDEX: MUDDLING THROUGH

imageAn increase in shipment volumes in February reversed a four‐month downward slide, putting levels back on pace with 2012. (…)  All modes have been experiencing up and down shifts in volume for the last eight months, with no signs of change in the coming months. Although there are some strong indicators of improvements in the economy, many of them do not translate to improvements in the freight logistics market. Others signal weak demand for freight.

The 5.6% increase in shipments in February reversed last month’s 4.8 percent sequential drop. (…) The turn‐around followed four consecutive months of declines, and still puts 2013 only 0.6 percent of December 2012. February’s sharp increase is partially due to the strong showing for rail over the last four weeks – carloadings are up 3.7 percent and intermodal units are up 6.9 percent over the preceding four weeks.

Breaking it down week by week, however, demonstrates the uneven performance of the transportation sector; both carloadings and intermodal loadings were up two weeks and down two weeks. The most significant drop was 5.2 percent in intermodal loadings for the week ending February 28th.

The ATA’s truck tonnage index has shown growth during the last two periods (December and January), which would seem contrary to the trend in this index. The Cass shipments index is not a reflection of tonnage carried, so the two could vary for a variety of reasons. The most likely reason for the difference in the last few months is that the average weight of a shipment rose during the period. In addition, the trucking industry remains at near capacity and there was no indication of capacity pressure or truck shortages, suggesting that the same number of trucks were handling more tonnage per shipment. Anecdotal evidence also supports fuller loads for LTL carriers.

Rail Traffic Continues to Point to Economic Strength

“Rail intermodal traffic continues to grow.  In February, year-over-year intermodal volume on U.S. railroads rose for the 39th straight week, and February saw the first double-digit year-over-year increase in two years,” said AAR Senior Vice President John T. Gray.  “Shippers find intermodal appealing for a lot of reasons, including fuel savings, higher trucking costs, and service that has become much better in recent years.” (Via PragCap)

rails Rail Traffic Continues to Point to Economic Strength

 

 

China Exports Beat Expectations

China posted a surprise trade surplus in February thanks to stronger-than-expected exports as the global economy recovered, and a drop in imports.

Exports were up 21.8% from a year earlier—slower than January’s 25% pace but well above economists’ expectations of 5%, and a positive sign for the world’s second-largest economy. (…)

Exports to the U.S. were up 15.7% from a year earlier, and exports to the European Union were up 16.5%. But exports to Japan were down 6.5% and imports from Japan were down 36%, reflecting heightened political tensions between the two countries as a territorial dispute lingers.

High five  The FT has this important info:

Because the Chinese New Year holiday fell in January last year and in February this year, analysts said it was better to look at aggregate trade data for the two months to make sensible year-on-year comparisons.

On that basis, Chinese export and import growth both held up reasonably well. Exports were up 23.6 per cent in the first two months of 2013 from a year earlier, while imports were up 5 per cent.

But even this two-month comparison might be misleading since the slowdown in factory activity has carried through into March because the New Year celebration fell later than usual in February.

“This can mean even the January and February combined data are distorted on the upside and the unwinding of the Chinese New Year distortions would happen in March,” said Song Yu, an economist with Goldman Sachs.

So, read on:

Storm cloud  CHINA ECONOMY SOFT AFTER HOLIDAYS

Our (CEBM Group) survey basically reflects the weakness of both spot and futures markets for steel after Spring Festival. Over 45% of respondents stated that actual sales were lower than their expectations, much worse than the previous survey.

Construction projects and cement production restarted after the Lantern Festival (Feb. 24) (…) However, actual demand had not been confirmed in the short term; only 23% producers were optimistic about sales in March.

The survey suggests that around 90% of copper merchants surveyed indicated that orders have declined slightly M/M due to the holiday break. Copper merchants did not see a strong recovery after the Chinese New Year due to soft downstream demand.

In the March survey, real estate developer respondents reported strong sales before Chinese New Year (CNY), in-line with developers’ expectations. Sales decreased slightly after CNY, but developers can still sell 70%-80% (75%-85% in January) of their supply in Tier-1 cities and 60%-70% (60%-80% in January) in Tier-2 cities. None of surveyed developers have introduced new supply in February, but they observed strong low-end demand and high-end property sales.

Surprised smile  As March is the beginning of the peak season in property sales, respondents showed strong motivation to raise prices in March even when they knew a rapid rise in property prices would have a negative impact on their own sales. According to the survey, average prices in March for new properties will increase by 5%-10% M/M in Tier-1 cities, and by 3%-5% M/M in Tier-2 cities.

Few surveyed developers said they would launch new sales campaigns in March due to low inventory. As most developers stopped purchasing land in 1H12, respondents agreed that a shortage of new supply is a real problem for them until late April.

The CEBM machinery manufacturer survey shows that the demand recovery after the holiday has not been observed. (…)  New orders of machinery tools in January and February were still weak.

The result from the survey shows that uncertainty of auto sales conditions has increased.

Exports recovered weakly after the festival; total exports in January and February remained flat Y/Y, barely changed from 4Q12. (…) Export volume surged in March 2012 due to the significant increase in shipping fees. A high Y/Y base will likely weigh on March exports Y/Y.

China warns over fresh currency tensions
Competitive devaluations will hurt emerging nations, says Beijing

Beijing has issued a new warning against competitive devaluations by rich countries, saying that emerging markets will pay the price for so-called currency wars.

“For the global economy this year, I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,” commerce minister Chen Deming said on Friday.

Martini glass  Chinese parliament holds 83 billionaires
Report identifies 17% rise in super-wealthy delegates

Not quite what Lincoln thought of a “government of the people, by the people, for the people…”

Brazil’s central bank adopts hawkish tone
Benchmark Selic rate left unchanged at low of 7.25 per cent

(…) But in the accompanying statement, for the first time since August 2011, it left open the possibility of an increase to tackle rising inflation.

This represented a sharp turnround from previous statements that rates would remain low for a “prolonged period”, leading economists to predict central bank president Alexandre Tombini could increase them as early as next month. (…)

Profit squeeze hammering emerging equities

(…) Godet’s calculations show a steep decline in return-on-equity (ROE) in emerging markets to around 12 percent, a fall of 3 percentage points in the last 18 months and well below pre-crisis levels of 16-17 percent.

That lags developed markets’ 13.5 percent. But U.S. firms – “the ultimate quality and growth markets” in Godet’s words – have usurped EMs’ ROE supremacy with a 15 percent average. ROE shows how well a company is using shareholders’ equity investment to generate profits. (…)

Money  [image]Firms Return Record Cash To Investors

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.

(…)American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market [image]research firm. (…)

The Federal Reserve on Thursday paved the way for more activity. In its “stress tests” of banks’ financial health, the Fed said 17 of the largest U.S. financial groups have enough capital to keep lending even if the economy were to take a sharp downturn. Several banks are now expected to boost dividends and share buybacks.

(See on that NORTH AMERICAN BANKS RANKING (March 2013))

‘Stress Tests’ Show Banks on the Mend

The Fed in its latest “stress tests” said the largest U.S. banks have enough capital to keep lending in a hypothetical sharp economic downturn, potentially clearing the way for the return of billions of dollars to investors.

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[image]

Storm cloud  German Industrial Production Unexpectedly Stagnates  German industrial production unexpectedly stagnated in January as Europe’s debt crisis weighed on company spending and investment.

Production was unchanged from December, when it rose 0.6 percent, the Economy Ministry in Berlin said today. December output was revised up from an initially reported 0.3 percent increase. From a year earlier, production fell 1.3 percent when adjusted for working days. (…)

Spanish industrial output shrank 5 percent in January from a year earlier. In Finland, production slumped 3.6 percent in January from December, while in Turkey output rose 2.3 percent. (…)

ECB should cut rates, allow higher inflation: Lagarde

The European Central Bank should cut interest rates further and strong economies such as Germany should allow higher inflation and wage growth, the head of the International Monetary Fund said on Friday.

ECB Chief Plays Down Italy Fears

European Central Bank President Mario Draghi played down fears that Italy’s indecisive election could reignite Europe’s debt crisis, saying that financial markets have taken the election results in stride and that Italy’s current political mess doesn’t threaten its budget discipline. (…)

A majority of Italian voters supported political parties, especially those led by comedian Beppe Grillo and former Premier Silvio Berlusconi, that have pledged to soften or reverse fiscal austerity measures that Italy has already enacted.

Italian Banks’ Bad Loans Seen Rising as Gridlock Hampers Growth

(…) Italian corporate and household non-performing loans rose to a record in December, reaching 125 billion euros, according to data from the Italian Banking Association. Banks’ gross non- performing loans as a proportion of total lending increased to 6.3 percent from 5.4 percent a year earlier. (…)

Italian banks tied their fortunes more closely to the financial strength of the state in 2012, increasing holdings of the country’s sovereign debt by 58 percent to 331 billion euros. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. (…)

Hollande faces pressure over jobs pledge
Unemployment hits highest level since 1999 as police and protesters clash

Figures published on Thursday by Insee, the statistics office, put the country’s jobless rate at 10.6 per cent in the final three months of 2012, up from 10.2 per cent in the previous quarter. Excluding France’s overseas territories the rate was 10.2 per cent, which compared with 5.7 per cent in Germany and an 11.7 per cent eurozone average.

Stratfor: Europe, Unemployment and Instability 

Excerpts from a good Statfor piece via Economic Intersection.

(…) Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.

Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.

This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.

History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.

It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.

It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.

The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has not encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.

SENTIMENT WATCH

World shares hit highest since June 2008

World shares hit their highest level since June 2008 and the dollar touched a fresh 3-1/2-year high against the yen on Friday, ahead of U.S. jobs data expected to point to a continuing pick up in the world’s biggest economy.

AAII Bullish Sentiment Posts Small Increase

 

NEW$ & VIEW$ (6 MARCH 2013)

Sentiment watch. Eurozone exports plunge. Chain store sales weak. Debt re-shuffling does not reduce indebtedness.

I am beginning this morning with the “Sentiment Watch” feature because, absent rising earnings (yes, they peaked 6 months ago), only rising multiples can propel equities higher for now. The only goal here is to display how the media can influence investor behavior and try to help us all stay cool and rational.

SENTIMENT WATCH

Stocks extend gains on growth hopes
Investors take cue from record close for the Dow

 

CalculatedRisk

 

Strategists Wonder: Will Rally Last?

Some money managers said they are starting to embrace the stock market’s gravity-defying rally. Still, excitement was tempered by acute awareness of the Federal Reserve’s force in driving stocks higher.

“Among clients and investors, there is this newfound courage,” said Erik Davidson, deputy chief investment officer of Wells Fargo & Co.’s Wells Fargo Private Bank, which manages about $170 billion in assets. The overall economy “is a lot less worse than people had feared.” (…)

For now, though, corporate earnings and dividends are rising Sarcastic smile, the U.S. housing market has stabilized, the unemployment rate is gradually declining and bond yields are low. Those are all positives for stocks, many experts said, and good reasons to stick with the market. (…)

One buy signal: Transportation stocks are rising in tandem with the blue-chip index, an occurrence that many investors view as a harbinger of more gains. On Tuesday, the Dow Jones Transportation Index hit its own record high, which “absolutely” confirms to Mr. Saut and other believers in so-called Dow Theory that stocks still have room to climb, he said. (…)

“The market has momentum,” Mr. Koesterich said. “I think we go higher until you have an event that suggests things aren’t as rosy as people think.”

Ooops!

U.S. Economic Confidence Falls as Sequester Becomes Reality

Gallup’s Economic Confidence Index fell to -22 last week from -13 the week prior, with most of the decline occurring after Congress and the president ultimately failed to avert the $85 billion in budget cuts mandated as part of the sequestration legislation. The weekly average of -22 is the lowest such average since the -22 reading for the week ending Dec. 30, amid the fiscal cliff debate.

Gallup Economic Confidence Index -- Weekly Averages Since January 2012

Ooops again!

ECONOMIC OPTIMISM IN U.S. PLUNGES

The federal economic policies confidence gauge fell 11% to 35.5, also a 15-month low. The six-month outlook index cratered 18% to 38.8, the worst since October 2011. The personal financial outlook reading lost 4.4% to 52.2, though that’s still above the neutral 50 level separating optimism and pessimism. (…)

“Americans across the board think that the economic outlook is grim,” said Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, IBD’s polling partner. “The big slide in our economic outlook subindex perhaps signals a turning point and an impending entry into a recession. This month, nearly 60% believe that the economy is in a recession.”

But don’t worry:

THE CHEERLEADERS ARE BACK

Now that the Fed has begun talking about eventually stopping stuffing the economy with monetary heroin, market cheerleaders are jumping over each other explaining that, after all, the Fed did not have that much impact on equity markets since 2009. Therefore, investors should not shiver at the thought of an eventual starvation:

Many analysts argue the Fed’s easy money policies have been the main catalysts for the run-up. Charts following the financial crisis show stocks have rallied every time the Fed has announced a new round of quantitative easing. The market has fallen when the central bank has been less accommodative.

But some investors and analysts think there is more to the story.

Dan Greenhaus, chief global strategist at New York brokerage firm BTIG, chimed in last week when he noted earnings growth in the S&P 500 and the index’s returns are roughly equal since March 2009. “We suppose this isn’t all about the Federal Reserve after all,” Mr. Greenhaus told clients.

Others have jumped on board. “The Fed’s easy money approach has not been the driver for equity prices as is presumed,” said Tobias Levkovich, chief equity strategist at Citigroup. (…) “Earnings have been far more crucial to the S&P 500’s trend,” Mr. Levkovich said.

Jim Paulsen, chief investment strategist at Wells Capital Management (and a well-known bull), also made the argument that fundamentals, rather than liquidity, have been the main drivers behind the rally.

“Stock prices are not nearing all-time record highs simply because of continuous liquidity injections from the Fed,” Mr. Paulsen said on Monday. “Rather than a sugar high orchestrated by the Fed, this bull market appears much more like a ‘fundamental high’ driven by a revival in private economic activities.”

He pointed to data showing stocks throughout the past four years have roughly tracked the trends in corporate profits, weekly jobless claims and economic momentum – measured by the Citigroup U.S. Economic Surprise Index. (WSJ)

It is indeed nice to see that people are finally realizing that earnings matter in the (P/E x earnings = price) equation. Just when earnings have peaked…

Back to the real world

 

Lightning  Euro-Zone Exports Plunge

Eurostat, the European Union’s statistics agency, said exports from the euro zone fell 0.9% in the fourth quarter compared with the third quarter, a sharp reversal from 1% growth in the period before. (…)

Eurostat said imports also fell 0.9% in the fourth quarter, the steepest drop since the end of 2011, having grown less rapidly than exports in the previous three months. Weak imports reflect the poor state of consumer demand in the currency bloc. Business investment, consumer spending and government expenditure all continued to fall in the fourth quarter, Eurostat figures showed. (…)

Eurostat now estimates the currency bloc has been in recession for 15 straight months.

ScotiaCapital has this chart showing that Europe is nowhere near a major turn, China is attempting to soft land while the U.S. remains the only growth engine out there, albeit a weakish one.

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WEEKLY CHAIN STORE SALES

Weekly sales were up 0.2% last week but the 4-week m.a. remain s stuck at a low level, up only 2.1% Y/Y.

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Watch that:image

INDEBTEDNESS REMAINS VERY PROBLEMATIC

(…) Those who believe that we have made good progress in terms of addressing the high financial leverage in our society must be kidding themselves. (…) it is fair to say that we haven’t really achieved much so far beyond some re-shuffling of debt from the household and financial sectors to the public sector.

Overall debt levels remain excruciatingly high and I note with some trepidation that Greece is not even close to being the most indebted nation in the world today. In chart 1 debt from all the four main sectors of the economy have been added together. As experience has taught us, it is total debt that matters. Focusing on government debt alone will lead to bad investment decisions. Niels C. Jensen, Absolute Return Partners LLP

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Without a healthy level of economic growth there is no way that all this debt can ever be repaid, hence the growing focus on nominal GDP growth, so, in that respect, economic growth still matters.