NEW$ & VIEW$ (10 DECEMBER 2012)


The Labor Department’s latest job-market overview showed employers added 146,000 jobs in November. That is better than the previous two months, which were revised down, but still too weak to get many of America’s 4.8 million long-term unemployed back to work.

The biggest surprise in the report was the government’s pronouncement that Superstorm Sandy didn’t significantly affect the findings. (WSJ)

The change in total nonfarm payroll employment for September was revised from +148,000 to +132,000, and the change for October was revised from +171,000 to +138,000. Most of the downward revisions were in government employment.


Few people accept the BLS view that Sandy had little impact on the November data.

As it happens, the week the household survey was conducted was around the time Sandy made landfall. Oddly, by the Bureau’s own count, some 369,000 workers couldn’t make it to work, yet it insists the hurricane did not “substantively impact the national employment and unemployment” totals for last month. Go figure. (Barron’s A. Abelson)


The BLS’ own household numbers point to a meaningful impact from Sandy. In addition, the 20k drop in construction employment is highly suspicious in light of the clear improvement in construction spending in recent months (chart below from Lance Roberts and AAR).



Here’s what the National Federation of Small Businesses said recently:

Sandy will have a substantial impact on the jobs numbers. Although large
national firms will not experience much of an employment impact, thousands of small firms were shut down along the East Coast, and large numbers have not re-opened and their customers can’t shop. Segregating the responses in the “Sandy States” from the rest of the U.S. (including western Pennsylvania and New York which weren’t affected), it is clear that there was less hiring and more job loss in Sandy States. (NFIB via John Mauldin)

Meanwhile, up North where Sandy had no impact: Canada Nov. Employment Rises More-Than-Expected 59,300

Canadian employment rose almost six times faster than economists forecast in November, countering recent signs of slowing economic growth.

The increase of 59,300 lowered the unemployment rate to 7.2 percent from 7.4 percent, the first decline in five months, Statistics Canada said today in Ottawa.

Full-time employment rose by 55,200 in November and part- time positions increased 4,100, Statistics Canada said. Private companies added 48,200 workers and public-sector employment climbed 5,400.


LEI Says Slow Growth, Not Recession

For now, leading economic indicators are not pointing toward recession—but they continue to suggest “stall-speed” growth. The Conference Board’s Composite of Leading Economic Indicators just hit a new high for the current expansion. As you can see in the chart and table below, the six-month rate of change in the LEI is consistent with nearly 2% gross domestic product (GDP) growth. Going off the fiscal cliff would almost certainly take the economy into a recession, but the present fundamental picture remains out of the contraction zone.

LEI Says Slow Growth, Not Recession

LEI Says Slow Growth, Not Recession

Smile Rail stats point up

Excluding coal and grain, U.S. carloads were up 2.2% M/M in November and 5.5% Y/Y, the biggest percentage increase in six months. (AAR)image image

Pointing up Also, the diffusion index of ISI’s company surveys made a new high last week.

But there is the cliff:

[image]As recently as September, about half of consumers were largely ignoring the issue, according to a regular survey by RBC Capital Markets. But in the most recent survey, completed last week, 71% of respondents said they were following the cliff debate, and more than half said the threat had hurt their confidence or led them to hold back on spending.

Will Churchill is already seeing the issue affect his business. Mr. Churchill, co-owner of Frank Kent Motor Co. in Fort Worth, Texas, saw strong sales growth at his Cadillac and Honda dealership until early November.

But sales started to slow after Election Day, with many customers attributing their caution to the Washington budget debate. “Fifty percent of the customers we talk to, it comes up at some point,” he said. “They’re in the market, they want to buy, but the hesitation is that they don’t know what’s going to be the result in Washington.” (WSJ)

In the twilight zone:

Boehner Says Week Wasted in Talks to Avert Fiscal Changes

An agreement won’t be possible “if the president insists on his position, insists on my way or the highway,” he said. “That’s not the way to get an agreement.”

High five Boehner said that Friday but before Nancy Pelosi met with President Obama and came out with:

“It’s not about the rate—it’s about the money,” Mrs. Pelosi told reporters. She said the point was not “about being punitive to the high end—it’s about getting money to reduce the deficit, to grow the economy.”

To me, this sounds like progress: “It’s not about the rate—it’s about the money,”

Who will blink first?

Pointing up  In the end, the President of the U.S.A. is Barrack Obama. He is the ultimate person responsible for what happens. No president would knowingly do anything that would clearly and effectively result in a recession which, after all, would make things even worse for the United States and the world.

Obama will blink.


Pay attention to this Ned Davis Research chart via Liz Ann Sonders (Charles Schwab & Co.):

Investors' Extreme Pessimism Starting to Reverse

Investors' Extreme Pessimism Starting to Reverse

And to this basic technical reading which suggests that equities have decent support around the still rising 200-Day MA (1390) and resistance on the 50-Day MA (1420).

Stocks Move Back Above Trendlines



Earnings Growth Rate Cut By Nearly 2/3 since September 30 (Factset)

The estimated earnings growth rate for Q4 2012 is 3.5% this week, slightly below last week’s estimate of 3.8%. Estimate cuts to companies in the Financials sector were mainly responsible for the decrease in the growth rate this past week. Overall, the growth rate for the Financials sector decreased to 20.0% from 20.9% during the week.

Since the start of the quarter (September 30), the estimated earnings growth for the index has dropped to 3.5% from 9.3%. Seven of the ten sectors have witnessed a decline in expected earnings growth over this time frame, led by the Materials, Information Technology, Financials, and Industrials sectors.

The estimated earnings growth rate for the Materials sector is 6.4% today, down from an expectation of 24.0% at the start of the quarter. The projected earnings growth for the Information Technology sector is -2.4%, down from an expectation of 8.7% at the beginning of the quarter. The predicted earnings growth rate for the Financials sector is 20.0%, below an expectation of 27.8% at the start of the quarter. The expected earnings growth rate for the Industrials sector is -4.2%, down from a projection of 3.3% on September 30.

Guidance: High Percentage of Information Technology Companies Guide Lower

The reduction in expected earnings growth for Q4 2012 can attributed in part to a high percentage of companies issuing negative EPS guidance for the quarter, particularly in the Information Technology sector.

Of the 108 companies that have issued EPS guidance for the fourth quarter, 79 have issued projections below the mean EPS estimate and 29 have issued projections above the mean EPS estimate. Thus, 73% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the five-year average of 61%, but below the percentage at this same point in time in Q2 2012 (80%).

An unusually high percentage of companies in the Information Technology sector have issued negative guidance. Of the 32 Information Technology sector companies that have issued EPS guidance, 29 (or 91%) have issued EPS projections below analyst estimates. This percentage is well above the five-year average of 56%.

I did the calculation for you. Excluding IT, 76 companies have issued Q4 guidance and 50 (66%) were below the mean estimate.

Slow demand is hurting revenue but operating margins are necessarily impacted by lower capacity utilization (charts from AAR):


Pointing up The current decline in capacity utilization is similar to the early 2008 experience. Then we had the Lehman failure and all hell broke loose. Nothing similar is expected in 2013, barring the fiscal cliff, but capacity utilization needs to stabilize if current margin expectations are realized:


Smile  China’s recovery gains momentum 

The monthly flood of Chinese data:

  • [image]Industrial output rose 10.1% Y/Y in November, up from 9.6% in October and the strongest since March. On a MoM basis, VAI rose 0.86%, up from 0.82% in October and the fastest pace since May. 
  • Electricity production accelerated to 7.9% growth from 6.4%. That was the fastest pace for 2012.
  • Retail sales rose 1.5% M/M vs. 1.4% in October. Retail sales growth rose to 14.9% Y/Y from 14.5% in October. Real retail sales rose 13.6% Y/Y, up from 13.5% in October and the fastest pace of the year.
  • Investment in fixed assets grew 20.7% Y/Y, down from 22.2% in each of the prior two months. FAI rose 1.3% M/M vs. 1.9% in October. FAI by state-owned firms rose 17.1% Y/Y last month, while FAI by private firms rose 22.7%.
  • Real estate investment showed a marked rebound, registering 16.7% in the first 11 months, compared with 15.4 percent for the first 10 months.
  • China’s exports rose just 2.9% Y/Y in November, much lower than October’s 11.6% rise. Imports were flat against a 2.4% increase in October. Exports to the EU fell 18% Y/Y in November. For the first 11 months of the year, China’s exports to the EU were down 7%. China’s exports to the U.S. fell 2.5% Y/Y after rising between January and November.
  • China property November 2012, floor space sold, new starts - UBSNew floor area under construction in the real-estate sector showed signs of recovery, as residential sales rose 31.6% year-to-year,up from 25% in October and from -3.3% in November 2011. In the nine months through June, sales were down Y/Y each month, while since then sales have been up Y/Y in four of five months. Residential investment rose 21.8% Y/Y in November, up from 13.2% in October and 10% in September.
  • New home starts jumped 6.3% Y/Y last month, following declines of -9.4% in October and -28.1% in September. 
  • Land purchases by developers rose 16.8% last month, after -36.6% in October.
  • The Consumer Price Index rose to 2% Y/Y in November. CPI rose 0.1% M/M with food prices up 0.4% and non-food prices flat.
  • China’s PPI dropped 2.2% in November, the ninth straight month of decline.

Auto  November vehicle sales hit top gear  Passenger-vehicle sales in China hit a record in Nov as a series of positive indicators boosted the market.

A total of 1.419 million cars, sports utility vehicles, multi-purpose vehicles and minivans were sold in November, a 13 percent year-on-year increase, according to data from the China Passenger Car Association on Friday.

The number showed that total sales for the first 11 months jumped 6.6 percent year-on-year to 13.12 million, paving the way for an increase of at least 5 percent in passenger-vehicle sales this year.

Cui Dongshu, deputy secretary-general of the association, said the Guangzhou Auto Show last month helped passenger-vehicle sales surge more than 20 percent in the last week of November.

“More impressively, China’s homegrown brands recovered in the domestic market as their share of the passenger-car sector reached 35.1 percent, the highest in 20 years,” Rao said.



Chinese Survey Shows Higher Jobless Rate

A new survey shows that the real unemployment rate in China is double the official level, and layoffs rose sharply among migrant workers in the past year, underlining the challenge for China’s new leaders to maintain growth.

The survey of 8,000 households shows the urban unemployment rate hit 8.05% in June, up slightly from 8% in August 2011 and nearly twice as high as the official 4.1% rate.

The unemployment rate for China’s army of 160 million migrant workers has risen sharply to 6% in June 2012, up from 3.4% in August 2011 according to the survey, suggesting 10 million unemployed as a result of the sharp slowdown in exports and real-estate construction.

China’s official unemployment rate is based on urban residents registering for unemployment benefits. That measure leaves out key sections of the workforce—notably migrant workers, who go uncounted because they can’t register for such benefits in the cities where they go to work. For the last 15 years it has stayed in a tight range between 3.1% and 4.3%, failing to capture wrenching changes in China’s labor markets.

Mr. Gan’s survey attempts to overcome the problems of the official data by dispatching student researchers into households up and down the country.

OECD Composite Leading Indicators, December 2012

The CLIS for Canada, Japan, Russia, Germany, France and the Euro Area as a whole continue to point to weak growth. In Brazil tentative signs have emerged that the positive growth momentum predicted in recent months is dissipating.

In China and Italy, on the other hand, signs of turning points in the cycle are beginning to emerge. Tentative signs of a stabilisation in growth have also emerged in India.

In the United States and the United Kingdom, where consumer confidence picked up strongly last month, the CLI continues to point to economic growth firming.



Lightning  Japan sinks into fresh recession Revised GDP indicates contraction in six months to September

Japan quarterly qoq annualised seasonally-adjusted GDP - Soc Gen Revised quarterly gross domestic product data on Monday showed that output fell 0.9 per cent in the three months to September, in line with earlier estimates. However, the government also marked down its previous estimate of 0.1 per cent growth in the second quarter to a shade below zero, with growth in net exports cut almost in half. That meant that the six-month period met the textbook definition of a technical recession.

Storm cloud  Turkish growth below expectations
Exports perform less well than hoped

Gross domestic product grew 1.6 per cent in the third quarter compared with the same period last year, significantly below analysts’ consensus forecast of about 2.6 per cent.

GDP advanced 2.6 per cent the first nine months of the year on the same period in 2011. The government forecast for the year as a whole is 3.2 per cent, but some economists say such projections will now be revised downwards.

Storm cloud  Mexico warns of economic headwinds New government says finances in US and Europe will hit growth

Mexico’s new centrist administration says weakness in Europe and concerns about US finance will limit economic growth next year to 3.5 per cent. The figure is in line with previous official forecasts, but below that of most independent economists who had expect 4 per cent growth.

ECB – symbolism matters  Central bank should have cut its benchmark interest rate this week

(…) the ECB also appears to be signalling that a cut is more likely than not, and probably soon. But why wait, especially since it is the symbolism as much as the fact of the cut that really matters?

Lightning  Italian bond yields jump sharply higher
Monti’s decision to step down early leads to wave of uncertainty


Italy’s Bersani Vows Steady Hand

Pier Luigi Bersani, the center-left politician tipped in polls as Italy’s next leader, pledged to uphold his country’s economic commitments to Europe and not dismantle the current government’s overhauls, if he is elected.

Pointing up  Spain Bailout Caution Grows as Business Lobby Backs Rajoy

Spain’s biggest business lobby is getting as cautious as Mariano Rajoy’s government on a possible bailout request because of concern how stringent conditions might be to trigger European Central Bank bond-buying.

A rescue “could impose a criminal pace of reduction in public spending,” Alberto Nadal, vice secretary-general of CEOE, Spain’s main business group, said in an interview.

The group’s newfound skepticism contrasts with their earlier support for a request following the ECB’s unveiling of its bond-buying program in September after President Mario Draghi committed to do “what it takes” to save the euro. Rajoy has refrained from seeking such aid and pressure on him to do so has eased, with the yield on Spain’s 10-year bonds now 214 basis points lower than in July.

Encouraged by the impact of the ECB’s announcement on borrowing costs, business leaders share Rajoy’s optimism that the five-year slump is reaching a low and that measures to overhaul the economy will pave the way to a recovery next year, with already resilient exports and declining labor costs helping resorb Spain’s current account deficit.

…until yields rise again


Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the
imagedynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs.

Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced
consumption. Those approaching their seventh decade need fewer cars and new homes. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years. (Bill Gross, Pimco)

The Collapse Of Microsoft’s Monopoly

(…) This chart comes from Goldman Sachs, and it shows Microsoft losing its market dominance of computing devices as smartphones and tablets have come into the market. (…)

Microsoft’s inability to make a smartphone people really love could be a deadly mistake. As people became comfortable with the iPhone, they became open to the idea of the iPad. As the iPad takes off, it is slowing PC sales. As people become comfortable with the iPad, they’re going to be more inclined to buy a Mac to stay in Apple’s ecosystem.


Here’s my humble contribution: two shots taken at the Aventura Mall in Florida within 5 minutes. Guess which is which.

image image


To Quote Thomas Jefferson, ‘I Never Actually Said That’

(…) Mr. Langworth says Chris Matthews, a fellow Churchill Centre board member and host of MSNBC’s “Hardball,” has misquoted Churchill. Last year Mr. Matthews made a promotional ad for MSNBC in which he recounted Churchill being told during World War II that he should cut government funding for the arts.

“Then what are we fighting for?” Churchill replied, according to Mr. Matthews.

Mr. Langworth says Churchill never said it, though many over the years have used what Mr. Langworth calls “this famous ‘red herring’ nonquote.”

Mr. Matthews, a self-described “Churchill nut,” insists he hasn’t misquoted his hero, but adds, “How can you prove someone never said something?” Confused smile


NEW$ & VIEW$ (30 NOVEMBER 2012)


The FT’s headline: US talks to avert fiscal cliff sour  Republicans reject ‘unbalanced and unreasonable’ offer

From the WSJ and the NYT:

“No substantive progress has been made in the talks between the White House and the House over the last two weeks,” House Speaker John Boehner(R., Ohio) said after meeting with Treasury Secretary Timothy Geithner Thursday and speaking to Mr. Obama by phone Wednesday night. “The White House has to get serious.”

“Right now, the only thing preventing us from reaching a deal that averts the fiscal cliff and avoids a tax hike on 98% of Americans is the refusal of congressional Republicans to ask the very wealthiest individuals to pay higher tax rates,” said White House spokeswoman Amy Brundage.

“The country doesn’t need a victory lap, it needs leadership,” said Mr. Boehner.

“They took a step backward, moving away from consensus and significantly closer to the cliff,” said Senator Mitch McConnell of Kentucky, the Republican leader.

“This was almost insulting.”

Peggy Noonan stirs the pot:

Noonan: The Drawn-Out Crisis—It’s the Obama Way

The president seems to prefer frustration to good-faith negotiation.

(…) You watch and wonder: Why does it always have to be cliffs with this president? Why is it always a high-stakes battle? Why doesn’t he shrewdly re-enact Ronald Reagan, meeting, arguing and negotiating in good faith with Speaker Tip O’Neill, who respected very little of what the president stood for and yet, at the end of the day and with the country in mind, could shake hands and get it done? Why is there never a sense with Mr. Obama that he understands the other guys’ real position?

It’s not as if Mr. Boehner and the Republicans wouldn’t deal. They’ve been weakened and they know it. (…) Mr. Obama not only was re-elected, it wasn’t that close, it was a clean win. If the president was clear about anything throughout the campaign, it was that he wanted to raise taxes on those he calls the rich. So you might say that a majority of the American people just endorsed that move.

No one would know this better than Mr. Boehner, who has risen to where he is in part because he’s good at seeing the lay of the land and admitting what’s there.

Where to from here? No clue! Confused smile

U.S. Small-Business Owners Pessimistic Post-Election

U.S. small-business owners are pessimistic post-election, with the Wells Fargo/Gallup Small Business Index plunging to -11 in November from 17 in July. This is the most pessimistic that owners have been about their operating environment since July 2010, when the index stood at -28.

Wells Fargo/Gallup Small Business Index

Storm Weighed on Retailers

A burst of end-of-the-month holiday shopping couldn’t overcome the damage that superstorm Sandy did to U.S. retailers in November.

imageThe 17 retailers that report same-store sales, or sales at stores open more than a year, posted a 1.6% rise in same-store sales, missing the 3.3% growth expected, according to analysts tracked by Thomson Reuters. The figure doesn’t include drug stores. The results are through Saturday, which is when retailers closed their books for November and compare with a 3.5% gain a year ago.

Third-Quarter GDP Growth Revised Upward to 2.7%

Third-quarter growth in the U.S. gross domestic product was revised higher to 2.7%, compared with an initial reading of a 2% gain.

But the factors that led to the upward revision—growing inventories, strong federal spending and robust exports—may not persist. Add in other headwinds, and the economy could struggle to grow in the fourth quarter.

The increase in private inventories was the primary driver of the upward revision to third-quarter GDP. The new data show the change in private inventories contributed 0.77 of a percentage point to growth. Initially, the government estimated the change was a 0.1 percentage-point drag.

Consumer spending increased by 1.4% during the third quarter. However, that was a downward revision from the previous reading.

Click to View

(Chart from Doug Short)

Smile  Housing Demand Rose in October

The housing market saw demand hit its highest level in 2½ years in October, according to an index released Thursday that tracks the number of buyers who signed contracts to purchase previously owned homes.

The National Association of Realtors said Thursday that its pending home sales index increased by 5.2% in October from a month earlier, to a seasonally adjusted reading of 104.8. That was up by 13.2% from one year ago and marked the 18th straight year-over-year gain. (Chart from Haver Analytics)

New Home Sales down last month

Seasonally adjusted new home sales in October (contract signings) fell 0.3% month-over-month to 368,000 units annualized – breaking a recent trend of gradually improving housing data points. Importantly, the September sales numbers were also revised down 5% from prior estimates (from 389,000 to 369,000). Overall, this new data suggests that the seasonal pace of new home sales has not changed (up or down) in any meaningful way since May. As a result, the y/y growth rate in national sales has decelerated to +17% from the 20-25% range, as monthly comparisons are becoming more difficult. Unfortunately, we expect this trend in decelerating comps to continue in the near term, as several “speed bumps” in the housing recovery emerge early next year, including 1) a bevy of new Dodd-Frank regulatory changes that will impact the mortgage industry, 2) growing skilled labor shortages in specific trades, and 3) a dwindling supply of developed homesites in sellable locations. (Raymond James)

Lightning  Euro-Zone Data Show Weaker Picture

The euro zone’s annual inflation rate fell to its lowest in almost two years in November, while a rise in joblessness in the countries at the heart of the region’s fiscal crisis pushed unemployment to record levels.

Eurostat, the European Union’s statistics agency, said the annual rate of consumer price growth in the 17 nations that use the euro fell to 2.2% in November from 2.5% in October.

In a separate release, the agency said unemployment in the euro zone rose to 11.7% of the work-eligible population in October—the highest rate since records began in 1995—from 11.6% in September. Some 173,000 people lost their jobs in October, the biggest monthly rise since June.

Germany‘s Federal Statistics office said on Friday that retail sales fell sharply in October, ahead of the vital Christmas trading season, which traditionally starts in November. Retail sales suffered their largest monthly decline in almost four years as sales dropped 2.8% on the month in inflation-adjusted terms, more than reversing September’s 0.5% gain and far exceeding economists’ forecasts for a modest drop of 0.4%. In year-to-year terms, German retail sales fell 0.8%. Extremely cold weather in October may have deterred shoppers.

Greece‘s statistics agency Friday reported a 12.2% year-to-year fall in retail sales in September, steepening from an 8.8% drop in August. Portuguese retail sales fell 6.9% in October from a year earlier, again deeper than the prior month’s 5.9% drop, Statistics Portugal said.

Now, these are official stats for October. Here’s a preview for November:


Markit’s Eurozone Retail PMI rose slightly in November to 45.8, from October’s 45.3. The latest figure signalled a sharp fall in retail sales compared with one month previously, and the average for the fourth quarter so far (45.5) is the second-lowest since Q1 2009. Moreover, the trend for 2012 so far (45.6) is the lowest annual average of any year since the survey started in 2004. The previous record low was in 2008 (46.1).


By country, Germany registered another broadly flat trend in monthly retail sales revenues. The German Retail PMI has been above the neutral level 23 times in the past 26 months, but has averaged 50.0 in the second half of 2012 so far.

imageIn stark contrast, Italian retail sales declined for the twenty-first
successive month. The pace of contraction was rapid, and accelerated to the fastest in seven months. Meanwhile, French retailers posted the slowest fall in sales since June, and only a modest overall decline. (…)

The value of new purchases made by Eurozone retailers fell for the sixteenth month running in November. The rate of decline was sharp, and broadly in line with the average seen over the current sequence. Consequently, stocks of goods for resale at retailers declined at the fastest pace since August 2010.

Glimmer of hope in Europe’s debt tale

Immigration to Germany jumps as neighbours struggle

Immigration to Germany jumped 15 per cent in the first half of the year to about half a million people with most of them coming from other EU countries. Immigration to Germany from Spain, Greece and other crisis-hit southern states grew at an even quicker pace.

Pointing up  Current account balancesBut amid all the gloom, and beneath the fierce impact of austerity, the countries worst affected by the crisis have also been laying the groundwork for their economic renaissance after the crisis, according to a growing consensus among economists that is reflected in two studies published this week.

A study by Allianz, the insurer, and another conducted jointly by Berenberg Bank and the Lisbon Council, a think tank, concluded that these and other structural reforms were beginning to bear fruit. (…)

Both studies rank eurozone countries against each other using several indicators to measure how well they are adjusting and both give high marks to Greece, Spain and Portugal for making significant progress in structural adjustment, with Italy lagging behind in both cases. Ireland scores highly on its adjustment progress in the Berenberg report and less well in Allianz’s assessment.

“By and large, we find a major rebalancing within the eurozone,” the Berenberg study says. “Almost all countries with serious fundamental problems are changing their ways rapidly.” (…)



Surprise Gain in Japan Production

Japan’s industrial production posted a surprise 1.8% gain in October, but the growth was narrowly concentrated in the electronics sector, suggesting a broader recovery may not be at hand yet.

Japan unveils $11bn stimulus package
Noda government acts ahead of December 16 election

On Friday the cabinet announced that it would tap reserve funds to spend Y880bn ($10.7bn) on a variety of measures, including rebuilding areas hit by the March 2011 earthquake, employment support and aid to cash-strapped small businesses. The plan is roughly double the size of a package announced in late October, which was also drawn mostly from reserves and aimed at reconstruction efforts.

Indian growth slows to 5.3%
Faltering economy adds to government’s problems

In estimates released on Friday, the Central Statistics Office said year-on-year growth in manufacturing was a meager 0.8 per cent, while agriculture expanded just 1.2 per cent. The most buoyant sector was finance, insurance, real estate and business services at 9.4 per cent, while construction rose 6.7 per cent.

The Indian economy has now expanded at less than 6 per cent for three successive quarters, a sustained slowdown from earlier growth rates of more than 8 per cent that will hamper efforts by the Congress-led coalition to rein in the budget deficit and create jobs.

The IMF predicts growth of just 4.9 per cent for this year, while economists at CLSA are forecasting growth of 5.5 per cent for fiscal 2013, ending in March, rising to 6-6.5 per cent for 2014.

Brazil GDP Grows at Half Forecasted Pace as Investment Dives

Gross domestic product grew 0.6 percent in the third quarter, the national statistics agency said today in Rio de Janeiro.

Growth on an annualized basis was 2.4 percent in the third quarter, below a government forecast this month of 4.7 percent and the worst performance in the BRIC group of major emerging markets that includes Russia, India and China.

Even though quarterly growth was the fastest since the first quarter of 2011, investment fell 2 percent in the July- September period to 18.7 percent of GDP. That’s the steepest decline in five quarters. Consumer spending rose 0.9 percent, while the services sector was flat. Agricultural activity led all industries, expanding 2.5 percent.

At the current level of investment, the government will have trouble reaching its goal of delivering 4 percent growth next year.

Polish Growth Slows More Than Forecast on Weak Demand

Gross domestic product climbed 1.4 percent from a year earlier, the slowest pace since the second quarter of 2009 and compared with a 2.3 percent increase in the previous three months, the Warsaw-based Central Statistics Office said today.

Domestic demand dropped 0.7 percent in the third quarter after declining 0.4 percent in the second quarter, according to the report. Individual consumption rose 0.1 percent, the lowest rate since 2003, while fixed investments declined 1.5 percent, the office said.


Via Mauldin Economics:

(…) A Pew survey shows the high levels of skepticism and hostility toward
capitalism on the part of the emerging Democratic majority. Insofar as the liberal coalition succeeds in electing senators and representatives who share those views, the business community will have increasing difficulty in winning approval of its deregulated market and free trade agenda.
As Obama negotiates with Republican House and Senate leaders to prevent a dive over the “fiscal cliff,” he will be under strong pressure from his reinvigorated liberal supporters to take a tough stand in support of tax hikes on the well-to-do and to more firmly limit spending cuts.


This will impact the economy in coming years and, potentially, the Democrats longer term:

Recession Big Factor as Birthrate Falls  A steep decline in births among immigrant women hard hit by the recent recession is the driving force behind the record low U.S. birthrate, according to the Pew Research Center.



Immigration has propelled demographic changes in the U.S. for several decades, so any sustained decline in birthrates among immigrants could affect the pace of growth of the minority population. The U.S. population is poised to reach “majority-minority” status, when less than half of the population is white, around 2040, demographers say.


NEW$ & VIEW$ (29 NOVEMBER 2012)


Obama Flexible on Top Tax Rates

Obama signaled he wouldn’t insist tax rates on upper-income Americans rise to Clinton-era peaks as part of a deficit-reduction deal.

President Barack Obama signaled he wouldn’t insist tax rates on upper-income Americans rise to Clinton-era peaks as part of a deficit-reduction deal, showing new flexibility as he tries to accelerate talks with congressional Republicans. (…)

A full return to Clinton-era rates would have households paying a 36% rate on income earned between $250,000 and $388,000, compared with 33% today, and 39.6% rate on income above that level, up from 35%.

The White House’s flexibility, first described by Democrat Erskine Bowles after meetings with Mr. Obama and others, and confirmed by administration officials, could envision tax rates increase from their current levels but less than Clinton-era levels.

The trade-off, Mr. Bowles said, would be limits or curbs in tax deductions, which GOP leaders have expressed openness to.


Sales of New U.S. Homes Fell 0.3% in October

Sales dropped 0.3 percent to a 368,000 annual pace following a 369,000 rate in September that was 20,000 lower than initially reported.

While the Commerce Department said superstorm Sandy had “minimal” impact on sales last month, the breakdown did show differences among regions. Purchases surged 62.2 percent in the Midwest, to the highest level in almost three years, and jumped 8.8 percent in the West to the fastest pace since July 2008.

Home purchases dropped 32.3 percent in the Northeast, the area most affected by the storm.

Foreclosure Wave Averted as Doomsayers Defied: Mortgages

(…) When banks pulled back on foreclosures two years ago following a government investigation into allegations of faulty practices, market researchers, academics and Wall Street analysts said that a surge of delinquent homes would deluge the U.S. market once lenders resolved the claims and worked through backlog, driving down prices for years to come. (…)

In fact, the flood failed to materialize, even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators in February. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the housing market helped boost consumer confidence and the economy. (…)

Banks have stepped up foreclosure alternatives to avoid legal challenges. They’re forgiving debt, modifying payment plans and approving short sales that allow homeowners to sell for less than they owe.

The federal government, (…) is also helping to stem the crisis. Expanded loan-modification programs have gained traction, and the Federal Reserve has kept bank interest rates near zero. Investors including Blackstone Group LP (BX) and Colony Capital LLC are purchasing thousands of foreclosed homes in bulk before they even hit the market, further limiting new supply. (…)

The so-called shadow inventory of pending foreclosures, which may be larger than the visible supply of previously owned homes for sale, is shrinking as new defaults decline and banks work through their backlog of bad loans. Home loans that were more than 90 days late or in the foreclosure process, a proxy for the shadow inventory, fell to 7.03 percent of properties with a mortgage in the third quarter, the lowest share since 2008, the Mortgage Bankers Association said two weeks ago. (…)

The shadow inventory — which also includes properties owned by banks but not for sale — fell from an estimated 8.8 million homes in 2010 to 5.36 million as of this month, a faster decline than expected as fewer loan modifications re-defaulted, according to Tirupattur. (…)

More households, more demand

One reason that U.S. housing starts have flared higher is that household formation has rebounded to about a 1 mln/year pace (it stalled completely during the financial crisis). Long-term formation tends to be
somewhere in the 1-1.5 mln/year range, but given the extended period of overbuilding during the 2000s, homebuilding might settle in at the low end of that range—not unlike what we saw in Canada during the 1990s. Still, that leaves healthy upside from current levels. (BMO Capital)




Auto Car Makers Say No Looking Back

The U.S. auto industry is expected to post November sales at another four-year high and project year-over-year gains continuing into 2013.

Industry executives interviewed ahead of this week’s Los Angeles Auto Show said November results, due out next week, should continue the year’s big gains. Some analysts estimate November sales could hit an annualized selling pace of 15.2 million cars and light trucks—the strongest single monthly showing since 2008. (…)

The average car on the road in the U.S. is now a record 11 years old, industry executives say and about 20% are 16 years old. When customers wheel their rattletraps into showrooms, they’re also finding credit is relatively cheap and available.

Car Demand Slower Outside the U.S.

On Wednesday, forecasting firm LMC Automotive cuts its 2013 outlook for global automotive sales by 1.8 million vehicles. It now projects a 2.6% increase over 2012 to 82.9 million cars and light trucks, down from a prior forecast of 84.7 million.

Its estimate for 2012 is unchanged at a 5.3% gain over 2011, to 80.8 million vehicles. (…)

In Germany, the new car market is expected to shrink by about 6.5% to 2.9 million vehicles in 2013 from 3.1`million this year, the German Federation for Motor Trades and Repairs projected last week.

Two charts from RBC Capital show the long term trends.



Japan’s Retail Sales Fall in October as Car Sales Drop  Japan’s retail sales fell in October by the most in 11 months as consumers purchased fewer cars and televisions, adding pressure on the government to stimulate an economy that may be entering a recession.

Sales fell 1.2 percent from a year earlier, the Trade Ministry said in Tokyo today, after a 0.4 percent advance in September. (…)

Japanese wages dropped for seven of the 12 months through September. Large companies cut winter bonuses by 2.7 percent from last year to 781,396 yen, a business lobby group said earlier this month.


German Unemployment Rose for an Eighth Month in November

The number of people without a job increased a seasonally adjusted 5,000 to 2.94 million, the Federal Labor Agency in Nuremberg said today.  The adjusted jobless rate held at 6.9 percent. (…)

Storm cloud Schaeffler AG, the German roller-bearing maker that’s the biggest investor in car-parts manufacturer Continental AG, this month lowered its 2012 sales forecast because of weaker demand in Europe and Asia.

Storm cloud Hornbach Holding AG, a home-improvement retailer, cut its annual sales and earnings forecasts on Nov. 27, citing weakening consumer confidence across Europe.

Swedish Economic Growth Slows as Euro Crisis Hurts Sales

Gross domestic product expanded a seasonally adjusted 0.5 percent, compared with growth of 0.7 percent the prior quarter, Stockholm-based Statistics Sweden said today. Annual growth slowed to 0.7 percent from 1.3 percent, the agency said. (…)

Sweden’s central bank has signaled it may cut interest rates again next month, after three reductions since last year, as a recession in the euro area hurts exporters in the largest Nordic economy. (…)

Exports fell an annual 2.3 percent in the period, while consumer spending rose 1.3 percent. Investments slid 0.4 percent from a year earlier. A separate report from the agency today showed that retail sales declined 1.7 percent in October, falling for the second month out of the past three. (…)

Manufacturing confidence in the $500 billion economy fell to its lowest level in more than three years this month, while consumer sentiment slid to the lowest in a year.

“Industry forecasts further staff cuts and unchanged output volume for the next few months,” Sweden’s National Institute of Economic Research said on Nov. 27. “Consumer confidence in the Swedish economy and labor market developments are considerably more negative than normal.”

Money  ECB Data Show Healing Banks

The pressure on banks appears to be falling, but the broader economy has shown little improvement.

Deposits in the banking system rose by €105 billion ($135.91 billion) in October, driving a surge in headline measures of the money supply to their highest level in more than a year. That suggests that the financial system is slowly healing from the disruption caused as markets bet on a breakup of the euro zone earlier this year, and that banks are again getting funding from traditional sources.

M3, the ECB’s preferred measure of the broad money supply, rose 3.9% on the year, its fastest rate since early 2009, while the narrower M1 aggregate, which has been a more accurate reflection of economic output over recent years, rose 6.2%, its fastest since September 2011.

Most of the increase in deposits came in “core” euro-zone countries such as Germany, France, Austria and the Netherlands, but they also rose in Ireland and in Greece, where they hit their highest level since May.

Lending to the private sector continued to fall, with an €8 billion drop in loans to companies more than offsetting a €4 billion increase in loans to households. Overall, private credit was down 0.7% on the year, a modest improvement from a 0.9% drop in the year through November.


China’s Stocks Drop as Valuations Reach Low; Brokerages Plunge  Chinese stocks declined for a fourth day, dragging valuations on the benchmark index to their lowest level on record, as brokerages tumbled amid speculation they may cut trading fees.

(…) Regulatory data showed the number of stock-trading accounts that had transactions last week was the lowest since at least January 2008, excluding weeks that had holidays. The value of shares traded on the Shanghai stock exchange slumped to 33.1 billion yuan ($5.3 billion) on Nov. 26, the least since November 2008 and about a third of the 102 billion yuan daily average over the past five years.

Shares on the Shanghai Composite trade at an average 10.8 times reported earnings, the lowest level since at least 1997, according to data compiled by Bloomberg.

Interesting charts from RBC Capital Markets:

image image



President Obama met privately with some of the country’s most important corporate titans on Wednesday to bury the hatchet from a rough campaign season and talk through the fiscal crisis confronting Washington.

Mr. Obama conceded that there had been friction between the White House and big business in the past, but he expressed hope that such rancor was now behind them, according to one chief executive who asked not to be named describing a private conversation.

“He said, ‘I really want you guys to succeed, I don’t have to campaign anymore,’ ” the executive said. (NYT)


NEW$ & VIEW$ (28 NOVEMBER 2012)

THE “GRAND BARGAIN”: Back to the future

Democrats Harden Budget Positions

The White House and congressional Democrats hardened their budget positions in talks on a fiscal-cliff deal.

White House officials suggested in a closed-door meeting with supporters that talks wouldn’t heat up for about a week. In the meeting, President Barack Obama said he considered the fiscal-cliff debate a defining moment of his presidency.

The next four weeks could define the next four years,” Mr. Obama told a small group of Democrats after joining their meeting in the Roosevelt Room with his top aides, according to a participant. (…)

Complicating the already complex budget talks, Mr. Durbin said the year-end budget agreement will have to include an increase in the country’s statutory borrowing limit to avoid another fight when the federal debt ceiling is reached, likely early next year. “The president isn’t going to sign off on an agreement that doesn’t provide some certainty on the debt ceiling,” he said.

A GOP House leadership aide said Republicans would insist on greater concessions from Democrats, in addition to any fiscal-cliff agreement, to include the debt ceiling in any deal.

Déjà vue, and not funny at all!

Peter Orszag: Vague Plans to Limit Tax Breaks Will Soon Die

As negotiations over the U.S. fiscal cliff get down to details, they will become more arduous — something that financial markets seem to be ignoring. The superficial appeal of proposals to limit tax expenditures, for example, will fade as the details become clearer. (…)

On their face, proposals to raise revenue by limiting tax breaks enjoy unusual bipartisan support — at least when they are described generically as “broadening the tax base and eliminating loopholes.” Enacting legislation, though, requires much more than such platitudes, and therein lies the political difficulty. (…)


Housing Market Propels Economy

The U.S. housing market, which plunged the economy into recession five years ago and was a persistent drag on the recovery, is now a key economic driver at a time when other sectors are slowing. (…)

imageMacroeconomic Advisers projects the economy will grow at a 1.4% annual rate in the fourth quarter, with housing contributing 0.4 percentage point. IHS Global Insight is projecting a 1% growth rate, with housing contributing 0.53 of a percentage point—the largest contribution since 2005. (…)

The housing turnaround has been a boon for real-estate brokers and home builders, some of whom have seen their stock prices more than double this year. Retailers have seen a new stream of customers ready to decorate, furnish and upgrade their homes while investors are spending at hardware stores to renovate previously foreclosed homes. Banks, meantime, have posted record mortgage profits amid high refinance volumes and stronger demand for new loans.

Beyond those direct benefits are a number of indirect effects. Rising home values make homeowners feel better about their finances—making them more likely to spend and, with interest rates low, more comfortable about taking on debt. An index of confidence released Tuesday by the Conference Board rose to 73.7 in November, the highest level since February 2008.

US housing market still in recovery mode

imageThe S&P/Case-Shiller house price index showed the largest annual increase in US property prices since July 2010, up 3.0% on a year ago in September, compared with a 1.9% increase in August. House prices have gained 4.7% since hitting a low in January. (Markit)

Higher prices beget higher demand 

Buried in the Conference Board’s November consumer confidence report was a surge in plans to buy a home in the next 6 months, to an elevated 6.9% of respondents (that’s the highest since August 2007). Potential buyers have been presented with the best affordability in decades for some time, but maybe now they’re starting to sense that home prices are in fact rising again in many cities. In other words, when affordability is high but prices are still falling, what’s the rush? But, when affordability is high and prices have begun to rise, then that’s a different story… (BMO Capital)



Falling Mortgage Balances Offset Rising Student, Auto, Credit-Card Debt

Americans cut their debt further in the summer, with falling mortgage balances more than offsetting increases in other types of borrowing, new data show.

Americans have reduced their debts by more than $2 trillion since household debt peaked in summer 2008, a process called deleveraging.

Deleveraging delivered!


(Chart from FBN Financial)


Smile  Durable goods orders were unchanged in October. They had surged a revised 9.2% in September. Ex transportation, orders rose a strong 1.5% after a 1.7% gain in September.

However, in the latest three months, orders have dropped 5.3% on the prior three month period, the steepest three-month fall since May 2009. However, if volatile transportation goods are excluded, which has a closer correlation with industrial production, orders rose 1.5% against expectations of a 0.5% drop, helping ease the three-month rate of decline up from -3.4% to -2.0%. (Markit)

Unfilled orders rose a modest 0.2%, after a 0.1% gain in September and a 1.7% drop in August. (table below from Haver Analytics)


The good news is from Non-defense Cap. Goods ex-Aircrafts which rose 1.7% after a 0.4% decline in September. Doug Short explains:

Last month Business Insider posted a commentary with the attention-grabbing headline: DAVID ROSENBERG: Here’s Your Big Red Flag That We Could Be Heading For Recession. Rosenberg has frequently included CAPEX among his various recession indicators.

The CAPEX referenced by Rosenberg is the Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft data series, which is conveniently available in the FRED database. The data goes back to February 1992, so we only have two recessions during this timeframe to evaluate CAPEX as a recession indicator. Here is a look at the monthly data.

Click to View


The chart below is the YoY of a 3-month moving average of the complete series. This is the data manipulation used by Rosenberg to support his recession alert.

Click to View

Indeed, the CAPEX 3-month MA has been trending down since March of this year. In fact, the month-over-month data has been trending downward since its interim high on December 2011. I would point out, however, that the latest 3-MA month-over-month change is tiny: -6.6 percent in September slipping to -6.7% in October.

Ultimately my sense is that this data series manipulation (the YoY 3-month MA) has an insufficient track record to be considered a definitive recession indicator.



Smile  Thailand Holds Policy Rate as Economic Data Signal Recovery

Thai manufacturing and exports increased in October, adding to signs from the U.S. and China of a recovery in the global economy. While the central bank last month lowered its growth forecast for 2013, it said today risks to expansion have subsided, and that it doesn’t see much need for more rate cuts. (…)

Thai GDP increased 3 percent in the third quarter from a year earlier, after expanding a revised 4.4 percent in the previous quarter, the government said last week. Still, manufacturing jumped 36.1 percent in October from a year earlier, when the floods shuttered thousands of factories, while exports rose 15.6 percent, the fastest pace in more than a year. (…)

Smile  Philippines 7.1% Growth Surprise May Herald End of Rate Cuts

Gross domestic product increased 7.1 percent in the three months through September from a year earlier, compared with a 6 percent gain in the previous quarter, the National Statistical Coordination Board said in Manila today. (…)

Philippine exports rose 22.8 percent in September from a year earlier, as data signaling a recovery in the U.S. and China boosted the outlook for Asian goods.

The Philippine economy expanded 6.5 percent in the January- September period, today’s report showed. Public construction in the third quarter climbed 23.7 percent from a year earlier, while government spending gained 12 percent and household spending advanced 6.2 percent.

RBC Capital Markets adds:

The OECD’s LEI has rounded the corner and it is important to note that the index usually turns ~6 months ahead of global GDP growth.


Pointing up Also, ISI’s global economic diffusion index, which measure all eco indicators in 38 countries, has clearly hooked up in recent weeks, suggesting the global economy is starting to improve.



Spain’s Bankia says it expects to post a loss of 19 billion euros ($24.6 billion) in 2012, and announces plans to cut 6,000 jobs.

Europeans Scrimp on Gifts

Shoppers across Europe are pinching pennies as the debt crisis enters its third year, forcing retailers to cut prices and push promotions.

imageBoth the Italian national consumer association and Portugal’s commerce-and-services confederation expect Christmas sales to drop about 20% from last year in their respective countries. (…)

According to Deloitte, the average German family plans to spend around €485 for Christmas, compared with €639 for the average French family. (…) Deloitte predicts Irish households will spend €966 on average this year, the most of any country in the euro zone.

Schaeuble Signals Greece May Need More Help as Bild Slams Deal

German Finance Minister Wolfgang Schaeuble signaled that Greece may need additional help as the country’s most-read newspaper slammed a rescue accord as a “never-ending story” financed by German taxpayers.

Euro-area governments may provide additional funding through the European Union structural fund and further interest- payment reduction as long as Greece meets all its obligations under the agreement, Schaeuble wrote in a letter to German lawmakers obtained by Bloomberg News. (…)

They may confront increased public resistance as Bild- Zeitung, a tabloid that’s called in the past for Greece’s exit from the currency union, pilloried yesterday’s late-night agreement in Brussels to ease terms on emergency aid for Greece.

“The Greek patient is beyond help,” Bild said in a commentary, adding that the ever-rising costs were falling on German taxpayers. “One hardly needs to imagine the worst scenario: the patient dies, the paramedic goes bust.”


With 489 reports in, S&P calculates that Q3 earnings came in at $24.37, down 3.6% Y/Y. However, Factset warns that

Of the 103 companies that have issued EPS guidance for the fourth quarter, 75 have issued projections below the mean EPS estimate and 28 have issued projections above the mean EPS estimate. Thus, 73% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the long-term average (61%), but it is below the percentage recorded in the previous quarter at this same point in time (80%).


Analysts Cutting Estimates for Q4 & 1st Half of 2013
Since the end of the third quarter (September 30), analysts have reduced earnings growth expectations for Q4 2012 (to 3.9% from 9.3%), Q1 2013 (to 3.1% from 5.3%), and Q2 2013 (to 7.7% from 9.2%).

Despite the reductions to earnings estimates for Q4 2012, analysts are still calling for an increase in earnings growth (3.9%) relative to Q3 2012 (-0.9%). In addition, analysts are calling for slightly higher revenue growth rates in Q4 2012 (2.5%), Q1 2013 (0.9%) and Q2 2013 (3.4%) relative to the current growth rate for Q3 2012 (-1.2%)


Birth rule could be relaxed  Changes to the family planning policy are being considered, and action plans have been drawn up, amid a graying society and other challenges.

(…) According to Zhang, one of the key areas of possible change will concern the criteria for urban couples having a second child. At present, only parents who are themselves an only child are allowed to have a second child. Under the proposed changes, couples will be able to have a second child even if one of them is not an only child. (…)

The national fertility rate (the average number of children a woman has during her lifetime) stands at about 1.7, far below the replacement level of 2.1.

“Even with the policy further relaxing, there won’t be any sharp rise in the population,” Zhang said, adding that an ideal fertility rate should be at least 1.8.

President Hu Jintao said in the report of the 18th National Congress of the Communist Party of China this month that “we must adhere to the basic state policy of family planning, improve the health of newborns, steadily improve the population policy and promote long-term and balanced population growth”.

Observers said it was the first time that “maintaining low reproduction levels” had been omitted, representing the central government’s wish to ease the policy.

There are things that never change.  I have always thought that airlines and steel were two sectors that investors should simply avoid.

Problem: There’s Too Much Steel

This year, steel mills around the world have a production capacity of 1.8 billion tons but will take orders for only 1.5 billion tons. And instead of consolidating, the industry is building still more capacity.

By 2016, an estimated 100 new mills, with total estimated supply capacity of 350 million tons, are expected to come on stream, according to industry executives and consultants. Companies in Vietnam, Argentina, Ecuador, Peru and Bolivia, all backed in some way by their governments, are building or planning new mills. (…)

Getting a definite count on the number of steel mills in the world and actual production capacity is difficult in large part, say industry officials and analysts, because there are hundreds of small, uncounted mills in China, which accounts for 46% of world steel output. Estimates for the number of steel mills in China range from 600 to 800 mills. (…)

The world’s top five steel companies control only 18.2% of global steel supply. (…)

Meanwhile, governments continue to subsidize mills, despite weakening demand, to maintain jobs and sustain local economies.

Wolfgang Eder, president of the European Steel Association, has called for European politicians to organize a coordinated scheme of capacity-cutting. Confused smile

“The steel industry could fall back into the mistake of the 1980s, in which it would demand subsidies and keep obsolete plants running for social and political reasons,” he said in a recent interview.

France Escalates Steel Fight

A dispute pitting France against the world’s largest steelmaker escalated Tuesday after Socialist President François Hollande threatened to nationalize a plant that owner ArcelorMittal MT -2.32% wants to partially close, fueling concerns about the country’s treatment of foreign investors.


NEW$ & VIEW$ (4 OCTOBER 2012)


Worldwide PMI surveys showed some signs of picking up in September, though remains far weaker than seen earlier in the year. The JPMorgan Global PMI, produced by Markit from national PMI surveys, rose from 50.9 in August to 52.5, but suggests that the global economy is expanding at a mere 1.5-2.0% annual pace.

Growth of global services hit a six-month high, though the improvement was largely driven by a jump in the volatile ISM non-manufacturing index for the US.


High five  Jump in New Orders in Service Sector Overstated

That was a big surprise in yesterday’s Non-Manufacturing ISM.

(…) The new orders subindex climbed to 57.7 last month, compared to 53.7 in August. Reading above 50 indicate expansion. A closer look reveals the increase was actually driven mainly by an exceedingly high percentage of respondents — 65% — who said new orders were flat, combined with a much lower number — 11% — who said orders fell.

Only 24% said September orders were higher, better than 22% in August, but notably below the 28.6% average in 2012′s first eight months.

At 65%, the percentage who reported flat orders was up from 60% in August and 55% in July, and also the highest percentage in monthly data going back to July 1997.

Fingers crossed  Wealth Effect: David Rosenberg did the math:

the correlation between wealth and spending is only 52% since 1952. The correlation between spending and after-tax personal incomes is more like 75%.

Smile  Hey! Here’s a wealth effect:

Oil Tumbles 4.1% on China Fears

(…) Light, sweet crude for November delivery settled $3.75 lower at $88.14 a barrel on the New York Mercantile Exchange, a two-month low. Europe’s benchmark Brent crude fell $3.40, or 3%, to $108.17 a barrel. (…)

Wednesday’s drop came as weekly data from the U.S. Department of Energy showed that domestic oil production rose to 6.52 million barrels a day, the highest level since December 1996, and 12.4% higher than the output last year. U.S. gasoline demand fell 3.6% from last year to a 10-year low for this time of year. (…)


Not quite yet in California:

California Gas Stations Begin to Shut on Record-High Spot Prices

Gasoline station owners in the Los Angeles area including Costco Wholesale Corp. are beginning to shut pumps because of supply shortages that have driven wholesale fuel prices to record highs. (…)

Spot, or wholesale, gasoline in Los Angeles has surged 70 cents this week to a premium of $1.15 a gallon versus gasoline futures traded on the New York Mercantile Exchange, data compiled by Bloomberg show. That’s the highest level for the fuel since at least November 2007, when Bloomberg began publishing prices there. On an outright basis, the fuel jumped to $3.9495 a gallon.

Gasoline at the pump cost $4.232 a gallon in California on Oct. 2, according to, 45 cents more than the national average of $3.782. In Los Angeles the price was $4.259. Gasoline futures for the front month on the Nymex sank to the lowest level in 10 weeks yesterday, settling at $2.7995 a gallon, down from $3.342 on Sept. 28. Retail price movements tend to lag behind those of futures. (…)

Clock  Van der Valk called the price surge a “a short-term problem.” Wholesale costs should start falling as Exxon’s refinery returns to normal operations and other plants finish maintenance. (…)

Sad smile  Un-wealth effect:

World Food Prices Jump to Six-Month High as Dairy Costs Rise

(…) An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.

Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. (…)

The FAO dairy-price index jumped 6.9 percent to 187.7 points from 175.6 in August, the biggest advance since April 2010, the data showed. The index for meat prices rose 2.1 percent to 175, climbing for a second month.

The world cereal-price index rose to 262.6 points from 259.9 points the previous month to reach the highest level since April last year. The index for grain prices in July surged 17 percent, the biggest jump since February 2008. (…)

Thumbs up Thumbs down Wealth effect?

(FT): Romney dominates presidential debate
Republican challenger reignites campaign

(Bloomberg): Romney Puts Race Against Obama Back on Track in Debate

(Business Insider) Mitt Romney Absolutely Destroyed Obama In Last Night’s Presidential Debate

ISI: Romney Gets a Win.

Storm cloud  Retail Hiring Weakens in September, Raising Concerns About Holiday Season  Retail hiring activity continued to weaken in September, reflecting broader labor-market troubles, in what could be a worrisome development for the upcoming holiday season.

(…) retail-level hiring declined in September to a seasonally adjusted 31,776 new hires, the fourth-straight monthly decline. (…)

Smile  U.S. Vehicle Sales Reach Recovery High

Unit sales of light motor vehicles during September gained another 3.0% m/m (13.9% y/y) to 14.96M (SAAR) according to the Autodata Corporation. The gain raised sales to their highest since March 2008.

Auto sales increased 4.2% m/m (24.1% y/y) to 7.69M. Domestic car sales nudged up 0.2% to 5.32M (27.1% y/y) while imports jumped 14.3% (17.7% y/y) to 2.37M. Light truck sales rose 1.8% (4.7% y/y) to 7.27M. Domestic light truck purchases gained just 0.2% (7.0% y/y) to 6.30M but sales of imported light trucks recovered 13.4% (-7.8% y/y) to 0.97M.

Disappointed smile  QE3 headwinds:

The Mortgage Bankers Association index of total mortgage applications gained 16.6% last week (38.8% y/y) led by a 19.6% spurt (46.5% y/y) in applications to refinance an existing loan. Home purchase applications gained a lesser 3.9% last week (10.8% y/y). Applications for fixed interest rate loans have risen 42.5% y/y as lower mortgage rates are locked in. Conversely, adjustable rate loan applications have fallen 14.4% y/y. (Haver Analytics)

large image

Devil  Old Mortgages Slow New Bank Lending

A battle over who gets stuck with tens of billions worth of bad housing loans made during the boom years explains why many Americans still can’t get a mortgage as interest rates hit a new low.

The average rate on a 30-year fixed-rate mortgage hit 3.53% last week, the Mortgage Bankers Association said Wednesday. It was the lowest rate since at least the 1950s. But thousands of would-be homeowners are being locked out of the market because lenders, facing a hard-line stance from Fannie Mae and Freddie Mac, have grown wary of making new loans.

The two mortgage giants have been forcing banks to take back an increasing number of loans that the banks made during the boom years and sold to Fannie and Freddie. To protect themselves from such demands in the future, banks are ratcheting up credit and documentation standards for new mortgages. (…)

Buying back defective mortgages “is part of the business if we make a legitimate mistake,” says Bill Cosgrove, chief executive of Union National Mortgage Co., a Strongsville, Ohio-based lender.

But bankers believe Fannie and Freddie are going too far. (…)

There is near-universal acknowledgment that mortgages were much too easy to get during the past decade. But Mr. Cosgrove said standards are now more conservative than at any time since he started working as an underwriter in 1986.


On the other hand:

U.S. Consumer Credit Delinquencies Near 6-Year Low

(…) Delinquencies across eight loan categories fell a total of 11 basis points to 2.24 percent of all accounts in the second quarter, the best showing since the fourth quarter of 2006, when the rate was 2.23 percent. The rate has now been below the 15- year average of 2.40 percent for two consecutive quarters, the ABA said in its Consumer Credit Delinquency Bulletin. (…)

Delinquencies on bank card debt fell from 3.08 percent of all accounts in the first quarter to an 11-year low of 2.93 percent, and well below the 15-year average of 3.91 percent. (…)

The broad decline masked a rise in delinquencies in some categories, including home equity loans and lines of credit, and direct auto loans. Home equity loan delinquencies rose 9 basis points to 4.09 percent over the first quarter, while those for lines of credit spiked 13 basis points to 1.91 percent, and direct auto loans climbed 6 basis points to 2.34 percent. (…)

Freezing  Small Businesses Fear the Fiscal Cliff

A survey of 833 business owners released Wednesday found that 47% of small-business owners and chief executives said they don’t expect the country will avoid the tax increases and deep spending cuts that are set to take effect at year-end unless Congress and President Barack Obama agree on a new deficit-reduction plan.

In comparison, 38% of respondents said they thought lawmakers would be able to reach an agreement. Another 14% weren’t sure.

Same news, different spins:

Sad smile  Shopping Center Demand Slows as Consumer Spending Stalls  Demand for space in U.S. shopping centers slowed in the third quarter as economic growth was reduced by stalled consumer spending, Reis Inc. said today.

(…) Occupancies at neighborhood and community shopping centers rose by a net 1.46 million square feet (135,000 square meters), the smallest quarterly increase in a year, according to the New York-based real estate research firm. The gain in so-called net absorptions compared with an increase of 2.18 million square feet in the previous three months, and was the smallest since 840,000 square feet were added in the third quarter of 2011. (…)

Smile  Malls See Fewer Vacancies

(…) [image]Malls in the top 77 U.S. markets posted an average vacancy rate of 8.7% in the quarter, down from 8.9% in the second quarter, according to new data from real-estate research company Reis Inc. The latest figure is a notable step down from the recent high of 9.4% set in last year’s third quarter.

Mall rents, meanwhile, continued their slow rise, climbing 0.3% in the third quarter from the previous quarter to an average of $39.24 a square foot per year, according to Reis. The increase marked the fifth consecutive quarterly increase for malls, a group that includes large, enclosed shopping centers typically anchored by department stores.

Retail strip centers, which are smaller than malls and feature several stores facing a common parking lot, typically with a grocery store as an anchor, didn’t fare quite as well. Their vacancy averaged 10.8% in the third quarter, unchanged from the previous one, Reis said. That rate is only slightly less than the recent high of 11% in last year’s fourth quarter as well as the 32-year high of 11.1% in 1990.

Rents at retail strips increased by 0.1% to $16.57 per square foot per year, marking the third consecutive quarter of razor-thin increases in that sector. (…)


The Toronto Real Estate Board released their September sales tally yesterday, and added more to the pile of evidence that Canada’s housing market has begun a slow melt since mortgage rules were tightened in early July (or is it an accelerated melt?—the market was already moderating on its own accord beforehand). Sales fell a hefty 20.8% y/y in September, though TREB noted that there were two fewer business days than in the same month last year, and sales on a per-day basis were down a more modest 12.5%—still, the direction is clear.

Condos underperformed, with sales down 27% y/y, but detached singles were not far behind at – 19% y/y. Interestingly, average prices were still up a solid 8.6% y/y, to above the $500,000 mark. But, with new listings up 4% y/y against a backdrop of falling sales, and with plenty of potential resale condo supply coming over the next year, Toronto is quickly heading for buyers’ market. (BMO Capital with chart below)



Clock  ECB Holds Interest Rates as Spain Keeps Draghi Waiting  The European Central Bank kept interest rates on hold today as President Mario Draghi waits for Spain to decide if it needs his help.

Meanwhile, in the real world:

Eurozone retail sales

imageRetail sales rose 0.1% across the Eurozone in August, led by a 0.3% increase in Germany, according to official Eurostat data. A 0.2% decline in July was also revised to show a 0.1% gain. Eurozone retail sales have now risen for four successive months. The retail PMI, however, indicates that retailers saw the worst quarter for two-and-half years in the third quarter, as sales fell again in September. (Markit)

What Markit is not saying is that sales volume was down 0.2% between February and June and has risen only 0.1% per month since. Excluding food and fuel, sales volume is down 0.3% in the June-August period. Remember these data are subject to revisions. Can we really believe that Spain sales volume jumped 2.1% in August? Only if we believe that Portugal’s rose 2.8%.

Austerity anyone?


Lightning  Portugal to Raise Income Taxes

Portugal announced new austerity measures to help narrow its budget gap, raising income taxes after a popular uproar prompted the government to back away from an earlier proposal to reconfigure payroll taxes. (…)

Finance Minister Vítor Gaspar said Wednesday all earners will pay an extraordinary additional tax of about 4% on their annual income next year. The government will also reduce the number of tax brackets to five from eight, effectively raising average tax rates, and increase taxes on luxury goods and cigarettes by an unspecified amount. (…)

He said the tax measures, combined with a new “solidarity tax” of 2.5% of income on top earners, will raise an estimated €2 billion ($2.58 billion) in additional revenue. He reiterated that public workers will also forego one paycheck, and that there will be new taxes on financial transactions. Mr. Gaspar also repeated the government’s projection that the Portuguese economy will contract 3% this year and 1% in 2013. (…) Charts below from Moody’s

image image


Pan Pacific to Offer 15% Cut in Copper Premium for China  Pan Pacific Copper Co., Japan’s largest producer, offered a 15 percent cut in next year’s premium for refined metal supplied to clients in China and Taiwan, said two executives with knowledge of the pricing.

(…) Pan Pacific’s offers for 2013 came before Codelco, the world’s largest copper producer, sets its annual sales premiums for buyers in Europe, South Korea and China. Premiums of copper cathode sales decline when the market sees more supply. The premium includes shipping and insurance costs. (…)

Property market peak season see weak sales  Real estate developers are lowering their expectations for ‘Golden September and Silver October’ as fewer homebuyers turn out.

September and October are as important to China’s property developers as Christmas is for retailers in the West. Potential homebuyers are more likely to buy during these months, commonly known in China as “Golden September and Silver October”. (…)

GOOD READ: A new power: China’s young flex their muscles

(…) From 2015, when the working-age population will start to shrink, the demographic dividend China has enjoyed for so long will crank into rapid reverse.

This is all happening much quicker than in other countries that trod a similar development path. Yolanda Fernandez Lommen, in a 2010 ADB working paper, calculates that China started ageing when its real per capita income was $4,000. That compares with $14,900 in Japan and $16,200 in South Korea.

At factory-floor level, that means the balance has been tilted in favour of labour at a much earlier stage of development. Jobs are easier to come by and workers far less beholden to their employers. (…)

Today’s workers are less willing to tolerate long hours of drudgery. Dissatisfaction is compounded by a growing awareness of the lifestyle richer Chinese are leading. True, factory wages are now rising by as much as 20 per cent a year. But for an increasing number of workers, that does not compensate for the feeling that they are being exploited in dead-end jobs.

There is another, more subtle, demographic influence at work. The one-child policy, introduced in 1979, explains China’s sudden ageing. It also explains a shortage of women. (…)

In factories, one result is a gradual increase in male workers, less easily corralled than the predominantly female workforce that used to line factory floors. Alexandra Harney, author of The China Price, has been visiting Chinese factories for a decade. A few years ago she began to notice she was interviewing more and more men. Recently, a young woman told her: “Our generation doesn’t work in factories.”

In a fascinating Bloomberg column, Ms Harney writes that Chinese factories do a terrible job of training their workers or offering them a credible career path. Instead, they want what she calls “just-in-time workers”, who can be hired and fired to fit the demands of each new order cycle. “The question for me,” she says, referring to the need for more manufacturing value-added, “is how China moves up the ladder.”

That’s a huge question for China. It’s not such a small one for factory owners either. Foxconn founder Terry Gou has already announced plans to install 1m robots in his factories in three years. Foxconn is also diversifying, investing in plants in Brazil, Mexico and eastern Europe. Indonesia has been trying to woo Mr Gou to set up a plant there. Installing robots and moving to other countries is one response to Chinese demographics. Far harder will be to figure out how to design factories where workers can build more sophisticated products and a career at the same time.

Australian Retail Sales Rose Less Than Forecast in August

Sales climbed 0.2 percent to A$21.5 billion ($22 billion) from a month earlier, when they fell 0.8 percent, the Bureau of Statistics said in Sydney today.


S&P 500 Earnings Likely To Post First Drop In 3 Years (IBD)

(…) Analysts are setting a lower bar. They see total S&P 500 revenue coming in flat. Earnings should decline 2.3% — the first drop since Q3 2009, when the nation crawled out of the last recession. (…)

Pointing up  Already 22 firms in the S&P 500 have posted, with 55% beating views. Last quarter, 67% topped higher, though still modest views. The long-term average for beating forecasts is 63%.

And there have been 4.3 negative pre-announcements for each firm guiding higher. The average is 2.4 negative to positive. (…)

For the record, the Q3 2012 EPS estimate ($25.01) is 4.5% below the estimate ($26.20) at the start of the quarter (June 30). In terms of revenues, the estimated growth rate stands at 0.0%, down from an estimate of 1.9% at the start of the quarter.

Factset notes:

It is interesting to note that while the EPS estimate for the index for Q3 2012 declined 4.5% during the quarter, the price of the index actually increased 6.2% (to 1447.15 from 1362.16) during this same time.

While it is not unusual to see EPS estimate revisions for a quarter and the price of the market move in opposite directions (it has happened in 20 of the past 40 quarters), it is unusual to see this magnitude of change in both the EPS estimate revisions and price. In the 20 quarters in which the estimate revisions and the price moved in opposite directions, there were just six quarters in which both moved in opposite directions by 3% or more.

In fact, three of these six quarters have occurred in the past year. In Q4 2011, the EPS estimate dropped 6.6% while the price of the index rose 11.2%. In Q1 2012, the EPS estimate fell 3.0% while the price of the index jumped 12.0%.

Grim Outlook Hits H-P  H-P warned profit and revenue will decline in the coming year before CEO Meg Whitman’s turnaround effort gains traction. The bleak forecast sent the tech giant’s shares sharply lower.

(…) The strategy for years helped H-P prosper. But Ms. Whitman’s said in an interview that the growth through acquisition came with unacknowledged costs.

She said H-P for years didn’t invest enough in research and development, and failed to develop internal software systems that could provide her and other executives with necessary intelligence about how the business is performing. (…)  Confused smile

Punch  Always be wary of fast growers through acquisitions.

Google warns of more cuts at Motorola, third-quarter cuts to cost $340 million

The Internet search giant said in August that it would cut 20 percent of the workforce at Motorola Mobility, which it bought for $12.5 billion last year, as it moves to make more smartphones and fewer simple mobiles.


NEW$ & VIEW$ (17 May 2012)

(I am travelling this week)


Lightning  Bankia Shares Dive on Deposit Concerns

Shares in Bankia plummeted as small investors scrambled to sell their holdings after a newspaper report stoked fears that customers were withdrawing deposits after the government stepped in to rescue the bank.

Spanish Banks Face Imminent Ratings Cut

Moody’s plans to announce the downgrade of up to 21 Spanish banks at 1900 GMT, newspaper Expansion reports, citing unidentified sources.

Money  Money  Big banks need extra $566bn, says Fitch
Rating agency spells out impact of tougher Basel III rules

The world’s 29 largest global banks will need to raise an additional $566bn in new capital or shed about $5.5tn in assets by 2018 to meet the new tougher Basel III bank capital standards, a new study by Fitch Ratings has found.

The additional capital would represent a 23 per cent increase in what the banks had at the end of 2011 and is roughly equivalent to three times their combined annual earnings, according to the report published on Thursday by Fitch’s Macro Credit research arm.

US banks are expected be hit particularly hard by the part of the reform package that increases the relative capital requirements for risky activities, while European banks will suffer more from tighter definitions of what counts as capital.

Pointing up  Says Fitch:

This potential capital increase would imply an estimated reduction of more than 20% in these banks’ median return on equity (ROE) from about 11% (over the past several years) to approximately 8%–9% under the new regime. Basel III thus creates a tradeoff for financial institutions between declining ROE, which might reduce their ability to attract capital, versus stronger capitalization and lower risk premiums, which benefits investors.



Fed Signals Easing an Option as Risks to Growth From Europe to Budget Loom

Several members of the Federal Open Market Committee said new actions could be necessary if the economy loses momentum or “downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April meeting released yesterday in Washington.

Smile  Housing Starts Rise

Home construction increased 2.6% from March to a seasonally adjusted annual rate of 717,000. Year-over-year, starts were up nearly 30%.

March starts, however, were revised significantly upward to a rate of 699,000 starts from a previously reported 654,000. The newly stated data reflects a 2.6% decline from February. (Chart from Haver Analytics)

Rainbow  Foreclosures Show No Sign of Decline

The decline in the share of homeowners late on payments was due almost entirely to fewer new cases of delinquency, a sign that households’ finances are improving. The percentage of borrowers behind on their mortgage but not in foreclosure fell to 7.4% at the end of March from 8.3% a year earlier.




Pointing up  Shell warns on US natural gas bounce
Demand could see prices double by 2015

For planning purposes, he said, Shell was using a price of $4-$6 per million British thermal units for 2014-15, up from the current $2.55.

Mr Voser said gas demand in the US would rise “as coal is replaced by gas in electricity generation, and gas in transportation takes off”. He added that the low price would push some producers to curtail output, allowing the price to rise.


U.S. Hits a Demographic Milestone

For the first time in U.S. history, whites of European ancestry account for less than half of newborn children, marking a demographic tipping point that is already changing the nation’s politics, economy and workforce.



Few people care about demographic trends. Yet, they are key economic drivers working behind the scene, slowly and quietly, but nevertheless often quite powerfully. Doug Short just did a post that requires every investor’s attention since it deals with The Decline of Peak Spenders. Look at the chart, then go to Doug’s blog to listen to demographer Harry Dent’s Bloomberg interview.

Curious to know what goods and services will be impacted? This PDF file from Dent’s website illustrates the life-cycle buying habits of households by the age of the head of household for about 240 different product categories. Very basic but so crucial.