NEW$ & VIEW$ (8 JANUARY 2014)

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

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

Discounts drive U.S. holiday retail growth: ShopperTrak

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

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

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

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

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

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

Growth Picture Brightens as Exports Hit Record

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

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

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

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

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

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

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

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

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

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

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

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

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses


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

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

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

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

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

Euro-Zone Retail Sales Surge

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

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


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

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

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

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

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

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

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




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

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

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

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

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

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

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

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


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

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

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

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

Thumbs down A Flurry of Downgrades Kick Off the New Year


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

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

Record-Setting Cold Hits Eastern U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging Markets See Selloff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:


  • Auto Makers Rebound as Buyers Go Big 

    Five years after skyrocketing fuel prices and turmoil in financial markets knocked auto makers into a tailspin, the U.S. market has recovered to its former size and character.

(…) U.S. car and light truck sales rose less than 1% in December, reflecting in part a hangover from a surge the month before. But overall, the U.S. auto industry in 2013 had its best sales year since 2007, and industry executives said on Friday they expect gains to continue in 2014, though at a slower pace.

For the year, U.S. consumers bought 15.6 million vehicles, up 7.6% from 2012, according to market researcher Autodata Corp., the strongest volume since 2007. Purchases of light trucks including sport-utility vehicles exceeded cars, a reversal from the year earlier. (…)

But as gas prices drifted lower last year, U.S. consumers trading old vehicles for new favored pricey pickup trucks, SUVs and luxury cars. Ford, for example, boosted sales of its F-150 pickup by 8.4% in December over a year ago, while sales of its subcompact Fiesta and compact Focus cars plunged by 20% and 31% respectively. (…)

Consumers also are springing for more luxurious models, driving average new-car selling price to $32,077 in 2013, up 1.4% from a year earlier and up 10% from 2005, according to auto-price researcher (…)

High five December points to slower growth ahead as auto makers found gains harder to achieve against year-earlier results.

GM said its December sales fell 6.3% compared with the same month last year because of what executives said were aggressive pickup truck promotions by Ford and tougher competition from Asian auto makers.

December also marked the first monthly year-over-year decline in car sales at GM, Ford and Chrysler for 2013. Gains in pickups and SUVs offset weaker car sales at Ford and Chrysler. (…)

  • Here’s the monthly sales pattern (WardsAuto):

An expected post-Christmas surge in LV sales failed to materialize, as U.S. automakers reported 1.35 million monthly sales – an increase in daily sales of 4%. December devliveries equated to a 15.3 million-unit SAAR for the month.

ZeroHedge zeroes in on domestic car sales:



Nearly every automaker has reported lower-than-expected sales for the month of December relative to our forecast and the consensus. At this time, domestic light vehicle sales are running at a disappointing low 11.3 million annualized pace, which compares with 12.6 million for November.

If taken into context, we can say that the strong selling pace in November pulled sales away from December. In September and October, domestic light vehicle sales fell under 12.0 million due to the impact of the federal government shutdown, slipping to 11.7 million for both months, as it negatively impacted on buying confidence.

In November 2013, sales recovered strongly to 12.6 million, perhaps too strongly to the detriment of December’s sales. Therefore, if we average November and December together, we get 12.0 million, which is a respectable, though not spectacular, selling pace.

The times, they are a-changing:



Total car sales using a 3-month m.a. to smooth out monthly fluctuations.


Girl “Daddy, is this a cyclical peak?”


Just kidding “May well be, but let’s hope not…”


From my Nov. 20 post:

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers.

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

Demand for cars has been helped by the aging of America’s vehicles.

(…) during the 2007-2009 downturn and after, financial problems and tight credit standards prevented many consumers from replacing their old vehicles. As a result, estimate analysts at IHS Automotive, the average age of a vehicle stands at a record 11.3 years. The average age increased faster in the five years ended in 2013, than in the five years before that. The trend is true for cars and for light trucks.

(…) IHS projects vehicle sales will total just over 16 million in 2014, and the new cars will help to slow the aging of America’s car fleet.

Truth is that cars do last longer.

And seems that people want, need or can only afford fewer cars (chart from ZeroHedge)

Cases in point:

Office-Rental Market Is Gaining Strength

(…) Businesses occupied an additional 8.5 million square feet of office space in the quarter. That was only a 0.25% increase from the third quarter, but Reis said it was the largest gain since the third quarter of 2007.

The expansion of tenants was offset by the completion of 9.1 million square feet of new office space during the quarter, the most since the fourth quarter of 2009, according to Reis, which tracks 79 major U.S. office markets. That left the market’s vacancy rate at 16.9%, unchanged from the previous quarter.

The vacancy rate had been steadily falling from the recent high of 17.6% in early 2011, but it still is well above the low of 12.5% in the third quarter of 2007, Reis said.

The amount of occupied office space now stands at slightly more than 3.4 billion square feet, which falls short of the market’s peak in late 2007 by 79 million square feet.

At the current rate that companies are leasing new offices—known as “positive absorption”—it would take more than two years to reach that peak level again.

(…)  Average asking rents increased in the fourth quarter to $29.07 per square foot a year, up 0.7% from the third quarter but still short of the recent high of $29.37 hit in 2008. (…)

Economic research firm Moody’s Analytics projects office-using jobs will increase 2.1% this year to nearly 33.9 million. That growth rate, along with a 2.1% gain in 2012, are the largest since last decade’s boom. “I would expect 2014 to be the best year since 2006 for office-using jobs,” says Mark Zandi, chief economist at Moody’s Analytics.

Reis’ preliminary forecast for 2014 calls for office-vacancy rates to decline by roughly half a percentage point by year’s end and asking rents to increase 2.8%, the largest gain since 2007. (…)

Alien ‘Polar Pig’ Threatens Coldest U.S. Weather in Two Decades

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida. Mike Musher, a meteorologist with the U.S. Weather Prediction Center in College Park,Maryland, said 90 percent of the contiguous U.S. will be at or below the freezing mark today.

Freezing temperatures spur energy demand as people turn up thermostats to heat homes and businesses. Power generation accounts for 32 percent of U.S. natural-gas use, according to the Energy Information Administration. About 49 percent of all homes use the fuel for heating.

China Shows Signs of Slowdown

Four purchasing managers’ indexes—two compiled by the government and two by HSBC Holdings PLC all dropped last month, the first time that has happened since April. The HSBC Services PMI, released Monday, fell to 50.9 for December, compared with 52.5 the month before. (…)

All four PMIs remained in narrowly positive territory for December, indicating that expansion continues, albeit at a slow pace. But that masks difficulties for individual companies in some sectors. Conditions are worsening for small and medium-size businesses, according to the official manufacturing PMI. The subindex for large companies, which has performed best in recent months, also fell in December, though it remains above the 50 mark that separates growth from contraction.

The data show manufacturers cut back stocks of both raw materials and finished goods, suggesting they are expecting weaker sales ahead. (…)


This is what the media have been posting from Factset in recent weeks:

For Q4 2013, 94 companies in the S&P 500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.

The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).

These following info from the same Factset release have generally been omitted by the media:

Although the number of companies that have issued negative EPS guidance is high, the amount by which these have companies have lowered expectations has been below average. For the 107 companies in
the S&P 500 that have issued EPS guidance for the third quarter, the EPS guidance has been 5.7% below the mean estimate on average. This percentage decline is smaller than the trailing 5-year average of -11.1% and trailing 5-year median of -7.8% for the index. If -5.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q2 2012 (-0.4%).

That could mean that companies are more prone to reduce guidance than before. Here’s what has happened following Q3 guidance:

At this point in time, all 114 of the companies that issued EPS guidance for Q3 2013 have reported actual results for the quarter. Of these 114 companies, 84% reported actual EPS above guidance, 9% reported
actual EPS below guidance, and 7% reported actual EPS in line with guidance. This percentage (84%) is well above the trailing 5-year average for companies issuing EPS guidance, and above the overall performance of the S&P 500 for Q2 2013.

Under-promise to over-deliver!

Companies that issued quarterly EPS guidance for Q3 reported an actual EPS number that was 9.5% above the guidance, on average. Over the past five years, companies that issued quarterly EPS guidance reported an actual EPS number that was 12.8% above the EPS guidance on average.

Now this:

For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 56% (149 out of 265), which is below the percentage recorded at the end of September (61%).

Since the end of September, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by eight, while the
number of companies issuing positive EPS guidance has increased by 15.

Pointing up There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

As a result:

Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q4 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

So, do you really want to use forward earnings in your valuation work?

Bernanke Kicks Off Farewell Tour In Philly. Some of his comments:

  • I have done my job:

At the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.

  • Politicians have not:

Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.

  • So get to it now:

But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.

  • That’s for you bankers as well:

The Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates;

  • Get ready for higher rates:

in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the (Fed) will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates.

Need more warning?


Fed’s Plosser: May Need to Employ Aggressive Tightening Campaign

(…) Mr. Plosser, who spoke as part of a panel discussion held in Philadelphia at the annual American Economic Association, will be a voting member of the monetary policy setting Federal Open Market Committee this year. (…)

Currently, the Fed expects to keep short-term rates very low until some time in 2015. The veteran central banker is uneasy with that, and warns the Fed should prepare for a faster and more aggressive campaign of rate hikes given the inflation risks presented by all the liquidity it has provided markets.

Mr. Plosser said the Fed would like to raise rates “gradually” but added “it doesn’t always work that way.”

“How fast will we have to move interest rates up…we don’t know the answer to that,” Mr. Plosser said. He warned that the Fed may have to be “aggressive,” and he added “people like to think the Fed has all this great control over interest rates, but the market does its own thing.”

JPMorgan Shows The US Is The Most Expensive Developed Market In The World

JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

Foreign direct investment in the U.S. appears to have dropped 11% last year, to about $148 billion, according to preliminary Commerce Department data, as analyzed by the Congressional Research Service.

This follows a decline in 2012 to about $166 billion from 2011’s estimated $230 billion. Foreign direct investment, or FDI, had peaked in the U.S. at $310 billion in 2008 and sank to about $150 billion in 2009, before rebounding in 2010 to $206 billion.

The steep fall in 2012-2013 has many possible causes, including the heated presidential elections and the knockdown, drag-out budget battles that culminated in last year’s government shutdown. Our politics frighten foreigners. We also saw tougher air-quality regulations from the Environmental Protection Agency and the new Dodd-Frank rules. Nevertheless, the U.S. last year emerged for the first time since 2001 as the most promising destination for FDI, thanks to our productivity gains, according to a survey of 302 companies from 28 countries by A.T. Kearney, a New York international consulting firm.

Obama seems to be in the mean-reverting biz now with many priorities aimed at reversing trends…(see below)

Stock Buybacks’ Allure Likely to Fade

(…) In the fourth quarter, S&P 500 companies may have bought back nearly $138 billion worth of stock, says Howard Silverblatt, Standard & Poor’s senior analyst. If that estimate proves correct as companies file their quarterly disclosures, it’ll be the biggest quarter for buybacks since 2007 and a 40% jump from the level a year ago.

Companies have already repurchased a staggering $445 billion worth of shares in the 12 months ended on Sept. 30. (…)

The S&P 500 Buyback Index, which covers the 100 companies that are the busiest buying back shares, rose 48.3% in 2013, trumping a 33.3% return for even the S&P Dividend Aristocrat Index brimming with companies that have hiked dividends every year for a quarter-century.

Conventional wisdom now expects 2014 to be an even bigger year for buybacks. After all, global growth is improving at only a drowsy pace, and receding crises heap pressure on management to spend their cash stash. Goldman Sachs, for one, sees repurchases increasing 35% this year.

(…) Rising interest rates will make it dearer for companies looking to borrow to finance buybacks or replenish their cash hoards. (…)

Besides, buybacks work better as an interim measure for returning cash to shareholders when the outlook is iffy. Today, a broadening recovery nudges management to rely less on financial engineering and to begin the riskier, tougher task of finding growth, investing in research and development, or inventing the next big thing—whether it’s ocean-driven hydropower or a cure for male-pattern baldness. Reflexively buying back shares was the easy, momentarily crowd-pleasing part. Figuring out where future growth lies and how to secure it is the real challenge that lies ahead.



Biggest Lenders Keep On Growing

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial.

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial. That expansion has been reshaping banking since at least 1990, when the top five institutions held 9.67% of bank assets. (…)

At the same time, the number of U.S. banks fell last year to the lowest level since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

There were 6,891 banks as of the third quarter, down from a peak of 18,000. Between 1984 and 2011, more than 10,000 banks disappeared through mergers or failures, according to FDIC data.

The banking units of J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo and U.S. Bancorp held $6.46 trillion in assets as of the third quarter, the report, released Thursday by SNL, found. The total for the rest of the banking industry, comprised of thousands of midsize, regional and smaller players, was $8.15 trillion.


Sarcastic smile Barack Obama has played 160 rounds of golf since taking office. (Time). That’s 32 per year over the past 5 years.


NEW$ & VIEW$ (31 DECEMBER 2013)

Smile Small Businesses Anticipate Breakout Year Ahead

(…) Of 937 small-business owners surveyed in December by The Wall Street Journal and Vistage International, 52% said the economy had improved in 2013, up from 36% a year ago. Another 38% said they expect conditions to be even better in 2014, up from 27%.

Three out of four businesses said they expect better sales in 2014, and overall, the small business “confidence index”—based on business owners’ sales expectations, spending and hiring plans—hit an 18-month high of 108.4 in December. All respondents, polled online from Dec. 9 to Dec. 18, had less than $20 million in annual revenue and most had less than 500 employees.

According to the latest data from the National Federation of Independent Business, a Washington lobby group, small-business owners in November ranked weak sales below taxes and red tape as their biggest headache, for the first time since June 2008.

In the group’s most recent survey, owner sentiment improved slightly in November but was still dismal compared with pre-2007. (…)

U.S. Pending Home Sales Inch Up

The National Association of Realtors said Monday that its seasonally adjusted index of pending sales of existing homes rose 0.2% in November from the prior month to 101.7. The index of 101.7 is against a benchmark of 100, which is equal to the average level of activity in 2001, the starting point for the index.

The November uptick was the first increase since May when the index hit a six-year high, but it was less than the 1% that economists had forecast.

Pointing up The chart in this next piece may be the most important chart for 2014. I shall discuss this in more details shortly.

Who Wins When Commodities Are Weak? Developed economy central bankers were somewhat lauded before the financial crisis. Recently, though, they’re finding it harder to catch a break.

(…) Still, here’s a nice chart from which they might take some solace.  Compiled by Barclays Research it shows the gap between headline and core consumer price inflation across Group of Seven nations, superimposed on the International Monetary Fund’s global commodities index. As can be seen at a glance, the correlation is fairly good, showing, as Barclays says, the way commodity prices can act as a ‘tax’ on household spending power.

During 2004-08, that tax was averaging a hefty 0.8 percentage points a year in the G7,  quite a drag on consumption (not that that was necessarily a bad thing, looking back, consumption clearly did OK). However, since 2008. it has averaged just 0.1 percentage points providing some rare relief to the western consumer struggling with, fiscal consolidation, weak wage growth and stubbornly high rates of joblessness.

So, what’s the good news for central bankers here? Well, while a deal with Iran inked in late November to ease oil export sanctions clearly isn’t going to live up to its initial billing, at least in terms of lowering energy prices, commodity-price strength generally is still bumping along at what is clearly a rather weak historical level.

And the consequent very subdued inflation outlook in the U.S. and euro area means that central banks there can continue to fight on just one front, and focus on delivering stronger growth and improved labor market conditions.

Of course, weak inflation expectations can tell us other things too, notably that no one expects a great deal of growth, or upward pressure on wages. Moreover, as we can also see from the chart, the current period of commodity price stability is a pretty rare thing. Perhaps neither central bankers or anyone else should get too used to it.

Coffee cup  Investors Brace as Coffee Declines

Prices have tumbled 20% this year, capping the biggest two-year plunge in a decade and highlighting commodity markets’ struggle with a supply deluge.

(…) The sharp fall in coffee prices is the most prominent example of the oversupply situation that has beset many commodity markets, weighing on prices and turning off investors. Mining companies are ramping up production in some copper mines, U.S. farmers just harvested a record corn crop, and oil output in the U.S. is booming. The Dow Jones-UBS Commodity Index is down 8.6% year to date.

In the season that ended Sept. 30, global coffee output rose 7.8% to 144.6 million bags, according to the International Coffee Organization. A single bag of coffee weighs about 60 kilograms (about 132 pounds), an industry standard. Some market observers believe production could rise again in 2014. (…)

The U.S. Department of Agriculture forecasts that global coffee stockpiles will rise 7.5% to 36.3 million bags at the end of this crop year, an indication that supplies are expected to continue to outstrip demand in the next several months. (…)

The global coffee glut has its roots in a price rally more than three years ago. Farmers across the world’s tropical coffee belt poured money into the business, spending more on fertilizer and planting more trees as prices reached a 14-year high above $3 a pound in May 2011.(…)

Americans on Wrong Side of Income Gap Run Out of Means to Cope

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

The result has been a downsizing of expectations. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. The lack of faith is especially pronounced among those making less than $50,000 a year, with close to three-quarters in the Dec. 6-9 survey saying the economy is unfair. (…)

The diminished expectations have implications for the economy. Workers are clinging to their jobs as prospects fade for higher-paying employment. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer rather than venturing out on their own.

In the meantime, record-high stock prices are enriching wealthier Americans, exacerbating polarization and bringing income inequality to the political forefront. (…)

The disparity has widened since the recovery began in mid-2009. The richest 10 percent of Americans earned a larger share of income last year than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

(…) The median income of men 25 years of age and older with a bachelor’s degree was $56,656 last year, 10 percent less than in 2007 after taking account of inflation, according to Census data.(…)

Those less well-off, meanwhile, are running out of ways to cope. The percentage of working-age women who are in the labor force steadily climbed from a post-World War II low of 32 percent to a peak of 60.3 percent in April 2000, fueling a jump in dual-income households and helping Americans deal with slow wage growth for a while. Since the recession ended, the workforce participation rate for women has been in decline, echoing a longer-running trend among men. November data showed 57 percent of women in the labor force and 69.4 percent of men. (…)

Households turned to stepped-up borrowing to help make ends meet, until that avenue was shut off by the collapse of house prices. About 10.8 million homeowners still owed more money on their mortgages than their properties were worth in the third quarter, according to Seattle-based Zillow Inc.

The fallout has made many Americans less inclined to take risks. The quits rate — the proportion of Americans in the workforce who voluntarily left their jobs — stood at 1.7 percent in October. While that’s up from 1.5 percent a year earlier, it’s below the 2.2 percent average for 2006, the year house prices started falling, government data show.

Millennials — adults aged 18 to 32 — are still slow to set out on their own more than four years after the recession ended, according to an Oct. 18 report by the Pew Research Center in Washington. Just over one in three head their own households, close to a 38-year low set in 2010. (…)

The growing calls for action to reduce income inequality have translated into a national push for a higher minimum wage. Fast-food workers in 100 cities took to the streets Dec. 5 to demand a $15 hourly salary. (…)

Cold Temperatures Heat Up Prices for Natural Gas

2013 by the Numbers: Bitter cold and tight supplies have helped spur a 32% rise in natural-gas futures so far this year, making it the year’s top-performing commodity.

(…) Not only are colder-than-normal temperatures spurring households and businesses to consume more of the heating fuel, the boom in U.S. output is starting to level off as well. These two factors are shrinking stockpiles and lifting prices. The amount of natural gas in U.S. storage declined by a record 285 billion cubic feet from the previous week and stood 7% below the five-year average in the week ended Dec. 13, according to the Energy Information Administration. (…)

Over the first 10 days of December, subzero temperatures in places such as Chicago and Minneapolis helped boost gas-heating demand by 37% from a year ago, the largest such gain in at least 14 years, according to MDA Weather Services, a Gaithersburg, Md., forecaster.

MDA expects below-normal temperatures for much of the nation to continue through the first week of January.

Spain retail sales jump 1.9 percent in November

Spain retail sales rose 1.9 percent year-on-year on a calendar-adjusted basis in November, National Statistics Institute (INE) reported on Monday, after registering a revised fall of 0.3 percent in October.

Retail sales had been falling every month for three years until September, when they rose due to residual effects from the impact of a rise in value-added tax (VAT) in September 2012.

Sales of food, personal items and household items all rose in November compared with the same month last year, and all kinds of retailers, from small chains to large-format stores, saw stronger sales, INE reported.

High five Eurozone retail sales continue to decline in December Surprised smile Ghost

image_thumb[5]Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

The overall decline would have been stronger were it not for a marked easing the rate of contraction in Italy, where the retail PMI hit a 33-month high.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, fell back to 47.7 in December, from 48.0 in November. That matched October’s five-month low and indicated a moderate decline in sales. The average reading for the final quarter (47.8) was lower than in Q3 (49.5) but still the second-highest in over two years.

image_thumb[4]Retail sales in Germany rose for the eighth month running in December, but at the weakest rate over this sequence. Meanwhile, the retail downturn in France intensified, as sales fell for the fourth successive month and at the fastest pace since May. Retail sales in France have risen only twice in the past 21 months. Italy continued to post the sharpest decline in sales of the three economies, however, despite seeing a much slower fall in December. The Italian retail PMI remained well below 50.0 but rose to a 33-month high of 45.3, and the gap between it and the German retail PMI was the lowest in nearly three years.

Retail employment in the eurozone declined further in December, reflecting ongoing job shedding in France and Italy. The overall decline across the currency area was the steepest since April. German retailers expanded their workforces for the forty third consecutive month.


Perhaps lost among the Holidays celebrations, Thomson Reuters reported on Dec. 20 that

For Q4 2013, there have been 109 negative EPS preannouncements issued by S&P 500 corporations compared to 10 positive EPS preannouncements. By dividing 109 by 10, one arrives at an N/P ratio of 10.9 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Strangely, this is what they reported On Dec. 27:

For Q4 2013, there have been 108 negative EPS preannouncements issued by S&P 500 corporations compared to 11 positive EPS preannouncements.

Hmmm…things are really getting better!

On the other hand, the less volatile Factset’s tally shows no deterioration in negative EPS guidance for Q4 at 94 while positive guidance rose by 1 to 13.

The official S&P estimates for Q4 were shaved another $0.06 last week to $28.35 while 2014 estimates declined 0.3% from $122.42 to $122.11. Accordingly, trailing 12-months EPS should rise 5.1% to $107.40 after Q4’13.

Factset on cash flows and capex:

S&P 500 companies generated $351.3 billion in free cash flow in Q3, the second largest amount in at least ten years. This amounted to 7.2% growth year-over-year, and, as a result of slower growth in fixed capital expenditures (+2.2%), free cash flow (operating cash flow less fixed capital expenditures) grew at a higher rate of 11.3%. Free cash flows were also at their second highest quarterly level ($196.8 billion) in Q3.

S&P 500 fixed capital expenditures (“CapEx”) amounted to $155.0 billion in Q3, an increase of 2.2%. This marks the third consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Because the Energy sector’s CapEx spending represented over a third of the S&P 500 ex-Financials total, its diminished spending (-1.6% year-over-year) has had a great impact on the overall growth rate.

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 6.1% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit a 13.7% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales were above the ten-year average.


Going forward, however, analysts are projecting that the CapEx growth rate will slide, as the projected growth for the next twelve months of 3.9% is short of that of the trailing twelve-month period. In addition, growth for capital expenditures is expected to continue to slow in 2014 (+1.6%) due, in part, to negative expected growth rates in the Utilities (-3.2%) and Telecommunication Services (-3.0%) sectors.

Gavyn Davies The three big macro questions for 2014

1. When will the Fed start to worry about supply constraints in the US?

(…) The CBO estimates that potential GDP is about 6 percent above the actual level of output. This of course implies that the Fed could afford to delay the initial rise in short rates well beyond the 2015 timescale that the vast majority of FOMC participants now deem likely. The very low and falling rates of inflation in the developed world certainly support this.

But the suspicion that labour force participation, and therefore supply potential, may have been permanently damaged by the recession is gaining ground in some unexpected parts of the Fed, and the unemployment rate is likely to fall below the 6.5 percent threshold well before the end of 2014 (see Tim Duy’s terrific blog on this here)This is the nub of the matter: will Janet Yellen’s Fed want to delay the initial rate rise beyond the end of 2015, and will they be willing to fight the financial markets whenever the latter try to price in earlier rate hikes, as they did in summer 2013? I believe the answer to both these questions is “yes”, but there could be several skirmishes on this front before 2014 is over. Indeed, the first may be happening already.

2. Will China bring excess credit growth under control?

Everyone now agrees that the long run growth rate in China has fallen from the heady days when it exceeded 10 per cent per annum, but there are two very different views about where it is headed next. The optimistic version, exemplified by John Ross’ widely respected blog, is that China has been right to focus on capital investment for several decades, and that this will remain a successful strategy. John points out that, in order to hit the official target of doubling real GDP between 2010 and 2020, growth in the rest of this decade can average as little as 6.9 per cent per annum, which he believes is comfortably within reach, while the economy is simultaneously rebalanced towards consumption. This would constitute a very soft landing from the credit bubble.

The pessimistic view is well represented by Michael Pettis’ writing, which has been warning for several years that the re-entry from the credit bubble would involve a prolonged period of growth in the 5 per cent region at best. Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.

As I argued recently, there is so far no sign that credit growth has dropped below the rate of nominal GDP growth, and the bubble-like increases in housing and land prices are still accelerating. The optimistic camp on China’s GDP has been more right than wrong so far, and a prolonged soft landing still seems to be the best bet, given China’s unique characteristics. But the longer it takes to bring credit under control, the greater the chance of a much harder landing.

3. Will the ECB confront the zero lower bound?

Whether it should be described as secular stagnation or Japanification, the euro area remains mired in a condition of sluggish growth and sub-target inflation that will be worsened by the latest bout of strength in the exchange rate. Mario Draghi said this week that

We are not seeing any deflation at present… but we must take care that we don’t have inflation stuck permanently below one percent and thereby slip into the danger zone.

This does not seem fully consistent with the ECB’s inflation target of “below but close to 2 per cent”. Meanwhile, the Bundesbank has just published a paper which confidently denies that there is any risk of deflation in the euro area, and says that declining unit labour costs in the troubled economies are actually to be welcomed as signs that the necessary internal rebalancing within the currency zone is taking place.

The markets will probably be inclined to accept this, as long as the euro area economy continues to recover. This seems likely in the context of stronger global growth.

But a further rise in the exchange rate could finally force the ECB to confront the zero lower bound on interest rates, as the Fed and others have done in recent years. Mr Draghi has repeatedly shown that he has the ability to navigate the tricky politics that would be involved here, but a pre-emptive strike now seems improbable. In fact, he might need a market crisis to concentrate some minds on the Governing Council.

So there we have the three great issues in global macro, any one of which could take centre stage in the year ahead. For what it is worth, China currently seems to me by far the most worrying.


Goldman’s Top Economist Just Answered The Most Important Questions For 2014 — And Boy Are His Answers Bullish

Goldman Sachs economist Jan Hatzius is out with his top 10 questions for 2014 and his answers to them. Below we quickly summarize them, and provide the answers.

1. Will the economy accelerate to above-trend growth? Yes, because the private sector is picking up, and there’s going to be very little fiscal drag.

2. Will consumer spending improve? Yes, because real incomes will grow, and the savings rate has room to decline.

3. Will capital expenditures rebound? Yes, because nonresidential fixed investment will catch up to consumer demand.

4. Will housing continue to recover? Yes, the housing market is showing renewed momentum.

5. Will labor force participation rate stabilize? Yes, but at a lower level that previously assumed.

6. Will profit margins contract? No, there’s still plenty of slack in the labor market for this to be an issue.

7. Will core inflation stay below the 2% target? Yes.

8. Will QE3 end in 2014? Yes.

9. Will the market point to the first rate hike in 2016? Yes.

10. Will the secular stagnation theme gain more adherents? No. With the deleveraging cycle over, people will believe less in the idea that we’re permanently doomed.

So basically, every answer has a bullish tilt. The economy will be above trend, margins will stay high, the Fed will stay accommodative, and inflation will remain super-low. Wow.

High five But wait, wait, that does not mean  equity markets will keep rising…

David Rosenberg is just as bullish on the economy, with much more meat around the bones, but he also discusses equity markets.

Good read: (

Snail U.S. Population Growth Slows to Snail’s Pace

America’s population grew by just 0.72%, or 2,255,154 people, between July 2012 and July 2013, to 316,128,839, the Census said on Monday.

That is the weakest rate of growth since the Great Depression, according to an analysis of Census data by demographer William Frey of the Brookings Institution.

Separately, the Census also said Monday it expects the population to hit 317.3 million on New Year’s Day 2014, a projected increase of 2,218,622, or 0.7%, from New Year’s Day 2013. (…)

The latest government reports suggest state-to-state migration remains modest. While middle-age and older people appear to be packing their bags more, the young—who move the most—are largely staying put. Demographers are still waiting to see an expected post-recession uptick in births as U.S. women who put off children now decide to have them. (…)



NEW$ & VIEW$ (30 SEPTEMBER 2013)

Back from Europe, up quite early with much in the news. I strongly encourage you to read this post through the end. There is much to consider, especially on the earnings side, while most economies are showing poor momentum, if any.

Government Heads Toward Shutdown

The nation braced for a partial shutdown of the federal government, as time for Congress to pass a budget before a Monday midnight deadline grew perilously short and lawmakers gave no signs Sunday they were moving toward a resolution.

(…) The stalemate was a monument to problems that have increasingly gripped U.S. politics, especially over the last three years of divided government. The growing polarization of the parties, a diminished willingness to compromise on spending and an epidemic of brinkmanship have made it more difficult for Congress to address even the most routine budgeting questions.

Mr. Obama and other Democrats have said that agreeing to GOP demands now would invite Republicans to press for more in the future, with each fiscal deadline. Next up is a battle over terms for raising the nation’s borrowing limit, which the Treasury says must be approved by mid-October. Most economists predict that the financial consequences of failing to raise the debt limit would be greater than a government shutdown. (…)

Uncertainty Poses Threat to Recovery

(…) “American businesses have this mentality where no one wants to make a decision because you have no idea what’s lurking around the corner,” said Jeremy Flack, president of Flack Steel, a Cleveland steel distributor. “Government needs to make us feel more solid about the state of affairs, and they’re doing the exact opposite.”

Flack Steel’s business took a hit from all three crises in 2011 and 2012. “You can watch our earnings evaporate three months after each event,” Mr. Flack said. “Our customers start pulling back their business” in the weeks around every fiscal deadline in Washington. (…)

Sinking Feeling

Fiscal warfare can harm the economy directly and indirectly. Cutting government services—either temporarily in a shutdown, or permanently through spending reductions—can disrupt a broad range of commerce and hit American workers and businesses tied to the public sector. Indirectly, the annoyance from disruptions alongside the threat of damage to markets and the economy can dent confidence and weigh on corporate planning. (…)

In August, one benchmark of economic confidence registered its first decline in six months. The Equipment Leasing and Finance Association’s index of new business was down 11% from July—and 7% from August 2012.

The drop in the index, which measures leasing and financing activity for commercial equipment used in technology, health care, energy and other sectors, is due to waning confidence, said Adam Warner, president of Key Equipment Finance, the Colorado-based arm of financial-services firm KeyCorp.

Instead of stepping up their leasing, businesses are postponing commitments. “They are thinking,‘Let’s push this off and see what’s going to happen,. Is the economy going into a tailspin because of a possible government shutdown?'” Mr. Warner said.

Such retrenchment ripples through the broader economy and can be a bellwether for the labor market. “When a business is acquiring equipment, chances are you are going to be hiring someone to operate that equipment,” Mr. Warner said. “When we see a fall in that activity, typically there is going to be less employment.”

Italy Makes Final Bid To Save Government Prime Minister Letta launched a last-ditch effort to rescue his government from collapse after Silvio Berlusconi pulled support for the government, plunging Italy into a fresh political crisis.

image(…) Italy’s political chaos, which inflamed the euro-zone crisis two years ago, could be the biggest test so far of Europe’s defenses against a revival of the financial panic that has afflicted the region in recent years. This time, faith in the European Central Bank’s promise to safeguard stability is so strong that many political leaders and economists believe a full-blown run on Italy’s bond market is unlikely.

If Mr. Letta loses Wednesday’s vote, Mr. Napolitano, who has opposed calling new elections, has signaled he would try to piece together Italy’s fourth government in two years, either headed by Mr. Letta or another figure. But that attempt is likely to take weeks. (…)

The government crisis now threatens to thwart the recovery of the Italian economy, which is badly in need of reforms to help pull it out of a two-year recession and create jobs. While Mr. Letta passed some modest measures, his five-month government has been largely paralyzed by infighting. (…)

Meanwhile, the absence of a government could actually lower Italy’s budget deficit and bring it closer to the European Union-mandated limit of 3% of gross domestic product. That would happen because of existing measures that were to be scrapped, including an unpopular property tax on primary residences, a scheduled increase in the value-added tax rate and a tax amnesty for the gaming industry would remain on the books, bringing in more than €3 billion in revenue.

Even if Italy survives this latest political upheaval without reigniting bond-market turmoil, its current travails betray deeper problems that threaten Italy’s longer-term solvency and ability to prosper inside the euro zone. Italy’s political class has struggled to deal with the underlying causes of the country’s malaise, including a loss of international competitiveness and the stagnant productivity of its business sector that began well before the European financial crisis of recent years.

The economy’s meager growth rates have pushed up the national debt to over 130% of gross domestic product. The level of debt could become critical if investors conclude that Italy’s long-term growth prospects are so poor that the debt will rise endlessly. Unlike other crisis-hit countries such as Spain and Greece, Italy has yet to implement major economic overhauls or to push down labor and other business costs to levels that would make its industries more competitive abroad.

Companies Holding Lots More Cash

U.S. nonfinancial companies has $1.8 trillion in cash on their books at the end of the second quarter, according to the Federal Reserve’s quarterly “flow of funds” report (now known formally as the “Financial Accounts of the United States”). (…)

The sharp rise in holdings of hard cash doesn’t appear to reflect a broader caution among executives. The $1.8 trillion in liquid assets — the line item most people are referring to when they talk about “corporate cash” — accounted for 5.4% of all assets held by nonfinancial corporations in the second quarter, down from 6% in 2009 and pretty much flat for the past two years. (…)

U.S. Personal Income Gain Leads Personal Consumption Higher


Personal income in August matched expectations and increased 0.4% (3.7% y/y) following a 0.2% July rise, revised from 0.1%. An improved 0.4% increase (3.5% y/y) in wage & salaries followed a 0.3% July decline. (…) Disposable personal income increased 0.5% (2.8% y/y) and inflation adjusted take-home pay rose 0.3% (1.6% y/y).

Personal consumption expenditures improved 0.3% (3.2% y/y) last month after a 0.2% rise in July, revised from 0.1%. The gain also matched expectations. Spending on durable goods jumped 0.5% (5.9% y/y) as motor vehicle purchases gained 1.1% (7.7% y/y). Home furnishings purchases rose 0.2% (4.4% y/y) with the strength in home buying; but spending on apparel fell 0.5% (+2.2% y/y). (…)  Adjusted for price changes, personal consumption rose 0.2% (2.0% y/y).

The personal savings rate moved up to 4.6% but remained down slightly from 4.9% twelve months earlier.

The PCE chain price index inched 0.1% higher (1.2% y/y) in August and matched the July rise. Durable goods prices again fell 0.3% (-1.9% y/y) while prices for nondurables rose 0.2% (0.4% y/y). Services prices increased 0.2% (1.9% y/y). Less food & energy, the chain price index rose 0.2% (1.2% y/y).


Nominal spending matched income growth since June at 1.1% or 4.4% annualized. In rwal terms, personal expenditures are up 0.5% during the last 3 months or 2.0% annualized.

Fingers crossed  Gasoline Prices Stall Out

Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September as supplies reached their highest level in three years and the peak summer driving season ended. (…)

“We have plenty of supplies and low levels of demand. The fundamental picture isn’t pretty,” said Addison Armstrong, senior director of market research at Tradition Energy, an energy-investment adviser in Stamford, Conn. (…)

In the U.S. retail market, the price of regular gasoline averaged $3.42 a gallon on Friday, a decline of 13 cents from a month earlier and down 38 cents from a year before, according to AAA. (…)

 Tighter Mortgage Standards Stalling Recovery

(…) The paper was written by Jim Parrott, a former housing advisor in the Obama White House who is now a senior fellow at the Urban Institute, a left-leaning think tank, and Mark Zandi, chief economist of Moody’s Analytics.

The clearest sign of tighter credit standards are seen in average credit scores, which in June stood nearly 50 points above their pre-housing bubble levels. Credit scores are not only higher, but they also understate the quality of recent borrowers, who have earned these scores during a much tougher environment. In the early 2000s, borrowers had an easier time building their credit because unemployment was low and home prices were rising. In other words, a 750 credit score coming out of the financial crisis counts for more it did ten years ago.

Easing lending standards to return credit scores to pre-bubble levels would boost home sales by around 450,000 units and new single-family home construction by around 275,000 units, according to estimates from Zandi. (…)

Parrott and Zandi concede there’s little evidence that credit is tighter based on either average loan-to-value ratios and debt-to-income ratios. But they say there are other problems, particularly around banks’ verification of borrowers incomes, scrutiny of appraisals, and other factors that have led to a tighter credit box. (…)

The problem is that Fannie, Freddie and the [Federal Housing Administration] have stepped up their put-backs in ways that lenders cannot address adequately through better underwriting or pricing. This includes disagreements over judgment calls made by lenders or their agents; changes in circumstances occurring after the underwriting process has been completed; small mistakes that bear little relation to either the credit risk or the subsequent default; and inconsistent interpretations of the rules.

The upshot is that because lenders can’t predict how they could be penalized, they’ve chosen to lend less. This last point is the most important, the authors said, because it’s the one where policymakers can exercise the most control.

But the problem is difficult to solve because it’s not as easy as changing specific lending criteria. As it is, banks are putting in place standards that go beyond those required by Fannie, Freddie or the FHA. What’s needed instead, the authors argue, is better clarity around when banks could be forced to take back loans. Regulators overseeing those housing entities, they write, “must embrace the challenge with a good deal more urgency” than they have so far.

Mexico struggles to stem faltering growth Tepid US recovery and catastrophic floods weigh on GDP

(…) Though there have been some newly encouraging signs – such as a boost in retail sales in July for the third month running and promising economic activity data that could help rev up growth – the Ingrid and Manuel storms that battered both coastlines simultaneously will only deepen Mexico’s sudden slowdown in gross domestic product growth.

The storms, which killed at least 147 people and caused an estimated $6bn in damage, are likely to trim another 0.1 per cent off 2013 growth, bringing this year’s official forecast to 1.7 per cent, Luis Videgaray, finance secretary, has concluded. That is less than half the 3.5 per cent predicted last December when Mr Peña Nieto took office and Mexico was the region’s success story.

With government aid already expected to exhaust a 12.5bn peso ($950m) emergency fund, some economists consider even the lower growth target too generous.


Fed May Not Start Taper Until January

(…) “We’re not on a pre-set course,”Charles Evans, president of theFederal Reserve Bank of Chicago told reporters on the sidelines of a monetary policy conference in Oslo. He said the Fed’s decision to start reducing its $85 billion in monthly bond purchases “could be in October, it could be in December, but it also could be at the January meeting.”

Mr. Evans was among ten central bank officials who have expressed a wide range of views on the program since their most recent policy meeting September 17-18. (…)


German August Retail Sales Rose While Missing Estimates

Sales adjusted for inflation and seasonal swings increased 0.5 percent from July, when they fell a revised 0.2 percent, the Federal Statistics Office in Wiesbaden said today. Sales advanced 0.3 percent from a year earlier.

Renewed decline in eurozone retail sales in September

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August. The average PMI reading for Q3 (49.5) was nevertheless the best since Q2 2011.

The overall drop in retail sales mainly reflected a fresh contraction in France following two months of growth, and an ongoing decline in Italy. Encouragingly, the fall in Italian retail sales was the slowest in two years. German retail sales rose at the weakest rate in four months.



Euro-Area September Inflation Slows More Than Forecast on Energy

Consumer prices rose an annual 1.1 percent after a 1.3 percent increase in August, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 34 economists was for 1.2 percent growth. The core inflation rate, which excludes volatile food and energy costs, was 1 percent.

Siemens Targets 15,000 Job Cuts

Siemens AG, the German industrial giant, said Sunday that it will have cut a total of about 15,000 jobs world-wide by the end of the next business year, defining for the first time the scope of the reductions it plans under a two-year restructuring program aimed at boosting profits.

Jobs eliminated during the business year that ends Monday account for about half the total. Another roughly 7,500 jobs will be cut in the new business year, which begins on Oct. 1, a company spokesman said. (…)

Spain Outlines Austere 2014 Budget

Government ministries will get on average 4.7% less funds to spend next year, the budget minister says with eyes on an economic recovery.

The Spanish government outlined an austere 2014 budget that includes further cuts in spending by its ministries and a salary freeze for public employees despite the country’s emergence from recession.

The budget highlights the huge imbalances created by five years of economic crisis: Spain will set aside €36.6 billion ($49.5 billion) to service its fast-rising pile of public debt, €2 billion more than it will spend on the 13 government ministries.

And it is pledging about €31 billion for welfare and entitlements, up almost 20% from last year. That includes unemployment benefits for the more than a quarter of the working population that is registered as out of work. (…)

Spain will keep public sector wages frozen for a fourth straight year, while pensions will grow by a meager 0.25% next year.

On Friday the government raised its estimate for gross domestic product growth next year to 0.7% from an April estimate of 0.5%. It said private consumption, which has been depressed since Spain’s massive housing bubble burst in late 2007, will grow marginally next year and exports will keep growing at a robust pace.

Finance Minister Luis de Guindos said he expects the economy to start adding jobs in the second half of next year. (…)

Medvedev Warns on Economy

Prime Minister Dmitry Medvedev renewed calls for Russia to end state dominance of the economy and take steps to boost smaller firms to avoid an economic “abyss.”

(…) In a commentary for the country’s leading business daily Vedomosti and a keynote address to an investment forum Friday, Mr. Medvedev presented the gloomiest picture of Russia’s challenges by a top official since its economy started slowing a year and a half ago.

“We are at a crossroads,” he said in the newspaper article. “Russia may continue to move slowly with a close to zero economic growth, or make a leap forward. The latter is risky, but the former is…even more dangerous; it’s a path to the abyss.”

The government last month cut its growth forecast for this year to 1.8%, far below that over-5% expansion called for by President Vladimir Putin. Russia’s economy grew at 7.2% per year from 2000 to the peak of the global financial crisis in 2009, fueled by huge oil and gas revenues.

Mr. Medvedev said the economy could no longer rely on state investments and spending for growth. (…)

In the article and the speech, Mr. Medvedev called for more security for investors by strengthening the rule of law, without mentioning the word “corruption,” which many investors call one the main Russia’s problems.

Mr. Medvedev noted that the state budget and state-controlled companies were the main drivers of the growth in recent years, calling for steps to help small- and medium-size companies grow.

“Amid slowing economic growth we must ensure that the state is not taking up unreasonably large role in the economy,” he said.

Jump in output hints at S Korean recovery
Industrial production at nine-month high


New figures from Korea’s National Statistical Office showed output jump 1.8 per cent in August, pulling up the year-over-year gain to 3.3 per cent from 0.9 per cent in July.

HSBC called the figures “particularly impressive” in light of recent strikes in the auto industry and argued the data is indicative of resiliency that could fuel a broader rebound:

Korea is well poised for meaningful recovery towards year-end. But while economic activity is still below potential, the Bank of Korea will likely maintain an accommodative stance. We expect rates to stay on hold at 2.50% on 10 October.


[image]Now that the dreaded September is past, keep your fingers crossed for another month. Over and above all the political farces, Q3 earnings season officially begins shortly.

High Time for Profits to Catch Up to Stock Prices

(…) earnings growth has been in the mid-to-low single digits since the middle of 2012. The third quarter is seen registering 3.5% growth, according to S&P. Earnings grew by 3.8% in the second quarter. (…)

Here’s the latest Factset:

  • The estimated earnings growth rate for Q3 2013 is 3.2%. The Financials sector is
    predicted to report the highest earnings growth for the quarter, while the Health Care sector is predicted to report the lowest earnings growth for the quarter.
  • Earnings Revisions: On June 30, the earnings growth rate for Q3 2013 was 6.5%. All ten sectors have recorded a decline in expected earnings growth over this time frame, led by the Materials sector.
  • Earnings Guidance: For Q3 2013, 89 companies have issued negative EPS guidance and 19 companies have issued positive EPS guidance. As a result, 82% (89 out of 108) of the companies that have issued EPS guidance for the third quarter
    have issued negative EPS guidance. This percentage is consistent with the percentage recorded in the previous quarter at this time (81%), but well above the 5-year average of 62%.
  • Earnings Scorecard: Of the 17 companies that have reported earnings to date for Q3 2013, 12 have reported earnings above the mean estimate and 11 have reported revenue above the mean estimate.

Over the course of the third quarter, analysts have lowered earnings estimates for companies in the S&P500 for the quarter. The Q3 bottom- up EPS estimate has dropped 2.6% (to $26.94 from $27.65) since June 30.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 4.4%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 6.4%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.2%.

Thus, the decline in the EPS estimate recorded during the course of the Q3 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages. In fact, the decline in the bottom-up EPS during the third quarter was the lowest since Q1 2011 (-0.7%).

Just kidding  Please, keep reading:

More than $1bn has been wiped off earnings estimates for Wall Street’s five biggest banks in the past month on growing fears of a sharp decline in trading revenues coupled with increased legal costs.

JPMorgan Chase has borne the brunt of forecast cuts, with consensus estimates of net income down $526m to just under $5bn. Its growing legal bills alone are expected to add $2bn in costs when it kicks off the banks’ earnings season on October 11.

But the depressed forecasts have extended to all banks with big fixed income trading operations, after several warnings of slow activity throughout the last three months. Hopes of a final trading flurry in the last few weeks of the quarter have been dashed, with fixed income trading revenues particularly hurt. (…)

Analysts reduced their expectation of net income by $210m for Citigroup, $128m at Bank of America, $123m at Goldman Sachs and $97m at Morgan Stanley, according to Bloomberg data. Those forecasts strip out the distorting effect of an accounting rule that forces companies to take profits or losses from changes in the value of their own debt.

Pointing up  Here’s the punch line from Factset:

The Financials sector is projected to have the highest earnings growth rate (9.3%) of any sector for the third consecutive quarter. It is also expected to be the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 1.9%.

At the company level, Bank of America and Morgan Stanley are the key drivers of growth in the sector, due in part to comparisons to weak earnings in the third quarter of 2012. The mean EPS estimate for Bank of America is $0.20, relative to year-ago EPS of $0.00. The mean EPS estimate for Morgan Stanley is $0.44, compared to year-ago EPS of -$0.55. If both of these companies are excluded, the growth rate for the sector would fall to -0.4%.



I have posted a lot about that. The revolution is happening but it is a zero sum game. From the losers side:

Eon chief warns of US energy advantage
Comments fuel concerns heavy industry will abandon EU

The head of Germany’s largest utility has warned it will be years before Europe can hope to counter the US’s growing advantage in energy costs and predicts that the disparity will meanwhile lead heavy industry to abandon the continent.

Johannes Teyssen, chief executive of Eon, said there were no obvious options for Europe to narrow the US advantage – whether by drilling for shale gas, importing more liquefied natural gas or importing inexpensive US supplies.

“There is a competitive advantage for America that we cannot prevent, at least for some time,” Mr Teyssen told the Financial Times. He said it was “a dream” for politicians to suggest otherwise. “It will take years and long years of innovation before we can start to shrink it,” he added.

Mr Teyssen’s comments will add to growing concerns in Europe that high energy prices are encouraging manufacturers such as chemicals companies to shift investments across the Atlantic, where the shale bonanza has reduced natural gas costs to between a quarter and a third of those in the EU. (…)

“The price difference is unnerving some companies and deciding their investments,” Mr Teyssen said, adding that the US advantage was “getting so big we cannot allow it to continue”.

Even if Europe put aside its environmental concerns and decided to pursue natural gas fracking, it would take at least five years to develop such an industry, he predicted. Instead, he said, the continent was more likely to benefit if China and Australia pushed ahead with the technology because it would free up gas from Qatar and other world suppliers. (…)


NEW$ & VIEW$ (29 AUGUST 2013)

U.S. Pending Home Sales Decline Further

The National Association of Realtors (NAR) reported that pending sales of single-family homes during July declined 1.3% m/m but remained up 6.7% versus July of last year. The monthly decline followed an unrevised 0.4% June slip.

Last month’s sales decline again reflected mixed performance around the country. Home sales in the Northeast fell 6.5% (+3.3% y/y) while sales in the West dropped 4.9% (-0.4% y/y). Also moving 1.0% lower were home sales in the Midwest but they remained up 14.6% y/y. Pending home sales in the South rose 2.6% (7.7% y/y).

BMO Capital:


U.S. foreclosures fall in July from year ago: CoreLogic

There were 49,000 completed foreclosures last month, down from a 65,000 in July of last year, CoreLogic Inc said. There were 53,000 foreclosures in June, down from an originally reported 55,000.

Before the housing market’s downturn in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006. (…)

There were about 949,000 homes in some stage of foreclosure, down from 1.4 million a year ago. That foreclosure inventory represented 2.4 percent of all mortgaged homes, down from 3.4 percent in July last year.

German Jobless Figures Unexpectedly Rise in Summer Lull

The number of people out of work increased by a seasonally adjusted 7,000 to 2.95 million, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 25 estimates in a Bloomberg News survey. The adjusted jobless rate stayed at 6.8 percent, near a two-decade low.

Brazil raises rates for fourth time since April
Central bank in drive to tame stubbornly high inflation

imageThe central bank’s monetary policy committee, Copom, raised Brazil’s benchmark Selic rate by 50 basis points to 9 per cent late on Wednesday, the latest increase in a 175 basis point tightening cycle since April.

Indonesia Raises Rates in Unplanned Move to Shore Up Rupiah

The central bank increased the reference rate to 7 percent from 6.5 percent, it said, after a meeting in Jakarta today that came before the next scheduled policy review. It also raised the deposit facility rate by half a point to 5.25 percent, and extended a bilateral swap deal with theBank of Japan valued at $12 billion that will allow the two to borrow from each other’s foreign-exchange reserves.

Indonesia raised the key rate by a combined 75 basis points in June and July before keeping it unchanged at its meeting on Aug. 15 as slowing growth deterred a third consecutive increase. The rupiah’s more-than-5 percent slump in the past two weeks may have pressured the central bank to increase borrowing costs again before a scheduled policy review on Sept. 12.

Philippine economy maintains strong growth
Services led by trade and real estate fuel 7.5% GDP rise

GDP grew 7.5 per cent in the second quarter from a year ago after expanding by a revised 7.7 per cent from the previous period, making it the fourth straight quarter that the economy climbed more than seven per cent, the government National Statistical Coordination Board said. (…)

Though personal consumption spending still accounts for almost 70 per cent of the economy, it contributed less than half of second-quarter GDP growth. Most of the expansion came from government spending, boosted by the May 2013 midterm polls, and investments, particularly public and private construction.

Construction grew by 15.6 per cent in the quarter to June after rising by 30.1 per cent in the previous period, buoyed by government infrastructure projects as well as a boom in high-rise residential condominiums, office towers and other types of housing.

Is The Japanese Consumer Losing Faith?confidence is waning. More data on Friday may underline this trend.

Last week, subdued department store sales set off alarm bells. On Thursday, preliminary retail sales figures brought more bad news, falling 0.3% on year in July. On a seasonally adjusted basis, retail sales were down 1.8% on the previous month, the biggest fall since August 2011.

Oil market: multiple worries
Libya may be bigger threat to oil price than Syria

(…) Syria always has been and always will be a marginal player in the oil market. Before the civil war, it produced about 370,000 barrels of oil equivalent a day; that may have fallen to about 70,000 b/d now. Nor is it a significant transit point. (…)

More troubling is Libya, which produced almost 2 per cent of the world’s total oil and gas output last year. Earlier this year, Libya was boasting that it was almost back to its prewar production level of about 1.6m b/d (of which 1.3m b/d is exported). But strikes and protests have cut its daily oil production to an average of just 500,000 b/d this month. The chaos that has gripped the country since the ousting of Muammer Gaddafi in 2011 now threatens to curtail production indefinitely.

The “War” Effect

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts…? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya… and why Syria is arguably more complex than these previous conflicts

Via Citi,

S&P: trades better once conflict begins. This time should be no different.

Gold: falls after start of action. Again should be no different.

Crude: usually falls at or just prior to start of military action.

USD: reverts back to dominant trend. USD weakened post-action in 1991, 2003, 2011 as it was in a bear market. The opposite happened in 1999 and 2001 (USD bull market). This time around USD strength should return once military intervention begins.

One counterpoint: Syria is arguably more complex than these previous conflicts. Military objectives are also not as well defined. Russia and Iran will also weigh in both pre- and post-action. The usual market reaction may be more muted and short-lived because of greater uncertainties.


Links Between Capacity Utilization, Profits and Credit Spreads

From Moody’s:

Though the share of jobs directly linked to goods producing activity has shrunk considerably over time, the percent of industrial capacity in use remains highly correlated with overall profitability, credit spreads, and business debt repayment. In all likelihood, the large amount of economic activity that is indirectly linked to the production of tangible goods helps to explain the still strong correlation between industrial activity and the corporate credit cycle. For example, much service sector activity is derived from the transportation, storage, sale, and maintenance of tangible merchandise. Capacity utilization’s ability to offer useful insight shows that tangible goods still figure prominently in a post-industrial economy. We still consume a lot of things.

(…) Amid sufficient slack, rising rates of capacity utilization often generate percent increases by profits that are a multiple of the accompanying percent increase in business sales. This phenomenon is referred to as operating leverage.

Ordinarily, the bigger is the year-to-year percentage point increase in capacity utilization, the faster is the year-to-year growth rate of profits. For example, when the year-to-year increase by the rate of industrial capacity utilization most recently peaked at the 6.8 percentage points of 2010’s third quarter, the annual growth rate of the moving yearlong sum of profits from current production also crested at 33%. Subsequently, the yearly change of the capacity utilization rate eased to the 0.0 points of 2013’s second quarter and profits growth slowed to 3%. (Figure 1.)


Capacity utilization has declined in each of the last 5 months, from 78.2% in March to 77.6% in July. It has also declined in each of the last 7 cycles.


David Rosenberg recently wrote on the “normal” biz cycle:

I think we are heading into mid-cycle where consumer spending is going
to take the baton from the housing market. This is currently being
delayed by the lagged impact of the early year tax bite and the current
round of sequestering, but next year we should begin to see the impact
of gradually improving job market fundamentals spill into a pickup in
consumer spending growth. This would not just be desirable — it would
be natural. Exports should also take on a leadership role as the
recession in Europe ebbs and Chinese growth stabilizes. The cyclical
outlook in Japan is also constructive as the monetary and fiscal stimulus
has to fully percolate but there is already evidence that the two-decade
experience with deflation is drawing to a close.


The next chapter would then involve capital spending and plant
expansion, and capacity utilization rates and an increasingly obsolete
private sector capital stock will trigger accelerating growth in business
spending, likely by 2015 or perhaps even earlier. Profit growth is slowing and normally that would be an impediment, but there is ample cash on balance sheets and what businesses need is a less clouded policy
outlook, which hopefully will be resolved in the coming year as we get a
new Fed leader, greater clarity on monetary policy and some fiscal
resolution ahead of or following the mid-term elections.

That may be nothing but a hope and prayer, but more fundamentally, productivity growth has stagnated and the best way the corporate sector can reverse the eroding trend and protect margins at the same time will be to move more aggressively to upgrade their operations and facilities — we are coming off the weakest five-year period in the past six decades with regards to growth in capital formation.

Moody’s makes the link between capacity utilization and the high yield market:

Given the capacity utilization rate’s significant correlations with both the high-yield default rate and the delinquency rate of bank C&I loans, it is not surprising that the high-yield bond spread tends to widen as the capacity utilization rate falls. The diminution of cash flows and pricing power that accompanies a lowering of capacity utilization will increase the yield that creditors demand as compensation for default risk. Thus, a narrowing by the high-yield bond spread from its recent 460 bp to its 418 bp median of the previous two economic recoveries will require the fuller use of production capacity. (Figure 6.)

After rising sharply from June 2009’s record 66-year low of 64.0% to February 2013’s current cycle high of 76.5%, the capacity utilization rate of US manufacturers has since eased to July’s 75.8%. An extension of the current credit cycle upturn requires the return of a rising rate of capacity utilization.  (…)


However, U.S. capex are not about to turn up:

An unexpected second monthly decline in nondefense capital goods shipments in July, coupled with weak orders, flags slower business capex in Q3. (BMO Capital)



NEW$ & VIEW$ (5 AUGUST 2013)

Low Pay Clouds Job Growth

The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. (…)

Over the past year, lower-paying sectors such as retail, restaurants, hotels and temporary-help agencies accounted for more than 40% of job growth. Many of those jobs are part time; the share of Americans imageworking part time, which spiked during the recession, has shown little improvement and has been trending upward for much of this year. (…)

Of the 227,000 new jobs in the July household survey, 45% were part-time in June. In the past three months 684,000 (97%) of the 706,000 new jobs were part-time (Chart from NBF Financial).

But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June. (…)

The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth. (…)

But only 175,000 on average in the last three months. The lack of momentum is also apparent in the private sector where an average 181,000 jobs were created in the last 3 months compared with 206,000 in the previous 4 months.

The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low.

Questions of Quality

Pointing up Aggregate hours worked fell 0.1% as the workweek declined 0.2% (-0.1% in the private sector), and wages fell 0.1% in July leading the annual pace to slow to 1.9% from 2.1%. As a result, workers’ earned income fell by 0.3% in July.

Oh! by the way, ISI Company Surveys have been weaker lately with their diffusion index threatening to go negative. Most of their consumer-related surveys are weaker. We are entering the all-important back-to-school season. Eighteen states are offering sales tax holidays for a couple of days in August, 12 were last weekend.

Construction Jobs Are a Wreck The housing industry may be resurgent but construction jobs aren’t helping build payrolls.

Friday’s employment report showed that construction industry jobs fell by 6,000 in July and are down three of the past four months. At a seasonally adjusted 5.79 million, the number of jobs in the sector is up less than 3% from a year earlier.

But the real culprit appears to be a big drop in public construction.

Residential and specialty trade contractors — home builders — added 6,300 jobs in July.

Meanwhile, the nonresidential side cut 9,500 jobs. Heavy and civil engineering subtracted another 2,000 positions.

Looking only at residential construction, there was a loss of 400 jobs in the last 3 months. Actually, on a non-seasonally adjusted basis, the number of construction workers in the U.S. has increased only by 8,100 workers or 1.3% in one year. What housing recovery?


Meanwhile, Congress is back to budget brinksmanship, with the threat of a possible government shutdown in the fall and another market-rattling fight over the federal government’s borrowing limit looming ever-larger. So no one really knows — not even the Fed — what the central bank will do in September, and the July jobs numbers didn’t change that one bit. (WSJ)

Barron’s Gene Epstein adds this to blur everyone’s vision:

But if there were no signs of improvement over the job gains of last year, there was one apparent bright spot in the July report. The unemployment rate fell two-tenths of a percentage to 7.4%.

The bright spot was tarnished, however, by another trend in job-deprivation. Based on the BLS measure of labor underutilization that includes involuntary part-timers, the official unemployment rate “should” have read 7.9% rather than 7.4%. The math involved in generating that 7.9% is fairly straightforward.

The BLS keeps six measures of labor underutilization, “U-1” through “U-6,” of which U-3 is the official measure. U-3 covers only those jobless folks 16 and older who have looked for work over the past four weeks. U-6 includes those folks and adds two other categories, often referred to as the “hidden unemployed.” The first is the “marginally attached”—people who haven’t looked for a job over the past four weeks, but have done so over the past 12 months. The second consists of the involuntary part-timers (“part-time for economic reasons,” in BLS parlance)—people who work part-time, but are searching for full-time positions. (…)

For 15 months from October 1999 through December 2000, U-3 fluctuated between 3.8% and 4.1%—by all accounts, a time when jobs were quite plentiful and the labor markets unusually tight. Yet through this same 15 months, U-6 ran between 6.8% and 7.2%, averaging 177% higher. And it turns out that, over the 235 months since January 1994 when the BLS began tracking U-6, the ratio between U-6 and U-3 has also been 177%. Over that period, the ratio has fluctuated between a low of 163%, in ’02 and ’03, and a high of 189%. When the ratio gets that high, U-6 may be trying to tell us something.

That high of 189% was reached just last month. In July 2013, U-6 was at 14%, and if you assume a “normal” ratio last month of 177%, then U-3 would be 7.9%, not 7.4%. Also, if you parse U-6 you find that, the reason it’s unusually high is not because of the marginally attached, but because of the unusually high share of involuntary part-timers.

U.S. Consumer Spending Rises 0.5%

Personal spending, which measures how much Americans spend on items from gasoline to refrigerators, rose 0.5% in June from a month earlier, the Commerce Department said Friday. The spending boost was more than double the increase in May and the biggest since February.

Personal incomes, meanwhile, rose 0.3%, down slightly from May’s revised increase of 0.4%. (…)

However, in one potentially troubling sign, Americans’ disposable income, adjusted for inflation, fell for the first time in months. That could raise doubts as to how much spending will increase in coming months. (…)

Doug Short’s charts reveal the consumer squeeze:

Click to View

Savings are of little help. The 2005-08 low savings rates came from the housing bubble, unlikely to get repeated for a while.

Click to View

The price index for personal consumption expenditures, the Fed’s preferred gauge for inflation, rose just 1.3% in June from a year ago. That was higher than 1.1% year-over year increase in May but still far below the Fed’s target of 2% inflation.

So-called core prices, which exclude volatile food and energy costs, rose 1.2% in June from a year ago. That was the same year-over-year increase as in May.

Just kidding  Simple math: per capita real disposable income growth is 0%, employment growth is 1.7% and mostly part-time and savings are just about as low as they can get. Tough to expect spending growth in excess of 1.5-2.0%. That’s for 70% of the economy. Another 20% is government spending, going nowhere for a while longer. Never mind the rest.

Hence: real consumption has grown 1.5% in Q1 and 1.2% in Q2. Real GDP was +1.7% in Q2 (on a big inventory rise) and +1.1% in Q1. Clearly, the U.S. economy is not accelerating as many pundits, including many Fed officials, expected.

Comstock Partners observes:

Since consumer spending accounts for about 70% of GDP, we see little chance that other sectors can make up for the shortfall created by the lack of demand. In fact, the economy is likely to face additional headwinds as a result of the coming showdown in Washington over the fiscal 2014 Federal budget and another fight over the debt ceiling. The result could be either a White House concession on spending leading to additional fiscal restraint or the debilitating threat of a government shutdown. Although this has not yet gotten a lot of attention in the media, it will probably hit the headlines and dominate cable news after the congressional summer recess.

Ghost  And just when practically nobody uses the R word, they add:

In assessing the prospect for growth, it is also important to mention the much-discussed concept of “stall speed”, the point at which the economy can no longer maintain momentum and, therefore, falls into recession. In post-World War II recoveries whenever the 4-quarter growth rate of GDP has declined to below 2% the economy has gone into recession within a short time. In this regard, it is noteworthy that 2nd quarter GDP growth was only up 1.4% from a year earlier. This does not bode well for the widely expected pickup in the 2nd half, particularly in view of the headwinds from the coming political fight over the budget and debt limit, the possible tapering of QE, and the numerous problems facing the global economy.

But the best recession indicator has yet to turn down even though it has been flattening out lately…(charts from Doug Short)

Click to View


Click to View


Stay tune!

U.S. Factory Orders Rise 1.5%

Demand for U.S. factory goods rose in June, boosted by higher demand for aircraft, as businesses stepped up investments but at a slower pace than earlier in the spring.

Excluding transportation, factory orders were down 0.4%.

Orders for nondefense capital goods excluding aircraft rose 0.9%, after rising 2.1% in May and 1.2% in April. That figure is considered a proxy for business spending on equipment and software.

The report also showed that orders for goods expected to last more than three years, such as cars or refrigerators—known as durable goods—rose 3.9%. That was revised downward from last week’s 4.2%.

In one potentially troubling sign, orders for consumer goods fell 0.7%, largely on nondurable items.


PMI readings signal the end of Eurozone recession in the third quarter

PMI surveys confirm the ongoing improvement seen recently in business surveys (EC surveys, Ifo) and hard data (Industrial production, retail sales). Beyond the uncertainties regarding Q2 outcomes, this suggests that the euro area economy as a whole may exit recession in Q3, although the recovery remains fragile due to several headwinds, in particular the ongoing deleveraging process, Chinese slowdown and political instability. (Pictet)

Euro-Zone Retail Sales Fall

Eurostat said the volume of sales in June was down 0.5% from May, and 0.9% from June 2012. The month-to-month decline was the largest since December 2012.



In fact, sales volume was up 1.1% in May. But the important stat is core sales, excluding food and fuel, which were down 0.2% in June after surging 1.1% in April and 0.7% in May. In total, core sales were +1.6% in real terms in Q2 (+6.5% a.r.), following +0.2% in Q1 0.8% a.r.).

Is Spain’s Experiment About to Succeed?

(…) Spain has become a giant laboratory for an experiment never before attempted in a modern democracy. Can a program of austerity and structural overhauls extricate an economy from a debt crisis? Is it really possible for a country to achieve a so-called internal devaluation—restoring its competitiveness by cutting wages and boosting productivity rather than lowering its external exchange rate? Are European democracies capable of confronting vested interests and coping with the resulting social upheaval? (…)

The Bank of Spain recently estimated that the Spanish economy contracted by just 0.1% in the second quarter, down from 0.5% in the previous quarter, raising hopes that a return to growth is imminent—perhaps as soon as the current quarter. At the same time, unemployment has started to fall—down by 77,000 in the past four months. House prices and car sales have also stabilized. Exports have surged, up 8% in 2012, matching Germany. The current-account deficit, once 10% of gross domestic product as the country sucked in cheap money to fund the  construction boom, has turned to surplus. (…)

Now the conditions are in place for a business-investment-led recovery: foreign direct investment is picking up while domestic firms are throwing off sufficient cash to be increasingly self-funding. After all, Spain’s impressive export performance was achieved despite the deep domestic credit crunch. (…)

What is certain is that the stakes couldn’t be higher—for Spain and the euro zone: A self-sustaining recovery would remove one of the biggest threats to the survival of the single currency.

No less importantly, it would vindicate Berlin’s approach to handling the crisis and send a powerful message to other governments tempted to look to debt mutualization as an easy alternative to the hard business of reform.

High five IMF casts shadow over Spanish jobs
Fund expects jobless rate above 25% for at least next five years

(…) echoing recent warnings from independent economists, the IMF makes clear that Spain’s growth rates in the years ahead will be too anaemic to allow job creation. The Fund expects Spain’s gross domestic product rise to be less than 1 per cent annually for the next four years, and only 1.2 per cent in 2018.

“Spain has historically never generated net employment when the economy grew less than 1.5-2 per cent,” the IMF notes. “Yet growth is not projected to reach these rates even in the medium-term. Thus reducing unemployment to its structural level (still likely very high around 18 per cent) by the end of the decade would require a significant improvement in labour market dynamics.” (…)

Hmmm…The IMF is not the ultimate in economic forecasts. FYI, Spain retail sales were down 0.8% in June but +0.6% in Q2 following +1.1% in Q1. These compare with EA17 sales up 0.6% in Q2 up 0.8% in Q1. (Eurostat)

Sales tax rise to hit Japanese growth
Government says economy would grow 1% next year

The cabinet office forecast that the economy would grow at only 1 per cent in the fiscal year starting in April if the government proceeds with the first phase of a two-stage plan to raise the consumption tax from 5 per cent to 10 per cent by 2015. (…)

The cabinet office also raised its forecast for the economy this year to 2.8 per cent from 2.5 per cent. While the estimates highlighted concerns about the controversial tax, they implied that Japan would avoid a severe sales tax-related recession, suggesting their value as ammunition for opponents of the rise may be limited.

A final decision on the plan’s first phase – a rise from 5 to 8 per cent next spring – must be made by October, and could come earlier. The long-debated measure is intended to shrink the budget deficit and tackle a gross public debt that is almost 250 per cent the size of the economy, the highest ratio in the developed world. (…)

Many Japanese policy makers remain haunted by the country’s last sales-tax rise, in 1997. Enacted in the face of a worsening Asian financial crisis, it is widely believed to have tipped the economy into a severe recession. (…)

Part of the predicted tax-related slowdown would be a result of a shift in the timing of consumption, rather than an overall suppression of demand, the government said. Some people would move up purchases of big-ticket items, such as cars and houses, to before the tax took effect. That would both lift consumption immediately before the implementation date and exacerbate the expected post-tax fall.

One solution for Mr Abe could be to cushion the blow of any tax increase with short-term government spending. Economists have suggested that a stimulus budget of Y4-5tn, about half the size of a spending package Mr Abe introduced in January, could offset the tax’s likely negative impact on consumption.

Indonesia’s consumer boom falters Second-quarter growth of 5.8% is slowest for nearly three years

(…) Indonesia’s annual GDP growth fell to 5.8 per cent in the second quarter, according to government data released on Friday, the slowest pace for nearly three years.

Agus Martowardojo, governor of the central bank, told reporters that the government needed to “promote exports to new markets . . . as growth slows in China and India”.

image image

Rate Cuts Fail to Lift Australian Consumers  Disappointing Australian retail sales data added to market expectations the Reserve Bank of Australia is likely to cut rates at a policy meeting Tuesday. But few observers expect such easing to help turn around weak consumer spending in the short term.

Wall St falls out of love with commodities
JPMorgan’s exit signals that the boom is over

(…) The fact that JPMorgan is considering a sale is the clearest sign yet that Wall Street’s commodities trading boom has fizzled out. Coalition, a consultancy, reports that the combined revenues of the top 10 banks in the commodities sector was $6bn last year, down 22 per cent on 2011. Revenues peaked at $14.1bn in 2008, the same year the oil price peaked. (…)


Miners return to hedging gold
Small and medium-sized companies lead industry shift

(…) The shift in philosophy towards hedging reflects mining executives’ fear that the past month’s rebound in gold prices may be shortlived, as well as the recognition that more falls in prices could push them into losses. Bankers said the hedging had accelerated as prices rallied from their June low to $1,313 last week.

The mining industry has a chequered history of hedging. The practice was most prevalent in the late 1990s, just before gold began a decade-long bull market, while by the time gold prices peaked in 2011, miners had cut their hedging to almost nothing. (…)

Nerd smile  Being a broker, or even a miner, does make you any smarter!


We are nearing the end of Q2 earnings season as 393 S&P 500 companies have reported. According to S&P, the beat rate remains at 66% while the miss rate edged up above 25%. The bulk of the companies yet to report are in the Consumer and Telecom sectors where the miss rates have been above average. See last Friday’s Earnings Watch comments for a valuation update.

For Q3 2013, 61 companies have issued negative EPS guidance and 16 companies
have issued positive EPS guidance. These numbers are in line with those at the same time during the Q1 season for Q2 results but well above the 5-year average of 62% according to Factset which adds:

Due in part to negative EPS guidance, analysts have lowered earnings expectations for the third quarter. The estimated earnings growth rate for Q3 2013 is 4.8%, down from an estimate of 6.9% at the start of the quarter (June 30). Seven of the ten sectors have recorded a decline in expected earnings during this time, led by the Materials and Information Technology sectors. (…)

Although analysts have reduced earnings growth expectations for Q3 2013 (to 4.8% from 6.9%) and Q4 2013 (to 11.1% from 12.1%) since June 30, they still expect a significant improvement in earnings growth in the second half of 2013 relative to the 1st half of 2013.

That is even though estimated revenue growth rates are only +2.8% for Q3 2013 and +0.7% for Q4 2013. Why are they seeing such margins expansion at this stage? Wishful thinking when we look at these two charts from Factset.


Q4’13 margins are estimated (!) at 10.0%, up from 9.0% in Q4’12 and 8.7% in Q4’11. This would be the first year when Q4 margins would be higher than margins of the previous 3 quarters. Why? Beats me. And then, of course, it’s up on a straight line.

Here’s a ScotiaCapital chart that speaks volumes about margins:


See 10% margins there?

Interestingly, Facset recently looked at  analysts quarterly projections for the past 10 years to discover a clear propensity to really overestimate Q4 results.


Hmmm…careful if you’re using forward earnings.


Dow Gains Sixth Week in a Row

Stocks edged higher, capping the Dow’s sixth-straight weekly advance, as investors shrugged off weaker-than-expected July jobs growth.

Morning MoneyBeat: Meh Earnings? Who Cares! Investors don’t seem to be losing much sleep over the unfolding of yet another lackluster earnings season.

(…) Corporate profits have taken a backseat to Fed policy as a primary catalyst for the market’s short-term moves. (…)

Earnings may not be great, but they’ve been good enough to keep the rally moving along.

Warning lights flash in US credit markets
There is much for financial stability hawks to worry about

(…) Fed governor Jeremy Stein’s February 7 speech on “Overheating in Credit Markets” signalled that officials were thinking seriously about the potential financial ill-effects of QE, in a theme that was taken up by chairman Ben Bernanke three months later. It looked an important speech then. It looks seminal now.

In it, Prof Stein highlighted the dangers to financial stability as investors reach to earn a little more yield in the ultra-low interest rate environment engineered by the Fed. He ran through a list of indicators where one may spot high-risk practices building up. It is worth repeating the exercise. (…)

All four of his non-traditional indicators are flashing warning lights, data from Lipper and S&P Capital IQ show. This year’s issuance of payment-in-kind notes, which allow borrowers to put off cash interest payments, is close to passing the total for the whole of 2012, having had the biggest month this year in July.

Issuance of covenant-lite loans hit an all-time record in February but even through recent turbulence it has remained elevated at monthly levels that were typical in the first half of 2007.

The use of borrowing simply to pay private equity shareholder dividends – “divi recaps” – doubled in the second quarter from the first. July was slow, but there are $8bn of deals slated for August, which will be at least the second-highest month this year.

Dividend recap volume

And finally, the leverage in large buyout deals in July was 5.9 times, the highest since 2007. There is still a wall of money chasing the higher yields from junk bonds and leveraged loans. Leveraged loan funds just recorded their 59th successive week of inflows. (…)

The evidence from credit markets, and from high-yield and leveraged loan sectors in particular, is that risk-taking may be more widespread even than it was when Prof Stein raised his early warning in February.

As Stock Market Surges, Private Equity Says It’s Time to Sell

Fortress, the first publicly traded buyout firm in the U.S., is preparing holdings for public offerings while struggling to find attractive new deals, Wesley Edens, who runs Fortress’s $14.3 billion private-equity business, said on a conference call with investors yesterday. That environment extends to credit and distressed investments, said Pete Briger, who oversees the New York-based firm’s $12.5 billion credit business.

“This is a better time for selling our existing investments than making new investments,” Briger said on the call. “There’s been more uncertainty that’s been fed into the markets.”

Their comments echoed remarks from Apollo Global Management LLC Chief Executive Officer Leon Black to Blackstone President Tony James, who said last month the environment is ripe for selling because credit markets are still hot and equities strong.

“It’s almost biblical: there is a time to reap and there’s a time to sow,” Apollo (APO)’s Black said at a conference in April. “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.”


NEW$ & VIEW$ (29 JULY 2013)


We are past the mid-point in the Q2 earnings season. Here’s the run down:

  • From S&P:

With 58% of S&P 500 companies having reported, the beat rate is 66% and the miss rate  24%, roughly unchanged from the earlier report. The miss rate is particularly high (33-35%) in Energy, Materials and Consumer Discretionary, the most cyclical sectors. Even though actual earnings are coming in 1.9% higher than the estimates, estimates from Q2 to Q4 continue to be reduced although only marginally.

At just past the mid-point of the Q2 2013 earnings season, the percentage of companies reporting actual earnings above estimates is 73%. This percentage is equal to the 4-year average of 73%. However, the earnings growth rate for the second quarter has only increased by one percentage point since the beginning of the earnings season. On June 30, the earnings growth rate was 0.8%. Today, the earnings growth rate is 1.8%. Over the past four years, the median increase in the earnings growth rate from the end of the quarter through the end of the earnings season has been five percentage points.S&P 500 Surprise %: Q109 – Q213








The answer can be found in the surprise percentage reported to date for the second quarter. At this point in time, the surprise percentage for Q2 2013 is 3.2% (i.e. companies in the S&P 500 are beating EPS estimates in aggregate by 3.2%). This percentage is below the 4-year average of surprise percentage of 7.0%. In fact, if 3.2% is the final surprise percentage for the quarter, it would reflect the second-lowest surprise percentage for the index since Q1 2009. The lowest surprise percentage recorded to date since 2009 was in the third quarter of 2012 (3.1%).

Unless there is an improvement in the surprise percentage during the second-half of the earnings season, there is a good chance that the Q2 2013 quarter will finish with the third lowest earnings growth rate recorded by the index in the past four years, trailing only the Q3 2009 (-15.3%) quarter and the Q3 2012 quarter (-1.5%).

Pointing up Most interesting however:

S&P aggregate Q2 EPS is tracking $0.38 above the season start levels (around 0.8% beat) and financials account for an astounding $0.63 of that!


This goes along Moody’s findings reported here last Friday: Financials are saving the earnings season so far as earnings ex-Fins are flat YoY.



Earnings for companies in the S&P 500 are projected to climb 3.3 percent, led by a 27 percent increase in bank profits, based on more than 11,000 analyst projections compiled by Bloomberg. Without the financial industry, S&P 500 income would contract 1.2 percent.

Of the 815 companies that have reported earnings so far this season, 65.2% of them have beaten earnings estimates.

Bespoke tallies all NYSE companies. The beat rate has declined sharply last week from 71% to 65%.

This a.m.: Corporate Profits Lose Steam

Revenue at the companies that make up the Standard & Poor’s 500-stock index—excluding banks, whose profits have soared—is expected to creep up by just 1.1% in the second quarter from a year earlier, according to Thomson Reuters, which melds Wall Street analysts’ projections with company reports.

Earnings, meanwhile, are expected to decline 0.6%. That would be the first profit decline for nonfinancial companies since last autumn and the first time in a year that earnings grew more slowly than revenue, a sign that margin widening is petering out. (…)

Analysts are divided on whether margin expansion will remain a reliable source of earnings growth. Tony Dwyer, U.S. portfolio strategist for Canaccord Genuity, says profit margins will continue to widen unless revenue drops, because companies are keeping expenses in check. “Margins should do pretty well,” he said.

But Howard Silverblatt, senior index analyst for Standard & Poor’s, questions whether margins will continue to increase.

“I don’t know how many more people you can get rid of,” he said. “You cannot continuously cut to get your way out.”

On margins: Margins Calls Can Be Ruinous In Many Ways


European Earnings: Bad And Getting Worse, As Majority Of Companies Miss EPS

Not surprisingly, we find that of the 120 DJStoxx600 companies reporting so far, the revenue picture is about the same as in the US, with 58% of companies beating the topline and 42% missing, a carbon copy of the US’ 58%/43%. But it is the EPS where the difference truly shines: while in the US some 73% of firms have “beat”, in Europe this number is only 48%. The flipside, or misses? In the US it is 26%. In Europe: a majority of companies, or 51%. In brief, anyone expecting a quick and easy turnaround in Europe’s corporate earnings picture will have to wait some more.

Source: Deutsche Bank

3 Signs the Market Is Near a Top


One study of bull market peaks over the past 80 years finds eerie similarities with current conditions.

We may be closer to a major market top than most investors think.

That at least is the conclusion that emerged when I compared the current market environment to what prevailed at major market tops of the past century. (…)

Market rises steeply before bull dies

The typical bull market comes to an end following a period of extraordinary performance. (…) 

Since the 1920s, the average bull market has gained more than 21% over the 12 months prior to a top — more than double the long-term average.

Interestingly, the stock market recently has produced a return that is quite similar to this average 12-month gain prior to market tops: The S&P 500 over this period is up nearly 23%.

Riskiest stocks shine before market tops

(…)  the historical record suggests the stock market is a particularly risky affair over the 12 months prior to market tops. The margin between the average value and average growth stock over those 12 months is nearly double that historical average; the same is true for the margin of the average small-cap over the typical large-cap.

Ominously, recent experience adheres to this pattern. The value-over-growth margin over the past 12 months has actually been nearly triple the historical average (Fama and French define value as riskier than growth). Though the small-cap sector hasn’t outperformed the large-caps by as big a margin, it still is well ahead over the past 12 months.

P/Es at market tops

I had fully anticipated, when focusing on price/earnings ratios, to find that they are at extreme levels at market tops. But that is not what I found.

On the contrary, the average P/E for the S&P 500 has been 18.7 at bull market tops since the 1920s. That’s only modestly higher than the 16.8 average over the entire eight-decade sample. (…)

This provides both good and bad news for the current market. On the one hand, the S&P 500’s current P/E, at 17.9 when calculated on the basis of trailing earnings, is hardly at an extreme level. On the other hand, however, the market’s current P/E is only marginally less than where it stood on average at past bull market tops — 18.7.

The bottom line?

Needless to say, not all historical parallels to the current market are worrisome. The index of leading economic indicators, for example, shows no signs of an imminent recession. And even though interest rates have begun to rise, the yield curve — which has an impressive forecasting record — has not only remained quite steep, but even become slightly steeper in recent weeks. That’s good news, because that means it’s moving in just the opposite direction of its becoming inverted, and only when it’s inverted would it signal a heightened risk of a downturn. (…)

All we can say right now is that, when we compare the current stock market to past market tops, there are some worrisome parallels.

This doesn’t automatically mean that the current bull market will soon end. But it also means we shouldn’t be too confident that it won’t.

Mark Hulbert always does interesting statistical work. This piece is no exception even though it is leading investors just about nowhere. When an analysis begins with

We may be closer to a major market top than most investors think.

And ends with

This doesn’t automatically mean that the current bull market will soon end. But it also means we shouldn’t be too confident that it won’t.

The reader is justified to ask: what’s the point?

There are nonetheless several worthy points in Hulbert’s analysis:

  • Market rises steeply before bull dies: do not buy equities just because they are rising. Beware when the crowd moves in. Keep your cool at al times, using objective analytics to gauge risk vs reward.
  • Riskiest stocks shine before market tops: Keep your cool at al times, using objective analytics to gauge risk vs reward.
  • P/Es at market tops: A long term analysis of absolute P/Es is bound to produce faulty results since inflation significantly impacts P/E ratios. Using averages of absolute P/Es during 80 years of fluctuating inflation rates is meaningless. Look at the charts below (click to enlarge) if you doubt that.



  • The bottom line? Hulbert confuses market corrections and recessions. Always sell stocks if you believe a recession is coming, whatever the P/E, because profits will collapse. The LEI and the yield curve are useful tools for that. Equities can also decline meaningfully to correct excessive valuations. This is when the Rule of 20 is most useful because it has a proven record and it uses objective facts.

Related read: S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years

Thumbs up Thumbs down The Employment Road To Tightening

Table 1 shows the average monthly increase in payrolls that is needed to achieve the Fed’s unemployment rate forecast, based on two assumptions about labor force growth. First, the working-age population picks up slightly, as per the Census Bureau’s projections. And second, the labor force participation rate (or part rate) holds steady near 34-year lows, as the upward push from cyclical forces (in particular, a tightening labor market) offsets the downward structural pull from an aging population.


Until now, the cyclical and structural forces have worked in concert to reduce the part rate by almost 3 percentage points since 2006 (one recent study suggests it was nearly an even split in terms of influence).

Under these assumptions, the jobless rate will hold steady if job growth averages 110,000 per month. However, the Fed has set a much higher bar than 7.6% unemployment before it slows stimulus, let alone tightens policy. With inflation in check, policy is squarely aimed at reducing the jobless rate to a sustainable range of 5.2% to 6.0%. The Fed expects to reach the upper bound of this range in late 2015. This will require employment gains averaging 189,000 per month in the next 2½ years.

Of note, the minimum unemployment-rate threshold (6.5%) that the Fed  has established before it considers raising rates is not expected to be reached, at the earliest, until late 2014. This will require job gains averaging 200,000 in the next 1½ years.

In the event that the part rate turns up, more job growth would be required to keep the Fed’s unemployment rate forecast on track. For every 0.1% increase in the part rate, an additional 7,000 jobs (over and above 189,000) would be needed to achieve a 6.0% jobless rate in late 2015. So, the higher the part rate, the more likely the Fed will delay tightening unless economic growth exceeds expectations. (BMO Capital)


IMF: Manufacturing Could Lift Long-Term U.S. Growth

(…) “The contribution of manufacturing exports to growth could exceed those of the recent past,” the IMF said in a new report on the U.S. economy that identifies important structural changes that could boost growth over the long term.

The IMF noted that U.S. production of durable goods like computers, motor vehicles and machinery returned to prerecession levels towards the end of 2011, before the overall economy did, and that the recovery of this sector has been more robust than in other advanced economies.

Pointing up  This dynamic is the result, the IMF said, of a decrease in labor costs relative to those of emerging markets, cheaper energy produced by the shale gas and oil boom, and a depreciation of the U.S. dollar. Thanks to these gains in competitiveness, if U.S. manufacturers were to shift the focus of their exporting activities to fast-growing Asian markets, the sector could add between 0.4 and 0.6 percentage point to growth through 2020, compared to a 0.2 percentage point contribution in the first decade of this century. (…)


China Aims to Help Small Businesses

China has rolled out temporary tax cuts and promises of fresh credit for small businesses that have been hit hard as economic growth slows, but the move will have only a limited impact on the economy, analysts said. (…)

On Friday, the central bank said it would encourage banks to lend more to smaller firms and it would encourage these companies to tap the bond market for financing. That followed an announcement by the State Council, or China’s cabinet, on Wednesday that it would temporarily suspend business and value-added taxes for companies with monthly revenue under 20,000 yuan ($3,260) starting Aug. 1.

That’s not small, that’s very tiny!

Small and medium-size enterprises account for 80% of China’s urban jobs, according to the Ministry of Industry and Information Technology.  (…)

Jobless rate to be ‘last straw’ for policy

Analysts believe that a sharp deterioration in the employment situation could be the ‘last straw’that forces changes in economic policy, although it’s not yet clear what the government’sbottom line for growth is this year. (…)

Zhu Baoliang, an economist at the State Information Center, a think tank under the NationalDevelopment and Reform Commission, said that the “safe zone” for unemployment is 4 to 5 percent. (…)

Don’t you worry about unemployment in China. It is clearly under control at 4.1%: Winking smile


Pointing up  Shale Threatens Saudi Economy, Warns Prince Alwaleed

Saudi Arabian billionaire Prince Alwaleed bin Talal has warned that the kingdom’s petroleum-dependent economy is increasingly vulnerable as rising production of U.S. shale oil and gas reduces global demand for crude from members of the Organization of the Petroleum Exporting Countries.

In an open letter dated May 13 addressed to Saudi Oil Minister Ali al-Naimi and several other ministers, which was published Sunday on Prince Alwaleed’s Twitter account, he said the kingdom won’t be able to fulfill its plan to increase its crude production capacity to 15 million barrels because of the shale threat.

Saudi Arabia, the world’s biggest oil exporter, is now pumping at less than its production capacity because consumers are limiting their oil imports, Prince Alwaleed said. This means the kingdom is, “facing a threat with the continuation of its near-complete reliance on oil, especially as 92% of the budget for this year depends on oil,” said the prince. (…)

In a report last month, OPEC’s own analysts predicted that demand for the group’s crude would fall next year to 29.6 million barrels a day, more than 600,000 barrels a day below its level last year. The International Energy Agency expects demand for OPEC crude to decline again in 2015 to 29.2 million barrels a day, before starting to rise gradually in the following years. (…)

European oil demand on the rise
Hopes for sign of increased economic activity

(…) The year-on-year increase in European oil demand in April and May – the first consecutive increases since the start of 2011 – means the continent is now set for its first quarter of oil demand growth since 2010.

Diesel demand has increased for three consecutive months, a sign of increased economic activity because it means trucks are making more journeys, according to David Wech, an analyst at JBC Energy in Vienna.

The International Energy Agency has raised its estimate for second-quarter oil demand in Europe by 2 per cent since the start of the year, and some analysts say European consumption could continue to exceed expectations.

High five  Some of the increase may have been due to a  cold spring encouraging consumption of fuel and heating oil.

And this:  Euro Area Credit Contraction a Stiff Headwind

However, while activity may at last be stabilizing, the economy
faces a significant headwind in the sharp contraction in bank lending. Lending to the private sector fell in July, as it has in 18 of the past 21 months, leaving total loans outstanding down a record 2.6% y/y. (BMO Capital)image

DRIVING BLIND (continued)

Fed ‘Doves’ Beat ‘Hawks’ in Economic Prognosticating

The WSJ examined more than 700 predictions in speeches and testimony by 14 Fed policy makers—and scored the predictions on growth, jobs and inflation.

(…) To evaluate the performance of individual Fed officials, the Journal looked at texts of speeches and congressional testimony. Forward-looking comments about the economy were rated for accuracy.

The Journal gave a mark ranging from -1.0—far off the mark—to 1.0—nearly perfectly correct—for each comment and averaged the total. A final score of zero showed someone was wrong as often as correct. (…)

Ms. Yellen and Mr. Dudley—both in Mr. Bernanke’s inner circle—ranked first and second in the Journal analysis. Both predicted slow growth and low inflation over the past four years. Ms. Yellen had the highest overall score in the Journal’s ranking, 0.52. Mr. Dudley scored 0.45.

The lowest scores were tallied by Mr. Plosser, -0.01; St. Louis Fed President James Bullard, 0.00; Richmond Fed President Jeffrey Lacker, 0.05, and Minneapolis Fed President Narayana Kocherlakota, 0.07.

Investors who closely follow every comment by Fed officials don’t appear to distinguish policy makers by the accuracy of their economic forecasts.

Macroeconomic Advisers LLC, a research firm, determined Mr. Plosser, Mr. Bullard and Mr. Lacker consistently moved markets more than Ms. Yellen. (…)


Well, the “overall scores” look strange to me when considering the “growth scores”.


John Mauldin in his latest Thoughts from the Front Line:

This week President Obama gave a speech on the economy that sounded like a campaign speech except that he should not be running any longer. He blamed the rise of technology for the loss of jobs, the decimation of the power of unions for flat incomes, and the policies of his predecessor for the current malaise. The speech was a wish list of new programs and promises, yet nothing is getting done. He fails to engage with the most pressing problems of our time and doubles down on a healthcare plan that is a train wreck even his most ardent supporters are walking away from. Did you see the recent letter from multiple union leaders asking for a course correction on healthcare?

The Congressional Budget Office now estimates that 7 million people will lose their employer-provided health insurance at the end of the year. One would assume that those are almost all full-time workers. So instead of getting health insurance in some form as a benefit, they will likely soon be paying $1400 a year (minimum) in mandated taxes (the level set by the Supreme Court), and those costs will rise dramatically over the next few years, according to the current schedule. That is a HUGE tax increase for those people.

Young people who have no insurance and are making more than $10 an hour will be paying about $1300 a year, or close to 10% of their after-tax income. That blows a monster hole in their disposable income at those levels. There is no other way to look at this: it’s a huge lower-middle-class tax increase. Yes, they get a benefit (health insurance) that someone somewhere in society was already paying for, but they personally did not have these costs before.

The unintended consequences of the healthcare bill are going to be vicious. Not only is there a tax increase on the rich and on small employers, there is a tax increase on young people and the middle class. And it’s a tax increase that comes in the middle of the slowest recovery on record. It is possible that we grew at less than 1% this last quarter. And the burden piles on top of a secular shift in employment practices that is making life more difficult for the younger generations.


Mauldin again on the next Fed chief:

Oh, dear gods. (…) This is most distressing. On the one hand we have the most uber-dovish candidate ever in the form of Janet Yellen, with no real-world experience and likely to continue QE at the sight of her own shadow, which as I noted yesterday in the letter is a real problem, OR
We get a man from whose vocabulary the terms collegiality and consensus are somehow missing.

He is possibly less dovish (maybe a good thing, but who knows what he would really do, as he is not going to tell us until after he is confirmed), and he will continue to be Larry Summers, which is to say divisive. I have talked to some of his colleagues at Harvard. You get mostly nuanced statements with a lot of clear body language that says “I am glad he’s gone.”

GOOD READ China’s Bad Earth

Industrialization has turned much of the Chinese countryside into an environmental disaster zone, threatening not only the food supply but the legitimacy of the regime itself.

(…) Estimates from state-affiliated researchers say that anywhere between 8% and 20% of China’s arable land, some 25 to 60 million acres, may now be contaminated with heavy metals. A loss of even 5% could be disastrous, taking China below the “red line” of 296 million acres of arable land that are currently needed, according to the government, to feed the country’s 1.35 billion people.

Rural China’s toxic turn is largely a consequence of two trends, say environmental researchers: the expansion of polluting industries into remote areas a safe distance from population centers, and heavy use of chemical fertilizers to meet the country’s mounting food needs. Both changes have been driven by the rapid pace of urbanization in a country that in 2012, for the first time in its long history, had more people living in cities than outside of them. (…)

The consequences of this shift catapulted to national attention in February, after China’s Ministry of Environmental Protection refused to release the results of a multiyear nationwide soil-pollution survey, calling the data a “state secret.” The decision—brought to a head when an activist lawyer pressed the ministry to reveal the numbers—sparked an outcry online and in the traditional media. (…)

Crying face Burgundy vineyards devastated by storm
Crop damage ranges from 10% to 100% after hail deluge

(…) France’s agriculture ministry said on Friday that up to 40 per cent of vineyards were hit in the Côte de Beaune, which accounts for about 10 per cent of the Burgundy region’s annual 200m bottle production. Crop damage in the stricken vineyards ranged from 10 per cent to 100 per cent, the ministry said.

Among the best known wine-growing districts hardest hit were Pommard, Volnay, Monthélie, Beaune and Meursault, according to BIVB, the Burgundy wine board, which estimates losses of more than 4m bottles. “In 40 years, we have never seen a whole area hit like this,” a BIVB spokeswoman said. “In 20 minutes, everything was ruined.” (…)


NEW$ & VIEW$ (19 JULY 2013)

Conference Board Leading Economic Index: Unchanged in June

The Conference Board LEI for the U.S. was unchanged in June. The improving indicators were yield spread, the Leading Credit Index™ (inverted), initial claims for unemployment insurance (inverted) and consumer expectations for business conditions. Negative contributions came from building permits, ISM® new orders and declining stock prices.

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Philly Fed Survey: Manufacturing Conditions Improved


The latest gauge of General Activity rose to 19.8 from the previous month’s 12.5. The 3-month moving average came in at 5.0, up from 2.9 last month. Today’s headline number is the highest since March 2011, and the 3-month MA trend is well above its interim low set in July of last year.


The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 12.5 in June to 19.8, its highest reading since March 2011. The percentage firms reporting increased activity this month (37 percent) was greater than the percentage reporting decreased activity (17 percent).


Other current indicators suggest continued growth this month. The shipments index increased notably, from 4.1 in June to 14.3. The demand for manufactured goods as measured by the current new orders index
remained positive, although it fell back 6 points to 10.2. Firms reported a drawdown of inventories this month: The inventory index fell 15 points, from -6.6 to -21.6.image

Labor market conditions showed a notable improvement this month. The current employment index, at 7.7, registered its first positive reading in four months. The percentage of firms reporting increases in employment
(18 percent) exceeded the percentage reporting decreases (10 percent). Firms also indicated an increase in the average workweek compared with June.



Baring teeth smile  Bernanke: Recent Tightening Unwelcome

During his testimony Wednesday before a House panel, Mr. Bernanke stressed that the Fed would be watching for any adverse impact to the housing market from recent rate moves. He said the Fed would act if necessary to ensure the housing recovery doesn’t falter. (…)

Mr. Bernanke said Thursday that at least part of the interest-rate spike in recent weeks happened because investors misinterpreted what he was trying to say at that news conference.

“We’ve not changed policy. We are not talking about tightening monetary policy,” Mr. Bernanke said, repeating the message he delivered repeatedly throughout the two days of testimony before Congress as well as at an economics conference last week.

(…)  “I want to emphasize that none of that implies that monetary policy will be tighter at any time in the foreseeable future,” he said.

Mr. Bernanke also cautioned that “it’s way too early to make any judgment” about exactly when the first reduction to the bond program will happen. He demurred when asked about market speculation that the first reduction will happen at the Fed’s Sept. 17-18 policy meeting, saying it will depend on economic data.

Pointing up There hasn’t been enough data since the June policy meeting to make such a determination, and the data that has come in has been “mixed,” he said. (…)

He’s getting clearer: they just don’t know what’s going to happen. Another truth: Bernanke: Nobody Really Understands Gold Prices

Fed Surveys Highlight Job Risk in Healthcare Reform  Surveys released this week by two regional Federal Reserve banks highlight how the Affordable Care Act may have the unintended consequence of keeping the labor market’s share of part-time workers historically high.

In New York state, 7.6% plan to fire or refrain from hiring in order to stay under the mandate, and 6.5% plan to shift from full time to part-time workers.

In Philly the answers are 5.6% and 8.3%, respectively. Many also planned to outsource work. (…)

During the 2000s expansion, the percentage of workers who had part-time jobs because of economic reasons hovered around 3%. Then in the last recession, the share jumped to 6.6%. It has come down, but stood at a historically high 5.7% in June. If the two Fed surveys prove correct, the percentage will remain elevated.

These surveys were done with manufacturers. Retailers, restaurants and other service providers are the most likely to change their hiring practices.

Electrolux Sees Higher U.S. Demand

Electrolux said the worst of Europe’s recent economic doldrums may finally be in the rearview mirror, potentially allowing the Swedish company to lessen its reliance on American appliance buyers.

Electrolux, the world’s No. 2 maker of home appliances after Whirlpool Corp. of the U.S., said its operations in Europe continued to suffer in the second quarter with demand remaining weak, albeit slightly higher than a year earlier. But while the company expects overall market demand in Europe to decline by 1% to 2% for the full year, it says it sees some signs of a turnaround.

“There are some signs that we are at or near the bottom,” Chief Executive Keith McLoughlin said, adding that market conditions are improving in most of Northern Europe, but that the market remains weak in Spain, France and Italy.

In North America, where the company makes nearly a third of its sales, Electrolux maintained strong sales and earnings growth, supported by a recovering housing market, which it expects to continue throughout the year. It raised its guidance for North American demand for appliances in 2013 to 5%-7% from 3%-5% previously. The company’s North American operating margin reached a record level of 7.8%.


US crude oil rallies to 16-month high
WTI discount to Brent narrows to near three-year low




First Reading on EPS and Revenue Beat Rates

Roughly 150 companies have reported earnings since the second quarter reporting period began on July 8th.  While this is less than a tenth of the total amount of companies set to report throughout earnings season, it’s enough to get an initial reading on the percentage of companies beating earnings and revenue estimates.

As shown in the first chart below, 69% of companies have beaten earnings estimates so far this season. It’s still very early, but compared to the final quarterly readings over the past few years, the earnings beat rate has gotten off to a great start.  The revenue beat rate, on the other hand, has been below average at just 50%.  Top line numbers have struggled in three of the last four quarters, and it’s looking like the same could be in store this quarter as well.

Morning MoneyBeat: What’s That You Said About a Strong Earnings Season? Almost a fifth of companies in the Standard & Poor’s 500-stock index have reported earnings for the second quarter, and things are already looking grim.

Earnings for S&P 500 companies are on track to grow 1.5% from the previous year. That isn’t exactly screaming growth—and is solidly below the 4.1% of growth analysts expected at the beginning of the quarter—but it’s not a decline, either. Of the 82 companies that have reported so far, 74% have beaten analyst estimates for their earnings. Sales are on track to grow a relatively meager 0.9% this quarter, but that marks a sequential improvement from their 0.1% first-quarter decline.

High five  But the results look different when you leave out bank stocks. You know, the group with the exceptionally easy comparisons from last year? When financial shares are excluded, S&P 500 companies would actually see earnings shrink 2.7% from last year, according to FactSet. That’s worse than Wall Street expected at the beginning of the quarter, when analysts were aiming for a decline of 2.3% in earnings without financial stocks.

Sales are on track to grow just 0.1% if banks are excluded, according to FactSet. Any growth still seems like a good thing, right? But there’s one big asterisk on that growth. Kinder Morgan Inc. alone has contributed that much to sales expectations in the S&P 500, after a quarter in which its revenue grew 56% from the previous year.

Even when banks and Kinder Morgan are included, the top line still looks shaky. Companies are missing analyst estimates for their sales figures, with just 48% of firms beating expectations for the second quarter.

Pointing up  The pain probably isn’t over yet, either. A flurry of companies have announced that their second-quarter profit would be lower than expected. United Parcel Service said last week that its earnings would be worse than expected. Other companies that have recently warned about lower-than-expected profits include E.I. DuPont de Nemours & Co., Ingredion Inc., Valero Energy Corp., and Nabors Industries Ltd.

As of last Friday, 97 companies in the S&P 500 had projected that their second-quarter earnings will be lower than Wall Street’s forecasts, compared to 16 that had said their results would be better than expected, according to Thomson Reuters.

That is the highest rate of lower-than-expected guidance since the first quarter of 2001–making it pretty tough to be optimistic on earnings.

Meanwhile, the crowd is moving back in…

Wall of money shifts into US equity funds
Weekly inflows at highest since June 2008

Some $19.7bn was invested in global equity funds in the past week, the most for six months, while $700m was pulled from bond funds, according to Bank of America Merrill Lynch citing EPFR figures. The amount put in US equity funds was the most since June 2008, the bank said.

China, U.S. companies’ great hope, now a drag

It’s official. China’s slowdown is starting to hurt corporate America.

The slowing has occurred as major U.S. names garner more revenue from Asia. Among 18 S&P companies with large exposure to China, 12 of them were underperforming the broader S&P 500 .INX index year-to-date, including Yum Brands Inc and Intel, which noted the slower growth in China as a headwind.

“The China impact is becoming more and more significant because the (U.S.) companies’ exposure has grown so much over the years,” said Robbert van Batenburg, director of market strategy at Newedge in New York.

G-20 Poised to Back Global Tax Overhaul

The G-20 is set to back a major reform of international taxation designed to eliminate loopholes that enable many companies to keep their tax bills low.

The 15-point action plan has been developed by the Organization for Economic Cooperation and Development, and is being discussed by finance ministers from the G-20. They are likely to endorse the plan in a communiqué to be issued at the end of their two-day meeting Saturday.

The action plan aims to plug the gaps created by a complex web of bilateral tax treaties that has expanded since the 1920s, and which now allow for “aggressive” tax planning, where companies adopt legal structures designed to shift their profits to the lowest tax jurisdictions, regardless of where those profits are earned.

More fundamentally, it seeks to modernize the international tax system to match the increasingly globalized operations of companies, and move away from a system in which tax administrations are largely focused on what happens within their national borders.

The plan aims to do that by updating rules on how services and goods transferred between units of a company located in different countries are priced to reflect the fact that many are now “intangible,” and take the form of licenses and the use of branding.

The action plan also includes steps to widen legislation that allows governments to tax profits that have been shifted to low-tax jurisdictions, eliminate opportunities for avoiding tax through the use of complex financing structures, and the use of contracts to avoid having a taxable presence in a country in which a company operates. (…)

Clock  Tax experts warned that the OECD’s action plan will be difficult to implement, and may not have the full support of all G-20 members.

“Notwithstanding the fact that the G-20 leaders are far from united on how to proceed, any global reforms will have to be brought in through changes between countries on a bilateral basis…and also amend existing domestic laws,” said Sandy Bhogal, head of tax at international law firm Mayer Brown “This process will take a considerable amount of time, even with the cooperation of all the relevant parties.”

The drive is on and we should all keep in mind that corporate profits, at least as measured by the S&P 500, are currently taxed at low rates which may not prevail a few years hence.