NEW$ & VIEW$ (3 JANUARY 2014)

Global Manufacturing Improves At Fastest Pace Since February 2011

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

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

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

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

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

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

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

U.S. Construction Spending Advances Further

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

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

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

Surprised smile Euro-Zone Private Lending Plunges

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

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

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

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

Auto Decline in German car sales accelerated in 2013: KBA

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

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

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

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

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

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

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

EARNINGS WATCH

 

The Morning Ledger: Rising Rates Buoy Pension Plans

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

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

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

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

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

SENTIMENT WATCH

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

Running with the bulls
Uneasy truths about the US market rally

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OIL AND SHALE OIL

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

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

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

From Astenback Capital Management

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

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

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

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

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

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

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

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

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

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

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

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

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

U.S. Warns on Bakken Shale Oil

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

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

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

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

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

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

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

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

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

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

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

MILLENNIALS SHUN CREDIT

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

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

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

 

NEW$ & VIEW$ (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.

EARNINGS WATCH

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.

image_thumb[1]

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.

SENTIMENT WATCH

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: (http://breakfastwithdave.newspaperdirect.com/epaper/viewer.aspx)

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. (…)

Call me   HAPPY AND HEALTHY 2014 TO ALL!

 

NEW$ & VIEW$ (19 DECEMBER 2013)

Fed Slows Bond Buying 

Ben Bernanke gave the U.S. economy a nod of approval just a month before he leaves the Federal Reserve, moving the central bank to begin winding down a bond-buying program meant to boost growth with the recovery on firmer footing.

“Today’s policy actions reflect the [Fed’s] assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal,” Mr. Bernanke said.

After months of wringing their hands about the implications of less Fed stimulus, investors resoundingly approved of the latest action to begin paring the $85 billion-a-month program. They were cheered in part because the move came with new Fed assurances that short-term interest rates would stay low long after the bond-buying program ends. (…)

The Fed, which launched the latest round of bond buying in September 2012 in a bid to fire up the tepid recovery, will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. That will include $35 billion monthly of mortgage securities and $40 billion of Treasurys, $5 billion less of each. It will look to cut the monthly amount of its purchases in $10 billion increments at subsequent meetings, Mr. Bernanke said.

Although the Fed expects to keep reducing the program “in measured steps” next year, the timing and the course isn’t preset. “Continued progress [in the economy] is by no means certain,” Mr. Bernanke said. “The steps that we take will be data-dependent.”

If the Fed proceeds at the pace he set out, it would complete the bond-buying program toward the end of 2014 with holdings of nearly $4.5 trillion in bonds, loans and other assets, nearly six times as large as the Fed’s total holdings when the financial crisis started in 2008. (…)

The Fed has said it wouldn’t raise short-term rates, which are now near zero, until the jobless rate gets to 6.5% or lower. (…)

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials who participated in the policy meeting said they expected their benchmark short-term rate to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016. (…)

But What About Inflation

Barry Eichengreen Taper in a teapot (The writer is professor of economics and political science at the University of California, Berkeley)

(…) But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this month’s $10bn reduction is the first in a series of successive monthly steps in the same direction, it will take many months before the change has discernible impact on the Fed’s financial statement.

Wall Street may have had some trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the markets into a tizzy. But given a night’s sleep, stock traders should be able to recognise the Fed’s announcement for the non-event that it is. (…)

The value of this week’s FOMC decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates would have said, it has at least done no harm.

The Fed’s Shifting Unemployment Guideposts

Dec. 12, 2012. In an effort to bolster confidence, the Fed pledged to keep its interest-rate target low “at least as long as the unemployment rate remains above 6.5%” and inflation remained under control.

June 19, 2013. In a press conference, Fed Chairman Ben Bernanke qualified the 6.5% target, calling it a “threshold, not a trigger,” at which point the Fed would begin to “look at whether an increase in rates is appropriate.” But then the chairman offered a new guidepost, this one for the central bank’s bond-buying program. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%,” Mr. Bernanke said. (Unemployment reached that point last month.)

Sep. 18, 2013. A surprise decline in the unemployment rate despite relatively weak economic growth forced Mr. Bernanke to back away from the new 7% target at his very next press conference. “The unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall,” Mr. Bernanke said, noting the recent decline was primarily the result of people leaving the workforce, not finding jobs. “There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.”

Dec. 18, 2013. As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely. “It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” the Fed said in its statement following its latest meeting. In his press conference, Mr. Bernanke said the Fed will be looking at other gauges of labor-market health. “So I expect there will be some time past the 6.5% level before all of the other variables we’ll be looking at will line up in a way that will” give the central bank the confidence to raise rates.

Firm, but flexible…

But with the Fed projecting that the output gap will narrow, inflation will edge up, and unemployment will fall in the years ahead, even these more liberal Taylor rules suggest the Fed should be ratcheting up rates faster than it says it will. Indeed, Fed officials’ median projection is for the target rate to have risen to just 1.75% by the end of 2016; typical Taylor rules would prescribe over 3%. (WSJ)

For the record, here are the FOMC projections and how they have “evolved” since June 2013, courtesy of CalculatedRisk:

  • On the projections, GDP was mostly unrevised, the unemployment rate was revised down slightly, and inflation was revised down.

imageProjections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

  • The unemployment rate was at 7.0% in November.

imageProjections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

  • The FOMC believes inflation will stay significantly below target.

image

  • Here is core inflation:

image

Nerd smile  The only “significant changes since June are in the unemployment rate projections. Everything else is somewhat weaker. So much for an “economy that is continuing to make progress”.

Fingers crossed  WARNING: Another Soft Patch Ahead? (Ed Yardeni)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

I have been warning about this possible inventory cycle. See Ford’s warning below.

U.S. Home Building Hits Highest Level in Nearly 6 Years

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the highest level in nearly six years, in the latest sign of renewed momentum in the sector’s recovery.

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the Commerce Department said Wednesday. That was higher than the 952,000 forecast by economists and brought the average pace of starts for the past three months to 951,000.

Details of the report showed broad strength for housing. Starts for single-family homes, a bigger and more stable segment of the market, also rose to their highest level in nearly six years.

November building permits, an indicator of future construction, fell slightly to the still-elevated level of 1,007,000. Permits had jumped 6.7% in October.

The report showed home building returning to the brisk pace seen early this year, before the sector’s recovery took a hit from rising interest rates. Builders broke ground on an average 869,000 homes between June and August.

 

 

Mobile homes are also moving:

 

RV Sales Rebound as U.S. Economy Improves

(…) More Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. The total for all new units sold this year is projected to rise about 11 percent from last year to 316,300, Walworth said. Meanwhile, 2014 looks like “another good year,” as sales could top 335,000, the most in six years. (…)

More than four years since the 18-month recession ended in June 2009, sales of these units — with an entry-level price of about $80,000 — are up more than 30 percent from last year, he said, citing data from the Recreation Vehicle Industry Association, a trade group. Meanwhile, towable units — retailing for as little as $4,000 — have risen 8.5 percent. (…)

It’s useful for investors to monitor this industry because it’s proven to be “fantastic as a leading indicator of overall economic trends,” said Kathryn Thompson, a founder and analyst at Thompson Research Group in Nashville, Tennessee. Sales began to drop as interest rates climbed into 2006; the yield on 10-year Treasuries reached 5.24 percent in June of that year. By December, “the consumer was completely falling apart in the RV industry.”

That slump came one year before the U.S. entered the worst recession in more than 70 years. Now traffic at dealerships nationwide probably will be even better in 2014, Thompson said, adding that “very strong” sales have helped drive towable units near the pre-recession peak. (…)

EARNINGS WATCH

 

FedEx Bolsters Full-Year Forecast

FedEx Corp. said a shorter holiday shipping season stunted growth in its ground division, but the package-delivery company bolstered its full-year guidance and said it expects an improved financial performance next quarter.

Profit rose 14% to $500 million for the company’s fiscal second quarter ended Nov. 30, up from $438 million in the same period a year earlier. Per-share profit totalled $1.57 for the most recent quarter, less than the $1.64 that analysts surveyed by Thomson Reuters had expected.

Cyber Monday, one of the year’s busiest online-shopping days, fell on Dec. 2 this holiday season instead of in November, damping expected growth and keeping ground-business profits from reaching as high as analysts had predicted, FedEx said. The company added that its results were affected by costs associated with the expansion of its ground network. (…)

It seems that just about everybody was surprised that Cyber Monday occurred Dec. 2nd this year…But no worry, buybacks will save the year.

FedEx, based in Memphis, Tenn., indicated that it is poised for strong growth in the current quarter. Chief Executive Frederick W. Smith said FedEx’s 22 million shipments on Dec. 16 marked its third-straight record Monday this month.

The company increased its outlook for full-year earnings-per-share growth to a range of 8% to 14% above last year’s adjusted results, up from 7% to 13% previously, in part because of the effects from its share-buyback program announced in October.

Auto  Ford Warns on Earnings Growth

Ford Motor Co. warned on Wednesday its 2014 profits won’t match this year’s results because of higher costs and a currency devaluation. And it said it likely won’t meet operating profit projections of between 8% and 9% of sales by 2015 or 2016. That goal is “at risk” because of the recession in Europe and weaker results in South America. (…)

In the U.S., it blamed competition from Japanese rivals for a decision earlier this month to temporarily idle U.S. factories that build the midsize Fusion and the compact Focus to reduce inventories. The shutdowns came less than four months after Ford expanded Fusion output, citing a shortage of the cars. It also was hurt by warranty costs for Escape engine repairs. (…)

Sounds more like poor production planning leading to excess inventory, just as the Japs are benefitting from their weak Yen. What about GM and Chrysler?

GM executives also say ambitious new product programs will be vital to sustaining profitability in the next few years. “You’ve got to protect your product and you got to protect your cash flow and you have got to invest in the future,” GM CEO Akerson said earlier this week. “That may mean short-term disruptions in other priorities.”

Hmmm…”You’ve got to protect…” Sounds like a warning to me.

(…) However, the recent decline in the value of the Japanese yen against the dollar gives Toyota, Honda and Nissan more latitude to cut prices. All three have aggressive holiday promotions, a sign they want to regain market share lost after the 2011 tsunami and a period of yen strength. (…)

Which leads to

Surprised smile McDonald’s Japan slashes profit forecast by nearly 60%
Battered yen raises costs for the Japanese affiliate of the US fast-food giant

(…) It’s now forecasting net profit of Y5bn, down from Y11.7bn, according to a statement to the Tokyo Stock Exchange. Analysts had been looking for Y9.5bn in profit, according a Bloomberg poll.

The profit warning follows a Nov 7 earnings report that revealed net income had dropped 36 per cent from a year earlier in the third quarter.

Even after the Nov. 7 release, estimates remained 60% too high! Sleepy smile

McDonald’s Corp, which owns 50 per cent of the Japanese fast-food chain, doesn’t break out Japan in its earnings results but calls it is one of six “major markets” alongside the UK, France, China, Australia and the US, which together accounted for 70 per cent of revenues last fiscal year.

Jabil Circuit Warns, Stock Sinks

Shares of Apple Inc. AAPL -0.76% supplier Jabil Circuit Inc. JBL -20.54% fell more than 20% Wednesday after the components maker said an unanticipated drop in demand from a big customer would hurt revenue and profit in the current quarter.

Jabil’s warning raised concerns about sales of Apple’s iPhone 5C, a less-expensive model that Apple released in September. Apple is Jabil’s biggest customer, accounting for 19% of its revenue in the fiscal year ended Aug. 31. Analysts said Jabil produces the plastic cases for the iPhone 5C and the metal exteriors for the iPhone 5S.

THE AMERICAN ENERGY REVOLUTION (Cnt’d)

Cheap Natural Gas Could Put More Money in Americans’ Pockets

A surge in natural-gas production has driven prices down 50% in the last eight years, a stunning development that is reducing Americans’ energy costs, according to a study by the Boston Consulting Group. By 2020, these savings from low-cost energy could amount to nearly 10% of the average U.S. household’s spending after taxes and paying for necessities, or about $1,200 a year, the report said.

Economists say lower natural-gas prices will help U.S. businesses reduce costs, but there’s an important impact on consumers, too: The average U.S. household devoted about 20% of its total spending last year to energy, both directly (things like electricity and heating) and indirectly (higher costs for goods and services), BCG says. If Americans save more on energy and see lower prices when they buy goods, they might ramp up discretionary spending and propel the sluggish recovery. (…)

Consumer spending, which accounts for roughly two-thirds of the nation’s economic activity, has been resilient this year despite higher taxes and stagnant wages. One possible explanation is lower energy costs. Indeed, BCG says the average American household is already saving more than $700 a year. On Tuesday, the Labor Department said energy prices fell in November, helping muffle overall inflation. Prices at the gasoline pump have also fallen on average from nearly $3.70 in mid-July to below $3.25 as of Monday, according to the Energy Information Administration. (…)

 

NEW$ & VIEW$ (16 DECEMBER 2013)

U.S. Producer Prices Fall 0.1%

The producer-price index, which measures what firms pay for everything from lumber to light trucks, fell 0.1% from October, the Labor Department said Friday. That marked the third straight monthly decline, owing largely to a fall in gasoline costs from the summer. Excluding food and energy, “core” prices rose 0.1% in November after climbing 0.2% in October.

Compared with a year earlier, overall prices were up 0.7% in November, more than double the pace of the prior two months. Core prices climbed 1.3% in November from a year earlier after rising 1.4% year-over-year in October.

Half of U.S. Lives in Household Getting Benefits  The share of Americans living with someone receiving government benefits continued to rise well into the economic recovery, reflecting a weak labor market that pushed more families onto food stamps, Medicaid or other programs.

Nearly half of the U.S., or 49.2% of the population, live in a household that received government benefits in the fourth quarter of 2011, up from 45.3% three years earlier, the Census Bureau said.

Government benefits as defined by Census include Medicaid, Medicare, Social Security, food stamps, unemployment insurance, disability pay, workers’ compensation and other programs.

Part of the increase comes from an aging population, with the 16.4% of the population living in a household where someone gets Social Security and 15.1% where someone receives Medicare. That was up from 15.3% and 14%, respectively, at the end of 2008.

But the biggest increases were in benefits aimed at helping the poor. The program experiencing the sharpest rise in participation was food stamps, officially known as the Supplemental Nutrition Assistance Program. About 16% of people lived in a household where someone was receiving SNAP benefits, up from just 11.4% at the end of 2008.

Participation in Medicaid, the government health-insurance program for the poor and disabled, also climbed. At the end of 2011, 26.9% of the population was living in a household where at least one member was receiving Medicaid benefits, up from 23.7% three years earlier.

(…) unemployment compensation is one of the smaller pieces of the safety net. The Census report showed 1.7% of people lived in households where someone was collecting unemployment compensation in the final quarter of 2011 up a bit from 1.4% in 2008.

Canadian Housing: The Bubble Debate

It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view: Canada Housing Bubble

  • Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.
  • Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.
  • Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.
  • High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.
  • Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.

The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.

EARNINGS WATCH 

This Thomson Reuters chart has been around a lot lately, generally on its own, being apparently self-explicit.

ER_1209

The chart deserves some explanations, however:

  • The reason the ratio is so high currently is not really because many more companies have decreased guidance but rather because very few have raised it.

Over the past four quarters (Q412 – Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up only 3% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 54% compared to the one-year average. (Factset)

  • The chart uses Thomson Reuters data which seems to be the most negative among aggregators. Factset data show a negative/positive ratio of 7.8x. The ratio has deteriorated from 7.4x the previous week, however, as 5 more companies have issued negative guidance against zero positive.

(…) a record-high 94 companies in the S&P 500 index already have done so for the current quarter. Conversely, a record-low 12 have said they would do better. That ratio of 7.83 negative-to-positive warnings dwarfs any quarter going back to 2006, when FactSet began tracking such data.

  • So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.
  • In small and mid-cap stocks, the trend appears much less gloomy. Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The bulk of negative preannouncements is in IT and Consumer Discretionary sectors which have also recorded the largest increase in negative preannouncements in recent weeks.image

In spite of the above, earnings estimates are not cut. Q4 estimates (as per S&P) are now $28.41 ($28.45 last week) while 2014 estimates have been shaved $0.13 to $122.42, up 13.8% YoY. Actually, 2014 estimates have increased 0.4% since September 30.

THE CHRISTMAS RALLY

This is December over the past ten years (Ryan Detrick, Senior Technical Strategist, Shaeffer’s Investment Research)

Is Santa Coming This Year?

Wait, wait!

Bespoke Investment suggests the market is oversold:

(…) Below is a one-year trading range chart of the S&P 500.  The blue shading represents between one standard deviation above and below its 50-day moving average (white line).  The red zone is between one and two standard deviations above the 50-day, and moves into or above this area are considered overbought.  As shown, after trading in overbought territory since October, the S&P has finally pulled back into its “normal” trading range this week.  Technicians will be looking for the 50-day to act as support in the near term if the index trades down to it.  A break below means we’ll potentially see a close in oversold territory for the first time since June.  

While the S&P 500 is just above its 50-day in terms of price, its 10-day advance/decline line is indeed oversold.  The 10-day A/D line measures the average number of daily advancers minus decliners in the index over the last 10 trading days.  This provides a good reading on short-term breadth levels.  The oversold reading in place right now means the last ten days have not been kind to market bulls.  Over the last year, however, moves into the green zone have been good buying opportunities.

Gift with a bow  And here’s your Christmas present:

The Santa Claus Rally Season Is About To Begin (crossingwallstreet.com/)

I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.)

Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)

Here’s a look at the Dow’s average performance in December and January (December 21st is based at 100):

You should note how small the vertical axis is. Ultimately, we’re not talking about a very large move.

May I remind you that you can get all the dope on monthly stock returns in the “MARKET SMARTS” section of my sidebar. Here are the two charts that matter:

This is the simplified chart from RBC Capital Markets

image

Here is Doug Short’s:

WANT MORE?

Buy The “December Triple Witching” Dip (BofAML via ZeroHedge),

This Friday is December Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options). Consistently the week of December Triple Witching is one strongest of the year for the S&P500. In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years. With equity volatility fast approaching a buy signal, the conditions are growing ripe for an end to the month long range trade and resumption of the larger bull trend (we target 1840/1850 into year-end).

 
SENTIMENT WATCH
 

General Electric to raise dividend 16%  Largest increase by US manufacturing group since 2010

Hunger Grows for U.S. Corporate Bonds

Investors are buying new U.S. corporate bonds at a record pace, and demanding the smallest interest-rate premium to comparable government bonds since 2007.

imageDemand has also put sales of new junk-rated corporate bonds in the U.S. on pace to surpass last year’s record. Sales of investment-grade bonds in the U.S. this year are already at the highest ever, according to data provider Dealogic. (…)

The narrowest reading for investment-grade corporate-bond spreads in recent years came in 2005, when the gap hit 0.75 percentage point. (…)

According to Moody’s Investors Service, the default rate for below-investment-grade companies in the U.S. was 2.4% in November, down from 3.1% a year earlier. (…)

Meanwhile:

U.S. Rate Rise Sends High-Dividend Stocks Lower

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6 percentage points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88 percent from 1.67 percent. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.

BARRON’S COVER

An Upbeat View of 2014 Wall Street strategists expect stocks to rise 10%, boosted by a stronger economy and fatter corporate profits. Bullish on tech, industrials.

THE 10 STRATEGISTS Barron’s consulted about the outlook for 2014 have year-end targets for the S&P of 1900 to 2100, well above Friday’s close of 1775.32; their mean prediction is 1977.

(…) the strategists expect earnings growth to do the heavy lifting, with S&P profits climbing 9%, compared with subpar gains of 5% in the past few years.

Specifically, the strategists eye S&P profits of $118, up from this year’s estimated $108 to $109. Industry analysts typically have higher forecasts; their 2014 consensus is $122, according to Yardeni Research.

The consensus view is that yields on 10-year Treasury bonds will climb to 3.4% next year from a current 2.8%. Our panel’s predictions on year-end yields for the 10-year bond range widely, from 2.9% to 3.75%.

(…) corporations are sitting on $1 trillion of cash, and there is pent-up demand for investment around the world. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase, notes that U.S. gross fixed investment has fallen to 13% of GDP, on par with Greece and well below the 16% to 21% range that obtained from 1950 to 2007. Just getting back to the midpoint of that range would require additional spending of $600 billion, he observes. (…)

The calendar, too, is a help. Addition will come from subtraction as the U.S. begins to lap some of the government’s automatic spending cuts tied to the sequestration that began last spring, and the expiration of the Obama administration’s 2% payroll-tax cut early this year. The government cost the economy perhaps 1.5 percentage points of GDP growth in 2013, but “government drag will be a lot less in 2014,” predicts Auth.

Both people and companies will start to spend more in 2014, he adds.

How to be right, whatever happens;

Time to Brace for a 20% Correction Ned Davis Research expects a 2014 buying opportunity. How to play the decline-and-recovery scenario.

Davis: Right now, about 78% of industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish. However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] — a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was about 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.

We also looked at midterm-election years — the second year of a presidential term, like the one coming up in 2014 — going back to 1934, and the average decline in those years was 21%. But after the low was hit in those years, the market, on average, gained 60% over two years. So, a correction should be followed by a great buying opportunity. (…)

Hedge Funds Underperform The S&P For The 5th Year In A Row

The $2.5 trillion hedge-fund industry is headed for its worst annual performance relative to U.S. stocks since at least 2005. As Bloomberg Brief reports, the funds returned 7.1% in 2013 through November; that’s 22 percentage points less than the 29.1% return of the S&P 500, with reinvested dividends, as markets rallied to records. Hedge funds are underperforming the benchmark U.S. index for the fifth year in a row as the Fed’s inexorable liquidity pushes equity markets higher (and the only way to outperform is throw every risk model out the window). Hedge funds (in aggregate) have underperformed the S&P 500 by 97 percentage points since the end of 2008.

Light bulb  Hence the new marketing stance:

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.” (FT)

Winking smile  NEXT JOB FOR BERNANKE  China’s Smog Forces Pilots to Train for Blind Landings

 

NEW$ & VIEW$ (9 DECEMBER 2013)

GREEN FRIDAY

After pretty tame Black Friday and Thanksgiving sales, investors got their Green Friday with an ‘Unambiguously Positive’ Jobs Report accompanied by a relieving 1.1% jump in the S&P 500 Index, the best of all worlds for taper advocates. Good news is good news again!

The media narratives just flowed from that.

Employers Gain Confidence to Hire

U.S. employers are gaining confidence heading into year’s end, hiring at the quickest clip since before Washington’s political dysfunction rattled consumers and businesses this fall.

Payrolls rose by a seasonally adjusted 203,000 in November in sectors ranging from construction to health care, a striking pickup at an uncertain moment for the economy. Moreover, the jobless rate fell to 7% from 7.3%, though its declines in recent months have been driven in part by people leaving the labor force. (…)

U.S. job growth over the past three months now averages 193,000. In September, the average was thought to be 143,000; it has since been revised higher. (…)November’s job gains were more broad-based than in some previous months, suggesting fundamental economic improvements are reaching more parts of the economy.

Economists have worried that the biggest drivers of the nation’s job growth are lower-paying industries like retailers and restaurants. While those industries still represent a big chunk of the job gains, higher-paying sectors like manufacturing also grew in November, adding 27,000 jobs. (…)

It remains that

Nearly one-third of the private-sector job gains in November came from retailers, hotels, restaurants and temporary help agencies.

Retailers added 22,000 workers last month, while restaurants and hotels added 17,000 positions. Temporary help services hired another 16,000.

Lower-paying industries have dominated U.S. job growth for much of the recovery. Over the past year, retailers and temporary-help services have added 323,000 and 219,000 jobs, respectively.

By comparison, manufacturers added only 76,000 jobs.

As we all know, stats can be used to fit any viewpoint: the low month for job growth in 2013 was July at 89k.

  • First 6 months average employment change: +195k.
  • Last 5 months average employment change: +181k. Not enough to call it an ‘Unambiguously Positive’ jobs report. Tapering delayed.

But move July into the first part of the year:

  • First 7 months average employment change: +180k.
  • Last 4 months average employment change: +204k. Here comes the taper!

Never mind that the economy has added 2.3 million jobs over the past year, a pace that has changed little for the past two years in spite of QE1, 2,and 3.

Never mind that

Compared with September, the last reading before the shutdown, the new figures showed 265,000 fewer people working or looking for work, taking the labour market participation rate down from 63.2 per cent to 63 per cent of the adult population.

Declining participation was the main cause of the large fall in the unemployment rate, creating a puzzle and a worry for the Fed. If people are permanently dropping out of the labour force then it suggests there is less spare capacity in the economy.(FT)

Never mind that

Markit’s recent PMI surveys showed that the rate of growth was below that seen in September. Hiring slipped to the lowest for eight months as a result of firms reporting growing unease about the outlook. (Markit)

image

And never mind the important inventory build up revealed by the Q3 GDP, recent car data and clear evidence of enormous surplus retail inventory post Thanksgiving, all suggesting that the recent manufacturing uptrend may be short lived. The U.S. economy, and for that matter Europe’s as well, have been propped up by a production push rather than by a more solid and durable consumer pull.

Real consumer expenditures rose 0.3% MoM in October after edging up 0.1% in September, in spite of a 0.2% advance in real disposable income during the last 2 months. Taking the 4-month period from July, real expenditures are growing at a 1.8% annualized rate, unchanged from the preceding 4-month period. During both periods, real disposable income has grown 2.7% annualized but real labour income growth halved from 1.8% annualized in March-June to 0.9% annualized in July-October.

Consumer demand sustained by government transfer income and a low savings rate is not solid foundation for economic growth, needless to say. It gets even more dangerous when corporate inventories accumulate rapidly, especially during the all important fourth quarter.

Taper or not? Taking liquidity out when things are so fragile would be a big mistake in my view. The Fed won its bet with QE-induced wealth boost for the top 10% but it would be ill-advised to take the punch bowl away before the ordinary people’s party begins.

Fed credibility has already been hurt by all the goofy rhetoric since last May. The only transparency they have achieved is to expose their flaws wide open. When you decide to be more transparent, you better make sure that what you have to show is attractive…otherwise, be a Greenspan and let markets guess for haven’s sake.

To be sure, as BCA Research is quoted in Barron’s (my emphasis),

(…) policy makers are hoping for a cyclical rebound in the participation rate as discouraged workers are drawn back into the labor market. There is no evidence that this is occurring so far.


As a result, BCA thinks the Fed will lower the threshold for forward guidance about increases in the federal-funds target (which has been pinned near 0% to 0.25% since late 2008) until the jobless rate falls to 5% or even 5.5%, instead of the current 6.5%, which could be reached by next October if current trends continue. The Fed’s notion is that the better job market will lure folks on the sideline to start looking for work again, slowing the decline in unemployment, even as more people find positions. But BCA says its clients are increasingly worried that there is less slack in the labor market than presumed and that the Fed is making an inflationary policy mistake.

Much like a rising equity market eventually lures investors into action.

In all what was said and written last Friday, this is what must be most reassuring to Ben Bernanke:

Jonas Prising, president of staffing company Manpower Group, said the official numbers fit with what is happening on the ground. “What we see is a continued improvement in employers’ outlook. Despite what you see and hear about uncertainty, employers are clearly seeing a gradually improving economy,” said Mr Prising, noting that the pick-up in hiring was slow but steady. (WSJ)

TAPER WATCH

This is from Fed’s mouthpiece John Hilsenrath:

Fed Closes In on Bond Exit

Fed officials are closer to winding down their $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday’s encouraging jobs report.

The Fed’s next policy meeting is Dec. 17-18 and a pullback, or tapering, is on the table, though some might want to wait until January or even later to see signs the recent strength in economic growth and hiring will be sustained. On Tuesday, officials go into a “blackout” period in which they stop speaking publicly and begin behind-the-scenes negotiations about what to do at the policy gathering. (…)

The sharp rise in stocks Friday shows that the Fed is having some success reassuring investors that it will maintain easy-money policies for years to come.

(…) the November employment report was the latest in a batch of recent indicators that have boosted their confidence that the economy and markets are in better position to stand with less support from large monthly central bank intervention in credit markets.

Pointing up The economic backdrop looks better now than it did in September. Fingers crossed

Payroll employment growth during the past three months has averaged 193,000 jobs per month, compared with 143,000 during the three months before the September meeting.

Moreover, in September, the White House and Congress were heading into a government shutdown and potential a debt ceiling crisis. Now they appear to be crafting a small government spending agreement for the coming year. The headwinds from federal tax increases and spending cuts this year could wane, possibly setting the stage for stronger economic growth next year.

Still, the jobs report wasn’t greeted as unambiguously good news inside the Fed. One problem was an undertone of distress among households even as the jobless rate falls.

The government’s survey of households showed that a meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell from 7.2% to 7% during the period effectively because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.

“The unemployment rate [drop] probably overstates the improvement in the economy,” Chicago Fed President Charles Evans told reporters Friday.

Another worry among officials, and another reason some officials might wait a bit before moving: Inflation, as measured by the Commerce Department’s personal consumption expenditure price index, was up just 0.7% from a year earlier, well below the Fed’s 2% target. Mr. Evans said he was troubled and puzzled by the very low inflation trend. (…)

Fed December Taper Odds Double in Survey as Jobs Beat Estimate

 

The share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year. (…)

The payroll report puts the four-month average for gains at 204,000, and the six-month average at 180,000. Chicago Fed President Charles Evans, a supporter of record stimulus who votes on policy this year, said in April he wants gains of 200,000 a month for about six months before tapering. Atlanta’s Dennis Lockhart, who doesn’t vote, said several months of gains exceeding 180,000 would make slowing appropriate.

“The 200,000 number hits you right between the eyes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “That’s a number that everyone agrees the labor market is showing good-size gains, and the progress they’re making seems to be sustainable if that marker is met, which it was.”

See! It all boils down to where July stands in the economic calendar.

Credit-Card Debt Hits Three-Year High

U.S. consumers pushed their credit-card debt to a three-year high in October, a possible sign of their willingness to boost spending into the holiday season.

Revolving credit, which largely reflects money owed on credit cards, advanced by a seasonally adjusted $4.33 billion in October, the Federal Reserve said Friday. The expansion pushed total revolving debt to $856.82 billion, the highest level since September 2010.

The expansion marked a reversal from the prior four months when revolving balances either declined or held nearly flat. Consumers’ reluctance to add to credit-card balances was viewed by some economists as a sign of caution.

“Increasingly households are becoming more comfortable with using their plastic, and carrying a balance on it,” said Patrick J. O’Keefe, director of economic research at consulting firm CohnReznick. “The scars of 2007 and 2008 are starting to heal.”

When consumers are willing to carry a credit-card balance, it suggests they are confident they’ll have the future income needed to pay down the debt, he said.

The turnaround came in a month that brought a 16-day government shutdown, which weighed on consumer confidence and left hundreds of thousands of government workers without paychecks for weeks. (That may have been one factor in the increased use of credit cards. The federal workers received back pay after the shutdown.)

Total consumer credit, excluding home loans, rose by $18.19 billion in October, the largest gain since May. Economists surveyed by Dow Jones Newswires had forecast a $14.8 billion advance. (…)

The Fed report showed non-revolving debt, mostly auto and education loans, increased by $13.85 billion, or a 7.5% annualized jump. Such debt has been trending steadily higher since 2010, reflecting a surge in government-backed student loans and purchases of new autos. (…)

(ZeroHedge)

Fingers crossed  Congress Readies a Year-End Budget Dash

A Congress stymied by partisan divides, blown deadlines and intraparty squabbling gets a late chance to end the year with an elusive budget deal.

In the final week of 2013 that the Senate and House are scheduled to be in Washington at the same time, lawmakers and aides are optimistic that negotiators can reach a budget accord and continue to make progress on a farm bill and other measures.

China Exports Rise More Than Estimated

Overseas shipments rose 12.7 percent from a year earlier, the General Administration of Customs said today in Beijing. That exceeded estimates from 41 of 42 analysts surveyed by Bloomberg News. The trade surplus of $33.8 billion was the biggest since January 2009, while imports gained 5.3 percent, compared with a median projection of 7 percent.

The export figures reflect pickups in shipments to the U.S., Europe and South Korea, according to customs data.

China Inflation Stays Benign

 

The November consumer-price index was up 3% from a year ago, slowing down slight from October’s 3.2% pace, the statistics bureau said Monday. That was just below market expectations of a 3.1% rise and well within the government’s target of 3.5% inflation for the year.

Consumer inflation was even less of a worry when looked at on a month-over-month basis: It showed a decline of 0.1% in November, its first such drop since May.

At the factory level, producer prices continued to slide year-over-year, falling 1.4% for the 21st monthly decline in a row, showing continued weakness in domestic demand for raw materials. The decline in November was slightly less than the October’s 1.5%.

Japanese growth revised down
Third-quarter growth hit by weaker business activity

The updated calculation of gross domestic product in the three months to September showed that economic output increased at an annualised rate of 1.1 per cent, compared with an initial estimate of 1.9 per cent announced in November. (…)

The downward revision for the third quarter owed to lower estimates of investment and inventory-building by companies. Consumer spending was revised upward, but not enough to offset the less favourable view of business activity.

Corporate capital investment did not grow at all during the period, the data showed; the initial estimate had suggested a 0.7 per cent expansion. Inventory growth was cut to 0.7 per cent from double that figure in the initial data, while the estimate of private consumption growth was doubled to a still modest 0.8 per cent.

Bundesbank lifts German growth outlook
Central bank forecasts economic expansion of 1.7% in 2014

Germany’s Bundesbank has upgraded its economic projections, saying on Friday that strong demand from consumers would leave the euro area’s largest economy operating at full capacity over the next two years.

The Bundesbank has forecast growth of 1.7 per cent in 2014 and 1.8 per cent the following year. The unemployment rate, which at 5.2 per cent in October is already among the lowest in the currency bloc, is expected to fall further. (…)

The Bundesbank also expected inflation to fall back in 2014 – to 1.3 per cent from 1.6 per cent this year – before climbing to 1.5 per cent. If falls in energy prices were excluded, inflation would register 1.9 per cent next year.

EARNINGS, SENTIMENT WATCH

Notice the positive spin and the bee-sss just about everywhere now.

U.S. stocks could weather grim profit outlooks

The ratio of profit warnings to positive outlooks for the current quarter is shaping up to be the worst since at least 1996, based on Thomson Reuters data.

More warnings may jolt the market next week, but market watchers say this trend could be no more than analysts being too optimistic at the beginning and needing to adjust downward.

“There’s a natural tendency on the part of Wall Street in any given year to be overly optimistic as it relates to the back half of the year … It isn’t so much the companies’ failing, it’s where Wall Street has decided to place the bar,” said Matthew Kaufler, portfolio manager for Clover Value Fund at Federated Investors in Rochester, New York.

So any negative news about earnings may “already be in the stock prices,” he said. Sarcastic smile (…)

Still, estimates for fourth-quarter S&P 500 earnings have fallen sharply since the start of the year when analysts were building in much stronger profit gains for the second half of the year.

Earnings for the quarter are now expected to have increased 7.8 percent from a year ago compared with estimates of 17.6 percent at the start of the year and 10.9 percent at the start of the fourth quarter. (…)

The 11.4 to 1 negative-to-positive ratio of earnings forecasts sets the fourth quarter up as the most negative on record, based on Reuters data.

So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.

In small and mid-cap stocks, the trend appears much less gloomy.

Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The S&P 500 technology sector so far leads in negative outlooks with 28, followed by consumer discretionary companies, with 22 warnings for the fourth quarter. (…)

“It appears while the percentage (of warnings) is high, it’s still not really infiltrating to all sectors,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. “Obviously it impacts the individual (stocks), but maybe not the market trend.” (…)

So, this is a stock market, not a market of stocks!

Punch  That said, here’s a surprise for you: analysts estimates have actually gone up in the past 10 days:

image

CAPITULATION
 
Hugh HendryA bear capitulates
Hugh Hendry on why equities will rise further

Hugh Hendry is CIO of Eclectica Asset Management

(…) In this environment the actual price of an asset no longer has anything to do with our qualitative perception of reality: valuations are out, liquidity in. In the wacky world created by such monetary fidgeting there is one reason for being long markets and one alone: sovereign nations are printing money and prices are trending. That is it. (…)

So here is how I understand things. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should be long risk assets if you believe China will have lowered its growth rate from 7 per cent to nearer 5 per cent over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan.

It will all end badly; the mouse will die of course but in the meantime the stock markets look to us much as they did in 1928 or in 1998. In economic terms, America and Europe will remain resilient without booming. But with monetary policy set much too loose it is inevitable we will continue to witness mini-economic cycles that convince investors that economies are escaping stall speed and that policy rates are likely to rise. This happened in May.

The Fed, convinced its QE programme had succeeded in re-distributing global GDP away from China, began signalling its intent to taper. However, the anticipated vigorous American growth never materialised. The Fed had to shock market expectations by removing the immediacy of its tighter policy and stock markets rebounded higher.

So the spectre of tapering will probably continue to haunt markets but stronger growth in one part of the world on the back of easier policy will be countered by even looser policy elsewhere. Market expectations of tighter policy will keep being rescinded and markets, for now, will probably just keep trending.

Lance Roberts today (with a lot more from Hugh Hendry if you care):

(…) The PRIMARY ISSUE here is that there is NO valuation argument
that currently supports asset prices at current levels.

It is simply the function of momentum within the prevailing trend that makes the case for higher prices from here.

image
 

Hmmm…The trend is your friend, hey? With friends like that…

THE U.S. ENERGY GAME CHANGER

I wrote about that in 2012 (Facts & Trends: The U.S. Energy Game Changer). It is now happening big time.

Shale gas boom helps US chemicals exports
America now second cheapest location for chemicals plants

The US chemicals industry is planning a sharp increase in its exports as a result of the cost advantage created by the shale gas boom, putting pressure on higher-cost competitors in Europe and Asia.

The American Chemistry Council, the industry association, predicts in forecasts published this week that US chemicals exports will rise 45 per cent over the next five years, as a result of a wave of investment in new capacity that will be aiming at overseas markets. (…)

The shale revolution has caused a boom in US production of natural gas liquids used as chemical feedstocks such as ethane, and sent their prices tumbling.

US producers also face electricity costs about half their levels in Europe, and natural gas just one-third as high.

The result has been a dramatic reversal from the mid-2000s, when the US was one of the world’s most expensive locations for manufacturing chemicals, to today when it is the second cheapest, bettered only by projects in the Middle East that have tied up feedstock on favourable terms.

International chemicals companies have announced 136 planned or possible investments in the US worth about $91bn, according to the ACC, with half of those projects proposed by non-US companies. (…)

“The US has become the most attractive place in the world to invest in chemical manufacturing.”

DEMOGRAPHICS

We can discuss political and financial philosophies, fiscal policies and monetary policies till the cows come home. But there is one thing that is mighty difficult to argue about: demographics. As Harry Dent says in this interview with John Mauldin, you have to go back 250 years to find a generation with as much impact as the current supersized baby boomer generation. The impact of retiring baby boomers is so powerful that it can totally offset fiscal and monetary policies without anyone noticing. The 20 minutes interview is not as good as I was hoping it might be but still deserves your time.

A team of Kansas City Fed economists just wrote about The Impact of an Aging U.S. Population on State Tax Revenues (http://goo.gl/u5g3j5) with this chart that summarizes the stealth trends underway:

image

Here’s another way to deal with an adverse job market:

Saudi deportations gain momentum
Riyadh to expel up to 2m workers

Riyadh has said it wants to forcibly expel as many as 2m of the foreign workers, including hundreds of thousands of Ethiopians, Somalis, Indians, Pakistanis and Bangladeshis, who make up around a third of the country’s 30m population.

At home, the exodus of illegal workers is being seen as the kingdom’s most radical labour market experiment yet. With one in four young Saudi males out of work, analysts applaud Riyadh’s determination to tackle the problem, but doubt the crackdown will achieve its objective, as Saudi nationals are unlikely to apply for menial jobs. (…)

Ethiopia, Yemen, Somalia and several other countries are struggling to absorb the thousands of unemployed young men now returning, with development officials worrying about the impact on remittances.

Saudi Arabia is the world’s second biggest source of remittances, only behind the US, with outflows of nearly $28bn last year, according to estimates by the World Bank. (…)  Saudi analysts expect the crackdown on illegal workers to reduce remittance flows by nearly a quarter next year, or about $7bn. (…)

The crackdown on African and Asian illegal migrants is meant to complement a government labour market reform known as nitaqat, Arabic for “ranges”. Replacing the failing fixed-quota “Saudisation” system of 1994, nitaqat places a sliding scale of financial penalties and incentives on employers who fail to hire enough Saudi nationals. By draining the pool of cheap expatriate labour, the Saudi government hopes to encourage private sector employers to hire more nationals.

“The nationalisation agenda has been around for 20 years, but what’s changed is that the Arab spring has made private sector jobs for nationals a political priority,” says Steffen Hertog of the London School of Economics. “Saudi Arabia has become a laboratory for labour market reform,” he says. (…)

BUY LOW, SELL HIGH

A 700- year chart to prove a point:

Global Financial Data has put together an index of Government Bond yields that uses bonds from each of these centers of economic power over time to trace the course of interest rates over the past seven centuries.  From 1285 to 1600, Italian bonds are used.   Data are available for the Prestiti of Venice from 1285 to 1303 and from 1408 to 1500 while data from 1304 to 1407 use the Consolidated Bonds of Genoa and the Juros of Italy from 1520 to 1598.

General Government Bonds from the Netherlands are used from 1606 to 1699.   Yields from Britain are used from 1700 to 1914, using yields on Million Bank stock (which invested in government securities) from 1700 to 1728 and British Consols from 1729 to 1918.  From 1919 to date, the yield on US 10-year bond is used.

Ralph Dillon of Global Financial Data

 

NEW$ & VIEW$ (18 NOVEMBER 2013)

OECD Economic Growth Stalls

(…) The Organization for Economic Cooperation and Development Monday said the combined gross domestic product of its 34 developing-country members rose by 0.5% from the second quarter, the same rate of expansion recorded in the three months through June. (…)

The OECD will release new forecasts for economic growth in its 34 members and a number of large developing economies Tuesday. The International Monetary Fund last month cut its growth forecast for the world economy in 2013 to 2.9% from 3.2%, but expects output to rise 3.6% in 2014. (…)

OECD leading indicators released last week suggested growth is set to pick up in the euro zone, China and the U.K. in coming months, while remaining sluggish in India, Brazil and Russia.

Among the Group of Seven largest developed economies, the U.K. recorded the strongest growth in the third quarter, with an expansion of 0.8%, while France and Italy saw their economies contract by 0.1% each.

Euro zone rebound weaker than hoped: ECB’s Nowotny

The economic situation in the euro zone has started to improve but is still weaker than the European Central Bank had hoped, ECB Governing Council member Ewald Nowotny said on Monday. (…)

But “one has to say that this improvement is not as strong as we would have expected it perhaps some time ago, and at the same time inflation rates are clearly below the price stability level that we set at the ECB.” (…)

Spain’s bad loans ratio rises to 12.7 percent in Sept

Spanish banks’ bad loans as a percentage of total lending rose to 12.7 percent in September from 12.1 percent in August, marking a new high, Bank of Spain data showed on Monday.

The ratio has been steadily climbing as households and small companies struggle with debts and as banks, fighting to improve their own capital quality ahead of new stress tests, rein in lending. (…)

Bad debts rose by 6.9 billion euros ($9.3 billion) to 187.8 billion euros in September, while total credit fell by 8.9 billion euros to 1.5 trillion euros, the data showed.

Italian Tax Model Thwarts Recovery

(…) Italy’s tax model stands out in Europe for relying heavily on payroll taxes, which are paid by companies and employees, to fund the country’s state pension system. Payouts for old-age pensions alone are nearly 13% of GDP—a rate that is a third higher than in Germany and twice the U.S. percentage, according to the OECD.

(…)  “The absurdity is that an Italian worker costs more than a Spanish worker, but has a lower income,” said Riccardo Illy, owner of the eponymous coffee brand.

Economists say that the high mandatory contributions—33% of Italian salaries, compared with 13% in the U.S.—are particularly painful for younger workers in lower-income, entry-level jobs. (…)

Other European countries with even bigger welfare states have started to tackle the problem, at least in part. Germany puts more of the onus for pension contributions on the workers’ tab, which crimps income but not jobs.

French President François Hollande last year pushed through measures to reduce the country’s notoriously high labor costs, which help fund a broader array of social services. But he opted for tax breaks instead of direct payroll-tax cuts.

(…) the task facing Italy is daunting. Paolo Manasse, an economist at the University of Bologna, estimates that Italy would need to cut a further €30 billion in employment taxes to bring it in line with average employment taxes among OECD members.

Once pensions and interest on government debt are stripped out, Italy spends only 32% of gross domestic product on core services compared with 43% for Germany, meaning there is less budgetary fat to trim in other areas.

Some countries, such as Denmark, which has one of Europe’s highest overall tax rates, fund a bigger welfare state than Rome provides with a broader array of taxes covering income, investments and wealth.

Thus, Danish companies pay only a 10th of what their Italian peers do for social-security programs. Denmark’s total employment rate—the percentage of the working-age population with jobs—is 75% compared with Italy’s 61%. (…)

However, given the fragile nature of his two-party coalition, the prime minister has so far avoided bigger tax overhauls. He has criticized generational inequities in Italy but has been reluctant to trim current pension benefits.

Since future pensions in Italy will eventually be tied to actual contributions over a lifetime of working, the dearth of new jobs due to hefty payroll levies will have repercussions well into the future.

Younger generations are “at risk of being excluded from both work and, as a result, a main form of welfare,” said Marco Maniscalco, a partner at the Bonelli Erede Pappalardo law firm in Milan. (…)

Riskier loans hit record levels
‘Cov-lite’ proportion within CLOs surges in US markets

The amount of riskier loans offering fewer protections to lenders contained in packages of debt sold to investors have hit record levels, amid resurgent lending markets and a continued thirst for higher returns.

Managers of collateralised loan obligations, which buy up corporate loans then package and slice them into different pieces, have increased the proportion of riskier loans that their investment vehicles are allowed to buy to the highest levels on record. (…)

Already, 55 per cent of new leveraged loans come in “cov-lite” form, eclipsing the 29 per cent reached at the height of the leveraged buyout boom just before the financial crisis.

“The increased prevalence of cov-lite in the primary market has quickly translated into a similar market-wide increase,” Brad Rogoff, head of US credit strategy at Barclays, said in a recent note. (…)

While the majority of CLOs sold last year had a 40 per cent limit on the amount of cov-lite loans that could be bought by the vehicles, a 50 per cent cap has become the industry standard in 2013, according to data from S&P Capital IQ.

At least three deals have come to market this year with a 70 per cent limit.

In 2011 – the earliest data available from S&P – about 67 per cent of new CLOs came with a 30-40 per cent limit on the amount of cov-lite loans that were allowed to be placed into the deals. Limits of 70 per cent were completely unheard of. (…)

In addition to officially increasing the percentage of cov-lite loans allowed into their deals, some CLO managers have also been easing their definition of cov-lite in deal documentation, thereby allowing more of the loans into their products. (…)

Thai growth slips in third quarter Growth falls to 2.7% as investment and consumption dip

Thailand Cuts Economic Growth Forecast as Exports Falter

Gross domestic product rose 1.3 percent in the three months through September from the previous quarter, the National Economic & Social Development Board said in Bangkok today. It revised a contraction in the second quarter to no growth from the previous three months.

The state agency cut its full-year expansion forecast to 3 percent from a range of 3.8 percent to 4.3 percent projected in August, and said the economy may grow 4 percent to 5 percent in 2014. It said it expected no export growth this year, from an earlier estimate of 5 percent.

Household consumption fell 1.2 percent last quarter from a year earlier, the NESDB said. Public investment slumped 16.2 percent from a year ago as both government construction and investment in machinery and equipment declined, it said.

EARNINGS WATCH

Thomson Reuters:

Third quarter earnings are expected to grow 5.6% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.3%.

Of the 463 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.

54% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.

For Q4 2013, there have been 83 negative EPS preannouncements issued by S&P 500 corporations compared to 9 positive EPS preannouncements. By dividing 83 by 9, one arrives at an N/P ratio of 9.2 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Factset

At this stage of Q3 2013 earnings season, 94 companies in the index have issued EPS guidance for the fourth quarter. Of these 94 companies, 82 have issued negative EPS guidance and 12 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 87%. This percentage is well above the 5-year average of 63%.

Since the start of the fourth quarter, analysts have reduced earnings growth expectations for Q4 2013 (to 6.9% from 9.6%). However, they still expect a significant improvement in earnings growth in the fourth quarter of 2013 relative to recent quarters.

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GOOD READS
 
Up and Down Wall Street  Flacks Are People, Too

By RANDALL W. FORSYTH 

Spare, if you will, a moment of pity for the PR people. That may sound surprising coming from these quarters, given journos’ near-universal disdain for public-relations folks, many of whom see their function as obstructing or obfuscating on behalf of their bosses. But after the terrible, horrible, no-good, very bad week the spinmeisters had, even we stone-hearted, ink-stained wretches must have some sympathy.

Consider the PR genius at JPMorgan Chase (ticker: JPM) who came up with the idea of a Twitter (TWTR) Q&A with the bank’s vice chairman, Jimmy Lee, a week after it helped underwrite Twitter’s much-ballyhooed initial public offering. The idea presumably was to connect with the younger, social media-hip crowd. But instead of seeking career advice from the legendary deal-maker, the exchanges at #AskJPM quickly became an outlet for the public’s ire about banks and JPM in particular.

Starting with mock questions about whales, an allusion to the infamous London Whale trading fiasco, the queries became more acerbic about the alleged misdeeds by the nation’s largest bank by assets. It descended into what one wag dubbed “snarkalypse,” but not before he tweeted: “I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending. AM I DIVERSIFIED?” Not surprisingly, JPM cut short the “conversation,” but nobody was sacked over what a spokesman e-mailed the New York Times’ Dealbook blog as “#Badidea!”

Peggy Noonan:

(…) More and more it seems obvious that the vast majority of the politicians who pushed the [ObamaCare] bill in the House and Senate never read it. They didn’t know what was in it. They had no idea. They don’t understand insurance—they’re in politics, a branch of showbiz. (…)

 

NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.

image

 

Shoppers Can’t Shake the Blues

 

Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.

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We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.

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Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.

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EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.

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Core inflation was +0.8% in October, down from 1.0% in September.

 

Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as Pets.com have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.

 

NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

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

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

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

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

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

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

image  image

However,

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

And these peculiar stats:

Retail boom coming to a store near you?

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

Amazon to Hire 70,000 Workers For Holiday Selling Season

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

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

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

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

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

image

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

Confused smile More quirks:

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

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

From the GDP report:

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

 

image

 

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

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

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

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

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

Other notable findings:

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

Nonetheless:

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

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

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

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

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

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

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

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

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

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

Elsewhere:

S&P Cuts France’s Credit Rating

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

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

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

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

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

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

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

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

Surprise Jump in China Exports

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

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

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

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

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

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

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

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

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

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

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

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

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

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

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

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

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

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

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

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

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

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

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The Economist agrees (tks Jean):

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

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

Race to Bottom Resumes as Central Bankers Ease Anew

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

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

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

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

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

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

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

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

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

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

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

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

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


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

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

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

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

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

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

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

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

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

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

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

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

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

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