NEW$ & VIEW$ (8 JULY 2013)

Job Gains Show Staying Power The U.S. job market chalked up solid progress in June, bolstering evidence that the economy might be strong enough to grow with less help from the Federal Reserve and sending bond investors rushing to sell.

American employers added 195,000 jobs in June, the Labor Department said Friday, and tallies for April and May climbed by a combined 70,000.



Revisions are almost always up!



Job creation is still concentrated in the low-income, low wage industries. During June, 121,600 of the 195,000 jobs created (or 62 percent) were in leisure & hospitality (75,000), retail (37,100), and temporary worker (9,500) industries. It isn’t easy to get the economy going with jobs growth relatively isolated to these low-wage sectors. Overall, average hourly earnings increased just 0.4 percent in June, 2.2 percent from year ago levels. Once adjusted for the mild inflation of about 1.5 percent, real earnings are advancing at about a 1 percent pace. (Bloomberg)

Construction companies added 13,000 jobs, the most in three months, while automakers boosted employment by 5,100 workers, the biggest gain in four months. Hiring at auto dealerships and home-improvement stores also picked up, the report showed.

Factories reduced payrolls by 6,000 in June.

Doug Short illustrates the consumer earnings trends:


The next chart applies some simple math to the two data series. Let’s create a snapshot of hypothetical expected real annual earnings: multiply Real Average Hourly Earnings times the Average Hours Per Week and then multiply the weekly earnings times 50 (yes, a couple of weeks of unpaid vacation).



Some Troubling Signs In June’s Jobs Report  The latest June jobs report isn’t quite all roses.

Behind the solid payroll gains are a few troubling signs. The number of Americans working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month.

As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6,″ for its data classification by the Labor Department. (…)

The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago. (…)

Prime-Age workers remain jobless:

To get a cleaner read of trends in job opportunities we look at the EPOP after removing young people and people near or above retirement age. As the figure below shows, the employment-to-population ratio of “prime-age” workers—workers age 25–54—dropped from over 80 percent in early 2007 to 74.8 percent at the end of 2009, and has since increased to 75.9 percent. In other words, we are four years into the recovery, and we have climbed only about one-fifth of the way out of the hole left by the Great Recession. (Heidi Shierholz at the Economic Policy Institute)

 Annoyed  Jobs Strength Keeps Fed on Track

The Labor Department’s strong June employment report improved the odds the Fed will begin to pull back on its $85 billion-per-month bond-buying program by the end of the year.

The Labor Department said U.S. employers have added more than 200,000 jobs per month over the past six months, hitting a benchmark some Fed officials have cited as an indication of the kind of economic progress they want to see before shrinking their bond purchases.

But the market is not waiting for the Fed:

“The Fed has made clear that at the end of the day it is employment which will call the tune,” Mr. Feroli said. “Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting.”

The Atlanta Fed’s “Jobs Calculator” says if the economy can add an average of 180,000 jobs per month, that 7% jobless mark could be hit in a year’s time, all other labor force factors being equal.

Rising long-term rates are not without consequences:

Incidentally, ISI’s homebuilders’ survey has been wakening in recent weeks.

And the PMIs:


And this big danger:




Office Recovery Stays Slow

The U.S. office market continued its slow-but-steady recovery in the second quarter, as employers took on additional space at a modestly improved pace compared with recent anemic levels.

The amount of office space occupied by employers increased by 7.2 million square feet, or 0.2% of the total occupied stock, during the quarter, according to real-estate research service Reis Inc. That was the biggest increase since the economy began slowing in 2007.

But the pickup still was below levels seen in more typical periods of economic growth. During such times, the volume of occupied space can increase some 10 million to 20 million square feet per quarter. In contrast, employers have generally taken on between three million and five million square feet of additional space per quarter since the market began improving in 2011.

Without faster growth, the office-vacancy rate is likely to continue to stay high—and rents relatively low. In the second quarter, the overall U.S. vacancy rate stayed flat at 17%, down from a postrecession peak of 17.6% reached in mid-2010.

Rents sought by landlords ticked up to $28.78 per square foot in the second quarter, from $28.66 per square foot in the first quarter and $28.18 one year earlier, according to Reis, which tracks 79 metropolitan areas.

Ripple effects:

FT’s John Authers: ECB comes to the market’s rescue again

(…) Friday’s US jobs report, revealing the US labour market continued to show slightly greater strength than many expected, forced the message home. Despite much ongoing weakness in the US economy, if its labour market keeps improving like this, the chances are that the Fed stimulus will end next summer. In response, bond yields moved sharply upwards across the world. This may well have been what Mr Bernanke wanted, even if Fed colleagues later downplayed his remarks.

What is now beyond doubt is that the market went very far beyond anything the BoE or ECB could tolerate.

To counter rising rates, the ECB said it “expects the key rates to remain at present or lower levels for an extended period of time”, while the BoE’s new governor, Mark Carney, said “the implied rise” in future rates was “not warranted by the recent developments in the domestic economy”. In other words, the market had set gilt yields too high.

As a result, although the Fed is still buying bonds, while the ECB’s balance sheet is contracting, the extra yield on German Bunds compared to US Treasury bonds reached its highest since the crisis.

There is irony here. When the Fed launched its programme of bond purchases in early 2009 – arguably a form of printing money – the rest of the world complained that it was fighting “currency wars”. Low US rates made for a weak dollar, and cheaper US exports. The response was for other countries to cut their rates. In effect, the Fed exported its low interest rates. Now the problem has reversed. The Fed is exporting higher rates, and the ECB and BoE have been forced to be more lenient.

There is one safe bet out of this, which is prolonged weakness for sterling and the euro, already near their lows for the year. When their central banks appear so much more dovish than the Fed, this can only weaken them against the dollar.

A second, slightly less safe bet is on European equities. Easy money is good for stocks, and these announcements will prop up stock markets which in Europe have been anaemic. (…)

While European stocks enjoy support from their central banks, it is a bad idea to bet against them. But in the longer term, the reasons for concern about the eurozone and UK are not going away. That they share the world with a Fed that is talking up rates only adds to the hazards.

Canada Jobs Little Changed in June After May’s Huge Gain

Employment fell by 400 last month after May’s surge of 95,000 while the jobless rate was unchanged at 7.1 percent, Statistics Canada said today in Ottawa. (…)

Canada’s job gains have slowed so far this year, with the average monthly gain of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said.

Full-time employment fell by 32,400 in June, following a 76,700 gain the prior month. Part-time positions rose by 32,200, Statistics Canada said.

Private companies cut 5,300 workers last month after May’s 94,600 increase, while public-sector employment rose by 1,000.

Meanwhile, in the Eurozone

German Industrial Production Decreased in May

Production fell 1 percent from April, when it gained a revised 2 percent, the Economy Ministry in Berlin said today. That’s the first decline since January. From a year earlier, production decreased 1 percent when adjusted for working days.

Orders are also falling:

German Factory Orders Drop as Euro-Area Economy Struggles

Orders, adjusted for seasonal swings and inflation, dropped 1.3 percent from April, when they fell a revised 2.2 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 1.2 percent, according to the median of 42 estimates in a Bloomberg News survey. Orders slid 2 percent from a year ago, when adjusted for the number of working days.

Germany’s domestic orders declined 2 percent in May from the prior month, today’s report showed. Overseas demand shrank 0.7 percent, with orders from the euro area slumping 3.9 percent. Orders for basic goods fell 0.1 percent from April, while investment-goods orders slid 1.8 percent. Demand for consumer goods dropped 3.1 percent, with orders from the euro area down 5.7 percent.

The FT adds:

This follows a weak 48.6 in June’s manufacturing PMI survey. Economists at Markit said: “There’s a lack of demand both at home and in export markets, so stagnation seems to be the best that we can expect for the time being.”

Sweden’s IP fell 2.6% in May MoM, after dropping 1.1% in April. Turkey’s IP fell 0.6% in May MoM, following a 1.4% rise in April.

French Firms Cut Back on Investments

Despite low interest rates, French companies and entrepreneurs are cutting back on their investments. They’re delaying plans to expand existing factories, and canceling plans to build new ones.

[image]Higher taxes and cheaper foreign competition have pushed margins for French companies down to their lowest level since 1985—reducing companies’ ability to stomach risk. At the same time, French business leaders say the challenges from unpredictable tax rates and ever-changing French red tape are rising. (…)

Investment by nonfinancial companies in the euro-zone’s second-largest economy has contracted every quarter since the beginning of 2012. A recent survey by French statistics agency Insee showed French businesses in manufacturing expect to cut investment by 4% this year, while in January they expected to keep investment at the same level as 2012.

France isn’t alone in seeing shrinking private investment as the recession across much of Europe pushes businesses from Germany to Greece to tighten their purse strings. But economists say the decline is particularly worrying in France because of the lower profitability of French companies. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at 25.7% at the end of last year, compared with 35.2% on average in the euro zone, according to data from European the statistical agency Eurostat.

Greece’s Economic Future ‘Uncertain’

Hours before a euro-zone finance ministers’ meeting to approve the disbursement of aid to Greece, the technocrats overseeing its bailout said the country’s economic outlook remained cloudy

CEBM Research latest survey:

Industrial demand has remained weak during the traditional off-season with few bright spots among industrial sectors. Additionally, the recent liquidity squeeze in the interbank market has led to higher financing costs, worsening cash flows and higher credit risks among small and medium sized enterprises (SMEs).

In detail, a number of industrial sectors surveyed by CEBM did not achieve their sales targets during the month of June. Cement demand declined due to the upcoming off season, and actual sales were weaker than expectations. Steelmakers and machinery sales showed no improvement due to the off season. Auto sales, which have been quite robust over the past few months, decreased in June and were below seasonal trends, partially due to tightening credit conditions for car loans. Property sales were stronger than expectations but mostly due to lowered sentiment among property developers.

The most significant change during the course of June was of course the liquidity squeeze in the interbank market, which has expanded to enterprises and has led to higher financing costs, tightening cash flow, and increasing risk of default on debts. Current bill financing rates increased to an annualized cost of around 10-12% for enterprises, leading to significant pressure on their profitability and short term cash flow. A few cement producers and metal traders reported that they received a lot more commercial bills than they did previously, in addition to the rapid increase of other receivables. Many banks surveyed by CEBM are now concerned about the potential outburst of credit risks among SMEs, particularly those located in the Yangtze delta area. (…)

Consumer sector performance in June showed signals of further decline. Respondents in department stores, home appliance retailers, and supermarkets all reported weaker sales growth (Y/Y). Performance of restaurants further diverged.

Japan bank lending hits four-year high
Loan growth suggests stimulus is spurring fund demand

Outstanding loans held by Japanese banks rose 1.9 per cent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.


Global Earnings Downgrades Worst In 12 Months

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012.

But not in America:

Analysts Boost S&P 500 Target 11%, Lower Earnings Growth

The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.

Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate. (…)

Analysts are looking past profit growth this year and predicting improving investor sentiment will push stocks higher. They’ve boosted price estimates for the S&P 500 by 11 percent from 1,608.50 on Dec. 28, the fastest rate since July 2011, according to data compiled by Bloomberg.

U.S. equity volume, in retreat since 2009, is showing signs of picking up. Trading on all American markets has averaged 6.77 billion shares a day since the start of June, compared with 6.35 billion between January and May and 6.42 billion in 2012, according to data compiled by Bloomberg.

Well, if earnings are not cooperating, P/Es ought to rise! Why? “Improving sentiment”!”

What about rising interest rates…The same people calling for higher rates are calling for higher P/Es.


Fingers crossed Fingers crossed Maybe this might help:

A Turn in Economic Indicators


NEW$ & VIEW$ (16 MAY 2013)

Storm cloud  U.S. Industrial Production Moves Lower

Activity in the factory sector is weakening. Industrial production fell 0.6% during April following a 0.3% March increase, earlier reported as 0.4%. Declines in activity were broad-based amongst industries last month. Factory sector production fell 0.4% (+1.4% y/y) following its unrevised 0.2% March slip. Utility output reversed course and fell 3.7% (+3.4% y/y) following a 6.4% March owing to warmer-than-normal temperatures.

The drop in factory sector output reflected across-the-board industry weakness. Consumer goods production fell 0.6% (+2.3% y/y) as motor vehicle output dropped 1.2% (+5.2% y/y). Elsewhere, appliance, furniture & related goods production fell 0.8% and was unchanged y/y. In the nondurables area, apparel output fell 1.6% (-2.9% y/y) while paper production dropped 0.6% (-1.9% y/y). For business equipment, output fell 0.5% (+3.5% y/y). Output of information processing and related equipment fell 0.5% (+3.2% y/y) and transit equipment production fell 0.5% (+5.9% y/y). Excluding the output of high tech products & motor vehicles, production fell 0.5% (+1.8% y/y) during April.

The capacity utilization rate fell to 77.8% from a downwardly revised 78.3% in March.


Pointing up  Everything is slowing! Might it be because of the following?

Currencies react to Bank of Japan’s recent monetary moves


These are big, big moves!

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.


The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. Employment
indexes were mixed, showing both a modest increase in the number of
employees and a slight decline in the length of the average workweek.


New orders have been weakening for 3 months before crossing below the zero line (-1.17)in May.image


After Prices Paid, the next largest decline came in the Average Workweek, which fell from 5.7 in April to negative 1.1 in May.  The decline in the average workweek comes on the heels of the Non-Farm Payrolls report two weeks ago, where the average workweek also showed a sizable decline.  It is still early, but this could be an early indication that employers are cutting hours in an effort to stay below the thresholds that would require providing health coverage under the Affordable Care Act. (Bespoke Investment)

Home-Sales Expectations Hit 5-Year High

The National Association of Home Builders said Wednesday that its housing-market index was 44 in May, up three points from April. All three components of the index rose, with builders’ expectations of sales for the next few months hitting the highest level since February 2007.

High five  Curb your enthusiasm:

A reading above 50 in the NAHB index means that more builders view conditions as good rather than poor. The overall gauge hasn’t been in positive territory since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s.


(Charts from Haver Analytics)

Look at this next chart from BMO Capital remembering that Canada is the U.S. main trading partner.image

JAPAN, the only growth game in town:


Japan Reports Growth Surge

The country’s gross domestic product, the broadest measure of goods and services produced across the economy, grew at an annualized pace of 3.5% in the first three months of the year, as consumers loosened their purse strings and exports to the U.S. picked up, lifted by a weaker yen.

The figures reported by the government early Thursday marked a sharp improvement from the tepid 1% growth rate at the end of last year, which followed six months of contraction.


A government official said the GDP data showed consumers spent more overall, particularly on recreation, cars and dining out, and exports were lifted by stronger car exports to the U.S.

The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.

Baring teeth smile  It will not take much more before U.S. manufacturers start complaining about the weak Yen.

Of course, quite a lot happened after the end of Q1 as well.

It was just in early April that the BoJ announced open-ended QE and promised to double the monetary base, while prime minister Shinzo Abe pledged to boost competition in the quasi-monopolistic power sector. Since then the yen broke 100, the stock market continued soaring, and in recent days Japanese government bond yields have sold off. Even activist investors from the US are taking notice.

But it is early days yet. The unexpectedly strong first quarter growth numbers were driven mainly by exports — to be expected given the yen’s continued decline. (FT Alphaville)

How long will the ROW allow Japan to poach?



Foreign Investment in China Lags

Foreign direct investment in China sputtered in the first four months of the year, despite renewed signs of strength from the U.S. and the European Union, showing only a modest 1.21% rise from a year ago.

Foreign direct investment in China was $38.3 billion in the January to April period, including $8.4 billion in April, for a feeble 0.4% rise from April 2012. (…)

Investment from the U.S. was up 33.2% over last year in the four-month period, inflows from the EU rose 29.7%, while Japanese investment climbed 9.2%. But investment from the rest of Asia was very weak, rising just 0.21% from a year earlier.

More signs of weakness: China’s freight traffic was unchanged MoM in April, +7.8% YoY, same as in March. YTD to April: +8.7% YoY, down from +12% in 2012. Looks slower to me. April coastal container throughput was up 8.6% YoY, +8.4% YTD.

Annoyed  China Signals Concern at Yen Weakness as Japan Growth Quickens

Japan’s policy of monetary easing “makes it hard for China to increase exports to Japan,” Shen Danyang, a ministry spokesman, said at a briefing in Beijing today. The rising yuan is eroding profit margins of Chinese exporters, he said. (…)

A survey by the ministry found that the profit margins of 78 percent of exporters are narrowing, and 73 percent will report flat or lower profits for 2013, Shen said. Exporters at the Canton Trade Fair in April and May didn’t want to accept long-term orders because of concerns that the yuan will gain, he said.

Pointing up  Beijing signals concern at rising jobless
Li warns on challenge of finding work for graduates

(…) In a nationwide teleconference on Monday that was widely reported in state media on Wednesday, Mr Li said that nearly 7m tertiary students would enter the job market in July in China, the largest number in the country’s history.

He said it was an “important task” to find jobs for all these graduates, who make up a demographic considered potentially threatening to Communist Party rule if they become disaffected in large numbers.

“In the first few months of the year, as economic growth has slowed the employment trend has remained stable but employment pressures remain and the problem of employment for tertiary students is particularly prominent,” Mr Li said, according to a transcript of his speech.

But Mr Li also disappointed many investors by ruling out a large government-directed stimulus or investment boom this year.

“To achieve this year’s development targets the room to rely on stimulatory policies and direct government investment is not big and we will need to rely on market mechanisms,” Mr Li said. Relying on government efforts to boost growth “is not only difficult to sustain but also creates new problems and risks”. (…)

Disgruntled students have played a powerful destabilising role throughout modern Chinese history, leading enormous social movements in 1919, in the 1966-1976 Cultural Revolution and in the Tiananmen Square movement in 1989. (…)

Of the nearly 7m students who graduate in July most of them have not yet found jobs and the employment rate for these people is lower than in the past, according to state media reports.

By late last month, just 28 per cent of graduating students in Beijing had been hired while the rate was 29 per cent in Shanghai and 47 per cent in southern Guangdong Province.

The official urban unemployment rate in China was just 4.1 per cent by the end of March but the figure is regarded as deeply unreliable because it does not capture many demographic groups such as fresh graduates.



Lightning  European Recession Is Longest Since War

The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era, with no recovery in sight for a broad swath of the continent.

(…) Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing and France is steadily contracting.

The 17-nation euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis. Social strains, political paralysis and rising debt burdens are reigniting doubts about its economic future. (…)

Business surveys for April suggest the euro-zone economy could well shrink again in the second quarter. (…)

Sustained Pain

Italy airs pessimistic view on recovery
Government has little room for stimulating growth

(…) “I don’t see any signs of recovery at the moment,” commented Emma Marcegaglia, president-elect of Business Europe.

Italy - the wilderness years“The credit crunch is strong, internal demand and the construction sector are very bad, exports are slowing and investments have stopped. The recession is very severe,” she told the Financial Times.

At best, she said, the eurozone’s third-largest economy might see a bottoming out of its longest postwar recession in the final quarter of 2013. On the bright side, analysts noted the pace of contraction was declining more slowly than in the final quarter of 2012 when GDP shrank 0.9 per cent. (…)

By July the government needs to find a further €2bn to avoid a scheduled increase in sales tax although declining tax revenues put that goal in doubt, with Rome promising Brussels that it will stick to its budget targets in order to escape from the European Commission’s excessive deficit procedure. (…)

Fingers crossed  Bankers are starting to sound rather more upbeat however. Reporting quarterly results in recent days, the heads of Italy’s largest banks share the view that the recession is bottoming out.

The strongest indicator came from loan loss provisions which fell in the first three months of the year from the end of 2012 at UniCredit, Italy’s largest bank by assets. Intesa Sanpaolo, its largest retail bank, said inflows of bad loans were down by a third, quarter on quarter.

Euro Zone Runs Record Trade Surplus

Adjusting for seasonal effects, exports grew 2.8% from February, while imports fell 1.0%, to give a surplus of €18.7 billion, up from €12.7 billion in February.

March is really the first solid month in a while. Let’s see a couple more months, given that the EZ export markets all seem to be slowing now, perhaps because their own exports to the EZ are collapsing.


Slovenia Premier Bratusek Defies Markets With No-Aid Vow

(…) Bratusek says time is what she needs to fix the banks — by deploying a rescue package she opposed before she came to office — and that her nation won’t need an international rescue. By next month, she promises, her coalition government will begin swapping as much as 4 billion euros ($5.2 billion) in bad bank loans for government-guaranteed debt. After eight weeks in office, investors are questioning whether she can deliver.

“Talk is cheap,” Egon Zakrajsek, a Slovenian-born Federal Reserve economist in Washington, said in an e-mail. Slovenia needs “fundamental economic and social reforms” to restore market confidence and “neither the current government nor any of its predecessors has been able to deliver.” Zakrajsek said he was commenting in a private capacity. (…)

Slovenia’s overhaul drive has “failed to deliver on transparency and thus credibility, consistent with our concerns about implementation risks,” Mai Doan, an emerging-markets economist at Bank of America Merrill Lynch in London said in a note to clients today. The program could “disappoint the European Commission, which would probably prefer more rigorous measures and transparency.”

Opening the door to a bailout would expose Bratusek to the risk of having to impose Greece-like austerity measures in return for aid.


Wal-Mart Second-Quarter Forecast Trails Estimates

Wal-Mart Stores Inc., the world’s largest retailer, forecast second-quarter profit that was less than analysts estimated as shoppers struggle amid the slow U.S. economy and higher taxes.

Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said today in a statement. Analysts had projected $1.29, the average of 24 estimates compiled by Bloomberg.

Sales at U.S. Wal-Mart stores open at least 12 months excluding fuel fell 1.4 percent, the first decline after six straight gains. Analysts estimated a 0.1 percent decline.

Look at the rare long flattening in earnings. The tail wind to equities from rising profits has disappeared. Hmmm….



NEW$ & VIEW$ (25 FEBRUARY 2013)

The sequester and the fragile U.S. economy. Truck tonnage. Car sales. Rising inventories? ObamaCare. House prices. Canadian economy struggling. Social unrest. China’s PMIs. China housing. Earnings watch. Sentiment watch.


Long Impasse Looms on Budget Cuts

Lawmakers anticipate that looming spending cuts will take effect next week and won’t be quickly reversed, likely leading to protracted uncertainty that presents risks both to Congress and the president.

Never mind the political risks. How about the real world?


GDP could shrink in the first and second quarters — two consecutive declines is the popular definition of a recession — and stretch into the third quarter, according to Charles Dumas of Lombard Street Research in London — a prospect he says Wall Street is “blithely ignoring.” Federal spending could be reduced by 0.5% under sequestration, which would come atop the 1% fiscal tightening under the 2011 debt-ceiling agreement and 0.8% impact of the end of the payroll-tax cut on Jan. 1, he points out.

LEI – Is There A Disconnect? (Lance Roberts)


(…) the negative trend of the LEI since the turn of the century has not only been a reliable indicator of the maturity of the economic cycle but a cross below the ZERO bound has been closely associated with a market peak. However, with the Fed artificially suppressing the yield spread and boosting asset prices (both of which are major components of the index) through repeated QE programs the artificial inflation of the index is likely masking the weakness in the economy.

Speaking of underlying weakness in the economy – the next chart is the annual change in the LEI versus the annualized growth rate of GDP.


(…) Historically, when the annual rate of change in the LEI drops below zero the economy either has been, or was close to, a recession.  At a current reading of 2.06% there is not a tremendous margin for error with regards to missteps with either fiscal or monetary policy.  Furthermore, as discussed recently, with the global recession already providing a drag on the domestic economy – any drastic moves toward austerity could easily push the economy over the ledge. (…)

ATA Truck Tonnage Index Posts Best Ever January (via CalculatedRisk)

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.9% in January after jumping 2.4% in December. … Tonnage has surged at least 2.4% every month since November, gaining a total of 9.1% over that period. As a result, the SA index equaled 125.2 (2000=100) in January versus 121.7 in December. January’s index was the highest on record. Compared with January 2012, the SA index was up a robust 6.5%, the best year-over-year result since December 2011.

“The trucking industry started 2013 with a bang, reflected in the best January tonnage report in five years,” ATA Chief Economist Bob Costello said. “While I believe that the overall economy will be sluggish in the first quarter, trucking likely benefited in January from an inventory destocking that transpired late last year, thus boosting volumes more than normal early this year as businesses replenish those lean inventories.” (emphasis added)


Inventory restocking seems to be confirmed by rail traffic. Intermodal volume has been very strong in the past several weeks.

The problem with the above is that the consumer is 70% of the U.S. economy and indications are that consumer spending has stalled. Restocking could rapidly lead to destocking.

ISI company surveys revealed softness from truckers and retailers and restaurants last week while manufacturers and homebuilders improved.

Pent-Up Demand Drives Auto Sales

More than 1.2 million new vehicles were estimated to have been sold in the month, a 4.3% increase over a year earlier and a 15% increase over January, according to If accurate, that would put the seasonally adjusted annual rate at 15.5 million vehicles. (…)

Analysts, however, will be searching Friday’s reports for signs that auto makers may be too far ahead of the sales curve (…)

ObamaCare’s Tax Net Snares Middle Class, Economy

When the subsidized exchanges open in 2014, ObamaCare will become a redistribution program. This year, it’s primarily a tax collection program.

The health law will shrink the fiscal 2013 deficit by $34 billion due to $36 billion in revenue, the Congressional Budget Office predicts.

Thus, ObamaCare’s ramp-up will be an economic drag, made steeper by employers’ shifts to avoid fines that kick in next year.

While much of the new taxes will come from high earners, ObamaCare’s tax net will be impossible to avoid for the middle class. Pretty much anyone who uses medical care will pay up, since fees on insurance policies, prescription drugs and medical devices are sure to be passed along to consumers.

Likewise, tax penalties for employers who fail to offer affordable and comprehensive coverage would come at least partly out of wages for moderate earners.

In all, ObamaCare is expected to raise about $800 billion in revenue over 10 years, including penalties on individuals and firms for not complying with new mandates.

January Annual Home Value Increase Is Largest Since Summer 2006

Zillow’s January Real Estate Market Reports, released today, show that national home values rose 0.7% from December to January to $158,100. January 2013 marks the 15th consecutive month of home value appreciation. On a year-over-year basis, home values were up 6.2% from January 2012 – a rate of annual appreciation we haven’t seen since July 2006 (when the rate was 7.5%), before the peak of the housing bubble.


The rental market remains strong, even as the housing market regains strength. (…) Investors are still playing a big role in the housing recovery, as they purchase homes (many times lower priced homes or distressed inventory) and convert these into rental units to satisfy the increase in demand for rental housing. Their involvement in the marketplace has often squeezed out first-time buyers and has contributed to high home value appreciation. (…)

Pointing up  Fig4The rate of homes foreclosed continued to decline in January with 5.54 out of every 10,000 homes in the country being liquidated. Nationally, foreclosure re-sales continued to fall, making up 13.05% of all sales in January. This is down 3.6 percentage points from January 2012 and down 6.9 percentage points from its peak level of 19.9% in March 2009.

See also: 2 Million Homeowners Freed From Negative Equity in 2012; 1 Million More to Come in 2013


Canada’s Economy Struggles as Inflation and Sales Slow

Canada’s inflation rate fell in January to its lowest since 2009 and retail sales plunged in December, adding to evidence the country’s economy is struggling to accelerate from its slowest pace since the 2009 recession.

Consumer prices rose 0.5 percent in January from a year earlier, the least since October 2009, Statistics Canada said today from Ottawa. Retailers in December recorded a 2.1 percent drop in sales, the biggest decline in almost three years, the agency said separately.

France asks Brussels for budget pass
Finance minister seeks extra year to hit deficit targets Surprised smile
Risk of instability hangs over Italy poll
Result that yields strong government ‘would be a miracle’
Social Unrest In Europe? (BCA Research)

Three crucial stabilizing factors have de-fused the risk of an imminent social explosion in Europe.

  • First, in the powder keg that ignites major social unrest one vital ingredient is missing: inflation. An INSEAD study of social upheaval shows that the young can tolerate unemployment so long as prices are stable, and they expect a brighter future when they eventually find jobs. The good news is that inflation in Europe’s troubled economies is well contained, and coming down.
  • The second stabilizing factor is the role of the family as a vital shock absorber. For example, note that the countries with the highest youth unemployment rates are also the ones with the highest proportion of young adults living with their parents. Effective transfers at the family level are providing the young jobless with essential economic and social support.

Social Unrest In Europe

  • Third and probably most important the official unemployment numbers in some European countries are a fiction. It is an open secret that many of the officially jobless in countries like Greece and Spain are actually working in the shadow economy which encapsulates activity that is unrecorded, unregulated, and untaxed.

Bottom Line: The social, political and economic stability of Europe is much greater than widely believed. Hence, any sell-off on renewed social or political tensions in the coming weeks or months is a possible opportunity to shift into euro area assets.

I don’t subscribe to that view. Today’s youth has little patience. I expect a hot spring in Europe.

UK loses triple A credit rating  Moody’s action cites deteriorating outlook

Sterling hits two-year low on downgrade Moody’s action rattles currency in final minutes of trading


China’s farm produce prices down  Farm produce prices in China have seen a marked decline since mid-February, according to a survey conducted by Xinhua News Agency.

The average price of 21 monitored vegetables declined 11.2 percent from February 10-22, while the price of eggs was down 0.4 percent, said the survey released Friday.

The price of pork, a staple meat in China, dipped mildly, but the price for chicken held steady. Prices of beef and mutton also nudged down.

Food prices account for about one-third of the prices used to calculate the consumer price index (CPI), a main gauge of inflation, in China.


The overall index rose sharply to 61.8 in February. The New Orders index rose again.


High five  Note: this MNI index goes totally against this morning’s Markit flash PMI.

Is China’s Property Market Topping Out?

Investing in property is very important to Chinese people, who are unable to easily move their money overseas and distrustful of the stock market. According to Jing Ulrich, a property cycle in China only lasts about 14 months from beginning to end.

(…) Chinese home buyers in tend to put down a lot more cash and borrow less than their Western counterparts, so interest-rate hikes have less impact on the market. Instead, the government has used requirements for minimum down payments and restrictions on buying multiple homes to cool things down.

Though they never formally relaxed the rules, Ms. Ulrich said authorities judiciously started taking a more laid back attitude to enforcement when it became clear the market was stuttering in the second half of 2012.

Now she is on the lookout for renewed signs of zeal in enforcing the curbs, which would be the easiest way to suppress demand. Buying restrictions could also be extended beyond the 40 or so cities where they are now in force. (…)

Vietnam Inflation Rate Eases as Economy Struggles to Revive  Vietnam’s inflation eased in February as domestic consumption struggled to rebound after a credit crunch that slowed economic growth to a 13-year low.

Consumer prices climbed 7.02 percent from a year earlier after rising 7.07 percent in January, the General Statistics Office in Hanoi said today.

The World Bank in December forecast that Vietnam’s economy will expand 5.5 percent this year, which would mark a third straight year of below-6-percent growth. The increase in gross domestic product averaged 7.3 percent annually in the first decade of this century.


Q4 earnings season ends this week. Factset on S&P 500 companies:

Of the 429 S&P 500 companies that have reported earnings to date for the fourth quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 69% recorded over the past four quarters. (…)  In terms of revenues, 66% of companies have reported sales above estimates. This percentage is well above the average of 50% recorded over the past four quarters.

Bespoke on NYSE companies: Earnings Season Ends with a Thud

Not only did the season end on a down note regarding the market, but the underlying earnings numbers fell hard this week as well.  As shown below, the final reading for the percentage of US companies that beat Q4 earnings estimates was 61.4%.  This is still a solid number compared to recent quarters, but it actually fell 2.2 percentage points this week.  Of the 252 companies that reported this week, only 48% beat earnings estimates, causing the overall beat rate to drop from 63.6% down to 61.4%. While it hasn’t been mentioned, maybe weak earnings has been a key reason for the market’s drop this week.


The revenue beat rate ended at 62.7% for the fourth quarter reporting period.  As shown below, this is much better than what was seen in the prior two quarters, and it’s the exact same beat rate that was seen during the Q1 2012 reporting period.  Just like the earnings beat rate, the revenue beat rate also fell this week, dropping 1.3 percentage points from a reading of 64% last Friday.


The official S&P tally as of Feb. 21:

Of the 445 companies having reported, 65.8% beat and 24% missed earnings estimates. Ex-IT companies which beat by 83%, the beat rate drops to 62.8%.

Pointing up Q4 EPS are now seen at $23.28, down $0.04 from last week and $0.55 (-2.3%) from Jan. 31. This is the lowest earnings level since Q1’11. It also marks the second consecutive Y/Y decline (-5.1% in Q3).

Trailing 12-month EPS now total $96.95, down 0.5% from Q3’12 and 1.8% from Q2’12. Valuation based on trailing earnings is now facing a mild headwind after enjoying a strong tailwind since mid 2009 (EPS +149%).

Q1’13 estimates remain upbeat at $25.57, +5.5% Y/Y, even though they keep declining albeit at a slower rate lately. If met, trailing earnings would resume growth and reach $98.28 after Q1’13.

Note this, however:

Corporations and analysts are lowering earnings expectations for Q1 2013. In terms of preannouncements, 72 companies have issued negative EPS guidance for Q1 2013, while 23 companies have issued positive EPS guidance.


As of last week, nearly 20% of the S&P 500 companies have pre-announced and 76% were negative. The last few weeks seem to have been particularly difficult for consumer-centric companies. This could begin to hit producers potentially facing excess inventories. Then there is the looming sequester which will hit a host of companies which may have been hoping for a solution that now seems elusive. The risk is clearly tilted toward negative earnings surprises. Read on:

Darden Cuts Guidance, Citing Payroll Tax, Gas Prices

Darden Restaurants Inc., which owns Olive Garden and Red Lobster, cut its fiscal-year profit and revenue outlook, citing “headwinds” from consumers pinched by higher payroll taxes and gasoline prices.

Its less-rosy view comes amid similar warnings from U.S. food and retail chains that have blamed the economy for slowing sales. (…)

“While results midway through the third quarter, [which will end Sunday], were encouraging, there were difficult macroeconomic headwinds during the last month,” Chief Executive Clarence Otis said. Two of the most prominent culprits were increased payroll taxes and rising gasoline prices. (…)

Restaurant analyst Bonnie Riggs, from market research firm NPD Group Inc., said that three weeks ago, which is about when consumers likely saw the impact of the higher payroll tax in their paychecks, restaurants reported a 4% decline in same-store sales, marking the first industrywide, weekly decline that NPD has seen in more than a year and a half. (…)

For the year, Darden now expects earnings from continuing operations of $3.06 to $3.22 a share on sales growth of 6% to 7%, down from its previous view of $3.29 to $3.49 a share in earnings on 7.5% to 8.5% sales growth.

Darden said it expects fiscal third-quarter earnings from continuing operations between $1 and $1.02 a share, below estimates of $1.13 from analysts surveyed by Thomson Reuters.

Q3 will miss by 11% while full FY mid-point EPS are shaved 8%. Big impact.


RBC Capital Markets’ latest sentiment indicator:

Bullishness recently hit its highest level since July 2005 according to our
sentiment indicator. Of the six components that comprise the composite, only the CBOE Put/Call Ratio and the AAII Bull Ratio stand at relatively depressed readings. Unbalanced optimism sets the stage for a pullback in share prices, one in which investors will need to decide whether to lean into or against.



(…) The Standard & Poor’s 500-stock index has gone 505 days without a correction, deemed a 10% drop from a recent high. Since 1962, the index has rallied for at least 500 days without a correction during five separate instances, according to data provided by stock-market research firm Birinyi Associates.

In all five rallies, stocks averaged another 9.2% gain over the next six months and a 13% increase over the ensuing one-year time frames. (…)

“This market’s rally without a 10% pullback is not out of the ordinary,” Kevin Pleines, research analyst at Birinyi, told MarketBeat. He said there is little historical merit to the notion that the market is overdue for a sizable drop. (…)

In a note to clients on Friday, Thomas Lee, chief equity strategist at J.P. Morgan, advocated some near-term caution. He said the S&P 500 would look more compelling if it fell to the 1400-to-1450 range.

Such a drop would be consistent with patterns that have played out since the market bottomed in March 2009. On average, rallies have lasted 55 days and risen 18% in between 5% pullbacks over the last four years, according to research firm Stone & McCarthy Research Associates.

Lately, the S&P 500 has risen 12% throughout the last 66 trading days since its most recent pullback that concluded in mid-November. There have only been four other instances throughout the last four years in which the market has rallied for a longer period of time without at least a 5% pullback, the research firm said.

“We think there could finally be a minor pullback at any time,” said Mark Arbeter, chief technical strategist at S&P Capital IQ. “While we continue to think that the market will grind higher in the weeks to come, risk appears to be rising and the call from here may get a little trickier.”

But on a longer-term time horizon, the rally may have more momentum behind it.

“We are still positive on stocks and believe the bull market will continue,” said Birinyi’s Mr. Pleines. (WSJ)


NEW$ & VIEW$ (18 FEBRUARY 2013)

Industrial production. NY Fed manufacturing. Retail sales weakening. Secular trends. Sentiment watch. Earnings watch. Broker poetry. Eroding equities undervaluation. China retail sales. Spain vs France. Currency wars. Oil. Mining. Bill Miller.


Monitoring for any signs of a growth problem like in 2010 (starting in May), 2011 (January)and 2012 (April):

But Markit reassures us:

imageIndustrial production fell 0.1% in January, confounding analysts’ expectations of a 0.2% increase. The downturn was led by a 0.4% drop in manufacturing output. However, December’s industrial production numbers were revised up, from 0.3% to 0.4%, and November had seen a 1.4% increase.

The January data therefore need to be looked at in part as an
adjustment of production levels from the strong upturn seen late last year, and importantly the three-month growth rate accelerated from 0.6% in December to 1.5% in January, pointing to the strongest underlying growth trend since last February.

Manufacturing output is meanwhile still up 1.9% in the latest three-month period, despite the wobble in January, enjoying the strongest pace of expansion since last April.

  • Same thing with retail sales: 3-ms growth through January is accelerating. And the NY Fed manufacturing survey jumped 18 points to 10.0 with the new orders index climbing 20 points to 13.3


image image


Alexander Ineichen’s high frequency indicators table is stable:


  • Readings Bolster Hope on Economy  U.S. consumers are showing surprising resilience, providing some hope for the economy as a new round of Washington budget battles approaches.

Consumer confidence jumped more than expected in the first half of this month despite higher payroll taxes since the beginning of the year, according to a gauge released Friday by the University of Michigan. Its index of consumer sentiment rose to 76.3, up 2.5 points. (…)

The U.S. economy lost $16 trillion in total wealth from the end of 2007, when the U.S. recession started, until early 2009, he said. That amounted to about a quarter of total U.S. wealth. It has since regained $13.5 trillion of that wealth, mostly owing to a rebound in the stock market and recent improvement in housing prices.


Punch  I don’t post often on consumer confidence surveys. Here’s why: CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL! And here’s the better readings on consumers:

  • Consumer is O.K.

Food company J.M. Smucker Co. on Friday said sales rose 6% in the three months ended Jan. 31 from the same period a year earlier. CEO Richard Smucker said he was “cautiously optimistic” about the economy going forward, and noted that the industry as a whole has seen stronger demand in recent weeks. “We are actually seeing the consumer be a little more confident and therefore spending a little more,” Mr. Smucker told investors.

Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.” (…)

Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

“(…)  Where are all the customers? And where’s their money?” (…)

“As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions,” David Tovar, a Wal-Mart spokesman, said in an interview, adding that the company will report fourth-quarter earnings on Feb. 21. Wal- Mart’s fourth quarter ends in January. (…)

About $19.7 billion more in tax refunds had been delivered to shoppers by this time last year, according to an analysis prepared by Wal-Mart’s Global Customer Insights & Analytics division that was attached to Murray’s e-mail on Feb. 12. The retailer expected returns to be delayed by three to four weeks because of the late release of tax forms and additional, federally mandated tax-fraud scrutiny. (…)

Even with a slow January, Wal-Mart is gaining market share steadily, Simon said.

“That points to our competitive landscape, which means everyone is suffering and probably worse than we are,” Simon said, according to the minutes.

What to think? I side with Wal-Mart, the largest and most sophisticated retailer in the world. These e-mails have not been denied by WMT. Their sales problems seem to be industry-wide since they see they market share growing. And it jibes with weekly chain store sales reports:



  • On the other hand, ISI surveys, which have done a good job warning of previous slowdowns, are, so far, not declining. Their diffusion index is going sideways, however, as “some of the consumer surveys with smaller ticket size have decelerated recently”.


Yet, when I scrutinize ISI’s surveys up to Feb. 15, I find that:

  • Auto dealers surveys are slowing and, at 51.1, are flirting with the 50 level;
  • Broadline retailers surveys have clearly weakened;
  • Specialty retailers surveys are stable at a weak level;
  • Restaurant surveys have slipped below 50;
  • Credit card companies surveys have slipped below 50;

Only Consumer staples companies surveys have improved in recent weeks and not by much.


In spite of its own “short term” hurdles and of significant problems abroad, the U.S. economy keeps surprising. Its resilience comes from new positive secular trends:

  • HOUSING, now a front page phenomenon. Pointing up Note that ISI homebuilders surveys remain very, very strong!
  • THE ENERGY GAME CHANGER, also front page now, and
  • THE U.S. MANUFACTURING RENAISSANCE, no longer page 16 but not quite front page material yet:

According to just-released data from the Federal Reserve, oil & gas extraction remains a key driver of industrial output. As today’s Hot
Chart shows, volume extraction has increased by more than 30% in the past three years. The last time the U.S. produced so much oil & gas was in 1974.

This unexpected energy surge is playing an important role in helping revive the U.S. manufacturing base. The new abundance of oil & gas is altering the outlook for U.S.-based production of chemicals and plastics. As shown, both industries are now adding capacity for the first time in five years. We would expect this situation to endure for the foreseeable
future since capacity utilization is running near the pre-recession high of 80%. Increased production will have to be met with increased capacity. (NBF Financial)


Reliable and sustainable energy sources are vital to a growing economy, boding well for the future, but perhaps more importantly, this again illustrates what creative minds in America can achieve when market forces are left to work. (Schwab Market Perspective: Seeing the Forest)

The changing, and encouraging, energy equation


That also helps:

Number of the Week: Aging Fleet Could Boost Car Sales

11.1 years: The average age of light vehicles in the U.S. last year, according to automotive-research firm Polk.



  • S&P 500 Gains for 7th Straight Week 

    The index has risen 8.37% over that period. The Russell 2000 also made it seven straight weeks of gains. It is up 10.94% in the past seven weeks.

  • S&P 500 Getting Close to Consensus Price Target At the start of the year, the consensus Wall Street year-end price target for the S&P 500 was 1,531, which translates into a gain of 8.76%.  With the index up 6.65% year to date, the market is already close to the consensus price target after just a month and a half.

That may be what is keeping the S&P 500 Index stuck at 1520. You can bet that, unless the economy turns bad in coming weeks, these “targets” will get a lift up accompanied with silly rhetoric such as this one from Citigroup’s European strategy group (my emphasis):

(…) However, policy makers and the healing process of time are reducing the fear. The risks of falling are still there but confidence in the safety net is increasing. This is being played out in risk assets rallying. We believe
there is more to go as investors time horizons lengthen. While we do not expect plain sailing from here we see equity markets at least 10% higher by the year end.

First the bad news that we all already know. The weak economic conditions especially in Europe in 2013 as more austerity bites will make the bottom up forecasts of 10% earnings growth very difficult to achieve. We view 5% as a more likely outcome.

But this is not a secret and the market should have discounted this already. What is more important is the outlook for 2014 earnings. As we have detailed above we expect economic growth to inflect in 2013 and be accelerating into 2014. This in itself makes double digit earnings growth more likely in our view.

While the EBITDA margin is at relatively high levels because leverage is low (Confused smile) the RoE is less stretched. We believe that margins should be sustainable around current levels given stable economic conditions, steady commodity prices and little delta in corporate capex.

Taking the 12m forward PE the market is trading at around a 10% discount to its 25 year average. Normalisation points to upside. Price to book is trading at a similar discount while ex Financials the markets are back to average. Of course by their very nature markets have to spend time above and below average to make up that average. Using the trailing PE, as it is a longer source of data, the market trades at above average multiples 48% of the time. It is not unusual to be re-rated.

So, 2013 is already well understood and discounted so we have to buy on 2014 prospects which call for 10% EPS growth because the economy is currently inflecting. Margins should remain high thanks to stable everything. And valuation is attractive because it is  10% below its last 25-year average (which includes 7 years of bubbly P/Es but never mind that since stocks trade above average 48% of the time).

Beautiful broker poetry!



The only worthy thing in this report is this chart which, I assume because it is not explicit, correlates the U.S. ISM with U.S. earnings momentum. Contrary to Citigroup, I fail to feel positive, just yet, on earnings based on this chart. image


  • In Europe:

Some 54 percent of companies in the Stoxx 600 reported earnings that topped analysts’ estimates this week, according to data compiled by Bloomberg. Fifty-six percent beat revenue projections, the data show. (Bloomberg)

  • In the U.S.

Q4 Earnings and Revenue Beat Rates

Below is an updated look at the earnings and revenue beat rates for the fourth quarter reporting period (which comes to an end next Thursday).  As shown below, 63.6% of US stocks that have reported this season have beaten earnings estimates, while 64% have beaten revenue estimates. 

I essentially rely on S&P data for my earnings and valuation analysis. This is important now since S&P includes “actuarial gains or losses” on pension expense in operating income, unlike some other aggregators.

S&P reports that as of Feb. 14, 79% of S&P companies had reported Q4 results. The beat rate is 64.9% while the miss rate was 24.5%. Ex-IT (beat rate of 82%), the beat rate drops to 61.7% and the miss rate rises to 27%.

Total Q4 EPS keep declining and are now seen at $23.32, down $0.21 from Feb. 6 and $0.51 from Jan. 31. As a result, trailing 12-month earnings dipped to $96.99, down 0.4% from their Q3’12 level, their first decline since 2009.

Q1’13 estimates stabilized lately: they are estimated at $25.62, up 5.6% Y/Y. If achieved Fingers crossed, trailing 12-month EPS would rise to $98.37. Keep in mind that Q4’12 results will likely come in nearly 8% below what analysts were estimating less than 2 months ago.

The creeping market and easing trailing earnings are slowly eroding the market undervaluation which is now 14%, down from 21% in December.




U.S. Corporate Earnings Whipsawed by Yen’s Drop

U.S. companies that do significant chunks of their business in Japanese yen are starting to see some serious costs associated with the currency’s recent decline.

“It’s having a significant top line and bottom line impact,” Wolfgang Koester, chief executive of foreign exchange risk-management company FiREapps told CFO Journal. While companies have spent much of the past year focused on protecting themselves from fluctuations in European currencies, the impact of the dollar-yen exchange rate over the past quarter has taken some companies by surprise, and could worsen if companies fail to put in hedges to absorb some of the impact, Mr. Koester said.

The Japanese yen has rapidly lost ground against the dollar, falling about 20% since November. (…)

Handbag maker Coach , Inc., for example, said last month that its fiscal second quarter Japanese sales fell 7% from the same period a year earlier in dollar terms due to the weaker yen. The sales were only off 2% in constant currency terms.

Automotive companies and airlines are also reporting negative impacts. (…)

“It isn’t just the dollar-yen” that has become a drag on results, Mr. Koester said. “The euro-yen is an even bigger exposure for some companies because of the European financial crisis. It is totally catching them off-guard.”


China New Year Retail Sales Growth Slows on Austerity  Shop and restaurant sales in China during the week-long Lunar New Year festival rose at the slowest pace in four years as a government campaign to discourage extravagant spending limited outlays on food and drink.


The improved competitiveness is illustrated by Spain’s recent success in attracting automotive manufacturing expansions by Ford, Renault, Nissan, and Volkswagen, despite a weak overall market in Europe.  (Schwab Market Perspective: Seeing the Forest)

Eurozone: those with lower costs more competitive



There’s a Feeling of Instability Bubbling Up  Even so, there are good reasons to believe that talk of currency wars is, for the moment, just talk.

The U.S. was the first country to be accused of waging currency war, when Brazil objected to the Federal Reserve’s second round of quantitative easing in 2011, which was widely seen as a naked attempt to drive down the dollar.

The new Japanese government may now claim that its promise of a massive monetary and fiscal stimulus is solely designed to boost the domestic economy but it has made little secret of its desire to see a weaker yen. Similarly, Bank of England Governor Mervyn King has been open in his view that a further devaluation of sterling, on top of the 20% depreciation since the start of the global financial crisis is needed to further rebalance the economy—even while warning that other countries risk triggering competitive depreciations. (…)

At the same time, the global prohibition on competitive devaluations appears asymmetric; countries that have intervened to prevent their currencies rising, such as Switzerland, have so far escaped censure. Goldman Sachs argues this de-facto global stand-off over currencies represents an unofficial Global Exchange Rate Mechanism. (…)

Pointing up  After all, central banks have so far largely welcomed rising asset prices as a sign of restored confidence and view low yields as creating an incentive for investment.

In the absence of domestic political support, it would take a brave policy maker to argue that soaring asset prices risk creating a new debt-fueled misallocation of capital and threaten to pull away the punch bowl. But perhaps they’re made of sterner stuff these days.

There we go!
  • Yen resumes slide after G20  Comments on currency devaluation fail to single out Japan

  • Investors turn their backs on sterling  Bets against pound second in volume only to yen

  • Norway Ready to Use Rate Cuts to Cool Krone, Olsen Says  “A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.”

  • Abe Pressures BOJ  Japanese Prime Minister Shinzo Abe said Monday that if the central bank is unable to achieve the 2% inflation target that it has set, that would be a condition for changing the Bank of Japan’s law.

  • Japan PM says BOJ easing a key factor driving FX Japanese Prime Minister Shinzo Abe said on Monday the central bank’s monetary policy is not directly aimed at weakening the yen, but is among key factors driving exchange-rate moves.

Currency wars: yen is now
Risk appetite is an important factor – but wars of any kind are bad for trade

(…) Certainly a strong yen is bad for Japan’s exporters. Popular thinking goes that a weaker one will thus lift profits and stocks. Since November 14, when Yoshihiko Noda called a general election, the yen has fallen 14 per cent against the dollar and the Topix has rallied by 30 per cent. Carmakers, as some of the biggest exporters, are among the biggest beneficiaries of a weaker currency. Toyota gains about Y38bn ($407m) in operating income – or 3 per cent of its full-year target – for every Y1 weakening, Nomura estimates. Add in the yen’s 15 per cent slide against the Korean won since November, which should hamper Japan’s biggest rivals, and exporters are in clover.

That does not make the stocks the biggest gainers from yen weakness – those are in fact banks and other financial groups. For every 5 per cent the yen weakens versus the dollar or won, the Topix banks index tends to gain 25 and 12 per cent respectively, according to CLSA. Transport stocks and the big electronics exporters add half that. That suggests the real driver is not the currency move and its profit effects so much as risk appetite. It was a flight to safety that drove the yen to its painful peaks. Now stock market volumes are up amid bets of even looser monetary policy.

Wars of any kind are bad for trade. Avoiding currency moves becoming a pitched battle should be good for the animal spirits that really move the yen – and the stock market.

Saxo Bank CEO Says Euro Doomed Amid Currency Woes

Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.

“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.” (…)

Ghost  “Another possible fallout is getting rid of some of the countries that are being ruined by being in the euro, notably the southern European economies,” Christensen said. “People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.”


Saudi Oil Output Falls to 19-Month Low as Exports Decline

Saudi Arabia’s crude oil output fell in December to a 19-month low as shipments from OPEC’s biggest producer dropped for a third month and domestic consumption decreased, the Joint Organisations Data Initiative said.

The kingdom exported 7.06 million barrels of crude a day in December, the least since September 2011, JODI reported, citing statistics the government submitted to the Organization of Petroleum Exporting Countries. Exports were 1.3 percent lower than the previous month. Production dropped 4.8 percent in the month to 9.03 million barrels a day.

Saudi Arabia, which burns oil to produce electricity and desalinate water, is seeking to increase use of natural gas as a substitute fuel. By doing so, the government plans to free up more crude for sale overseas, where the commodity can sell at higher prices than it does at home.

The kingdom burned 303,000 barrels a day at power plants in December, the lowest level in 10 months, according to the data. That is 29 percent less than what it burned a year ago.

Saudi Arabia, the world’s biggest oil exporter, stored 276.6 million barrels of crude within its borders in December compared with 278.9 million a month earlier, the data show. Refineries processed 1.73 million barrels a day during the month, down by 44,000 barrels a day from November.


Pointing up  Anecdotally, the economy in South Florida is clearly softening. There are vacancies all along A1A on the sea coast, right in prime season, and most business people I talk to say biz is slow.

Some things will never change:

Rash acquisitions leave miners in a hole  Companies report multibillion-dollar writedowns


Miller is a great investor, very fundamental value minded, well researched and articulated.  (if no longer freely available, try here)



NEW$ & VIEW$ (7 FEBRUARY 2013)

Economic storm coming? Low mortgage rates helping consumers. Slower growth in S. Korea, India. China car sales. Oil price management. Social security fund depletion. Beware earnings estimates.


Storm cloud Storm cloud Brace for Uglier Data as Cliff Meets Sequester

(…) The payroll-tax increase on Jan. 1 has been taking a bite out of paychecks for more than a month, though key gauges of consumer spending for January haven’t been released yet. The last-minute passage of the fiscal cliff deal also will delay tax refunds, deferring some consumer spending and complicating the seasonal adjustments in data for retail sales and consumer spending. Both of those forces are set to hit just as the government prepares for widespread spending cuts on March 1, followed by a potential government shutdown in late March. (…)

Storm cloud Consumers Skid From Fiscal Cliff to Oil Slick

Consumers are taking a wild ride this quarter, from peering over the fiscal cliff to skidding on an oil slick.

(…) The 18-cent jump in gasoline prices in the past week–the biggest weekly gain in almost two years–adds another negative risk to the consumer outlook this quarter. Not only are workers taking home less pay, more of that smaller stash is being spent at the gas pump. (…)

The general rule is that a 10-cent increase in the price of gas costs drivers about $1 billion a month. If prices remain at their current high level with no change in buying habits, households will have to spend less on other goods and services, creating a drag on the overall economy. (…)


Boehner: Spending Must Be Tackled  The chances of avoiding roughly $85 billion in government spending cuts scheduled to begin next month are dwindling, as House Republicans resist overtures from Democrats to replace the spending cuts with some tax increases.


Mortgage refinance applications remain at a relatively high level early in 2013. That is good news for homeowners as it comes against a backdrop of record low mortgage rates (courtesy of the Fed’s QE campaign). As today’s Hot Chart shows, the recent wave of refis has resulted in a tangible decline in the effective interest rate on mortgage debt outstanding. To the extent that job creation remains on track and that home prices remain on an uptrend, we think that there is room for refis to further reduce the spread between the market and effective mortgage rates.

According to Feddie Mac’s just-released quarterly analysis, the average interest rate reduction on refinancings was 1.8 percentage point in Q4, a
savings of about 33 per cent in interest rate. That is the largest percent reduction in 27 years. Our research has found that households get a windfall of around $70 billion annually at the economywide level from every one percentage decline in the effective mortgage rate. (NBF Financial)

Storm cloud  Weak sales hit S Korea growth hopes
Data follow warnings from exporters of darkening outlook


Sales at South Korea’s top department stores and discount shops fell sharply last month, renewing concerns about the country’s fragile economic recovery.

The weak data were a blow to hopes that Asia’s fourth-largest economy had bottomed out, and came soon after leading exporters warned of a darkening outlook for the coming months. (…)

In addition to weak domestic spending, South Korea also faces challenges on the export front as the won’s strength threatens the country’s export competitiveness. (…)

Storm cloud  India Expects GDP to Grow 5% This Year

The Indian economy is estimated to grow 5% in the fiscal year through March, the lowest in a decade, significantly slower than the 6.2% expansion last year.

In December, the finance ministry had cut its growth projection to about 5.8% from an initial forecast of 7.6% made when the federal budget was unveiled in March.

Auto  China Passenger-Vehicle Sales Surge as SUV Sales Double  China’s passenger-vehicle sales surged 49 percent to a monthly record, beating analysts’ estimates, as demand for SUVs almost doubled and Ford Motor Co. extended gains in market share.

(…) Wholesale deliveries, including multipurpose and sport utility vehicles, climbed to 1.73 million units in January, the state-backed China Association of Automobile Manufacturers said in an e-mail today. (…)

Total sales of vehicles rose 46 percent to 2.03 million units last month, according to the association. (…)

High five  The holiday distortion means that sales may decline in February. Economists and analysts typically calculate January and February figures together to explain the Chinese market. (…)

PBOC Signals Inflation Concern as Economy Rebounds

China must be alert to changes in price-gain expectations and to imported inflation, the People’s Bank of China said yesterday in its fourth-quarter monetary policy report. The costs of labor-intensive products, services and agricultural goods may rise persistently on slowing labor-supply growth, the PBOC said.



Brent Crude Rises to Four-Month High, Extends WTI Premium  Brent crude climbed to its highest level in more than four months in London, extending its premium over West Texas Intermediate for a seventh day.



Saudi Arabia Stabilizes Oil Output as OPEC Maintain Cap


The world’s largest crude exporter produced 9.05 million barrels a day in January, little changed from last month when output reached the lowest in 20 months, the Persian Gulf official said on condition of anonymity.

The kingdom, while keeping its production stable, supplied 9.26 million barrels a day to the market compared to 9.15 million a month ago, he said. The difference of 210,000 barrels between supply to market in January and production figures is made up for by deliveries from inventories, he said.

The Organization of Petroleum Exporting Countries trimmed output by 465,000 barrels a day in December to 30.4 million as budget wrangles in the U.S., speculation about stimulus measures in Japan and Europe’s struggle to boost growth clouded the outlook for fuel demand. Cuts were led by a reduction in Saudi Arabia, the group said last month in its monthly report, citing secondary sources. That’s 800,000 a day more than the 29.6 million the group estimates it will need to provide this year.

Saudi Arabia started producing at about 9 million barrels a day in December after pumping at 9.9 million for most of the second half of 2012, according to data compiled by Bloomberg.

Remember, Saudi Arabia’s budget is based on $100 Brent.

Punch  U.S. Treasury Considers Ways to Extend Debt Maturity

The U.S. Treasury and its Wall Street advisers are weighing steps to more rapidly extend the maturity of government debt, a development that could partially blunt the Fed’s effort to lower long-term interest rates.

(…) The U.S. Treasury Wednesday said the average maturity of its outstanding debt had risen to almost 65 months at the end of 2012, up 34% since an October 2008 trough. That is the longest average maturity in a decade.

The trend looks set to continue. Under current policies, the average maturity of debt is set to rise to 80 months by 2022.

And the Treasury Borrowing Advisory Committee, composed of executives from some of Wall Street’s largest banks and bond investors, at its most recent meeting explored more aggressive measures to extend the maturity even faster.

Scenarios under consideration included the issuance of the 50-year and 20-year bonds. (…)

Crying face  Social Security Trust Fund Likely To Run Out In 2031

Social Security’s financial outlook took another hit this week, as the Congressional Budget Office hiked its estimate for cash deficits from 2013 to 2022 by $212 billion.

The wider deficits — mainly due to weaker revenue estimates — mean a quicker depletion of Social Security’s trust fund, after which the program could only afford to pay about 75% of benefits. (…)

To offset a 25% lifelong benefit cut with 18 years of saving would require that average earners set aside about 6% of annual wages, assuming Treasury returns and a lifelong annuity. (…)


Just kidding  How accurate are analyst annual EPS projections one year in advance?

Over the past 15 years, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has been +10.3%. In other words, analysts on average have overestimated the final EPS number by about 10% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in ten of the fifteen years and underestimated the final value (i.e. the final value finished above the estimate) in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded three months after the end of each calendar year (March 31) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season (January through March).

However, this 10.3% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+35.9%), 2008 (+53.4%), and 2009 (+27.4%). Using the median instead of the average, the median difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +5.5% over the past 15 years. (Factset)

S&P 500 Bottom-UP EPS: One-Year Prior EPS Estimate vs. Final EPS Number


NEW$ & VIEW$ (10 JANUARY 2013)

(Travelling day’s limited edition)

China trade rebound hints at solid growth

2012 surplus hits $231bn, more than 50% larger than a year earlier

Exports rose 14.1 per cent from a year earlier, the fastest in seven months and well above November’s 2.9 per cent pace. Imports increased 6 per cent in December from a year earlier after flatlining in November. Both figures outstripped most forecasts.

Shipments to the European Union rose 2.3% in December, the first gain since May, on demand from the U.K. and the Netherlands. Exports to the U.S., Canada, South Korea and India also accelerated.

This just as U.S. exports were starting to slow down.


For those who care about earnings estimates. FYI, 2013 bottom up estimates are currently $113.

How accurate is the bottom-up EPS estimate one year in advance?

S&P 500 Bottom-UP EPS: One-Year Prior EPS Estimate vs. Final EPS Number

Over the past 15 years, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has been +10.3%. Analysts overestimated the final value in ten of the fifteen years and underestimated the final value in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded three months after the end of each calendar year (March 31) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season (January through March).

However, this 10.3% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+35.9%), 2008 (+53.4%), and 2009 (+27.4%). Using the median instead of the average, the median difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +5.5% over the past 15 years. (Factset)

Here’s something that analysts generally miss:

Extension of Bonus Depreciation Will Save US Companies Nearly $23 Billion

Last Wednesday, President Barack Obama signed into law legislation that extends by a year a 2012 tax benefit allowing companies to deduct 50% of their capital expenditures (CAPEX), significantly more than normal. (…) We estimate the extension will save companies nearly $23 billion in cash taxes for 2013.

(…) Companies are permitted to depreciate, for tax purposes, property plant and equipment acquired and placed into service during the year using a Modified Accelerated Cost Recovery System (MACRS). (…)

Exhibit 1 below shows the CAPEX for the 12 months ended 30 September for the five industries most likely to benefit from the bonus deprecation extension including utilities, energy, telecommunications and retail. These industries’ CAPEX totaled $426 billion, or 52% of $815 billion in last-12-month (LTM) CAPEX for all rated, non-financial companies.


For illustration, Exhibit 2 compares the estimated tax benefit (e.g., cash savings) with and without bonus depreciation in 2013. We used the LTM CAPEX as of 30 September 2012 for more than 1,100 public, non-financial rated companies. We assumed 75% of capital expenditures were eligible for bonus depreciation, a 60% election rate, an average asset life of 10 years (equal to a normal MACRS deprecation rate of 14.3%), a corporate tax rate of 35%, and that the company is subject to US federal income taxes. Without 50% bonus depreciation, the estimated tax benefit in 2013 would have been $41 billion (using MACRS). With 50% bonus depreciation, we estimate the benefit will be approximately 56% higher, or $64 billion.


Bonus depreciation is not a new benefit: prior to this current extension, President Obama in December 2010 signed a bill into law that allowed US companies to fully deduct 2011 capital expenditures, up from 50% previously. The rate reverted back to 50% in 2012 and would have gone back to the normal rates under MACRS in 2013.


What’s wrong with American baby boomers?

What’s wrong with American health care spending?

Want more: 2012 – The Year In Healthcare Charts

Obama Aide Is Treasury Pick

The president will nominate Jacob Lew as Treasury secretary, elevating the White House chief of staff into the administration’s top economic post.

While Lew, 57, worked as a managing director for Citigroup from July 2006 until the end of 2008, he’s spent most of his career in government. He served as director of the Office of Management and Budget for both Obama and President Bill Clinton and was an aide to the late Tip O’Neill, former speaker of the U.S. House. (Bloomberg)

Here’s Grant Williams’ reaction:

How in the name of all that is remotely sensible can your leading candidate for the Treasury Secretary role have ‘thin’ financial markets experience? Now? After 2008? With all the problems facing the banking sector? Lew may well be an extremely smart guy; but surely, a man who
spent two years at Citigroup in his 50s after a career in government isn’t the smart choice. Presumably, however, the likes of Jamie Dimon or Lloyd Blankfein wouldn’t be quick to subject themselves to the confirmation process…


Boehner and staff must be ecstatic!


NEW$ & VIEW$ (19 NOVEMBER 2012)

Ghost  “The only thing we have to fear is fear itself” (FDR)  Ghost


As of Nov. 15, S&P had tallied 476 (96.3%) company reports. Q3 EPS are now seen at $24.35, down another nickel from last week and 3.7% below last year. Q4 estimates slid $0.11 to $25.85.

Trailing 12 months earnings are now $97.75, nearly one dollar ($0.94) lower than at the end of Q2.

U.S. inflation has edged up from 1.7% in August to 2.2% in October. Meanwhile, the S&P 500 Index has retreated 7.9% from its September high. The Index is now selling at 14.1x trailing EPS while the Rule of 20 says fair P/E should be 17.8, a 21% undervaluation.


Fear is obvious in equity valuation: Fiscal cliff, recession, earnings, Europe, taxes, Middle East…


The spread between the percentage of companies raising guidance minus the percentage of companies lowering guidance ended at -5.4 percentage points this earnings season.  This marked the fifth consecutive earnings season in which more companies lowered guidance than raised guidance.  We haven’t seen that happen since the 2001/2002 bear market.  While bad, the final guidance spread of -5.4 percentage points was slightly better than the -5.6 reading we saw last earnings season.  (Bespoke Investment)

Surprised smile  Investment Falls Off Cliff

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined. (…)


Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. (…)

Money  Special Dividends Surge Fourfold as U.S. Tax Increase Looms

(…) From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared a one-time cash payment to shareholders, up from about 15 in the year-earlier period, according to data compiled by Bloomberg. More than a dozen said they acted because of a pending dividend-tax increase. (…)

If Congress takes no action, the dividend tax will revert to the ordinary income rate, which tops out at 39.6 percent. Companies, which according to data compiled by Bloomberg are sitting on $3 trillion of cash, can afford to give back to shareholders and create some goodwill by showing they’re attuned to possible higher taxes, Lowenstein said. (…)

RBC Capital Markets:

(…) we have never seen as big a tax increase in the post-war economy as the one that could hit us when the calendar rolls into the New Year. Rates on dividends could climb from the current 15% level to as high as 44.6% (meanwhile, capital gains tax rates could double). Given this caveat, the high payout ratio, low growth, higher-yielding equities which have shown strong price gains over the past few quarters are at greatest relative risk within the dividend-paying universe.

Consumer fear charted:


Business fear charted (from NFIB):

image image

Storm cloud  U.S. Industrial Output Declines Due To Sandy

large imageHurricane Sandy added to last month’s weakness in industrial output. Industrial production fell 0.4% during October following a 0.2% September increase, last month reported as 0.4%. A 0.2% increase had been expected. Factory output fell 0.9% after a minimal 0.1% September uptick and utility output slipped 0.1% (+0.5% y/y). The Fed indicated that industrial production would have risen roughly 0.6% without the storm and that factory output would have been unchanged.

Markit adds:

imageHowever, even after accounting for the storm impact, the output trend is one of more-or-less stagnation, which is in line with the message from recent business surveys. Unfortunately, the surveys also indicate that the
production trend is likely to have remained weak in November.

Purchasing managers reported that order books showed one of the smallest increases seen over the past three years in October, according to Markit’s Manufacturing PMI survey, which has accurately anticipated trends in official production. Exports continued to fall as a result of tough economic conditions in key export markets. With the eurozone and Japan facing renewed recessions, demand for US manufactured goods looks set to remain weak in coming months, leaving firms reliant on domestic demand.

Meanwhile in the twilight zone:


(…) The toughest issues remain unresolved, and significant differences between the two sides remain, especially the fate of the expiring Bush-era tax rates for the nation’s highest earners. (…)

imageLeaders from both parties and aides to Mr. Obama said they agreed to make concessions to achieve a deal. For Democrats, that included a willingness to curb entitlement programs, such as Medicare. For Republicans that meant a willingness to raise tax revenue. The question for each side, however, is how. (…)

Mr. Obama, House Minority Leader Nancy Pelosi (D., Calif.) and Mr. Reid said at the meeting they wouldn’t support extending the Bush-era tax rates for upper-income Americans as part of any deal. House Speaker John Boehner (R., Ohio) said those tax rates should be extended. People familiar with the meeting said all present knew this issue would be revisited later, and they agreed to set it aside. (…)

That is the crux of the matter.

Perhaps the most remarkable feature of the meeting, aides on both sides of the aisle said, was the absence of partisan jockeying that often marks these summits. (…)

Don’t you worry, that’s coming soon.


Home sales rebounded in Nov  Sales of new homes in Beijing hit 10,314 units in the first half of November, close to a record high in the first 15 days of June.

China Home Prices Gain in Half the Cities as Market Steadies

(…) Prices climbed in 35 of the 70 cities the government tracks, compared with 31 in September, according to data from the statistics bureau yesterday. Prices fell in 17 cities. (…)

Home prices rose in 12 cities from a year earlier, the same as in September, the data showed. (…)

Contracted sales at 11 major developers were 57.3 billion yuan ($9.2 billion) in October, up 24 percent from September and 41 percent from a year earlier, according to Ryan Li, an analyst at JPMorgan Chase & Co. in Hong Kong. It was the best month since developers started releasing monthly data in January 2009.

China’s housing sales climbed 6.6 percent to 3.88 trillion yuan in the first 10 months, while investment in homes, office buildings, malls and other real estate gained 15.4 percent to 5.76 trillion yuan, National Bureau of Statistics’ data showed. (…)

China’s home appliance sales pick up  Buoyed by subsidies on energy-saving products and favorable policies for rural consumers, China saw home appliance sales pick up in September.

(…) domestic consumers purchased 3.65 million units of washing machines, representing a 1.4-percent increase year on year, while exports expanded 18 percent to 1.98 million units, according to the data.

The September figures marked the first time that sales of air conditioners have expanded in the past seven months, while the surge in sales of refrigerators in the month trumped market expectations, the center said.

The pick-up came as rural consumers kicked off a buying spree ahead of the end of the rural subsidy program, which gives them subsidies equal to 13 percent of the price of designated types of home appliances, the center said. The program will end at the end of this year.

Sales were also boosted after the government announced in May that it would earmark 26.5 billion yuan ($4.21 billion) to subsidize the purchases of energy-saving electrical appliances for a one-year period, a program designed to cover a wider population, it added.


Dan Yergin needed a month to summarize just about all that has been written on “The U.S. Oil Revolution” (see my Oct. 18 post: Facts & Trends: The U.S. Energy Game Changer). The FT graciously allowed him to inform its readers about what’s happening in the world of energy: Winking smile

Daniel Yergin: US energy is changing the world again

(…)  The economic effects of this revolution in unconventional forms of production are already apparent. The most immediate has been in employment – more than 1.7m jobs have been created. The development of shale gas and tight oil involves long supply chains, with substantial sums being spent across the country. (…)

The impact will increase. By 2020, 3m jobs could be created by the energy revolution. Most will have salaries higher the average US job. This means more money for cash-strapped governments. By that year, government revenues from taxes and royalties arising from unconventional oil and gas could be over $110bn, according to analysis by IHS.

The other increasingly important impact is on global competition. US natural gas is abundant and prices are low – a third of their level in Europe and a quarter of that in Japan. This is boosting energy-intensive manufacturing in the US, much to the dismay of competitors in both Europe and Asia. Billions of dollars of investment are now slated for US manufacturing because of this inexpensive gas.

What about oil? (…) One geopolitical impact is already clear. Rising US oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

But US engagement in the Middle East is not simply about oil imports. The US buys only about 12 per cent of its oil from the Gulf. Its interest is less about how many barrels flow to the US and more about the overall accessibility and stability of supplies on which the world economy depends. After all, the US will be affected by any disruptions to the global market that drive up prices. (…)

The skeptical view via FT Alphaville:

Here are the IEA’s actual US oil production forecasts, in a “New Policies” scenario:

US oil production New Policies scenario - IEA

The ‘New Policies’ scenario includes no new greenhouse gas emission policies beyond what was committed to by mid-2012; average 3.5 per cent world GDP growth to 2035; and average crude oil prices approaching $125/barrel, in 2012 dollars, by 2035.

However, Neil Beveridge and colleagues at Bernstein Research have been sceptical about the predicted shale oil boom for some time, as highlighted in their note about the Bakken shale formation in Montana which we wrote about in August.

They remain unmoved by the IEA’s forecasts, foreseeing an earlier peak and a quicker decline of US oil output:

The renaissance in US liquids production has been remarkable, growing by over 1mmbls/d to reach 8.5mmbls/d this year over the past three years. By 2015 we expect that the US will produce close to 10.5mmbls/d given further growth in shale liquids. This will be comparable to Saudi production but only for a brief period and by 2020 we forecast that US production will have declined back to 9mmbls/d. In contrast, the IEA expect US liquids production to keep growing to 11.1mmbls/d by 2020 following which the US production will plateau and by 2025 start to decline.

Beveridge explains:

As we have noted, shale liquids plays are far rarer than their related shale gas plays and already we are seeing decline in some of the core areas of the Bakken oil field highlighting the early onset of maturity in some of these plays.

U.S. Oil Demand at Lowest October Level in 17 Years

U.S. oil demand fell 2.3% in October from a year earlier, to 18.4 million barrels a day, the American Petroleum Institute said Friday.

Demand was the weakest in October in 17 years, the trade group said, and was up 1.3% from September. Demand in the first 10 months of the year was 2.1% below the same period in 2011 at 18.562 million barrels a day.

(…) “The simple fact is that unemployment remains high and economic growth has been extremely modest. Petroleum demand is reflecting that.”

Demand for gasoline, the most widely used petroleum product in the world’s biggest oil consumer, fell 0.2% from a year earlier to 8.627 million barrels a day and was the weakest in October since 2000. Ten-month average demand of 8.744 million barrels a day was down 0.4% from the same time in 2011. (…)

Imports of crude oil fell by 4.5% to average just over 8.5 million barrels per day in October.

Crude oil production was 13.3% above year-ago levels, at 6.652 million barrels a day, the highest level in the month since 1994. (…)

America’s Oil Boom: Shape Up or Ship Out  America’s newfound natural-gas bounty has already sparked arguments over whether or not to export it. Soon, it will be oil’s turn.

(…) U.S. crude-oil exports are heavily restricted. Refined products such as gasoline can be shipped abroad more easily—indeed, the U.S. became a net exporter of these last year for the first time since 1949. (…)

Pressure to export crude oil won’t grow because the U.S. will suddenly no longer need imports. (…)  Rather, it is a matter of logistics.

The rapid increase in onshore U.S. oil output in states such as North Dakota, as well as rising Canadian oil-sands output, has created a glut in the Midwest. As a result, domestic grades sell for less than international benchmarks such as Brent. (…)

While refiners, pipeline operators and rail companies are investing to get these cheaper crudes toward markets like the East Coast, the current logistical setup still favors the Gulf of Mexico coast. This region is home to almost half of U.S. refining capacity. Gulf Coast refineries are running flat out already. Moreover, many are set up for a world in which the U.S. imported lots of heavy, high-sulfur crude oil, whereas much of the output from expanding onshore fields is light and low-sulfur or “sweet.”

Just under 800,000 barrels a day of light, sweet crude is currently imported to the Gulf Coast for processing, according to analysts at Raymond James. As onshore output of oil increases, these light, sweet imports will be replaced by domestic barrels. Raymond James estimates this will happen by the second half of 2013.

Gulf Coast refiners will tweak their plants to let them use more domestic light, sweet crude. But a growing surplus of these barrels in the Midwest with few easy options to get to market looks unavoidable.

So expect a push by exploration and production companies to ease export restrictions on oil in the same way they are pushing for natural gas. Gas accounts for about two-thirds of the E&P sector’s output. But profits—and stock-price performance—hew more to oil.

Equally, expect the other part of the industry, refiners, to resist. Just as petrochemical firms such as Dow Chemical profit from the glut of domestic gas, refiners able to process cheap domestic crude are enjoying a windfall. Looked at on a rolling three-month average, the premium for gasoline sold in the Gulf Coast region over WTI is around $28 a barrel, close to its highest ever.

That margin could be a political liability. It is easy to envisage export-ban supporters arguing it is unjust to sell domestic crude overseas while Americans pay high gasoline prices. But as that margin shows, the benefits of cheaper crude flow first to refiners. Since gasoline produced on the Gulf Coast can be sold anywhere, Americans must compete for it—that is, pay up. Changing that would actually require raising barriers to refined-product exports, protectionism that neither the world nor refiners would welcome. (…)


The Eurozone’s economic and political mess is rapidly morphing into a social disaster of potentially huge proportions. Europe’s social fabric will likely change radically (literally) in coming months and years. This FT editorial only sets the stage.

Common casualty

This week, the consequences of the eurozone’s misguided policies were brought home to the politicians overseeing them – politically and economically. On Wednesday, millions of workers struck across the eurozone to protest against the public sector austerity practised by the currency union’s governments. On the very same day, new numbers revealed that the eurozone has fallen back into recession. (…)

Behind the cold statistics lie strains on the social fabric. These burst into the open with the street protests which at times erupted into violence. Trade unions have special interests to defend against much-needed structural reforms. But their actions also reflect a deeply felt suffering from the job losses and ruination caused by the downturn and the collapse of the housing bubble in the countries that had one. Spain, for example, has been forced into emergency policy making to address an accelerating homelessness crisis.

This economic and political damage was caused by a wrong-headed morality tale that attributed the debt crisis to fiscal indiscipline, when in reality profligacy was a sin most promiscuously practised by private lenders and borrowers. (…)

This week reminds us that politicians must eventually listen to voters. The future hinges on next year’s crucial elections in the eurozone’s first and third economies: Germany and Italy.

Note to subscribers: I will now try to send the daily email between 9:00 and 11:00am. Just trying, no promise! For a free subscription, use the box in the sidebar.


NEW$ & VIEW$ (12 NOVEMBER 2012)

Much to deal with: earnings, valuation, politics. Make sure to read the “oil” part.


Nearing the end of the earnings season. S&P says that of the 451 companies having reported, 63% beat and 24% missed. The biggest beats were in Health Care where 79% beat. Excluding these, the beat rate drops to 61%.

EPS keep sliding and are now seen reaching $24.40, down 3.5% YoY, bringing trailing 12-month EPS to $97.80, down 0.9% from their June 30 level. Revenues are up 1.7% YoY, in line with Q2’s +1.8%. Margins are 9.02% down from 9.5% in Q2 and Q311.

Q4 estimates also keep being revised downward. They are now $25.96, up 9.4% YoY. Q4 estimates have been shaved nearly $1.00 in the last 3 weeks. Factset calculates that almost 40% of last week’s earnings revisions were accounted for by the Insurance industry post Sandy.

Of the 86 companies that have issued EPS guidance for the fourth quarter, 62 have issued projections below the mean EPS estimate and 24 have issued projections above the mean EPS estimate. Thus, 72% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the long-term average (61%), but it is below the percentage recorded in the previous quarter at this same point in time (80%).

Of the 24 companies that have issued EPS guidance since October 29, seven have mentioned the negative impact of Hurricane Sandy in their earnings release or conference call.

U.S. equities remain in deep undervalued territory per the Rule of 20. Earnings are not collapsing, however, providing some downside protection for now. The next few weeks will likely be volatile given the looming fiscal cliff debate in the U.S. and continued serious economic and financial problems in Europe.


Bespoke Investment tallies all NYSE companies:

(…) the current earnings beat rate stands at 59.7%.  After hitting a high of 61.8% on Monday, the beat rate dropped each consecutive trading day to close out the week below 60%. 





Obama, Boehner Open to Bargain  Obama and Boehner hinted compromise is possible, in a bid to defuse tensions before talks next week to avert a fiscal crisis.

[image]Mr. Obama, in his first statement on the fiscal cliff since winning re-election Tuesday, said any deal must include tax increases on “the wealthy.” He also called on the House to immediately pass a Senate bill that would extend the Bush-era tax cuts on household income under $200,000 a year for individuals and below $250,000 for couples. (…)

The following was widely quoted this weekend:

White House press secretary Jay Carney, responding to questions after the president spoke, said Mr. Obama would veto any legislation that extends the Bush-era tax cuts for the top 2% of American income earners.

But this next, important, part was often omitted:

At the same time, he didn’t rule out extending the rates if they were linked to raising revenue from wealthy people by eliminating deductions. (…)

Obama is also apparently open to changes in Medicare and Medicaid.

Mr. Obama also signaled that a deal would include changes to entitlement programs such as Medicare and Medicaid, but he didn’t mention Social Security. (…)

Mr. Boehner said Friday he is open to a deal that raises tax revenue but not rates, leaving open the possibility for a compromise that includes limiting or eliminating tax deductions or other tax breaks for those families. (…)

Hmmm…If these are more than mere words (Fingers crossed) , this might not be a repeat of the miserable 2011 debt ceiling standoff episode.

Senate minority leader Mitch McConnell, interviewed by the WSJ’s Stephen Moore::

“Let me put it very clearly,” says the five-term Republican senator from Kentucky. “I am not willing to raise taxes to turn off the sequester. Period.” (…)

“Look, he may think it would be helpful to his presidency to continue to divide and demonize us,” says Mr. McConnell. “But my answer will still be short and firm: No. We won’t agree to any tax increases that will hurt the economy.” (…)

Republicans are willing to be “flexible” on raising revenues but, he hastens to add, only “in the context of broad-based, comprehensive tax reform.” He’s open to prying more out of the rich by closing tax loopholes. But he and his caucus of 45 Republicans want lower, not higher, rates. (…)

The other unresolved mega-issue is what to do about the scheduled sequester cuts of $110 billion for 2013, half coming from defense and half from discretionary domestic programs. Much like the president, he wants to shut it off, but with a caveat: “I don’t think we should just forget about imagethe spending reductions we promised. We ought to achieve exactly the same amount of spending reductions,” with targeted cuts that the two parties have already agreed to. When pressed on whether he could live with the sequester, as some Republican budget hawks have suggested, the senator dismisses that drive-off-the-cliff option as “Thelma and Louise economics.” (…)

And what if the president insists on raising tax rates? Expect a principled stand by the minority leader and his fellow Republicans: “He’s got to understand he doesn’t fully control the Senate. He doesn’t control the House at all. In order to accomplish things for the country he will need to work with us.”

As Mr. McConnell walks me to the door, he adds: “You know, he doesn’t own the place.” (Image above from Scott Pollack for Barron’s)

Deficit Push Planned

The White House is planning an aggressive public campaign to build support for its proposal to reduce the deficit through tax increases and spending cut, a sharp contrast to its private talks with Republicans that faltered last year.

Mr. Obama’s new approach is in sharp contrast to his strategy last year, when he met privately with Mr. Boehner to try and craft a broad package of tax and spending changes to reduce the deficit. Now, Mr. Obama and his aides have promised to be much more flexible and seek outside ideas.

Mr. Buffett and his secretary will soon do politics again. Things could get nasty as this WSJ editorial shows:

The Hard Fiscal Facts

Individual tax payments are up 26% in the last two years.

(…) The feds rolled up another $1.1 trillion deficit for the year that ended September 30, 2012 which was the biggest deficit since World War II, except for each of the previous three years. President Obama can now proudly claim the four largest deficits in modern history. As a share of GDP, the deficit fell to 7% last year, which was still above any single year of the Reagan Presidency, or any other year since Truman worked in the Oval Office.

Tax revenue kept climbing, up 6.4% for the year overall, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Mr. Obama won’t want you to know this, but this revenue increase is occurring under the Bush tax rates that he so desperately wants to raise in the name of getting what he says is merely “a little more in taxes.” Individual income tax payments are now up $233 billion over the last two years, or 26%.

This healthy revenue increase comes despite measly economic growth of between 1% and 2%. Imagine the gusher of revenue the feds could get if government got out of the way and let the economy grow faster. (…)

Even if Mr. Obama were to bludgeon Republicans into giving him all of the tax-rate increases he wants, the Joint Tax Committee estimates this would yield only $82 billion a year in extra revenue. But if growth is slower as a result of the higher tax rates, then the revenue will be lower too. So after Mr. Obama has humiliated House Republicans and punished the affluent for the sheer joy of it, he would still have a deficit of $1 trillion.

Most of our readers know all this, but we thought you’d like some new evidence to rebut the kids who voted for your taxes to go up when they return from college for Thanksgiving. Maybe they’ll figure it out when they have a job, if they can find one. Punk  (Winking smile)

US plays chicken on edge of fiscal cliff
Politicians on both sides are flirting with the idea of going over the cliff

The issue is not the percentage of spending taken out of the economy; it is the blow to confidence. Going off the cliff would be an emphatic indication that an election had done nothing to make Congress more willing to compromise.

Here’s the rosy scenario:

Hence forth his goal will be to secure his legacy as the president who not only introduced universal healthcare and decapitated Al Qaeda, but also pulled the US economy out of its deepest economic crisis since the 1930s and assured the Treasury’s long-term solvency.

He knows that he can only secure this legacy and avoid lame-duck status
by breaking the gridlock in Washington. These changing political calculations mean that a new willingness to compromise is virtually
guaranteed on both sides of the US political divide. With the job market
improving, the housing crisis largely over and the financial system returning to normal, President Obama and the Republican congressional
leaders will quickly realize that they have to work together and compromise if they want to claim any credit for the US economic recovery that lies ahead. (Gavekal)

What’s at stake?

Nancy Lazar, who along with Ed Hyman heads up International Strategy & Investment, writes that a deal next month for a one-year deferral of a big chunk of the cliff would still result in a $162 billion tax hike in 2013. Moreover, since it would hit Jan. 2, the brunt of it would be felt in the first quarter, during which ISI estimates that real disposable personal income would plunge at a 3.8% annual rate.

Without a deal, ISI estimates, heading over the cliff would slash real disposable income at a 10% annual rate in the first quarter; consumer spending would plummet at a 5% rate and plunge the economy back into recession. (Barron’s)

Gavyn Davies: The anatomy of the US fiscal cliff

There are five main elements in the composition of the cliff. To simplify information that has recently been published by the Congressional Budget Office, they are the following:

The CBO has also estimated the economic impact of each of the separate components of the cliff. This is what the results look like:

The overall impact on US GDP next year, if the entire cliff were to take effect, would be to reduce real GDP by 2.9 per cent, and reduce employment by 3.4 million jobs. No wonder the markets are worried.

During all this bickering:

Partisan fight over “fiscal cliff” will harm U.S. economy: Reuters poll  Any partisan squabbling over the United States’ looming budget crisis will harm its economy, according to a strong majority of economists polled by Reuters after Tuesday’s presidential election.

Keep in mind that all this is happening during the biggest shopping season of the year and just as companies finalize their 2013 budgets. Confused smile


Third Quarter GDP Looking Better, but May Be at Expense of Fourth Quarter Initially viewed as another lackluster period, the third quarter could turn out to be among the most robust economic advances of the current recovery.

After surprisingly positive reports on wholesalers’ inventories and the trade deficit this week, some economists are now forecasting that the gross domestic product increased at better than a 3.0% rate during the third quarter. The government initially pegged it as a 2.0% gain, but will use the latest data to revise the figure later this month.

Economic growth has only twice topped a 3.0% rate since the recovery began thirteen quarters ago. The economy hasn’t grown at better than a 3.0% clip for a full year since 2005.


  • Total construction spending has been rising.

FRED Graph

  • Even though public spending keeps falling.

FRED Graph

  • Private resid. has gained for 6 consecutive months.

FRED Graph

  • Private non-resid.has flattened out. More capex stimulus needed, real or political…

FRED Graph

Pointing up  Also: ISI’s economic diffusion index, which incorporates all the economic indicators they monitor each week. The index made a new high last week. Citigroup’s economic surprise index also made a new high last week.


From the state controller’s office:

October’s numbers on California’s financial condition showed the positive impact of the state’s economic recovery, with tax receipts surpassing both expectations and last year’s numbers. Total revenues of $5.0 billion were $208 million, or 4.4%, above estimates contained in the 2012-2013 State Budget and 19% above last year’s actual figure.




China’s Trade Surplus Widens

China’s trade surplus widened in October as export growth accelerated, the latest encouraging sign for the world’s second-largest economy.

China’s October exports rose 11.6% from a year earlier, faster than September’s 9.9% rise. Imports, however, rose a lackluster 2.4% from a year earlier, unchanged from September’s rise.

Exports to Europe fell 8.0% from a year earlier in October, showing that economic weakness there continues to weigh on demand for Chinese goods. Exports to the U.S., on the other hand, were up 9.1%.

Minister warns of grim trade situation  Chinese Commerce Minister warned of lingering pressure on the country’s foreign trade from weak global demand, rising domestic costs and growing trade protectionism.

(…) “The trade situation will be relatively grim in the next few months and there will be many difficulties next year,” Chen told reporters at a group interview on the sideline of the 18th National Congress of the Communist Party of China, which opened Thursday. (…)

He cited lack of fundamental improvements in global demand, rising production costs of Chinese labor-intensive industries and stronger protectionism sentiment as the main factors dragging down exports. (…)

Is this a real upturn?

An earlier survey from Markit, produced for HSBC, had signalled a similar upturn in manufacturing output, though even more encouraging was a strong rise in the new orders to inventory ratio, which acts as a leading indicator of production trends and suggests that the rate of growth of output will continue to improve in November.


Needless to say, the sharp drop in China CPI to 1.7% in October provides ample working room for Beijing, a luxury no other major country has nowadays. The biggest risk to China now is the U.S. fiscal cliff.


Industrial Output Falls Across Europe

Industrial production fell sharply in a number of European nations during September, an indication that the continent’s economy is on the brink of a sharp downturn.

(…) In its monthly note on the economic outlook, Germany’s finance ministry Friday warned that Europe’s largest national economy will weaken “noticeably” during the winter months as companies hold back on investments because of the euro zone’s fiscal and banking crisis.

“Overall, there will be a noticeably weaker economic dynamic in the winter half-year,” the ministry wrote. (…)

Siemens, the German engineering group that is a bellwether for the European economy, Thursday said the value of orders fell 4% in the three months to Sept. 30. The company, whose products range from power equipment and high-speed trains to washing machines and medical scanners, said new orders in Germany fell 44% from a year earlier. For all of Europe including Russia and its neighbors, Africa and the Middle East, orders fell 5%. (…)

In France, figures released Friday showed industrial production fell 2.7% from a month earlier, while in Italy production fell by 1.5% in seasonally-adjusted terms. The data followed the release of figures Wednesday that showed industrial production in Germany fell by 1.8%, and figures from Ireland Tuesday that showed output fell by a staggering 13.9%. (…)

Figures also released Friday showed output in Sweden was down 4.1% in September, while in Hungary output dropped by 3.8%, despite a pickup in the manufacture of automobiles.

Germans show they mean it:

Germany agrees to cut spending  Economics ministry warns of further slowdown

It will reduce total spending by 3.1 per cent to €302bn, compared with the expected outcome in the current year, and cut the budget deficit from €18.8bn to €17.1bn, thanks largely to increased tax revenues and reduced social security costs. Mug

Japan edges towards 5th recession in 15 years
Economy contracted annualised 3.5 per cent in Q3


India’s Industrial Output Shrinks, Trade Gap Widens

Industrial output contracted 0.4% from a year earlier in September, hurt by the poor performance of the manufacturing sector, government data showed Monday. The government also downwardly revised the output reading for August to a 2.3% expansion from 2.7% reported previously. (…)

Factory output has shrunk in five of the seven months through September as high interest rates eat into demand and slow policy reforms hurt investor confidence. Economic growth in India has slowed to its weakest in nearly a decade. (…)

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said the economy could expand 5.5%-6.0% this fiscal year. It grew 6.5% last year, the weakest pace in nine years.

Singh promises second wave of reform
Indian PM vows to reverse slowdown in economy

India’s prime minister has pledged to follow up his recent burst of economic reforms with more measures to restart stalled infrastructure projects, attract foreign investment and reverse the slowdown in Asia’s third-biggest economy.

Manmohan Singh defended plans to attract capital from abroad, while admitting that India’s precarious public finances needed more international money to plug a growing gap between imports and exports.

Russian Third-Quarter GDP Grew 2.9%, Slowest Since 2010 Rebound

“The main reason for the slowdown is obviously agriculture, as the harvest has been worse this year,” Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said before the release. “The second point is a certain deceleration in industry, and more so in mining than in manufacturing.”


Composite Leading Indicators (CLIs), OECD, November 2012

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to point to weak growth prospects in many major economies, but signs of stabilisation are emerging in Canada, China and the United States.

Compared to recent months where the CLI has pointed to a deteriorating outlook, tentative signs of stabilisation are also emerging in Italy.

The CLIS for Japan, Germany, France and the Euro Area as a whole continue to point to weak growth. In India and Russia the CLIs also continue to point to weak growth. The CLIs for the United Kingdom and Brazil continue to point to a pick-up in growth.



Airplane  Another “down-to-earth” viewpoint:

Cathay Pacific Sees Little Christmas Cheer for Air Cargo


Cathay Pacific Airways Ltd. , the largest carrier of international air cargo, said it has seen only a small increase in freight ahead of the Christmas shopping season, prolonging an 18-month downturn in industry volumes. (…)

The cargo slump “tells you just how pessimistic people are about the economic outlook overall,” said Andrew Herdman, the head of the Association of Asia-Pacific Airlines. “There’s no growth expectations.”

The group’s 15 member-airlines suffered a 3.2 percent drop in cargo volumes in the first nine months of the year, according to data on its website. The proportion of cargo capacity filled with freight dropped 0.5 percentage point in the period to 66.2 percent.

Singapore Airlines Ltd.  said Nov. 3 that it will park one of its 13 Boeing Co. 747 freighters for more than a year starting in January after losses at its cargo unit tripled in the quarter through September. Asiana Airlines Inc., South Korea’s second-biggest carrier, may consider returning its leased freighter if there’s no improvement in volumes, CEO Yoon Young Doo said at the Kuala Lumpur meeting.


US set to become biggest oil producer
IEA report highlights impact of shale revolution

The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.

Pointing up  This marks the first time the IEA, the developed world’s most respected energy forecaster, has made such a prediction. It underscores how the drilling boom that has unlocked North America’s vast reserves of hard-to-get-at oil and gas is changing the world’s oil balance.

In its yearly world energy outlook, published on Monday, the IEA said that by 2030 “the US, which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries”. (…)

The increase in US domestic production – of biofuels such as ethanol as well as unconventional “tight” oil – comes as new fuel-efficiency measures in transport imposed by the first Obama administration are set to reduce oil demand sharply. That will lead to a big fall in oil imports into the US, which the IEA says will plunge from 10m barrels a day to 4m b/d in ten years’ time. The agency says that North America will become a net oil exporter by about 2035.

“The US, which imported a substantial chunk of oil from the Middle East, will be importing almost nothing from there in a few years’ time,” Fatih Birol, the IEA’s chief economist, told the Financial Times. “That will have implications for oil markets and beyond.” (…)

The US Energy Information Administration expects production will rise from 6.3m b/d this year to 6.8m b/d in 2013 – its highest level since 1993. (…)

In its outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase. In contrast, energy demand would “barely rise” in the leading industrialised countries. Global oil demand would reach 99.7m b/d in 2035, up from 87.4m b/d in 2011. (…)

Pointing up However, those projections are based on an extrapolation of the dramatic growth in shale oil production in recent years, which some analysts see as implausible, or at least uncertain.

Related: Facts & Trends: The U.S. Energy Game Changer

BUY LOW, SELL HIGH CHART  They don’t get much better than that (chart from Moody’s).



(…) , emerging & developing economies have seen their official holdings of gold rise to 200 million troy ounces for the first time ever this year. Still, despite a 44% increase in such holdings since 2007, the share of gold in total official reserves remains at a paltry 4.3%. As shown this compares to a share of nearly 24% in the advanced economies.

Given the current environment of surging sovereign debt in the U.S. and the Eurozone (whose government bonds account for the bulk of emerging markets’ official reserves) we think that the central banks of
emerging economies are likely to increase their exposure to bullion to guard against possible currency depreciation. (NBF Financial)


Surprised smile  No hold back in this buy-back

Coca-Cola (NYSE:KO) announced a plan to buy back an eye-popping 500 million shares, or approximately $18.9 billion, of its stock.