NEW$ & VIEW$ (27 AUGUST 2013)

Durable-Goods Orders Drop 7.3%

(…) Outside of the volatile transportation category, durable-goods orders were still relatively weak for the month, declining 0.6%, the Commerce Department said Monday.

July’s decline was the first in four months. In June, total orders rose 3.9%, but were up only 0.1% excluding transportation.

Pointing up A key gauge of business spending—nondefense capital goods orders, excluding aircraft—fell 3.3% in July after rising for five straight months.

Crying face  This 3.3% drop offsets the 3.4% gain of the previous 2 months, deflating hopes of a strong rebound in capex.


(Doug Short)

So, housing is not as strong as it first appeared, now capex is deflating. What will Ben do? Oh! There also this coming:

Treasury to Hit Debt Limit In October

The Treasury said it would hit its borrowing limit in mid-October and be unable to pay all of its bills soon after, narrowing the window for maneuver on budget talks.

(…) The new mid-October deadline falls just two weeks after Congress and the White House must reach a separate agreement over how to fund government operations beyond Sept. 30, the end of the federal fiscal year. Failure to do so would trigger a partial government shutdown. (…)

The White House has spent several months working with a small group of Republican senators to discuss a budget agreement that some Democrats had hoped would clear the way for an increase in the debt ceiling. Those talks have not progressed beyond an early stage, people familiar with the process have said. (…)

Emerging Europe Haven in Selloff

Investors are turning to Central and Eastern Europe amid the selloff hitting markets in the developing world.

Stock markets in Central and Eastern Europe are up 1.2% in the past three months, compared with a 7.5% drop in emerging markets overall, according to index provider MSCI. These markets have risen 2.3% when Russian companies, which have been hard hit by falling commodity prices, are excluded.


Mug  German Business Mood Brightens

The Ifo institute’s business confidence index increased for the fourth consecutive month, to 107.5 in August from 106.2 in July, and hitting its highest level since April 2012.

Fingers crossed  Fall in Thai Exports Hides Good News for Southeast Asia  A fall in exports would hardly seem reason for Thailand to celebrate, but there are signs that the slump in demand from its key trade partners is easing, a picture reflected across Southeast Asia.

Thailand’s exports slipped 1.5% on-year in July and rose only 0.6% in the January-July period.

But that was better than declines of 5.3% in May and 3.4% in June, reflecting the fact that demand from China, Japan, the U.S. and E.U. – Thailand’s four largest export partners – is improving.

Vietnam on Monday reported a robust 11.6% on-year rise in August exports, slightly softer than July’s 13.7% gain but still strong.

In Singapore, non-oil domestic exports improved to a 0.7% on-year fall in July, after June’s 8.9% drop. Indonesia’s exports fell 4.5% in June from a year earlier after dropping 8.6% in May, while Philippine exports rose 4.1% in June following a 0.8% fall in May.

In Malaysia, June exports contracted 6.9% compared with May’s 5.8% fall, but that was better than economists’ expectations for 7.5% contraction.

How Much Household Wealth Has Been Recovered?

This is from the St-Louis Fed’s 2012 annual report:

The Federal Reserve reported March 7, 2013, that aggregate household net worth at the end of 2012 was $66.1 trillion, nearly back to its precrisis peak of $67.4 trillion, reached at the end of the third quarter of 2007. After falling to $51.4 trillion at the end of the first quarter of 2009, the subsequent increase of $14.7 trillion through the end of last year represented a recovery of 91 percent of the losses suffered. Does this mean that the financial damage of the financial crisis and economic recession largely has been repaired?


The simple metric of aggregate household net worth is misleading for at least three reasons. First, the effect of inflation is ignored. Consumer prices increased about 2 percent per year in the five and one-quarter years since the third quarter of 2007, reducing the purchasing power of a dollar by a total of about 10 percent. Therefore, a return to the previous nominal dollar peak does not mean that a given amount of wealth could buy as much as before.

Second, simple aggregate net worth does not adjust for population growth. The number of households increased by about 3.8 million between the third quarter of 2007 and the end of 2012, or about 3.4 percent. The wealth of all American households now is shared by more families than before.

Third, the recovery of wealth has not been uniform across families. Of the total recovery of $14.7 trillion between the first quarter of 2009 and the fourth quarter of 2012, $9.1 trillion, or 62 percent, of the gain was due to higher stock-market wealth. Stock wealth is unevenly held, with the vast majority of stocks owned by a relatively small number of wealthy families. Thus, most families have recovered much less than the average amount.

Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure. Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.

This next chart from the report is scary: the younger population lost 3 times as much as the median. Since they own little in equities, most of them are still deeply suffering from the crisis.


Unsurprisingly, consumer confidence has thus recovered to its pre-crisis level for the higher income segment while people in the other income segments remain substantially less upbeat. Note in the chart below that the black line includes all incomes over $50,000. I suspect that the $50-75 bracket would also not come out so buoyant.

On the one “end”:

McMansions Make a Comeback

The average size of a new home now exceeds the levels reached during the housing boom, the latest sign the market is catering more to older, more affluent buyers and less to younger and first-time buyers.

imageData released by the Census Bureau this month confirmed the trend and showed that the average size of a new home was a record 2,642 square feet in the second quarter, eclipsing the record of 2,561 square feet set in the first quarter of 2009. The average size has bounced between small gains and declines for more than a year, but the 5.2% jump in the second quarter was the largest quarter-to-quarter gain since the Commerce Department began tracking the data on a quarterly basis in 1987. (…)

Some builders say they are intentionally building bigger homes to justify higher prices they must charge to recoup the rising cost of land. Prices for finished lots increased 24% in the second quarter from a year earlier, according to housing-research firm Zelman & Associates. “If you pay top dollar for land, you need to build a bigger home on it to make money,” said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. (…)

On the other “end”:

Stuck Working Part-Time? Blame the Economy

More than four years after the recession ended, nearly a fifth of American workers are part-timers, well above normal levels. More than 8 million people are working part-time because they can’t find full-time jobs. That’s given rise to fears of deep, structural shifts in the U.S. labor market due to technology, globalization or perhaps the new health care law, which will require companies to provide health insurance to full-time employees.

But a new paper from the Federal Reserve Bank of San Francisco argues there’s a simpler explanation for the rise of part-time work: the weak economy. (…)

The rise in part-time work during the latest recession wasn’t out of step with past downturns. At the height of the recession, about 20% of workers were part-timers, up from about 17% when the recession began. That’s worse than during the milder recessions of the 1990s and early 2000s, but actually a somewhat lower peak than in the severe recession of the 1980s.

What has been different this time around is the pace of recovery. The share of Americans working part-time has fallen since the recession ended in June 2009, but only very slowly. In recent months, it has even edged back up, though it’s too soon to say whether the uptick has been a real trend or a statistical oddity. (…)

But Mr. Valletta and Ms. Bengali dig a bit deeper into these involuntary part-timers, distinguishing between former full-timers whose hours have been cut back and those who have taken part-time jobs because they can’t find anything else. The first category has been declining fairly steadily during the recovery, though the progress has stalled a bit this year. But the second category has continued to trend upward.

In other words, fewer companies are cutting hours, but they aren’t yet hiring full-time workers. That pattern reflects another trend in the recovery: Layoffs have dropped back to pre-recession levels, but hiring remains slow. The problems are likely one and the same: Companies aren’t disproportionately hiring part-timers; they just aren’t hiring many workers at all. With jobs scarce, the unemployed are accepting whatever work they can find.

“It is more probable that the continued high incidence of individuals working part time for economic reasons reflects a slow recovery of the jobs lost during the recession rather than permanent changes in the proportion of part-time jobs,” the authors write. (…)

I am not convinced. The truth is that employment has increased since 2009 but unlike after past big recessions, full-time employment has seriously lagged. Companies have voluntarily cut full-timers and still improved productivity.



Debt Drags on China’s Growth

As worries over China’s debt problem mount, the burden of paying off those loans could be the trigger that tips runaway credit into slower economic growth and financial stress.

(…) Nationwide, four-and-a-half years of breakneck growth in lending has significantly increased China’s debt burden. Outstanding borrowing by businesses and households rose to 170% of gross domestic product at the end of 2012 from 117% in 2008, according to data from the Bank for International Settlements. The 2012 figure for the U.S. was 157%. (…)


There are few signs of imminent crisis. Bad debt levels in China’s banks are low. A high savings rate means bank deposits continue to accumulate, and a tightly controlled capital account makes it hard for funds to go anywhere else.

And Beijing has multiple tools to manage problems. In many cases, lenders and borrowers are both state-owned. Central government debt is low.

Even without a crisis, though, rising costs of repayment still threaten to choke growth, already testing a 20-year low. If money is used to service debt, companies can’t invest as much as they otherwise would and local governments might have to limit what they spend on crucial public services. (…)

That adds fragility to an overstretched financial sector, which might have to slow lending if bad debts mount. Bank loan books have already doubled in size since the end of 2008. (…)

Given existing debt levels, an increase in lending rates of one percentage point would add almost two percentage points of GDP to the annual burden of repayment.

A key fault line is the repayment capacity of China’s local governments. Since the 2008 financial crisis, town halls around China have borrowed heavily to pay for a splurge in spending on roads, railway and airports. With many of those projects generating little or no returns in the short term, repayment is a challenge and some local governments are taking on more borrowing to repay existing loans. (…)

China also appears to be getting less bang for every dollar that is borrowed. Credit expanded about 20% year on year in the first half of 2013, while GDP increased just 7.6%. One possible reason: New debt is being used to repay interest on loans rather than make productive investments. (…)

The FT has been hitting on the same nail: The debt dragon
China’s credit habit proves hard to kick

Some of the FT charts:








China Construction Bank Sees Bad-Debt Risk

China Construction Bank Corp. 601939.SH -0.47% encountered a surge in overdue loans during the first half of the year and could face a “hidden crisis” if the situation worsens, its top official warned on Monday.

Speaking at a news briefing on Monday, Mr. Wang said nonperforming loans remain a small portion of outstanding total loans. Still, he said, nonperforming loans at CCB had risen rapidly compared with a year earlier.

There has been “a big rise in overdue loans, and that is a hidden crisis for nonperforming loans.”

Loans are generally classified as overdue before a bank categorizes them as nonperforming.



Study Shines Light on Fracking

So much oil and water is being removed from South Texas’ Eagle Ford Shale that the activity has probably led to a recent wave of small earthquakes, according to a study that appears in the online edition of the journal Earth and Planetary Science Letters.

The Wall Street Journal reviewed the findings in advance of publication. The peer-reviewed study’s authors suggest that taking oil and water out of the ground allows surrounding rock and sand to settle, triggering small tremors that are typically too weak to be noticed on the surface.

The new study doesn’t find much evidence that the man-made fracturing is causing earthquakes all by itself.

Netherlands fracking moves step closer
Government report says risks are ‘manageable’

(…) The report by the consultancies Witteveen and Bos, Arcadis, and Fugro acknowledges the risks but says the possibility of groundwater pollution is “very small”, partly because Dutch shale gas reserves lie much deeper than those in the US, at three to four kilometres rather than 1.5. (…)

France and Bulgaria have banned fracking altogether, and there has also been strong resistance in some German states. Yet America’s Energy Information Administration puts Europe’s recoverable reserves on a par with America’s. (…)

The final word:

Winking smile  Washington DC Drivers Ranked Most Accident-Prone  That’s because they are DRIVING BLIND.


NEW$ & VIEW$ (21 AUGUST 2013)


Asian Shares Mixed After Sell-Off Asian stocks traded mixed following a dramatic two-day selloff across the region that sent governments in some markets rushing to stem further declines.

Emerging-Market Currencies Fall

Emerging-market currencies seen as most vulnerable to shifts in U.S. monetary policy slumped once again Wednesday, hours before the U.S. Federal Reserve is set to release minutes from its most recent policy meeting.

With traders and investors bracing for the possibility that the Fed will signal greater confidence that it will start peeling back, or tapering, stimulus measures from as soon as next month, some of the currencies that have been the biggest beneficiaries of the easy-money era fell hard. (…)

Malaysia Cuts 2013 Growth Forecast as Expansion Misses Estimates

The economy may expand 4.5 percent to 5 percent in 2013, from a previous prediction of as much as 6 percent, the central bank said in Kuala Lumpur today. Gross domestic product rose 4.3 percent last quarter from a year earlier, after gaining 4.1 percent in the previous period, it said.

Net exports of goods and services slumped 41.6 percent in the second quarter from a year earlier, after falling 36.4 percent in the first quarter of 2013, today’s report showed.

Total consumption rose 8 percent in the April-to-June period from a year ago after climbing 6.1 percent in the earlier quarter. Gross fixed capital formation gained 6 percent, after an increase of 13.1 percent in the previous period.

For Asia, Shades of 1997

The same toxic combination of U.S. and Japanese tightening that sparked the Asian financial crisis in 1997 is looming now. Time to freak out? Watch the dollar and yen, writes Vince Cignarella.

(…) Rewind to March 1997. Then, the Fed’s communications policy bore little resemblance to the current era of transparency, so inevitably some investors were taken aback when the central bank raised the discount rate, the rate at which the Fed lends money to commercial banks, to 5.5% from 5.25% after two years of trimming rates. (Remember, this was before fed funds targeting was in vogue.)

One month later, in April 1997, the Japanese government raised a nationwide consumption tax to 5% from 3%. This was seen at the time as a major contributing factor to Japan’s economy falling into a recession in Q41997.

Fast forward to today. The Fed is expected to usher in the beginning of the end of its bond-buying program, put in place after the financial crisis to stimulate growth. Whether the Fed makes a move in September or December will ultimately become a footnote in history. What’s important is that this tapering right now looks inevitable.

Meanwhile, Prime Minister Shinzo Abe is weighing an increase in the same exact consumption tax, to 8% starting April 2014 from the current 5%.

No wonder emerging markets in Asia are freaking out. By any measure, that’s a lot of money that’s going to stop making its way into the financial system. Say bye-bye to the search for yield and those “hot money” flows that propelled those markets higher. (…)

The question remains: Is this 1997 all over again?

So far, the market moves have been milder. A big reason: Many currencies back then were set at a fixed exchange rate against the dollar. Unmoored, the baht plunged 40% in four months after the central bank was forced to let it float in July 1997. A similar fate met the Indonesian rupiah when the crisis made the managed float rate impossible.

There are other differences this time around, as well. Before the Asian financial crisis, Japan helped drive the growth of the developing countries that neighbored it. This time around, China plays that role. And for all the hand-wringing about China’s growth outlook, no one is making any comparisons between China today and Japan in 1997.

So what’s an investor to do?

My approach: Keep close tabs on the dollar, especially how it trades against the yen. During the Asian financial crisis, investors looking for a safe place to camp out piled into the dollar. In April 1997, one dollar bought about 106 yen. By August 1998–at which point the crisis had spread to Russia and was causing U.S. stocks to reel–one dollar was fetching about 147 yen.

If the dollar begins to gain rapid ground against the yen, the Asian cold may turn into the Asian flu–a bug we’re all likely to catch.

Fingers crossed  Bloomberg offers hope thanks to Japan

The Fed’s surprise signal in May of the approaching tapering of asset purchases has unsettled emerging markets. Economies such as India and Indonesia, which are more reliant on foreign investment for growth and the funding of current account deficits, have been hit the hardest. The anxiety may not be justified, using past phases of Fed tightening as a guideline.

During 1999 and 2004-06, Asian GDP growth averaged 5.9 percent and currencies, after an initial bout of selling pressure, gained an average 5 percent against the U.S. dollar. The key this time will be the Fed’s ability to preserve risk appetite amid a leadership transition.





Chicago Fed Index Remains in Negative Territory

The Federal Reserve Bank of Chicago said Tuesday that its National Activity Index rose to -0.15 in July from -0.23 in June, while the less-volatile three-month moving average improved to -0.15 from -0.24.

It was the fifth straight month the two measures have remained in negative territory, indicating below-trend growth.

Doug Short adds this:

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

Click to View

The next chart includes an overlay of GDP, which reinforces the accuracy of the CFNAI as an indicator of coincident economic activity.

Click to View

Summer Jobs Elude Many Teenagers

The job-market recovery is leaving teenagers behind—especially those from low-income and minority backgrounds.

Less than a third of 16- to 19-year-olds had jobs this summer, essentially unchanged from a year ago, according to Labor Department data released Tuesday. Before the recession, more than 40% of teens had summer jobs. One in four teens who tried to find work failed to get a job, far above the 7.4% unemployment rate for the broader population.

Retailers, fast-food restaurants and other traditional employers of this cohort have stepped up hiring in recent months. But with the ranks of unemployed including many better-qualified candidates, companies have little incentive to hire inexperienced teenagers. With work still scarce, college students and even college graduates are settling for jobs once done mostly by teens, while at the same time more retirees are taking part-time jobs.



More on Job Growth Quality

(…) In short, yes, the U.S. economy is adding a large number of low-paying jobs, however we are also seeing relatively strong growth at the top end of the employment scale as well. We are missing the growth in jobs at the middle of the income distribution.



In short, the middle class is holed out.

Home Depot’s Earnings Rise 17%

For the first time since 1999, quarterly sales at Home Depot Inc.’s stores open at least a year rose at a double-digit rate, as the home-improvement retailer benefited from an improving housing market that has shoppers spending more freely on bigger ticket items like appliances and lawn mowers.

Amazing: Comps at Home Depot’s U.S. stores increased 11.4%. In F2Q, total transactions (traffic) increased 4.9% YoY to 393 million and average ticket increased 4.3% to $57.39.

Pointing up  Also note the following:

The Atlanta-based retailer has benefited from looser credit standards, as customers with lower credit scores were able to get approved for private-label credit cards, whose usage increased by 0.44%. The company’s professional customers, who represent 36% of its sales, also were able to attain increased lines of credit, which rose by an average $200 from a year earlier to $68,000. The company has been working with underwriters to help professional customers get extended credit lines.

Lowe’s Profit Up 26%, Boosts Outlook

Lowe’s Cos. fiscal second-quarter earnings jumped 26%, beating analyst expectations, and the home improvement retailer raised its outlook after logging double-digit percentage growth in revenue, buoyed by an improving housing market.

Net sales were up 10% to $15.71 billion, while same-store sales were up 9.6%. Gross margin widened to 34.4% from 33.9%.

The company also raised its financial outlook for the year, now expecting per-share earnings of $2.10 on sales growth of 5% and same-store sales growth of 4.5%. Its previous expectation was for share earnings of $2.05 on sales growth of 4% and same-store sales growth of 3.5%.

But the recent rise in mortgage rates seems to be biting as this chart from CalculatedRisk shows:



Iran Fills Rhetoric Void With Bullish Words on Oil Iran is willing to start an oil-price war to win back the market share lost through sanctions.

Iran is willing to start an oil-price war to win back the market share lost through sanctions, Bloomberg reports.

The country’s new, old oil minister Bijan Zanganeh says Iran wants to increase production by 70% in an effort to retake its place as OPEC’s second-largest producer.

“We only ask those who have replaced us in the world’s oil markets to know that when we are re-entering these markets they will have to accept that the oil prices decline or they should reduce their production to create enough space for Iran’s oil,” Mr. Zanganeh said.

It is the use of “only” in that sentence that stands out. There may or may not be a transliteration error, but the minister isn’t asking a small favor here. Internal OPEC politics mean the group’s other members won’t roll out the red carpet for the return of Iranian oil.

Iran already needs oil to trade way above where it now is in order to break even. A price war would be in nobody’s interests.

Can Iran even manage to increase its production? Bullish noises come from the state oil company, and Mr. Zanganeh, who was an oil minister from 1997 to 2005, has been welcomed as an authoritative, knowledgeable figure who will remove the politics from domestic oil production.

Raising production will likely require the return of those foreign, western oil majors — Norway’s Statoil ASA, France’s Total or Italy’s Eni – that quit Iran when sanctions hit. Getting them back will likely require the lifting of sanctions.


News of violent unrest in Libya has been flying under the radar somewhat in the face of the ructions in Egypt, but for the oil market the former situation is easily the one that is more interesting.

Libya last year was the fourth-largest oil supplier to Europe.

Clashes erupted Tuesday at oil terminals that had been closed in eastern Libya, The Wall Street Journal’s Benoit Faucon reports, with more peaceful protests at other terminals helping to cut the North African country’s oil production to levels not seen since the 2011 civil war that toppled strongman Moammar Gadhafi.

Remarks made to the Journal by Libya’s deputy oil minister this week suggest the government is running out of patience with the situation. This isn’t surprising — the disruption has cost the country over $1 billion in lost revenue to date.

Conflicting reports are only adding to an already-confusing situation. One day Libya invokesa legal clause known as force majeure, which excuses a seller from making deliveries because of events beyond its control; the next, ports are being prepared for reopening.

There is no certainty about anything in the world of Libyan oil.



Leveraged ETFs, the Flash Crash, and 1987

(…) You could be forgiven if you’ve never heard of leveraged ETFs. But this smallish corner of the investing universe could, under the right circumstances, do to the market what portfolio insurance did to the market in 1987: that is, force a liquidation that sparks a big selloff.

At least, that’s the suggestion of a new paper from the Federal Reserve Board, written by staffer Tugkan Tuzun. He likens leveraged ETFs to the portfolio insurance schemes of the 1980s, which are believed to have either contributed to or even caused the great crash of October 1987, when the Dow Jones Industrial Average dropped 22% in one day.

Portfolio insurance was a popular hedging strategy in the ’80s that used options, and “synthetic options,” to protect against losses. But it involved a daily rebalancing that, in October 1987, led to a “cascade” of sell orders that exacerbated what happened on Oct. 19, 1987.

That kind of one-day drop would be much harder to produce today, given the circuit breakers that were installed specifically in response to the ’87 crash. But the point of the Fed paper is that leveraged ETFs could, under the right conditions, produce a similar cascade of sell orders, amplifying the severity of any market drop.

Leveraged ETFs date back only to 2006, and have only about $20 billion in total assets. The key here, though, is what’s called rebalancing, which these funds typically do on a daily basis. Because these funds promise a certain multiple over the underlying exchange it’s tracking, the funds use derivatives and borrowed money to amplify their returns. Also, to maintain those returns, the fund managers must buy when the market is going up, and sell when it’s going down.

That’s where the 1987 connection comes in. What is generally believed to have happened in 1987 – it is still a debated subject – was that once the selling started, the portfolio insurance strategies demanded investors sell, resulting in a massive wave of sell orders.

Leveraged ETFs could bring about the same dynamic, Tuzun writes. Imagine a situation where the market is selling off. “LETF rebalancing in response to a large market move could amplify the move and force them to further rebalance, which may trigger a ‘cascade’ reaction.” If the fund is using swaps, counterparties are likely hedging their positions in equities or futures markets. Thus, a forced selloff of leveraged ETFs could, through derivatives and counterparties, wind up moving the cash stock markets.

Moreover, because most of this daily rebalancing occurs in the last hour or so of trading, a cascade of selling could amplify late volatility and drive indexes down near the close, leading to “disproportionate” price changes. (…)

I was managing equities in 1987 and Black Monday is still very much present in my mind. That was a scary day!

It was not caused by portfolio insurance, rather by a total loss of confidence in the willingness of world central bankers to cooperate and coordinate their actions in order to correct the imbalances in world currency markets.

This happened as U.S. equities were selling at very risky levels as per the Rule of 20. As portfolio insurance kicked in after the first down draft (whew!), markets sank further. The overvaluation quickly changed into a deep undervaluation creating a terrific buying opportunity for those who understood that this was not the end of the world.



Just kidding Mohamed El-Erian
Don’t wait for autumn to reposition portfolios


The next few months promise to be particularly tricky and volatile for markets, with uncertainty coming from the US, Europe, Japan and the Middle East. (…)

In the US, the Federal Reserve is expected to signal at its September policy meeting its appetite for tapering its exceptional support for markets and the economy. (…)

September may also bring news of the next chairman of the Federal Reserve. (…)

Then there is America’s highly polarised Congress. When they return from their summer recess, lawmakers will be unable to avoid for long two important pieces of legislation: the immediate one required for the continued functioning of the government; and that needed to avoid a technical sovereign default a few months down the road. (…)

The situation across the Atlantic is also quite uncertain. With German elections in September, and with few wishing to undermine Chancellor Angela Merkel’s likely victory, several national and regional initiatives have been placed on hold. This summer pause has reduced policy disagreements; but at the cost of heavily burdening the autumn policy agenda facing officials who have repeatedly proven reluctant to take prompt decisions absent crisis-like conditions. (…)

In Japan, delays in unveiling the “third policy arrow” are undermining the policy pivot implemented by the Bank of Japan at the behest of Prime Minister Shinzo Abe. Judging from the recent sell-off in Japanese equities and the behaviour of the currency, markets are already signalling that Japan’s policy experiment will falter if exceptional monetary and fiscal stimulus is not accompanied quickly by structural reforms. (…)

Then there is the Middle East. (…)

Rising Stocks Hit Short Sellers  Short sellers are facing their worst losses in at least a decade, a Wall Street Journal analysis has found, as many of the rising stocks they bet against have only continued to soar.

(…) [image]In the Russell 3000 index, the 100 most heavily shorted stocks are sharply outperforming the average returns of stocks in the index, according to a Journal analysis of data provided by S&P Capital IQ. The shorted stocks are up by an average of 33.8% through Aug. 16, versus 18.3% for all stocks in the index.

The gap between the performance of the most-shorted shares—as measured by percent of total shares outstanding at the beginning of the years—and the market as a whole is wider than it has been in at least a decade. (…)

Stock hedge funds are expected to outperform when markets fall but underperform during bull runs, since they generally hedge their bets by betting against stocks. But the gap is wider than usual. Through July, stock hedge funds returned 7.7% on average, compared with 19.6% by the Standard & Poor’s 500-stock index, including dividends. (…)


NEW$ & VIEW$ (20 AUGUST 2013)

Fear of Easy Money Retreat Roils India

The Fed’s plan to reduce monthly bond purchases is exposing the deep-seated fragility of India’s economy, underscoring the risks facing emerging markets at a time of rising global interest rates.

India’s stock market tumbled 1.6% Monday, adding to a 4% decline Friday, and the rupee hit a fresh low against the dollar. Government-bond prices slumped, sending yields sharply higher.

(…) as their export engines have sputtered, because of China’s slowing growth and uneven demand in the U.S. and Europe, these [emerging] economies have started to run large current-account deficits, which occur when imports outweigh exports. As investors begin demanding higher returns for taking on risk, nations with large economic imbalances are getting punished. (…)

The selloff in Indian assets began in May, as Fed officials started discussing plans to pull back from the $85 billion of monthly bond purchases designed to bolster uneven U.S. economic growth. Seeing interest rates rise in rich-country markets such as the U.S., investors who had sought investments in faster-growing emerging markets pulled their funds.

The selloff has since spread to other developing nations, such as Indonesia and Thailand, which like India are exposed to rising global interest rates, thanks to budget and current-account deficits that mean they must borrow to finance daily spending.

The Indonesian rupiah fell to its lowest level in four years Monday. Shares slid 5.6% in Indonesia and 3.3% in Thailand. Asian shares fell further in early trading Tuesday. Indexes in Japan and Australia were both down 0.7%, and Indonesia’s main index dropped 3%. (…)

Just kidding  Let’s not forget that financial markets are communicating vessels.

Emerging markets selling hits sentiment
Sell-off worsens in Indonesia, India and Thailand


Brazil’s Currency Slides to New Low

Brazil’s currency hit a new low against the dollar amid increasing concerns that the country’s policy makers are failing to reinvigorate the South American economy.


(…) Brazil’s central bank has tried to fight the outflows by raising interest rates three times this year, raising the yields on the country’s debt. It also has stepped up market interventions, pumping $7.6 billion into the currency-futures market in the past week and $45.8 billion since May 31. The real is down more than 10% over that period.

“They’re intervening like crazy, and it’s still not working,” said Sara Zervos, portfolio manager of the $11.7 billion Oppenheimer International Bond fund . “It’s gotten to the point where investors and even domestic citizens have lost confidence in the ability of the government to navigate the country into growth.” (…)

Bond Market Bear Markets

After a 71.35% rally over 4,571 calendar days from 1/18/2000 to 7/24/2012, the US long bond future is quickly approaching bear market territory for the first time in more than 13 years. 

Ed Yardini reveals who the big sellers are (US International Capital Flows)

The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.

Ghost  This a.m.:

  • Morning MoneyBeat: Stock Selloff Starting to Get Serious (WSJ)

This selloff is proving to be more than just a blip on investors’ radars.

The Dow and S&P 500 are each riding their first four-day losing streaks of the year and have fallen in nine of the past 11 trading days. The Dow is down 4.1% from its record high hit earlier this month, a skid that has brought back memories of the spring swoon that was also driven by worries about future Fed stimulus.

A lackluster earnings season, negative technicals – the S&P 500 fell through its 50-day moving average with authority on Monday – and historically tough months ahead are making some investors nervous that this selloff could be worse than what transpired a few months back.

Stocks are Tapering Themselves (Barron’s)

The Dow Jones Industrial Average is coming off its worst week of the year and now, for the second time in 2013, it is trading below its important 50-day moving average. Even without any fancy indicators, it is not difficult to surmise that something has changed in the stock market. Now is not the time for taking big risks.

Not only has the blue chip index dipped below its 50-day average, but it is the first major index to fall below its rising trendline from the market’s 2012 low (see Chart 1). That is a big deal, but unfortunately for the bears the Dow is the only major index to accomplish this dubious feat.


Fingers crossed  (…) A longer-term view of this index suggests that it has its sights set on the vitally important 200-day moving average, which should provide some comfort to the bulls. After all, one simple definition of a bull market is consistent trading above this metric. At its current rate of advance, this average will rise roughly 150 points to meet chart support from the Dow’s June low in two or three weeks. This is where the risk/reward equation will once again be favorable for the bulls. (…)



The Philly Fed ADS Business Conditions Index

The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed’s National Activity Index, the August update for which will be published tomorrow (more about the comparison below).

Named for the three economists who devised it, the index, as described on its home page, “is designed to track real business conditions at high frequency.”

The index is based on six underlying data series:

  • Weekly initial jobless claims
  • Monthly payroll employment
  • Industrial production
  • Personal income less transfer payments
  • Manufacturing and trade sales
  • Quarterly real GDP


This next chart shows that business sales are growing very, very slowly, in both nominal and real terms.


And this one from Bloomberg Briefs shows that the Fed is not helping at all and is not about to begin helping.


Meanwhile, the U.S. consumer seems exhausted:
Japan exports slide amid subdued demand
Decline puts spotlight on plan to raise consumption tax

(…) Figures from the finance ministry on Monday showed that total exports fell 1.8 per cent from June, to Y5.78tn ($59bn), when adjusted for seasonal variations. That marked the first month-on-month decline in the yen value of shipments since November last year, when Shinzo Abe’s Liberal Democratic party began to push for a lower currency to support an ambitious, multifaceted growth programme.

Falls were led by the US, Japan’s top export partner, where the nominal value of shipments dropped almost 3 per cent from June to just over Y1.1tn, on an unadjusted basis. Taking into account fluctuations in exchange rates and prices, overall exports in July were 2.1 per cent weaker than the previous three-month average, according to calculations by Nomura. (…)


Big debate whether China has hit bottom. CEBM Research’s mid-August surveys say:

  • The general condition of the steel market improved over the last month, with nearly 60% of respondents reporting sales better than expectations.
  • In August, the cement market remained stable and in-line with seasonal trends. Most respondents reflected that they had not observed any “stabilizing growth” policies from their local governments. Presently the amount and demand of projects in progress was considerable but some projects were terminated due to funding shortages. Compared with survey results in July, the proportion of producers we surveyed reporting that sales in the first half of August were below expectations declined from 37% to 23%.
  • Actual demand for construction machinery is not recovering. Historically, sales in August are generally at the year’s bottom. Most clients do not want to buy equipment before the second half of September unless it’s an urgent necessity. Most dealers did not see project starts or preparations for new construction. Progress of ongoing construction projects also remains slow. Funding constraints took the largest share of the blame.
  • During the August Heavy Truck Dealer Survey, 0% of the respondents reported sales in the first half of August exceeded expectations, while 63% believed sales were in-line with expectations and 37% reported sales below expectations. Generally speaking, respondents believe that sales in August will be increasingly weaker than seasonal trends.
  • Pointing up July Copper Imports Driven by Financing Demand Rather Than End Consumption We did not find any obvious signs of demand rebound in the August communication between copper traders and end users, and end demand is believed to be flat in September according to respondents. Although July copper import volume reached a 14-month high, based on our communication with copper importers, a large portion of copper imports were driven by tight liquidity rather than robust end consumption, as most copper import transactions are settled by letters of credit rather than cash. Some copper traders also said that the impact of these copper imports has not reached the Shanghai spot market yet, but this is ultimately inevitable. This revival in copper financing may distort the copper balance in China once again.

Work or Welfare: What Pays More?

(…) The report, by Michael Tanner and Charles Hughes, is a follow-up to Cato’s 1995 study of the subject, which found that packages of welfare benefits for a typical recipient in the 50 states and the District of Columbia not only was well above the poverty level, but also more than a recipient’s annual wages from an entry-level job.

That hasn’t changed in the years since the initial report, said Mr. Tanner, a senior fellow at Cato. Instead, the range has become more pronounced, as states that already offered substantial welfare benefits increased their packages while states with lower benefits decreasing their offerings. (…)

The authors found that in 11 states, “welfare pays more than the average pretax first-year wage for a teacher [in those states]. In 39 states, it pays more than the starting wage for a secretary. And, in the three most generous states a person on welfare can take home more money than an entry-level computer programmer.”

Fed advises US banks to lift capital targets More regulatory capital needed for periods of market stress

The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday.

The study, which examined banks’ approaches to the Fed’s recent stress tests, also said that while banks had “considerably improved” their regulatory capital planning in recent years, they had “more work to do to enhance their practices”.

Follow up on The Coming Arctic Boom:

From China to Europe, Via Arctic

China’s Yong Sheng is an unremarkable ship that is about to make history. It is the first container-transporting vessel to sail to Europe from China through the arctic rather than taking the usual southerly route through the Suez Canal, shaving two weeks off the regular travel time in the process. (…)

The travel time of about 35 days compares with the average of 48 days it would normally take to journey through the Suez Canal and Mediterranean Sea.


Chinese state media have described the approximately 3,400-mile Northern Sea Route, or NSR, as the “most economical solution” for China-Europe shipping. Cosco has said that Asian goods could be transported through the northern passage in significant volumes.

The NSR, at roughly 8,100 nautical miles, is about 2,400 nautical miles shorter than the Suez Canal for ships traveling the benchmark Shanghai-to-Rotterdam journey, according to the NSR Information Office. (…)

The Yong Sheng’s travel comes as shipping volumes on the arctic route are rising fast amid warmer weather, which has kept the passage relatively free of ice for longer than in recent decades.

The Russian-run NSR Administration has so far issued 393 permits this summer to use the waters above Siberia, compared with 46 last year and a mere four in 2010. The travel window usually opens in July and closes in late November when the ice concentration becomes prohibitive for sailing. (…)

Mr. Balmasov said even ships without ice-breaking capabilities received permits as the weather became warmer. “This cuts the cost of operators as the seaway is free of ice and the voyage time significantly lower,” he said.

Arctic ice covered 860,000 square miles last year, off 53% from 1.8 million square miles in 1979, according to the National Snow and Ice Data Center of the U.S. (…)

“It’s warming very quickly in the arctic and I would not be surprised if we see summers with no ice at all over the next 20 years. That’s why shipping companies are so excited over the prospects of the route,” Mr. Serreze said. (…)

The benchmark Asia-to-Europe shipping route accounts for 15% of total trade. (…) Shipowners recognize the potential of the route, but say it will take years to determine whether it will become commercially viable.

“We are looking into it but there are still many unknowns,” said a Greek shipowner whose vessels are chartered by a number of Chinese companies that trade with Europe. “The travel window is short and if ice forms unexpectedly your client will be left waiting and your cost will skyrocket to find an icebreaker. But if climate change continues to raise temperatures, the route will certainly become very busy.” (…)

Lloyd’s List, a shipping-industry data provider, estimates that in 2021 about 15 million metric tons of cargo will be transported using the Arctic route. That will remain a small fraction of the volumes carried on the Suez Canal. More than 17,000 vessels carrying more than 900 million tons of cargo plied the canal route last year.


NEW$ & VIEW$ (19 AUGUST 2013)


We now have Q2 reports from 446 of the S&P 500 companies. Based on S&P data, the beat rate slipped again to 65.2% while the miss rate rose to 27.3%. Interestingly and worryingly, only 3 sectors had a higher beat rate than the average: Health Care (76.9%), Financials (70.4%) and IT (71.9%). The other 7 sectors had a beat rate of 59.7%, down from 62.3% in Q1 and an average of 61.7% in the 3 previous quarters.

Factset notes that 92 companies have preannounced Q3, 81.5% negative. That compares with 94 preannouncements at the same time after Q1 with 79.8% negative and 95 preannouncements after Q4’12 with 75.8% negative. Of the 92 recent preannouncements, 49 were in the 3 sectors with the highest beat rates in Q2 and 40 (81.6%) were negative.

Q2’13 earnings are now estimated at $26.38, up 3.7% YoY. Trailing 12-month operating earnings would thus reach $99.30, up 1.0% from their level after Q1 and barely exceeding the last 18 months tight range of $97.40-$98.69.

Q3 estimates are $27.14, up 13% YoY while Q4 is seen jumping a whopping 26% YoY. Analysts are not meaningfully reducing their second half forecasts even though revenues are up a slow 3.4% YoY and trailing 4-quarter margins have plateaued during the last 12 months. They are obviously counting (hoping?) on a recovery from the weak Q3 and Q4’12 margins but even a return to 2011 margins would not boost earnings anywhere near their forecasts unless revenues really take off. I calculate that assuming quarterly margins return to their 2012 peak levels on a 5% increase in revenues, operating profits would rise 12% in Q3 and 13.5% in Q4. These apparently optimum conditions would take full year EPS to $105.30, nearly 3% lower than current expectations of $108.41.

Adding to the risk, it should be noted that only Financials recorded a meaningful increase in margins in Q2 (14.8% vs 12.4% last year). Ex-Financials, S&P calculates that earnings grew only 1.1% as margins declined from 9.2% last year to 8.9%. Trailing 4Q margins ex-Financials have been in a downtrend since Q3’11, dropping steadily from 9% to 8.6% during this 2-year period.


And here’s something that won’t help:

Productivity Growth Comes To A Halt

Cape crusader
Ratio is too negative, says Jeremy Siegel

Jeremy Siegel adds his support to my views on the Shiller P/E and profit margins in today’s FT:

(…) I believe the Cape ratio’s overly pessimistic predictions are based on biased earnings data. Changes in the accounting standards in the 1990s forced companies to charge large write-offs when assets they hold fall in price, but when assets rise in price they do not boost earnings unless the asset is sold. This change in earnings patterns is evident when comparing the cyclical behaviour of Standard and Poor’s earnings series with the after-tax profit series published in the National Income and Product Accounts (NIPA). (…)

Downward biased S&P earnings send average 10-year earnings down and bias the Cape ratio upward. In fact, when NIPA profits are substituted for S&P reported earnings in the Cape model, the current market shows no overvaluation.

On the above, Prof. Siegel omits another important flaw of the current CAPE reading: most of the companies that recorded humongous losses in 2008-09 are no longer in the index. As I wrote in The Shiller P/E: Alas, A Useless Friend:

This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

On profit margins:

A second argument used by bears is that the profit margins (the ratio of earnings to sales) of US companies are at unsustainably high levels and are likely to fall. Indeed, in 2012 profit margins of S&P 500 companies (based on operating income) reached 8.9 per cent, well above the long-term average of 7.2 per cent.

But David Bianco, chief equity strategist at Deutsche Bank, has shown that most of the margin expansion over the past 15 years has come from two factors: the increased proportion of foreign profits, which have higher margins because of lower corporate tax rates; and the increased weight of the technology sector in the S&P 500 index, a sector that usually carries the highest profit margins.

Higher profit margins also result from stronger balance sheets. The Federal Reserve reports that since 1996, the ratio of corporate liquid assets to short-term liabilities has nearly doubled, and the proportion of credit market debt that is long term has increased to almost 80 per cent from about 50 per cent. This means many companies have locked in the recent record low interest rates and will be much less sensitive to any future increase in rates, keeping margins high. (…)

Economists Trim 2013 GDP Growth Forecasts

The third-quarter survey of 41 forecasters done by the Federal Reserve Bank of Philadelphia shows the consensus view on gross domestic product expects growth of 1.5% for all of this year, down significantly from 2.0% expected when the survey was last done in May.

Part of the downward revision reflects the refiguring of historical GDP reported last month by the Commerce Department. But the economists in the Philadelphia Fed survey also expect the second half of 2013 will be less robust than they expected three months ago. The median forecast thinks real GDP will grow 2.2% this quarter and 2.3% in the fourth quarter, down from 2.3% and 2.7%, respectively.

For 2014, forecasters expect real GDP to grow 2.6%, down from 2.8% projected in May.

Asia Faces Higher Borrowing Costs

Low rates have been a significant motor of Asia’s developing economies. Now, rising U.S. rates are making it harder for Asian issuers to raise funds cheaply.


Debt loads in emerging Asia—measured as total public and private borrowing as a percentage of gross domestic product—rose to 155% in mid-2012 from 133% in 2008, according to McKinsey Global Institute, a unit of consulting firm McKinsey & Co.

Thai Economy Slows Sharply

Thailand’s economy entered a technical recession in the three months through June as China’s slowing growth and weak demand in the U.S. continued to weigh on exports, adding to signs of woes across Asia.

Thai gross domestic product, the broadest measure of economic activity, contracted 0.3% on a seasonally adjusted basis from the first quarter. GDP was 1.7% lower in the first three months of 2013 compared with the previous period.

The planning agency downgraded its full-year growth forecast to between 3.8% and 4.3% from a previous range of 4.2% t0 5.2%.

Thai exports fell 1.4% on quarter, driven lower by weak overseas sales to China, Thailand’s largest market, as well as the U.S. and Europe. Private consumption was 1.9% lower on quarter as the government phased out a tax-rebate program. The nation’s current account swung from a $1.3 billion surplus in the first quarter to a $5.1 billion deficit in the second quarter as exports slumped.

India fails to prevent fresh falls for the rupee

Currency hits new record low despite government measures


India and Indonesia appeared trapped in a race to the bottom on Monday, as both the rupee and the rupiah fell sharply against the US dollar, prompting a sell-off in equities.

The Indian rupee continued its relentless decline, hitting the latest in a series of all-time lows against the US dollar and dashing hopes the government had succeeded in calming the country’s unsettled financial markets. (…)

Like India, Indonesia relies on foreign capital to fund its deficits. But global investors have been pulling back from emerging markets since May, amid expectations the US could soon start reversing its ultra-loose monetary policy. (…)

The fresh currency falls also increased pressure on the debt markets. Yields on India’s 10-year debt spiked above 9 per cent for the first time since late 2011, while Jakarta’s cost of borrowing jumped 18 basis points to the highest level since March 2011. (…)

From FT Alphaville:

That’s the Jakarta Composite down more than 5.5 per cent at pixel time on Monday, anyway.

U.S. Manufacturers Regain Footing

After a decade of losing ground to China and other export powerhouses, U.S. manufacturers are finally showing signs of regaining their competitive edge.

(…) In a report for release Tuesday, BCG says rising exports and “reshoring” of production to the U.S. from China “could create 2.5 million to five million American factory and service jobs associated with increased manufacturing” by 2020. That, BCG says, could reduce the unemployment rate, currently 7.4%, by as much as two to three percentage points.

The overall U.S. trade deficit, meanwhile, narrowed recently, as new shale-drilling technologies have sharply boosted domestic energy production.

At present, about 12 million Americans are directly employed by manufacturers, down from nearly 17 million two decades ago. (…)

The U.S. accounted for 11% of global exports of manufactured goods in 2011, down from 19% in 2000, Mr. Preeg said. During the same period, China’s share rocketed to nearly 21% from 7%, and the European Union slipped to 20% from 22%.

China’s performance has cooled recently. U.S. exports of manufacturing goods to China surged 19% to $19.9 billion in the second quarter, Mr. Preeg said, but that is about one-fifth of China’s manufacturing exports to the U.S. (…)

Meanwhile, China no longer relies heavily on labor-cost advantages to get a leg up on other countries. As wages rise, China has shifted to more exports of higher-tech items, including telecommunications equipment, computers and scientific instruments, Mr. Preeg said. Only about 15% of China’s manufacturing exports are in labor-intensive industries, such as textiles or shoes, he said.

Value of US fuel exports soars
Petroleum and coal top growth rankings at $110.2bn

(…) According to Census bureau export data reviewed by the FT, the value of petroleum and coal exports more than doubled from $51.5bn in the year to June 2010 to $110.2bn in the year to June 2013. This placed it at the top of the rankings of export growth.

Oil and gas exports were second, with a 68.3 per cent increase over the same period but based on smaller nominal values. Primary metals and livestock exports have also experienced strong export growth under Mr Obama, well above the average 32.7 per cent for all commodities. (…)

China’s House Prices Spark Concern

[image](…) Prices rose an average 6.7% year-over-year in July, up from 6.1% in June, calculations by The Wall Street Journal based on official data released Sunday showed. On a month-to-month basis, the increase in prices moderated slightly. (…)

New home prices in major cities like Beijing, Shanghai and Guangzhou showed the largest gains in July. Export hub Guangzhou in China’s southeast recorded the largest year-over-year gain among the 70 cities tracked—a 17.2% increase. On a sequential basis, the increase in prices moderated—up 0.68% month-to-month in July, down from 0.78% in June, calculations showed.

Pointing up  China’s Xi Embraces Mao as He Tightens Grip


(…) It isn’t just Mr. Xi’s rhetoric that has taken on a Maoist tinge in recent months. He has borrowed from Mao’s tactical playbook, launching a “rectification” campaign to purify the Communist Party, while tightening limits on discussion of ideas such as democracy, rule of law and enforcement of the constitution.

Mr. Xi’s apparent lurch to the left comes as Chinese authorities prepare for the coming trial of Bo Xilai, the former party rising star who led a Maoist revival movement until his dramatic downfall last year. Two of Mr. Bo’s lawyers said they expected the trial where he faces corruption charges to take place next week. Before he was detained, Mr. Bo rejected allegations of corruption.

The Chinese president’s Maoist leanings have dismayed many advocates of political reform, who hoped that Mr. Bo’s downfall signaled a repudiation of his autocratic leadership style and might lead to a strengthening of the rule of law and other limits on party power.

But Mr. Xi’s recent record has delighted and emboldened many former Bo supporters who advocate stronger, centralized leadership as the solution to the country’s problems. (…)

Mr. Xi’s use of Maoist imagery, rhetoric and strategy sets him apart from his two predecessors—who both emphasized collective leadership—and suggests to many party insiders that he won’t pursue meaningful political reform during the 10 years he is expected to stay in power. (…)

The new Chinese leadership has also ordered officials to combat the spread of “seven serious problems” including universal values, press freedom, civil society and judicial independence.

At the same time, state media have published a series of attacks on civil society and “constitutionalism”—the idea that the party’s power be limited by China’s existing constitution. (…)

Mr. Xi’s attitude toward political reform is a critical issue in China today because the country may be entering a prolonged period of slower economic growth and mounting public discontent over environmental problems, patchy public services and widespread corruption. (…)

On the political front, however, Mr. Xi has shown no sign of considering even limited liberalization, party insiders say. “Xi is really starting to show his true colors,” said one childhood friend who recalls Mr. Xi spending hours reading books on Marxist and Maoist theory as a teenager. “I think this is just the beginning.” (…)

Yet rather than losing faith in one-party rule, both Mr. Xi and Mr. Bo had worked harder than many contemporaries to prove their allegiance to Mao as young men, and had been left with a heightened sense of how to get ahead in Chinese politics.

“Their thinking is quite similar: They have the same Maoist education, the same red family background, and the same experiences growing up,” said Zhang Lifan, a historian whose father was a senior official. “When they face a problem, they revert quickly to Maoist thinking.” (…)

Ninja  Russia Moves to Restrict Imports if Ukraine Signs EU Deal

Russia is moving to clamp down on imports from Ukraine if its ex-Soviet neighbor signs a landmark free-trade and political-association deal with the European Union, a senior adviser to President Vladimir Putin said.

The comments Sunday by Sergei Glazyev, a senior economic advisor to Mr. Putin, signal a more forceful approach by the Kremlin to the potential deal, which could anchor Ukraine, for centuries ruled from Moscow, more firmly in the West. Moscow is urging Ukraine, a Texas-sized country sandwiched between Russia and the EU, to join a rival trade bloc that it is forming with other former Soviet republics.

Russia last week began tougher checks at the border that Ukrainian exporters said stalled shipments and caused serious financial losses.

Mr. Glazyev said Sunday that those checks were “preventative measures” in preparation for changes in customs procedures if Ukraine signs the EU pact. (…)

A post on Swedish Foreign Minister Carl Bildt’s Twitter blog Thursday said it would be “very serious” if Russia was starting a “silent trade war against Ukraine to block its relations with the EU.”


U.S. Stocks Beat BRICs by Most Ever on Emerging Flight

Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low. (…)

The last time U.S. shares traded at such a premium and volatility versus emerging-markets was similar to now, was in June 2004, when the Fed started to raise interest rates from a 45-year low of 1 percent. Emerging markets rallied 29 percentage points more than the S&P 500 in the next 12 months, according to Bloomberg data. (…)


NEW$ & VIEW$ (7 AUGUST 2013)

Ghost Fed Fears Slam Stocks U.S. stocks fell the most since June, after two Federal Reserve officials indicated the central bank could begin reducing its easy-money program as soon as next month.

U.S. stocks fell the most since June, after two Federal Reserve officials indicated the central bank could begin reducing its easy-money program as soon as next month. (…)

Chicago Fed President Charles Evans said Tuesday he wouldn’t rule out the central bank curtailing its $85 billion-a-month bond-buying program at its September policy meeting, echoing statements from Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, earlier in the day.

“The underlying message from various Fed officials has been that tapering is going to start sometime this fall, unless the economic data takes a significant turn for the worse,” said Joseph Tanious, Global Market Strategist at J.P. Morgan Funds, which manages about $400 billion. (…)

Mr. Lockhart told Market News International the Fed could start cutting back its bond-buying program at any of the three remaining Federal Open Market Committee meetings this year. On Monday, Dallas Fed President Richard Fisher also mentioned a possible September start date.

How Much Is Job Market Really Improving?

It’s getting easier for unemployed workers to find jobs. Whether they’re good jobs is another question.

There were 2.99 job seekers for every open job in June, the Labor Department said Tuesday, the first time the ratio has dropped below three since October 2008. Unemployed workers still have it a lot harder than in the mid-2000s, when there were consistently fewer than two workers per opening, but their prospects are far better than in the depths of the recession, when there were more than six job seekers for every job.

But job seekers aren’t seeing their odds improve because employers are stepping up their hiring. Companies are posting somewhat more job openings — 3.9 million in June, up 144,000 from a year earlier — but they remain slow to fill them. Hiring actually fell to its lowest level of the year in June, and has been little better than flat over the past two years.

Rather, unemployed workers are doing better because there are fewer of them competing for jobs. Layoffs have fallen back to pre-recession levels and are well below the number of hires. So as job seekers find work, they aren’t being replaced on the unemployment rolls by new job losers. New claims for unemployment benefits last week fell to a five-and-a-half-year low. (…)

Crude Falls as Supply Returns

Oil prices fell Wednesday as returning North Sea supplies and comments from the new Iranian president added to recent price pressure.

(…) comments from Iran’s new president, Hasan Rouhani, were perceived as negative for oil. Mr. Rouhani said he was keen to resolve the stalemate over the country’s nuclear program. Any agreement with Western powers could open the door to an easing of the sanctions that have kept around 1 million barrels of Iranian oil a day off global markets.

Brokerage PVM said Mr. Rouhani’s comments acted as a dampener for oil prices, and compared the coming negotiation process with that of central banks’ loosening monetary policy. The oil price has come to depend on the loss of Iranian oil much as it has on quantitative easing, PVM said, and there is uncertainty about when and at what pace those barrels start to return.

Also weighing on oil prices were late Tuesday’s comments from Federal Reserve officials, who suggested that the central bank may begin to taper bond buying as early as September. Injecting money into the economy through such purchases has supported prices for oil and other commodities in the past few years–the policy keeps a lid on the value of the U.S. dollar, the global currency for trade in oil, and the resulting low interest rates means investors chase returns elsewhere.


Oil Boom Helps to Shrink U.S. Trade Deficit by 22%

Exports notched their sharpest rise since September 2012, hitting their highest level, adjusted for inflation, on record. Imports fell in part because Americans bought far fewer foreign-made cellphones and other consumer goods. (…)

The most recent report in part reflects a strengthening domestic energy industry. Imports of fuel oil and other petroleum products fell, while exports of both rose. When calculated in 2009 dollars, the trade deficit in petroleum products fell by almost $2.2 billion from May to $10.23 billion; the trade deficit in non-petroleum products fell by $5.93 billion to $37.38 billion.



Ed Yardini’s has this great chart revealing the true state of China’s exports:

There has been a great deal of criticism about the quality and accuracy of China’s official economic data, especially trade statistics. One way around the problem is to monitor the value of exports to China compiled by the countries of origin. The results aren’t pretty. Data through May show that dollar-denominated exports (on a 12-month sum basis) to China from the US, the euro zone plus the UK, Japan, and South Korea have been mostly flat to down in recent months. All together, they were down 4.9% y/y through May.

German Industrial Output Rebounds in Sign of Recovery

Output increased 2.4 percent from May, when it dropped a revised 0.8 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 0.3 percent, according to the median of 41 estimates in a Bloomberg News survey. Production climbed 2 percent from a year earlier when adjusted for working days.

German manufacturing output increased 2.2 percent in June, with production of investment goods jumping 4.1 percent, today’s report showed. Construction rose 1.6, while energy output (GRIPIMOM) advanced 5 percent.

Ghost  Emerging market output falls in July

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, fell to a new post-crisis low of 49.4 in July, down from 50.6 in June. The latest figure was the first sub-50.0 reading since April 2009, and indicated an overall contraction of output in global emerging economies.


Output fell across the four largest emerging economies, the first broad-based contraction since March 2009. Chinese output fell for the second month running, mainly reflecting a contraction in goods production. July data signalled the first decline in new business in global emerging markets in over four years. China, India, and Brazil all posted lower receipts of new work during the month, while growth in Russia was the slowest in nearly three years.


Employment in global emerging markets was broadly unchanged in July compared with one month previously. Job shedding at manufacturers offset marginal growth in service sector staffing.

Inflationary pressures remained weak in July. Input prices rose at the fastest rate in four months, but one that remained modest, while prices charged for final goods and services were broadly flat.



Extra Virginity: The Sublime and Scandalous World of Olive Oil by Tom Mueller – review This fascinating and entertaining investigation shows there no business more slippery than olive oil

Is there any foodstuff as dodgy as olive oil? Human beings have been defrauding and occasionally poisoning one another with the stuff – or simulacra of it – since the beginning of cooking. You may fairly picture a Sumerian house-spouse 5,000 years ago frowning at an amphora and saying: “The guy said he actually cold-presses extra virgin olives in his own kitchen. Funny taste, though…” Luckily, according to the cuneiform tablets discovered at Ebla, the Sumerians had a royally appointed olive oil fraud brigade.

That’s the sort of thing we need now, when the profits in olive oil crime are, as one EU official puts it, “comparable to cocaine trafficking, with none of the risks”, and the regulations less effective than at any time in the last two millennia. (…)


NEW$ & VIEW$ (6 AUGUST 2013)

Big Positive Reversal in ISM Services

The ISM had a big positive reversal in July, rebounding from its lowest level in over three years back to the highest level (tied with February 2013) it has seen in over a year.  While economists were forecasting the headline index to rebound from 52.2 up to 53.0, the actual level came in at 56.0.  On a combined basis (accounting for each sector’s share in the overall economy), the ISM for July rose to 55.9, which was the highest level in nearly a year and a half.

Americans With Best Credit in Decades Drive U.S. Economy

Household net worth soared to a record high in the first quarter, Federal Reserve data show, and the financial-obligations ratio relating consumer debt to income matched the lowest in 33 years. Consumer loans are rising, and the American Bankers Association reports the share of delinquencies on bank cards is the smallest since 1990.

Total consumer borrowing climbed by $19.6 billion in May, the biggest gain in a year, as Americans charged more purchases on credit cards and increased school and automobile loans, Fed figures showed

Demand for Business Loans Increasing, Credit Eases

Almost a third of banks reported an increase in demand for commercial and industrial loans from small businesses and nearly 28% saw an uptick from larger and midsized firms, according to the Federal Reserve‘s July survey of senior loan officers, released Monday. Both measures improved from readings in the previous quarter’s survey.

Stronger demand was attributed to businesses’ desire to invest in plants, equipment or inventories.

The survey found banks were more willing to lend as well. Nearly 20% of respondents report that credit standards had eased at least somewhat for larger and midsized firms, though only 10% saw a loosening for small businesses over the past three months.

From a year earlier, credit conditions improved, the Fed survey found. Most banks that eased their business-lending policies cited increased competition for such loans. Several also saw a more favorable economic outlook.

Among households, demand for mortgage loans was similarly strengthening, but banks weren’t moving as quickly to ease their standards, especially for weaker borrowers.

German Orders Gain Most in Eight Months in Recovery Sign

German orders, adjusted for seasonal swings and inflation, increased 3.8 percent from a month earlier, driven by contracts for bulk items, the Economy Ministry in Berlin said today.

Basic-goods and consumer-goods orders both dropped 0.2 percent from the prior month.

Pointing up  Orders for investment goods climbed 6.8 percent from May, led by a 20.2 percent gain in orders from within the euro zone. The increase for the single-currency bloc was the largest since June 2007 and partly reflects contracts signed at the Paris Air Show last month, the ministry said.

Italian GDP falls but decline is slowing
Economists warn signs of recovery remain fragile

Istat, the national statistics bureau, said on Tuesday that gross domestic product fell 0.2 per cent in the second quarter following a 0.6 per cent contraction in the first three months of 2013. Year on year GDP is down 2.0 per cent.

The Bank of Italy forecasts that the economy will start growing in the final quarter of 2013 and post a 1.9 per cent contraction for the year as a whole.


George Magnus
Forget ‘taper’ risk: China is a bigger threat

(…) Europe is a bigger cause for concern. Claims that recent economic indicators portend a return to sustainable growth in southern Europe look way off the mark, and are overshadowed by the absence of aggregate demand, the unsustainability of debt levels and default risk, and the difficult politics of austerity.

Moreover, the new German coalition government, emerging after next month’s elections, is most unlikely to accede to demands for a change in Germany’s macroeconomic policies, or for the transfer mechanisms and fiscal backstops needed to build a credible banking union, and a more stable European banking system.

But the most immediate and transparent threat to markets is already evident in the funk in emerging market equity, local currency bond, and currency markets, as well as in global commodity markets. Predictably, China is centre stage.

(…) Analysts and investors have not yet embraced fully the idea that the China problem is not about a cyclical and easily countered economic detour, but about the implications of what a fundamental transformation of the country’s economic model means for China’s GDP growth and supply chains, and for global commodity markets and industries.

(…)  China’s top leaders understand this, but changing the model to one based on efficiency, innovation and a greater role for markets at the expense of the state, is easier said than politically done.

Even if they succeeded, making the change could only be done in the context of slower, sustainable growth, and policies designed to absorb or address overcapacity in heavy and commodity-intensive industries, and a rise in debt service problems, defaults, and non-performing loans.

This comprises an unequivocally deflationary risk for global markets, which is likely to challenge risk appetite again and push up the US dollar, especially against emerging market currencies, including even the renminbi. (…)

Industrial and mining commodity exporters face a daunting time as the share of property investment in GDP falls from a lofty 15 per cent. The income and wealth effects on sectors from steel and cement to white and luxury goods could affect up to 35-40 per cent of the economy. Against this backdrop, concerns about tapering are little more than the proverbial rounding error.

(Chart from Bespoke Investment)

FtAlphaville adds these charts from Capital Economics:

Here are the Services PMIs from Haver Analytics:


(…) in terms of increases from their lows the best-performing economy is the UK which is up by 20 points from its low followed by the US, followed by Russia and then by the global economy and finally Brazil. China, at a queue ranking value at the 0.7 percentile, is actually quite close to its cycle low (within one percentage point). China had been able to fight off much of the weakness in the financial crisis but now is finding itself becoming entangled in the difficulties of getting growth going in a slow-growth world. The advanced economies are beginning to create blowback effects on the Chinese economy which is so dependent on demand in countries overseas and is desperately trying to shift its economy to reduce that dependence.

(…) Part of this I think is to acknowledge that the developing economies in the past were able to improve their economies by hitching their wagons to domestic demand in the strong countries of the most advanced economies by running trade surpluses with them. With weaker demand in the advanced economies the developing economies are having more difficult time. They are probably going to be further pressured to reduce their historic tendency to run trade surpluses. While this is a story principally about the traded goods sector, there are clear implications for the economy as a whole and you see the response by looking at the services sectors which largely consist of nontradable goods. Perhaps the developing nations should seek to stimulate their services sectors to reignite growth in their manufacturing sectors instead of sitting around waiting for the business cycle to turn up in the advanced economies. The game of export-led growth no longer looks like it will play out in the future as profitably it had in the past.

And this from

Australia cuts rates to record low
Less dovish statement from RBA triggers rally in Aussie

(…) The central bank is hoping for further declines in the currency. “The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” Mr Stevens said.

In taking interest rates to a record low the central bank is seeking to spur activity in industries such as construction to offset a peak in resources investment, which has quadrupled as a share of the economy. However, consumers and businesses have been slow to respond to lower borrowing costs.

Mr Stevens has also adopted a more bearish tone when discussing the recovery in the non-mining economy. At a lunch in Sydney last week Mr Stevens warned that “a stronger trend in non-resources business investment looks like it is a while off yet”. (…)


NEW$ & VIEW$ (5 AUGUST 2013)

Low Pay Clouds Job Growth

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

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

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

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

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

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

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

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

Questions of Quality

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

U.S. Consumer Spending Rises 0.5%

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

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

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

Doug Short’s charts reveal the consumer squeeze:

Click to View

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

Click to View

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

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

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

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

Comstock Partners observes:

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

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

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

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

Click to View


Click to View


Stay tune!

U.S. Factory Orders Rise 1.5%

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

Excluding transportation, factory orders were down 0.4%.

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

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

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


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

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

Euro-Zone Retail Sales Fall

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



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

Is Spain’s Experiment About to Succeed?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

image image

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

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

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


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

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

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

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


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

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

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

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

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


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

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


See 10% margins there?

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


Hmmm…careful if you’re using forward earnings.


Dow Gains Sixth Week in a Row

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

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

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

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

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

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

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

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

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

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

Dividend recap volume

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

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

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

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

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

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

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


NEW$ & VIEW$ (1 AUGUST 2013)

Jobless Claims in U.S. Fall to Lowest Level in Five Years

Applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department reported today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 345,000. A government analyst said no states were estimated, and the data were still being influenced by the auto plant shutdowns that play havoc with the figures at this time of year.

The less-volatile four-week moving average declined to 341,250 last week, a two-month low, from 345,750.

Tepid Growth Restrains Fed The U.S. economy is faring a little better than previously thought, but the overall picture is still one of lackluster growth.

The Commerce Department reported Wednesday that the economy grew at a 1.7% annual rate in the second quarter, enough to ease fears of a full-on summertime economic stall but still a sluggish pace by historic standards. (…)

Still, the April-June performance was only a small acceleration after the first quarter’s revised paltry 1.1% growth rate and represents little comeback from the end of last year, when the economy barely grew.

More than 24% of the quarter’s growth came from an increase in inventories—a buildup that is unlikely to be repeated and could even be erased in subsequent data revisions.

Consumer spending, which has been the backbone of the recovery recently, grew at a slower pace in the second quarter, with Americans cutting spending on hotels and restaurants—a possible indication families are pulling back on discretionary items.

The Commerce Department also significantly reduced its estimates for the prior four quarters and said the annual pace of growth since the recovery began in mid-2009 was only 2.2%, well below the nation’s long-term trend of over 3%. (…)

Against that backdrop, the Fed on Wednesday said it would continue an $85 billion-a-month bond-buying program meant to boost growth and hiring and offered no substantive changes in its stance on how long the purchases would continue.

Fed officials nodded in their statement to a few economic developments of late that could cause them concern if they persist. They described the pace of growth in the first half as “modest” and noted risks to the economy if inflation runs “persistently below” their 2% objective, as it has been. The Commerce Department report showed inflation running near a 1% annual rate in the last three months, well below the Fed’s goal.

Draghi Signals Worst Over as ECB Reiterates Low Rate Guidance

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at 0.5 percent. Policy makers expect to keep borrowing costs “at the present or lower level for an extended period of time,” he said, repeating a formula first deployed last month.

How confident should we all be on “confidence indicators”? More on that? CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL!

I prefer economic facts such as

  • German retail sales declined 2.8% YoY in June following a 0.4% advance in May.
  • Spain’s workday-adjusted real retail sales decreased 5.0% in June after a 4.5% decline in May.

And this from

The data on lending also continues to show signs of weakness. Loans to
nonfinancial corporations, adjusted for sales and securitization, fell 2.3 percent year over year in June versus minus 2.1 percent in May. The equivalent figure for households stood at 0.3 percent year over
year, unchanged from the previous month.

The ECB’s quarterly bank lending survey provided little reason for optimism. It indicated: “looking forward to the third quarter of 2013, banks expect the net decline in demand for loans across all loan
categories to continue.”


Japanese PMI signals near-stalling of manufacturing sector

PMI survey data hinted at a waning impact of Japan’s  economic stimulus plan, dubbed ‘Abenomics’, at the start of the third quarter. After strong survey readings pointed to a further strengthening of GDP growth in the second quarter, the third quarter may bring disappointment to policymakers.

The manufacturing PMI signalled a near-stalling of growth in the sector in July. Alongside an easing in growth of manufacturing output, new orders and exports, the survey found price pressures to have eased again, and that employment started to fall again as companies cut capacity in line with weak demand.

Having risen to its highest for over two years in June, rounding off the best quarter of growth for the manufacturing sector for three years, the Markit/JMMA PMI fell in July. Dropping from 52.3 in June to a four month low of 50.7, the PMI signalled a marked easing in the rate of growth of the goods-producing sector at the start of the third quarter.


Output grew at the slowest rate since February, registering only a modest increase after the strong gains seen throughout the second quarter. New order growth also slowed, registering the weakest increase since March.

imageJuly’s PMI survey showed that, although new export orders rose for the fifth straight month, the latest increase was only modest and the smallest seen over this period. Any increase in competitiveness resulting from the weaker yen is being in part countered by weak economic growth in key export markets, notably China. (…)

Najib Plans Budget Measures After Fitch Cuts Malaysia’s Outlook

Fitch cut its outlook to negative from stable this week, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform. The credit rating company’s concerns are shared by the government, Najib told reporters at an Islamic finance event in Kuala Lumpur today, without giving details of fiscal measures planned for his October 25 budget address.

“We are just looking at various policy options but we do understand that there’s a need for us to strengthen the fiscal and macro position of the government,” he said. “The actual details will be unveiled shortly, particularly in the forthcoming budget.”

Najib, who is also finance minister, led his Barisan Nasional coalition to victory in Malaysia’s general election in May following a spending spree which saw him raise civil servants’ salaries and give cash handouts to the poor. He also froze planned cuts in state subsidies on essential items and stalled on introducing a goods and services tax. (…)

Indonesia Inflation Rate at 4-Year High as Economy Set to Slow

Consumer prices rose 8.61 percent in July from a year earlier, after a 5.9 percent gain in June, the Statistics Bureau said in Jakarta today. That exceeded all estimates in a Bloomberg survey of 23 economists. Gross domestic product probably grew 5.9 percent last quarter from a year earlier, the first drop below 6 percent since March 2010, a separate survey showed before a report due tomorrow.

Higher costs may hurt domestic consumption that has been the driver of growth in Indonesia, at a time of falling demand for the country’s commodity exports. Bank Indonesia has already raised its benchmark interest rate by 75 basis points in the past two meetings to fight inflation.


some prominent fund managers/commentators are now advocating investing in European stocks, moving some money out of “highly valued” U.S. equities into “better valued” European equities.

ISI tries to support this notion with this chart on Price/Sales.


My own observations:

  • U.S equities P/S is above the historical mean but so is France and Germany.
  • The Stox600 P/S ratio is somewhat below its mean but within a very narrow range.
  • P/S ratios are near useless without profit margins trends. Margins in the U.S. are much, much higher that in Europe, suggesting much better comps on P/Es.
  • The real bargains on a P/S basis are obviously in Spain and Italy. These countries may be where the U.S. was in early 2009 but their economic, financial, fiscal and political complexion is far different and much less comfortable than that of the U.S. I see no reason for Spanish or Italian companies selling at P/S ranges so much above German companies. Why should Spain P/S be similar to the U.S.?
  • Why would anybody want to invest in France?
  • The U.K. market does look appealing, however.