NEW$ & VIEW$ (21 JANUARY 2014)

Pointing up Pointing up Pointing up U.S. bankers voice new optimism as businesses line up for loans Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.

JPMorgan Chase & Co Chief Executive Jamie Dimon, who has long described himself as “cautiously optimistic” about the economy, recently dropped the modifier “cautiously,” he said on a conference call with investors last week.

“We’re using the word optimistic because we are actually optimistic,” he added.

“The sun and moon and stars are lined up for a very successful year” in the U.S., he said the next day at a conference in San Francisco.

Pointing upI don’t see any weak spots in America,” Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.

Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.

Bankers say that anecdotally, business customers are more hopeful than they had been.

“I am hearing more when I talk with customers about their interest in building something, adding something, investing in something,” Wells Fargo & Co (WFC.N) CEO John Stumpf said on a conference call with investors last week. “There is more activity going on.” (…)

“We have seen some moderate strength in the U.S.,” GE Chief Financial Officer Jeff Bornstein said in an interview, even if he cautioned that the company has not yet seen “the breakout broadly across the economy.” (…)

“We see solid demand for loans as we head into 2014″ from businesses, particularly large corporations and healthcare companies, along with owners of commercial real estate, Bank of America (BAC.N) CFO Bruce Thompson said on a conference call with analysts on Wednesday. (…)

If you missed yesterday’s New$ & View$ you have missed this from the latest NFIB report which neatly complements the above:

Small firms capex is also brightening:

The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005.

Of those making expenditures, 43 percent reported spending on new equipment (up 5 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 6 points).The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy.

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And to confirm what bankers are saying, this chart of weekly loans up-to-date as of Jan. 8, 2014:

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So:

Fed on Track For Next Cut In Bond Buys

The Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year.

A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke.

Punch Read this next piece carefully, as it confirms that the U.S. industrial sector is perking up:

US oil demand growth outstrips China
Abundant energy supplies drive US resurgence, IEA report shows

US demand for oil grew by more than China’s last year for the first time since 1999 according to the International Energy Agency, in a startling indication of how abundant energy supplies are driving an economic resurgence in the US.

The IEA – the rich world’s energy club whose forecasts are the gold standard for the energy market – said US oil demand grew by 390,000 barrels a day or 2 per cent last year, reversing years of steady decline. Chinese demand grew by 295,000 b/d, the weakest in at least six years. (…)

“It is clear that the US economy is rebounding very strongly thanks to its energy supplies,” said Antoine Halff, head of oil market research at the IEA.

“Sometimes oil is a lagging indicator, but sometimes it is the opposite and shows that an economy is growing faster than thought,” he added.

Pointing up The IEA said that US demand growth was driven by fuels such as propane, which is used in petrochemical plants, and indicated a pick-up in industrial activity in the US. 

The rapid growth in US consumption has taken many analysts by surprise. As recently as last month the IEA was forecasting US demand would fall in 2014, but it is now forecasting a second consecutive year of growth. 

Pointing up US consumption also appears to be accelerating. The IEA said the latest estimate of 2013 consumption was based on “exceptionally strong US monthly data for October and robust weekly data since then”.

Surging US consumption may reduce pressure on US politicians to lift an effective ban on the export of US crude oil beyond Canada. 

The IEA has been among the most vocal advocates of allowing foreign sales of US oil, arguing that domestic US oil prices would fall sharply, discouraging production, if US producers were denied a foreign outlet for their crude.

But in its monthly report the IEA acknowledged that thanks to fast-growing domestic demand and exports of refined oil products such as diesel, “challenges to [US production] growth are not imminent”.

European oil demand is also showing signs of growth for the first time since the financial crisis and the IEA said that industrialised economies as a whole are likely seeing oil demand rise for the first time since 2010. 

As a result, oil inventories in OECD countries fell by 50m barrels in November, the most since December 2011, pushing stocks 100m barrels beneath their five-year average.

The IEA also raised its estimate for total oil demand in 2014, helping push Brent crude oil prices up almost 1 per cent to just over $107 per barrel.

EU energy costs widen over trade partners
Industry paying up to four times more than in US and Russia

The gap in energy costs between Europe and its leading trading partners is widening, according to an official paper to be released by Brussels that shows industrial electricity prices in the region are more than double those in the US and 20 per cent higher than China’s.

Industrial gas prices are three to four times higher in the EU than comparable US and Russian prices, and 12 per cent higher than in China, says the European Commission paper, based on the most comprehensive official analysis of EU energy prices and costs to date. (…)

“If we paid US energy prices at our EU facilities, our costs would drop by more than $1bn a year,” said Mr Mittal, noting the US shale gas boom and more industry-friendly policies had led to much lower costs for industrial energy users in that country.

Separately, Paolo Scaroni, chief executive of the Italian oil and gas company, Eni, said in a speech at the weekend that lower American energy costs had created a “massive competitive advantage for the US” that was driving investors and businesses to that country at a rapid pace. “This is a real emergency for Europe,” he said. (…)

California Declares Drought Emergency

Governor’s move frees state resources to cope with the growing economic and environmental threat from some of the driest conditions on record.

(…) The economic fallout is beginning to spread. The U.S. Agriculture Department on Wednesday declared parts of 11 mostly Western states to be natural-disaster areas, making farmers in places including California, Arizona and Nevada eligible for low-interest assistance loans.

In California, with its huge economy, the financial impacts are likely to ripple beyond the farmers. Growers in the Central Valley’s Westlands Water District, for instance, are expected to fallow 200,000 of their 600,000 acres this year, resulting in job losses in surrounding communities, according to a statement by the agency. Other businesses that stand to suffer include landscapers, nurseries and orchards. (…)

Euro-Zone House Prices Improve

House prices rose at the fastest quarterly pace in over two years in the third quarter of 2013, a sign that the slow economic recovery continued in the second half of last year.

Eurostat said house prices across the 17 country euro zone were 0.6% higher in the third quarter of 2013 compared with the second quarter, and fell 1.3% in annual terms.

The quarterly gain was the strongest since a 1.1% increase in the second quarter of 2011, while the annual drop was the smallest since the fourth quarter of 2011.

In the second quarter of 2013 house prices in the euro zone rose 0.2% from the previous quarter and declined 2.4% in annual terms. (…)

House prices in France also bolstered the gain, rising 1.2% in the third quarter from the second. Although Eurostat doesn’t chart official data for German house prices, the estimate they use is based on European Central Bank statistics that showed house prices in the largest euro-area economy grew around 1.0% over the same period.

In Spain Eurostat said house prices grew 0.8% on the quarter in the third quarter after a 0.8% decline in the second quarter while in the Netherlands house prices grew 0.6% after a 2.0% drop in the second quarter.

Just five of the 17 countries saw house prices fall between July and September last year, according to the data—Italy, Cyprus, Malta, Slovenia and Finland.

Thailand Seen Cutting Rates as Unrest Continues

Thailand’s central bank is expected to cut interest rates at its meeting Wednesday as political unrest continues to engulf the exporter of automobiles and electronics.

Almost daily antigovernment protests, many of them violent, have destabilized the country since late last year. Prime Minister Yingluck Shinawatra has called elections for Feb. 2 but the opposition says they will boycott the polls, meaning a likely protracted battle.

At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%. (…)

Even before the instability, the outlook for Thailand’s economy was shaky. Exports, which account for around two-thirds of the economy, have performed poorly, declining 4.1% on the year in November, the latest month for which data are available.

The automobile industry is suffering because of weak demand in other Asian markets. Exports from the nation’s electronics industry, which supplies parts for personal computers—but not the fast-growing smartphone market—also have been disappointing.

The turmoil is taking its toll on the economy. Tourism, which accounts for 7% of national output, has been hard hit as foreign travelers postpone journeys. Plans to build multibillion-dollar infrastructure, including high-speed rail lines, look likely to face delays amid the political gridlock.

The Finance Ministry last week slashed its growth forecast for 2014 to 3.1%, compared with an earlier projection of 3.5% to 4.0%. Failure to push ahead this year with the 2.2 trillion baht ($66.6 billion) infrastructure plan could push growth as low as 2%, the ministry estimated. (…)

Such monetary easing, though, might have little direct effect in the current environment. The previous rate cut failed to filter through into higher bank lending because Thai banks are currently trying to reduce debt exposure.

Thai household debt stands at 80% of gross domestic product, one of the highest ratios in Asia, reflecting years of aggressive lending to finance house purchases and auto loans. A government tax rebate two years ago for first-time car owners also helped boost debt levels. (…)

China’s Working Population Fell Again in 2013

China’s working-age population continued to shrink in 2013, suggesting that labor shortages would further drive up wages in the years to come.

The nation’s working-age population—those between the ages of 16 and 59—was 920 million in 2013, down 2.4 million from a year earlier and accounting for 67.6% of the total population, the National Bureau of Statistics said Monday. The country’s workforce dropped in 2012 for the first time in decades, raising concerns about a shrinking labor force and economic growth prospects.

Last year, the statistics bureau said the population between the ages of 15 and 59 was 937 million in 2012, down 3.45 million from a year earlier, accounting for 69.2% of the total population. The bureau didn’t explain why it began using a different starting age of 16 to measure the working-age population in 2013.

The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.

Labor shortages are still common in several regions throughout the country, and many employers reported an increase of between 10% and 15% in labor costs last year, Ma Jiantang, chief of the National Statistics Bureau, said at a news conference Monday. (…)

But what’s even more significant than the shrinking working-age population was a notable decrease in the labor-participation rate, or the share of the working-age population that is actually working, Professor Li Lilin at Renmin University of China said.

“The labor-participation rate has been dropping, especially among females in the cities,” Ms. Li said.

Rising household income amid decades-long market reforms has made it possible for some who previously would have needed to work to choose to stay at home, she added.

After adjusting for inflation, actual disposable income of Chinese in urban areas grew 7% last year, while the net income of those living in rural areas rose 9.3%, the statistics bureau said. The average monthly salary of the nation’s 268 million migrant workers was 2,609 yuan ($431), up 13.9%, it said. The rise in wages means workers are likely to benefit more from the nation’s economic growth, though rising labor costs are a growing challenge for manufacturers.

SENTIMENT WATCH

 

Stock Values Worry Analysts

(…) Ned Davis Research in Venice, Fla., has reached similar conclusions. Ned Davis, the firm’s founder, published two reports titled “Overweighted, Over-Believed and Overvalued.” He looked at an array of measures including the percentage of U.S. financial assets held in stocks, margin-debt levels and how much money managers and mutual funds have allocated to stocks.

His conclusion: Investors are overexposed to stocks, but they haven’t gone to bubblelike extremes.

Vincent Deluard, a Ned Davis investment strategist, agrees that the P/E based on forecast earnings is above average. Because forecasts are unreliable, he also tracks earnings for the past 12 months, adjusted for inflation, interest rates and economic growth. All these measures yield a similar conclusion.

“We have a market that is getting a little frothy,” Mr. Deluard says. His team expects a pullback of 10% to 20% in the next six months, but perhaps not right away. Then they expect stocks to rise, maybe for years.

“This is not 2008. This is not 2000. This is more like 1998, where you have some of the signs that you see at tops, but not at extremes,” he says. (…)

High five But some people disagree. James Paulsen, chief investment strategist at Wells Capital Management, which oversees $340 billion, notes that P/E ratios in the past have moved even higher than they are today before running into real trouble.

As long as inflation stays moderate and the Federal Reserve doesn’t raise interest rates sharply, he says, the P/E ratio on earnings for the past 12 months can hit the 20s from its current level of around 16 or 17.

High five Yet Mr. Paulsen, too, is worried that 2014 could be a volatile year and that stocks could finish with little or no gain. His concern isn’t valuation; It is that the economy could warm up. Inflation fears could spread, he says, even if actual inflation stays modest. The worries could limit stock gains.

These things are so hard to predict that he and many other money managers are urging clients not to change their holdings or try to time the market.

This is so beautiful. In just a few words, Paulsen says everything we should know, makes all possible forecasts and none at all. And the article concludes saying that things are so uncertain and unpredictable that investors just just freeze sitting on their hands. Disappointed smile

 
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NEW$ & VIEW$ (14 JANUARY 2014)

SMALL BIZ OPTIMISM BETTER

The December NFIB report just came out today. You will read about the overall results elsewhere. I am more interested in the details.

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NFIB’s December survey did provide some positive signals, with the best
job creation figure since 2007 and a large increase in the percent of owners reporting actual capital outlays in recent months. The jump of 9
percentage points in December over November suggests that most of the
increase in spending came very late in the year. Expectations for real sales growth and for business conditions over the next six months improved substantially over November readings as well.

NFIB owners increased employment by an average of 0.24 workers per
firm in December (seasonally adjusted), the best reading since February 2006. Forty-eight (48) percent of the owners hired or tried to hire in the last three months and 38 percent reported few or no qualified applicants for open positions. This is not just a “skills” issue, but one of poor attitudes, work habits, timeliness, appearance and expectations, especially among the applicants for lower skill jobs.

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Twenty-three (23) percent of all owners reported job openings they could not fill in the current period (unchanged), a positive signal for the unemployment rate and the highest reading since January 2008. Fourteen (14) percent reported using temporary workers, up 1 point from November. Job creation plans fell 1 point, falling to a net 8 percent, but maintaining the improved level of plans recorded last month. Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development.

Last Friday’s NFP report showed no signs of that.

  • Wages are on the rise:

Two percent reported reduced worker compensation and 17 percent
reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (up 5 points), the best reading since 2007. A net seasonally adjusted 13 percent plan to raise compensation in the coming months, down 1 point from November. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery.

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Boy “Daddy, is this a margin squeeze above?”

  • While inventories are too high:

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January retail sales are off to a slow start. Weekly chain store sales have dropped significantly in the past 2 weeks even though the 4-week m.a. remains at its recent peak levels. Weather or not, the goods are still on the shelves.

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  • SMALL BIZ CAPITAL SPENDING

The frequency of reported capital outlays over the past 6 months
surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four (64) percent reported outlays, the highest level since early 2005. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 26 percent. Ten (10) percent characterized the current period as a good time to expand facilities. Of those who said it was a bad time to expand (61 percent), 31 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion. The net percent of owners expecting better business conditions in six months was a net negative 11 percent, 9 points better than November but still dismal.

Euro-Zone Factory Output Jumps Industrial production rose at the fastest pace in 3½ years, an indication that the euro-zone economy likely grew for the third straight quarter.

The European Union’s statistics agency said industrial output in November was 1.8% higher than in October, and 3% higher than the year-earlier month.

Figures for October were revised higher, and Eurostat now estimates that output fell 0.8% during the month, having previously calculated they fell 1.1%.

The rise in output compared with the month earlier was the largest since May 2010, when output jumped 2%. When compared with the year-earlier period, the increase was the largest since August 2011, when output surged 5.5%.

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The increase in industrial production was spread across much of the euro zone, with Germany recording a 2.4% rise, France a 1.4% increase, Spain a 1% rise and Italy a more modest 0.3% increase.

The rise was also spread across a number of different industries, led by manufacturers of capital goods, and including makers of intermediate and nondurable consumer goods. Manufacture of durable consumer goods fell 0.8%, however, an indication that households haven’t yet become confident enough about their prospects to make large purchases, such as of household appliances and cars.

For the 3 months ended in November, IP is up 0.8%, the same as for the three previous months. Capital Goods are notably strong: +1.2% last 3 months after +2.4% the previous 3 months.

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Spain GDP growth fastest in six years
Caution urged as economy starts to emerge from gloom

Luis de Guindos, the economy minister, told parliament on Monday that gross domestic product rose 0.3 per cent in the three months to December, a marked increase from the 0.1 per rise in output in the third quarter. (…)


There was more good news from Spain’s long-suffering services sector, which in December grew at its fastest pace in more than six years. Surveys of business and consumer confidence also showed striking leaps at the end of last year, suggesting that companies and households alike are starting to sense that a turnround is at hand.

Taken in conjunction, the data lend strength to the argument that Spain is experiencing the early stages of a classic recovery cycle, with falling wages leading to a rise in competitiveness, followed by a surge in exports that allows companies to invest in new plant and machinery, new hiring and – eventually – a rise in domestic demand and government tax revenue. Spanish exports have been on a tear for the past two years, and business investment started rising in early 2013. (…)

The consumer side of the Spanish ledger remains weak, however.

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Despite Slowdown, Employers in China Gave Bigger Raises Employers in China gave more-and bigger- raises last year on average than those elsewhere in Asia, a fresh sign that the country’s job market remains resilient despite slowing economic growth.

According to a survey by recruitment firm Hays, two-thirds of employers in China said they gave their workers raises during the last round of reviews of 6% or more—more than any other country surveyed. A majority, or 54%, of said they gave raises of between 6% and 10%, while 12% said they gave raises of more than 10%. Only 5% of employers in China said they gave no raises at all.

In contrast, in Asia as a whole, just 22% of employers said they gave raises between 6% and 10%, while only 7% said they doled out more than 10%. Across the region, paltry raises were common. In Hong Kong and Singapore, the survey notes, the majority of employers gave raises between 3% and 6%. And in Japan, despite the economic stimulus measures dubbed the Abenomics in 2013, 80% of employees received raises of 3% or less.

The survey featured 2,600 companies in China, Hong Kong, Japan, Singapore and Malaysia in professional sectors like  sales, marketing, engineering, human resources and accountancy & finance.

Chinese workers can also take heart in the fact that employers in China said they also plan to continue their generosity. For the next review, 58% of employers in China said they intend to give their staff a raise between 6%-10%, compared with less than a quarter of employers across Asia, the survey showed. (…) 

M&AAnimal spirits
Has the dealmaking cycle started to turn?

The burst of M&A activity announced on Monday – almost $100bn in total, including Suntory’s $16bn takeover of Beam Inc, Google’s $3.2bn purchase of Nest Labs and Charter’s $61bn move on Time Warner Cable – is enough for many bankers to declare that corporate animal spirits are back and the dealmaking cycle has finally started to turn, with activity taking place across all sectors and all regions.

“This is not just ‘animal spirits’, this is good, old-fashioned competition. If my competitor is growing, I need to grow. Yes, 2014 is different,” said Frank Aquila of law firm Sullivan & Cromwell. “Unlike the past three years when we have had a few big deals early in the year followed by disappointing levels of M&A activity, this year there is a high level of confidence that the global economy is growing and business confidence is the key ingredient to getting deals done.” (…)

 
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NEW$ & VIEW$ (8 JANUARY 2014)

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

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

Discounts drive U.S. holiday retail growth: ShopperTrak

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

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

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

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

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

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

Growth Picture Brightens as Exports Hit Record

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

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

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

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

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

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

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

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

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

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

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

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

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

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

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

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

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

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

Euro-Zone Retail Sales Surge

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

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

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

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

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

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

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

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

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

Meanwhile:

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

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

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

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

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

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

Record-Setting Cold Hits Eastern U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging Markets See Selloff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
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NEW$ & VIEW$ (10 DECEMBER 2013)

Small Businesses Optimism Up Slightly

Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has
been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.

Small business optimism report data through November 2013

The net percent of all owners (seasonally adjusted) reporting higher
nominal sales in the past 3 months compared to the prior 3 months was
unchanged at a negative 8 percent. Fifteen percent still cite weak sales as
their top business problem, but is the lowest reading since June 2008. The
net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.

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The pace of inventory reduction continued with a seasonally adjusted net
negative 7 percent of all owners reporting growth in inventories, 1 point
worse than in October. The negative outlook for the economy and real
sales prospects adversely impacted inventory satisfaction. The net percent
of owners viewing current stocks as too low improved only 1 point, to
negative 4 percent in November. Inventories are too large, especially given the poor outlook for sales improvements. The net percent of owners
planning to add to inventory stocks was a net 0 percent (up 1 point), no
new orders for inventory when stocks are excessive compared to expected
sales.

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WEEKLY CHAIN STORE SALES SHOW NO HOLIDAY CHEERS

Sales dropped 1.6% last week after the 2.8% decline the previous week. The growth in the 4-week m.a. is 2.2% YoY. It was 3.0% at the same time last year when the Christmas season sales finished up 3.3% by this measure.

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Smile Americans Regain Some Wealth

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, the highest on record, according to the Federal Reserve.

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The value of stocks and mutual funds owned by households jumped $917 billion last quarter, while the value of residential real estate grew about $428 billion, according to the Fed. (…)

Sad smile Wealthy Go Frugal This Holiday Amid Uneven U.S. Recovery

(…) Coach Inc. has said customers plan to spend less on gifts and that mall traffic fell sharply last month. Analysts predict Nordstrom Inc.’s fourth-quarter sales may grow less than half the year-ago pace of 6.1 percent. Tiffany & Co.’s third-quarter comparable sales in the Americas were barely higher. Even before Black Friday, Saks Inc., Neiman Marcus Group Inc. and Nordstrom offered 40 percent off on many brands. (…)

In early October, Unity Marketing conducted an online survey of 1,200 affluent shoppers. Twenty five percent said they’ll spend less on holiday gifts this year than they did in 2012, while 60 percent said they plan to spend the same. Just 13 percent said they would spend more.

Half the respondents said the financial health of the country is worse now than it was three months ago. (…)

First rise in US mortgage debt since 2008
Consumer spending may support economic growth next year

The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008.

After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. (…)

Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. (…)

Canada’s top 1% take home 10.6% of its income

A first glimpse of how top earners fared in 2011 shows their share of income peaked in 2006 at 12.1 per cent, before the recession walloped the wealthy as investment income and bonuses dried up. However, the share is still higher than when Statistics Canada began tracking incomes in 1982, when it stood at 7.1 per cent. (…)

In the U.S., the income share of the top 1 per cent of earners was 19.7 per cent in 2011, according to economists Emmanuel Saez and Thomas Piketty. By last year, it had grown to about 22.5 per cent – a similar level to both before the recession and the Great Depression. The economists found that incomes for the top 1 per cent grew by nearly a third between 2009 and 2012, compared with 0.4-per-cent growth for the bottom 99 per cent.

In Canada, the threshold to be in the top percentile of earners rose to $209,600 in 2011, up from $207,300 a year earlier in constant dollars. It requires $108,300 to be part of the top 5 per cent, while it takes $84,100 to be in the top decile of earners.

The rich typically pay a higher share of taxes in Canada, although that share has declined in recent years. The top 1 per cent of earners paid 20.8 per cent of the total share of federal and provincial or territorial income taxes, down from 23.3 per cent five years earlier. (…)

The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent. The report is based on 2011 tax-file data, which includes incomes from earnings and investments, but is not a measure of total wealth, which includes assets such as housing.

Signs Investment Slowing in China

(…) retail sales beat expectations, while investment lost momentum, a sign of progress toward the consumption-led growth policy makers have sought. Retail sales posted 13.7% annual growth in November, up from 13.3% in October, and auto sales hit a record high. (…)

Overall investment showed signs of slowing in November, though real-estate sales and construction starts were strong. Fixed-asset investment was up 19.9% in the first 11 months of the year, compared with the same period of 2012, just below expectations and lower than the figure for the January-to-October period. (…)

Growth in industrial production, the most closely watched monthly indicator of economic performance, slipped back to 10% on a year-to-year basis in November from 10.3% the previous month. (…)

Auto  China Auto Sales Gain 16% as Japan Automakers Extend Recovery

China’s passenger-vehicle sales rose 16 percent in November as Japanese automakers extended their recovery in the world’s largest auto market.

Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed to 1.7 million units last month, the state-backed China Association of Automobile Manufacturers said today. (…)

Industrywide, total sales of vehicles — including buses and trucks — reached 19.9 million units this year through November, putting China on course to be the first country to ever see 20 million units in annual vehicle sales. (…)

By contrast, Indian passenger-vehicle sales fell 10 percent last month, the third-straight decline, according to data released by the Society of Indian Automobile Manufacturers today.

Ghost  France’s Industrial Production fell 0.3% in October, following a 0.3% decline in September.

SENTIMENT WATCH

over the past 3 weeks a cumulative ~15B flowed into equity mutual funds while-$17B flowed out of Bond Mutual funds. (ISI)

 
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NEW$ & VIEW$ (9 DECEMBER 2013)

GREEN FRIDAY

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

The media narratives just flowed from that.

Employers Gain Confidence to Hire

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

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

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

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

It remains that

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

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

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

By comparison, manufacturers added only 76,000 jobs.

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

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

But move July into the first part of the year:

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

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

Never mind that

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

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

Never mind that

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

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

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

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

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

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

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

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


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

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

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

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

TAPER WATCH

This is from Fed’s mouthpiece John Hilsenrath:

Fed Closes In on Bond Exit

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

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

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

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

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

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

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

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

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

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

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

Fed December Taper Odds Double in Survey as Jobs Beat Estimate

 

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

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

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

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

Credit-Card Debt Hits Three-Year High

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

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

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

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

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

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

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

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

(ZeroHedge)

Fingers crossed  Congress Readies a Year-End Budget Dash

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

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

China Exports Rise More Than Estimated

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

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

China Inflation Stays Benign

 

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

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

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

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

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

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

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

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

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

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

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

EARNINGS, SENTIMENT WATCH

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

U.S. stocks could weather grim profit outlooks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hugh Hendry is CIO of Eclectica Asset Management

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

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

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

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

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

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

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

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

image
 

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

THE U.S. ENERGY GAME CHANGER

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

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

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

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

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

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

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

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

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

DEMOGRAPHICS

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

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

image

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

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

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

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

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

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

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

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

BUY LOW, SELL HIGH

A 700- year chart to prove a point:

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

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

Ralph Dillon of Global Financial Data

 
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NEW$ & VIEW$ (26 NOVEMBER 2013)

U.S. Pending Home Sales Continue to Erode

Pending home sales continue to show weakness. The number of homes on the market for sales has dropped for five straight months. The number of homes for sale has contracted by 1.2% over the past year. There are still year-over-year increases in homes for sale in the Northeast and the Midwest. But in the South and the West, the numbers have shrunk.

In all regions, sales are lower over six months. Sales are lower over three months in the Midwest, the South and the West with only the tiny Northeast showing a gain.

Pointing up Pending home sales are usually stronger than actual existing home sales. When the gap between the growth rates of the two series is squeezed, as it is now, that is usually a sign of more weakness to come. (Haver Analytics)

Auto Vehicle Sales Forecasts: Stronger Sales Expected in November
From CalculatedRisk:

The automakers will report November vehicle sales on December 3rd.
Here are a few forecasts:
From WardsAuto: Forecast Calls for Post-Shutdown Bounce

U.S. automakers should sell 1.21 million light vehicles in November, according to a new WardsAuto forecast.

The forecast sales volume (over 26 days) would represent … equate to a 15.9 million-unit SAAR.

From JD Power: Consumer Demand for New Vehicles Picks Up in November

In November, U.S. new-vehicle sales are likely to reach 1.2 million units … based on an auto sales forecast update from J.D. Power and strategic partner LMC Automotive.
The average sales pace in November is expected to translate to a 16.1 million-unit seasonally adjusted annual rate, or SAAR, which would … outpace the 15.2 million-unit SAAR in October, 2013.

From Edmunds.com: November Auto Sales Set the Tone for Final Stretch of 2013, Forecasts Edmunds.com

Edmunds.com … forecasts that 1,196,663 new cars and trucks will be sold in the U.S. in November for an estimated Seasonally Adjusted Annual Rate (SAAR) of 15.7 million.

It appears sales in November will be significantly above the government slowdown pace of 15.154 million in October 2013.

High five  …but within the monthly range of 2013 and at previous cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis):
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Thinking smile  While inventories are pretty high…

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New PMI-based indicators for non-farm payroll

Markit Flash US PMI™ surveys are signalling non-farm payroll growth of 163k in November, down slightly on the 219k rise signalled in October (which compared with a 204k rise in the official data for October). The latest increase in employment is being led by the service sector, while
manufacturing payrolls remained broadly stagnant.

Markit has extended its US PMI survey coverage to encompass private services as well as manufacturing. The data for services, as well as combined indices covering both manufacturing and services, are published for the first time for November, including the back histories extending to late-2009.

imageThe Flash Composite PMI Employment Index fell from 54.6 in October to 53.3 in November, signalling a modest easing in the pace of job creation. However, comparisons of the survey indicator against actual non-farm payrolls shows that the survey remains consistent with buoyant payroll growth of 163k in November, fuelled by a 176k rise in private sector payrolls (implying a small fall in government payroll numbers).

Over the latest three months, the PMI has averaged 54.2, signalling an average 202k monthly increase, identical to the change signalled by the official data.

The PMI showed services driving the increase, with private sector services employment up by 163k in November (as signalled by a Flash Services PMI Employment Index reading of 53.6). However, the manufacturing PMI data were consistent of a mere 1k rise in November (as signalled by a Flash Manufacturing PMI Employment Index reading of 52.2).

The PMI survey comparisons against the official data reveal that, while small variations in the monthly numbers are to be expected (a standard error of 49k for total non-farm payrolls), the PMI acts as a valuable advance guide to the trend in the data, helping not only in the prediction of official data but also providing additional information on the degree of confidence with which official data should be considered.

Fears Rise as China’s Yields Soar

Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.

The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

image

The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China’s debt markets were rattled by a cash crunch. (…)

Last week, China Development Bank, one of the nation’s largest issuers and regarded as one of the most creditworthy, delayed a planned bond sale by two days and cut the size of the offering from 24 billion yuan ($3.9 billion) to 8 billion yuan. China Development Bank supports funding for China’s major infrastructure projects.

Also cutting the size of a debt offering last week was another regular issuer, Export-Import Bank of China, according to people familiar with the deal. The Agricultural Development Bank of China, which helps fund the development of China’s vast rural areas, has postponed its borrowing plans indefinitely, according to bankers familiar with that deal. Export-Import Bank and Agricultural Development Bank weren’t available to comment on their plans to issue bonds.

According to the latest data from Financial China Information & Technology Co., bond issuance in China totaled 687.36 billion yuan last month, down from 785.88 billion yuan in September and 822.14 billion yuan in August. It also represents a 24% drop from April’s 908.13 billion yuan, which was the most of any month this year. (…)

Even the Chinese government is having a tough time selling debt. In October, China’s Ministry of Finance sold 28.25 billion yuan of one-year debt offering an interest payment of 4.01%. (…)  Offers to buy the bonds roughly matched the number of bonds available, according to the Finance Ministry. Analysts said that typically demand for such bonds has been about double the supply.

 
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NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

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

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

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

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

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

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

image  image

However,

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

And these peculiar stats:

Retail boom coming to a store near you?

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

Amazon to Hire 70,000 Workers For Holiday Selling Season

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

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

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

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

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

image

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

Confused smile More quirks:

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

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

From the GDP report:

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

 

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

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

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

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

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

Other notable findings:

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

Nonetheless:

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

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

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

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

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

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

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

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

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

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

Elsewhere:

S&P Cuts France’s Credit Rating

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

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

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

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

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

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

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

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

Surprise Jump in China Exports

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

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

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

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

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

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

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

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

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

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

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

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

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

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

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

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

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

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

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

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

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

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

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The Economist agrees (tks Jean):

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

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

Race to Bottom Resumes as Central Bankers Ease Anew

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

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

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

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

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

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

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

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

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

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

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

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

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


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

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

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

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

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

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

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

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

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

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

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

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

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

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

 
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NEW$ & VIEW$ (7 NOVEMBER 2013)

U.S. LEADING ECONOMIC INDEX KEEPS RISING

The Conference Board LEI for the U.S. increased for the third consecutive month in September. Improvement in the LEI was driven by positive contributions from the financial indicators, initial claims for unemployment and new orders. In the six-month period ending September 2013, the leading economic index increased 3.0 percent (about a 6.0 percent annual rate), much faster than the growth of 1.2 percent (about a 2.4 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread than the weaknesses.

These charts from Doug Short suggest that the probability of a recession remains very low:

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ISM Services Surprises to the Upside

Following up on the heels of Friday’s stronger than expected ISM Manufacturing report, Tuesday’s release of the non-manufacturing ISM index also came in ahead of expectations.  While economists were expecting the October headline reading to come in at a level of 54.0, the actual reading came in at 55.4.  This represents a one point increase from September’s level of 54.4.  With both the manufacturing and non-manufacturing indices having been released, we can see that the combined composite PMI (bottom chart) for October also increased from 54.6 to 55.5.

Of the ten components shown, only four increased this month, while six declined.  Compared to one year ago, ‘breadth’ in the components was more positive as seven increased and just three declined. 

Credit Jobs at 10-Month Low as Borrowing Slows

The credit-intermediation industry shed 7,700 workers — including commercial bankers, credit-card issuers and mortgage and loan brokers — in September, the biggest drop since June 2011, Labor Department figures show. The total fell to about 2.6 million, the lowest since November 2012. (…)

Mortgage refinancing is the more labor-intensive segment, so a recent rise in interest rates has resulted in sluggish credit growth and fewer people needed to make such loans (…)

German Industrial Production Falls as Recovery Slows

Output (GRIPIMOM), adjusted for seasonal swings, fell 0.9 percent from August, when it rose a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast no change, according to the median of 36 estimates in a Bloomberg News survey. Production advanced 1 percent from a year earlier when adjusted for working days.

Another highly volatile series.. Output is up 0.6% in the last 5 months but down 0.4% in the last 4 months.

CHINA ECONOMY NOT REACCELERATING

The CEBM November Survey indicates that aggregate demand has stabilized, but remains weak. From the perspective of domestic demand, overall consumer sector demand remained sluggish. From the perspective of external demand (…) overall Y/Y growth was flat. Commercial bank feedback communicated a cautious outlook for November.

SENTIMENT WATCH

Investors Rush Back Into Europe

Equities investors are returning in droves, but the region’s recovery remains fragile and deep structural problems remain.


Maligned Markets Return to Vogue

Cash is returning to emerging markets, sparking stock rallies and a surge in fundraising. Calm in the U.S., combined with low rates, has spurred global investors to try to juice returns before year’s end.

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The availability of foreign cash is also sparking a flurry of sales of corporate debt. Emerging-market companies have sold $71 billion of bonds since June, taking this year’s total to $236 billion, almost a third more than was sold at this stage in 2012, according to Dealogic, a data provider.

Yields on emerging-market sovereign debt, which rose until September, have also fallen sharply, signaling the return of foreign investors to the market. Average yields on five-year emerging-market government debt have dropped by 0.57 percentage point. In Indonesia, where the decline has been among the most dramatic, yields fell to 7.2% from 8.1%.

TAPER WATCH

Gavyn Davies
What Fed economists are telling the FOMC

(…) The implication of these papers is that these Fed economists have largely accepted in their own minds that tapering will take place sometime fairly soon, but that they simultaneously believe that rates should be held at zero until (say) 2017. They will clearly have a problem in convincing markets of this. After the events of the summer, bond traders have drawn the conclusion that tapering is a robust signal that higher interest rates are on the way.

The FOMC will need to work very hard indeed to convince the markets, through its new thresholds and public pronouncements, that tapering and forward short rates really do need to be divorced this time. It could be a long struggle.

Russia slashes long-term growth forecast
GDP growth will fall behind global average in the next 12 years

(…) The economy ministry said it now expected the economy to grow at an annual rate of just 2.5 per cent through to 2030, down from its previous forecast of 4.3 per cent made in April. Data for gross domestic product growth in the third quarter are due next week, and are also expected to show a continued slowdown.

The sharp cut follows a drop in fixed investment which independent analysts have warned can only be reversed by decisive structural reforms of which the government has so far given little indication.

At the end of September, fixed investment showed a 1.5 per cent drop year on year, and consumer spending slowed to 3 per cent from 7 per cent in the same period in 2012. (…)

The economy ministry said it expected corporate earnings and salaries growth to slow and the wealth gap to widen further, with the share of the middle class falling from half to just one-third of society. (…) …

EARNINGS WATCH

Q3 earnings season is almost over with more than 90% of S&P 500 companies having reported.

RBC Capital calculates that the earnings surprise was 64% with a 5.7% YoY EPS growth rate (3.6% ex-Financials) on a 3.1% revenue growth rate (3.3% ex-Financials). Bespoke Investment below writes about all NYSE companies:

Earnings Season Ending with a Whimper

As shown below, the percentage of companies that have beaten earnings estimates this season has dropped below the 60% mark (59.8%).  

Early on this season, the earnings beat rate looked pretty good, but things have turned around over the past few weeks.  The blue bars in the chart below show the overall earnings beat rate as earnings season has progressed.  The green area chart represents the total number of companies that have reported this season.  As of today, nearly 1,800 companies have reported.  

On October 23rd, 63.9% of the companies that had reported had beaten earnings estimates, which was the highest reading seen this season.  Since then the beat rate has trickled lower.  On November 1st, the beat rate was down to 61.1%, but as of today, it has crossed below the 60% mark (59.8%). 

 
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