NEW$ & VIEW$ (11 MARCH 2013)

U.S. employment growth accelerates. Canadian employment surges. Mexican stimulus. Brazil inflation problem. China economy slowing, inflation rising. Japan machinery orders slump. French IP slumps. Sentiment watch. U.S. foreign profits.

Sun  Employers Ignore Economic Clouds

Employers stepped on the accelerator last month, hiring briskly enough to bolster the recovery but likely not enough to prompt the Federal Reserve to turn off its easy-money spigot.

The U.S. added 236,000 jobs in February, notching gains in almost every corner of the private sector. February’s gains were well above the 195,000-job-a-month average of the previous three months and pushed the jobless rate to a four-year-low of 7.7%.

“The overall 236,000 number is nice, but the breadth of jobs growth across industries tells me that the recovery is broadening and likely gaining momentum,” said Mark Vitner, senior economist at Wells Fargo Securities LLC. “The mix of jobs is also changing. We’re creating higher-paying ones.” (…)

The ranks of temporary workers, often seen as a hiring bellwether, surged by 16,000 after declining by 3,000 in January.


Other details:

  • The net revisions to January and December was -15,000.
  • Wage and salary income growth in February looks to be very solid combining the 0.5% increase in hours worked with the 0.2% increase in average hourly earnings.
  • If the participation rate holds at 63.5% and employment growth averages +200,000/mo, then we won’t hit a 6.5% unemployment rate until October 2014 …
  • Government payrolls fell by 10,000 in February, the fifth straight month of declines. The total number of government jobs in the U.S. — about 21.8 million at the local, state and federal level — is now the lowest since October 2005.

image image

(Charts from Markit)

Pointing up  Stronger labour market provides some offset to tax hikes

(…) the goods sector, whose share of private sector payrolls hit a historic low last October, is now bouncing back sharply thanks to strong job gains in cyclical sectors like construction and manufacturing. With housing on the rise and factories benefiting from enhanced competitiveness (e.g. low
energy costs and a competitive US dollar), those favourable employment trends could persist and offset the expected sequester-related job cuts in government.

The labour market’s acceleration comes at a good time for consumers who have had to deal with the twin blow of tax hikes at the start of the year and gasoline price increases. So, consumption spending should find some support in Q1 despite the headwinds. With February’s data, wage growth is tracking +4.3% annualized so far in Q1, while aggregate hours are tracking +2.3%, both consistent with a pick up in GDP growth in the first quarter after a weak end of 2012. (National Bank Financial)


Obamacare Effect? (Mish Shedlock via Doug Short’s blog)

Obamacare is in play. Recall that under Obamacare, the definition of full-time employment is 30 hours. The BLS cutoff is 34 hours. At 30 hours, companies have to pay medical benefits so they have been slashing the number of hours people work. This reduced the number of hours people worked and provided an incentive for many to take on an extra job.

We can see the effect in actual BLS data.

Multiple Jobholders

In the past month there was a surge of 679,000 in the number of people working multiple jobs. The seasonally-adjusted increase, as shown above, was 340,000.

McDonald’s Posts Lackluster Sales

Factoring out the calendar impact, McDonald’s said its global same-store sales were up 1.7% last month. McDonald’s same-store sales in the U.S. fell 3.3% in February, but came in flat excluding calendar effects.

McDonald’s Asia/Pacific, Middle East and Africa region posted 1.6% lower same-store sales as positive results in China and Australia were offset by Japan. They were up 1.5% excluding the calendar shift.

In Europe, same-store sales were down 0.5%. Excluding the calendar impact, the metric was up 2.7%, led by performance in the U.K. and Russia.

Canadian employment in February blows past best forecasts

Defying even the most optimistic of forecasts, the economy created 50,700 jobs in February, marking employment gains in six of the past seven months.

Most of Canada’s gains were on the services side of the economy, specifically in professional jobs, such as computer system design and management services, along with food services and public administration.

The goods side fared less well, with factories shedding more than 25,000 jobs last month, bringing employment to below last year’s levels. And – in a sign of a recent challenges in the sector – natural resources lost 6,000 positions.

Mexico’s Central Bank Slashes Rates, Ending Years of Inaction  Mexico’s central bank slashed interest rates Friday, ending almost four years of inaction with a move intended to support sluggish economic growth in Latin America’s second-largest economy.

(…) the central bank cut the overnight lending rate by a half-percentage point to 4%, its first shift in the rate since July 2009. The bank made it clear it was a one-time cut and not the start of an easing cycle. (…)

The Mexican economy is closely linked to the U.S., sending almost 80% of exports north of the border. In 2009, when the U.S. economy shrank 3%, Mexico’s gross domestic product plummeted 6%.

Brazil’s February Consumer Prices Rise Faster Than Forecast

Prices as measured by the IPCA price index rose 0.60 percent in February, the national statistics agency said. That was down from the 0.86 jump posted in January. Annual inflation accelerated for the eighth straight month to 6.31 percent from 6.15 percent the month before.

With inflation running faster than in Mexico, Colombia or Chile and approaching the 6.5 percent upper limit of the central bank’s target range, the monetary policy committee unanimously decided to hold the benchmark rate at a record low for the third straight meeting on March 6.

Surprised smile  “Approaching the 6.5% upper limit”? Annualized inflation was 9.0% in the last 2 months!


China released its monthly stats on Saturday, combining January with February to mitigate the impact of the Lunar Year holidays:

China’s Retail-Industrial Data Signal Moderating Rebound

  • Retail sales were up 12.3% on-year in January and February, compared with a 15.2% rise in December.

The gain in retail sales was below the lowest economist projection of 13.8 percent and was the smallest for a January- February period since a 10.5 percent pace in 2004.

Pointing up Revenue of large catering firms, which includes higher-end restaurants, declined 3.3% YoY during the first two months.

Likely the consequence of the new leaders’ crack down on extravagance.

  • Electricity output, which is closely watched in China because of concerns about the quality of other data, was up 3.4% in the same period compared with growth of between 6% and 8% in the final months of last year.
  • Fixed-asset investment rose 21.2% Y/Y in January and February, compared with a 20.6% rise in the whole of 2012.
  • Industrial production grew 9.9% Y/Y in January and February, after a 10.3% gain in December.
  • Residential floor space sold jumped 55% off a weak base.

Remember last week’s release of 20%+ growth in exports?

Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, said the industrial-production data suggest that recent export numbers were exaggerated. “In view of the strong export figures in the last two months, such IP growth should have been higher than currently reported,” Qiao said in an e-mail.

China Passenger-Vehicle Sales Top Estimates  China’s passenger-vehicle market had its strongest start since 2010, indicating auto demand is thriving relative to other industries at a time when broader indicators are slowing in the world’s second-largest economy.

Wholesale deliveries of cars, multipurpose and sport- utility vehicles, rose 20 percent to 2.84 million units in January and February, from 2.37 million units a year ago, according to the China Association of Automobile Manufacturers.

Total sales of vehicles, including buses and trucks, rose 15 percent to 3.39 million units during the first two months, the association said.

China Inflation Climbs

China’s policy makers are grappling with an uptick in inflation just as industrial output and retail sales seem to be softening. Compounding the government’s challenges are soaring property sales.

China’s consumer inflation jumped to 3.2% year-on-year in February, up from 2% in January, for the highest increase since April last year. Prices were likely boosted by the Lunar New Year holiday, which often brings a spike in prices for food and other goods.

CPI-food rose 6% and non-food prices rose 1.9%. On a M/M basis, CPI rose 1.1% in February after 1% in January.  Food prices were up 2.7% last month while non-food prices rose by only 0.2%.



Storm cloud  [image]Japan Machinery Orders Drop Sharply

Japanese core machinery orders fell 13.1% in January from the previous month, the government said Monday, the first decline in four months, as Japan’s economic recovery has yet to gain momentum amid a recession in Europe and slower growth in China. (…)

Unadjusted core orders fell 9.7% from the same month a year earlier.

Lightning  French Industrial Output Tumbles as Recession Looms French industrial production fell more than expected in January as Europe’s second-largest economy teetered on the brink of its third recession in four years.

Output from factories, mines and utilities fell 1.2 percent in the month from December, national statistics office Insee said today. Factory output fell 1.4 percent in January and 4.6 percent in the three months through January, led by a slump in car production.

Thumbs down  Italy Downgraded by Fitch Fitch downgraded Italy’s credit ratings, citing inconclusive elections results and a deeper recession, and gave a negative outlook.

The firm lowered Italy’s issuer-default ratings to triple-B-plus, or three steps above junk territory, from A-minus. The outlook is negative. (…)

Fitch also noted that the latest data showed the continuing recession in Italy is one of the deepest in Europe, while the unexpected fall in employment and persistently weak sentiment indicators increase the risk of a more protracted and deeper recession than previously expected.

One in four Germans would back anti-euro party

(…) the poll conducted by TNS-Emnid for the weekly Focus magazine showed 26 percent of Germans would consider backing a party that wanted to take Germany out of the euro and as many as four in 10 Germans in the 40-49 age bracket would do so. (…)

A new eurosceptic movement called ‘Alternative for Germany’ (AfD) comprising mostly academics and business people is due to hold its first meeting later on Monday in a northern suburb of Frankfurt.


  • Dow Surges to Record Highs, Finishes Up 2.2%  Investors shed fears, pushing stocks up to their fourth all-time record high in five days. Banks get a clean bill of health

  • It’s Not Just the Fed The market has more going for it than easy monetary policy. If the Fed starts to tighten, stocks could fare surprisingly well.

  • Funds flow:

Investors continued to focus on adding equity exposure to their portfolios. Overall, stock mutual funds and ETFs reported net inflows of $5.7 billion for the week. It was the strongest week for equity products in the last four as both mutual fund (+$3.2 billion) and ETF (+$2.5 billion) investors showed confidence in a continued upward trend for stocks. It marked the ninth consecutive week of inflows for equity mutual funds, bringing their year-to-date total to an impressive $59 billion. Domestic equity funds contributed $22.2 billion of that total, while nondomestic equity mutual funds saw $27.4 billion of net inflows for the year so far. Net flows YTD for emerging markets products were almost flat, and net redemptions for ETFs (-$1.023 billion) nearly wiped out all of the net inflows for their mutual fund brethren (+$1.026 billion). (Lipper via Barron’s)

  • The Odds Favor the Bulls Chances are good that the Dow Jones Industrial Average will finish the year above 15,000—and the odds are 50-50 it could approach 18,000 by the end of 2014.

(…) Even with the Dow reaching a nominal record of 14,329 last Thursday, the performance of the market over the past five years is still below par. That bodes well for the bulls. Lower-than-average returns over five years are generally followed by higher-than-average returns over the following two years.

Accordingly, the Dow has four chances in five that it will be flat or higher by year-end 2014, and a 50-50 chance of approaching 18,000 over the same time frame.

(…) these market odds are derived from long-term market patterns whose source is University of Pennsylvania’s Wharton School finance professor Jeremy Siegel, author of the aptly titled best seller, Stocks for the Long Run.

Professor Siegel has amassed numbers on stock-market performance dating back to 1871, the earliest year for which unimpeachable data are available. The numbers, compiled with the help of one of Siegel’s former students, Jeremy Schwartz, provide the basis for projecting the likely path of the Dow. (Schwartz is research director of the New York-based WisdomTree Asset Management, a firm with which Siegel is associated.) (…)

Last year, the five-year returns were in the lowest quartile of all returns for five-year cycles. This year, the five-year returns through March 5 were in the lowest third of all returns for five-year cycles. Schwartz found 45 five-year periods in the lowest third. The median annual return on these 45 two-year periods was 14.59%. Median annual return on all two-year periods was 9.62%.

To apply that 14.59% to the Dow, we first subtract 2.48 percentage points for dividends, leaving a median price return of 12.11% a year. Grow the Dow at 12.11% from the March 5 close of 14,254—the final number in our last five-year interval—and you get 17,915 within two years.

Schwartz also found that of these 45 two-year periods, in 38 cases the market was either flat or higher over the next two years. How high? The strongest annual rebound post-World War II was 32% in the two years ended in 1976. Grow the Dow 29.5%—again, subtracting 2.48 percentage points for dividends—and you get 23,904.

There you go!. Oh!, don’t forget that markets rise about 65% of the time…

Gross, co-chief investment officer of Pimco, doubled his forecast for growth in U.S. gross domestic product to 3 percent for this year, up from the firm’s December forecast of 1.25 percent to 1.75 percent in 2013.

U.S. home prices probably will rise 8 percent this year, up from a previous estimate of a 4.7 percent increase, according to Bank of America Corp.

“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said in the report, dated yesterday. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”

(…) There are many factors, both technical and fundamental, that will continue to drive stocks higher. JPMorgan notes that the average mutual fund is trailing its benchmark by about 100 bps so far this year. Speculation is that these managers are using market dips to get invested. Factor in some “asset rotation” into equities and the favorable technical backdrop for equities becomes clear.

More importantly, however, are fundamentals. Announced stock buybacks in the US are currently at a “buyback yield” of 8% (annualized announced buybacks over aggregate market cap). Historically, in the US, 95% of announced buybacks are executed. Companies are also returning cash via dividends. The dividend yield of the top 20% of the S&P 500 is 4.2% compared to a 3.5% yield for investment grade bonds. This spread of 123 bps is the largest it has been since 2009. Valuations and earnings tell a similar story. TEV / EBITDA multiples are currently at 9x versus 11x before the financial crisis and consensus estimates for the S&P 500 are for 10%+ growth in 2013 and 2014.

More U.S. Profits Parked Abroad

U.S. companies are keeping more of their profits offshore, a Journal analysis of 60 big companies found. The moves shielded more than 40% of the companies’ annual profits from U.S. taxes.

A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. (…)

Overseas balances have grown in part because U.S. multinational companies are paying less tax on their overseas operations. Offshore subsidiaries of U.S. companies paid an average 14% tax rate in 2008, according to the most recent statistics from the Internal Revenue Service, down from 16% in 2004.

Corporate filings offer a glimpse of the low rates companies pay outside the U.S. Apple said it held $40.4 billion in untaxed earnings outside the U.S. as of Sept. 29, 2012. Apple estimated that it would owe $13.8 billion in tax if it brought that money back to the U.S. That is a 34% tax rate, just shy of the federal 35% rate. Since foreign income taxes are creditable on U.S. taxes, that means Apple has paid less than 5% tax on those earnings to date, says Ms. Blouin, the Wharton professor.


NEW$ & VIEW$ (15 JANUARY 2013)

Storm cloud Europe Malaise Hits German Economy  The German economy finally succumbed to the weakness gripping the rest of the euro zone, shrinking in the fourth quarter of 2012.

[image]Germany’s federal statistics office Destatis Tuesday said Europe’s largest economy expanded 0.7% in 2012, but its gross domestic product probably fell by 0.5% in the fourth quarter. That equates to a contraction of 2.0% in annualized terms.

(…) the government is cutting its 2013 economic growth forecast to 0.4% from 1.0% previously, a German economics ministry official told The Wall Street Journal on Tuesday.

Storm cloud  Empire Manufacturing Starts off the Year Slow

Manufacturing in the state of New York started off the year on a slow note as the January Empire Manufacturing report came in weaker than expected (-7.8 vs. 0.0) this morning.  This is now the sixth month in a row where this indicator has been below zero.  (…) 

The top chart below shows the General Business Index of the Empire Manufacturing index for current conditions and six months out.  Interestingly, even as the current conditions component has been declining, the outlook six months out has been improving.  The current spread between the two indices is the widest it has been since April 2012.  Let’s hope that manufacturers are not getting overly optimistic and actually have reason to be more optimistic.

The second chart below shows the outlook for capital expenditures and technology spending over the next six months.  As shown, both indices have been in multi-month downtrends.  In fact, the outlook for capital expenditures (4.3) is the lowest since July 2009.



Smile  Producer Prices Decline

Wholesale prices dropped 0.2% in December, a sign that inflation remains subdued.

The decrease was driven by a 0.9% decline in food prices and a 0.3% drop in energy costs. Gasoline costs slid 1.7%, the third consecutive monthly decline. Excluding volatile food and energy costs, producer prices increased 0.1%.

Fingers crossed  U.S. RETAIL SALES HANG ON

Retail and food-service sales increased 0.5% in the final month of 2012 to a seasonally adjusted $415.70 billion. (…) excluding autos, retail sales were up 0.3%. Excluding autos, building materials and gasoline—a figure closely watched by economists, who use it as a better gauge of spending—retail sales rose 0.6% during December.

December’s gain in overall retail sales followed a revised 0.4% gain for November. (WSJ, chart and table from Haver Analytics)


Pointing up  Credit Suisse economists noted (via FT Alphaville)

We look at average weekly earnings of all employees on private nonfarm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. And if weekly earnings held steady in January, at the December level, workers would feel like they earned $802.32 instead. That’s the equivalent of losing all the 2012 gain in weekly earnings in one month.

As a percentage of income it hits the middle class hardest because it applies only to the first roughly $114,000 in wages, effectively a regressive measure that takes money from the people most likely to spend it. The cuts themselves had been well-designed to be consumed, as noted by the NY Fed, and that effect will now be reversed.*

Wal-Mart plans $50 billion “buy American” push

Wal-Mart Stores Inc will buy an additional $50 billion in U.S.-made goods over the next decade in areas like sporting goods and high-end appliances in what the world’s largest retailer called a bid to help boost the U.S. economy.

Wal-Mart, the largest private employer in the United States, also said on Tuesday it plans to hire 100,000 newly discharged veterans over the next five years, at a time when the U.S. unemployment rate is at 7.8 percent.

Winking smile  China Defends Export Data After Economists’ Skepticism  China’s customs administration said every dollar of trade is documented, defending the quality of export data that analysts at UBS AG and Australia & New Zealand Banking Group Ltd. said may fail to capture the true picture.

Here’s a dependable stat:

Electricity consumption rose sharply in December – the fourth straight month. For all of 2012, the 5.5% rise was modest (for China), versus 11.7% in 2011. But just in the last four months, electricity use has risen over 8%. The 2013 China economy – a strong start. (ISI)


Fed Sees Bond Buys Continuing

“There are some positives, but I want to be clear that while we’ve made some progress there is still quite a ways to go,” Mr. Bernanke said, speaking about the economy at the University of Michigan’s Gerald R. Ford School of Public Policy here. The Fed has said that continuing these programs—such as an $85 billion-a-month bond-buying effort—hinges on progress in the U.S. job market. (…)

The Fed chairman cited bright spots for the economy, including the energy boom that is lifting output in some states, an improving housing market and resilient consumer confidence. He defended the effect of Fed policies on the economy. The programs helped drive down long-term interest rates to support growth, he said, as evident from “incredibly low” mortgage rates. That, he added, was a factor making housing more affordable and helping the sector recover.

Eventually, that will stop and the old normal will reappear…



NEW$ & VIEW$ (18 DECEMBER 2012)


I am partly re-committing to equities after having been cautious since April 2012.

  • The S&P 500 Index is 25% undervalued based on the Rule of 20.
  • Earnings have peaked but are not collapsing like in 2007.
  • Inflation has slowed and seems unlikely to re-accelerate soon.
  • The U.S. economy remains ok. Avoiding the fiscal cliff removes a big short term threat. Christmas sales look ok.
  • Oil prices are not a big threat although Middle East tensions remain.
  • The Fed keeps pumping.
  • China is not hard landing, actually showing signs of re-acceleration.
  • Europe remains in poor shape but the ECB will act as a backstop if things get worse.
  • Technically, U.S. equities look good with stocks above the rising 100-day and the 200-day moving averages. Technical downside is 1390 on the S&P 500, -3.3% from the current 1438 level.
  • Not a slam dunk but, all in all, the risk/reward ratio is very favorable and many catalysts are turning positive.



Obama Tax Concessions Signal Potential Bipartisan Budget Deal 

New Offers Bring Cliff Talks Closer

The White House for the first time abandoned its effort to raise tax rates on income above $250,000, one element of its counteroffer to Republicans as both sides try to craft a deal before the end of the year.

President Barack Obama backed away from his long-standing call for raising tax rates on households making more than $250,000 a year, a development that inches the White House and congressional Republicans closer to a budget deal.

During a meeting with House Speaker John Boehner (R., Ohio) Monday the president proposed allowing Bush-era tax rates to expire for households making more than $400,000 in annual income, people familiar with the meeting said. (…)

As part of the offer, the president lowered the amount of tax revenue he is seeking in a deal from $1.4 trillion to $1.2 trillion. He also agreed to accept a GOP proposal to slow Social Security growth by using a different inflation formula to calculate cost-of-living increases, people familiar with the matter said. (…)

Pointing up Another notable change in the White House’s newest offer was the removal of a push to extend the payroll tax cut. The change means the amount of tax paid by virtually all earners next year will increase.

A Democratic official familiar with the talks said Mr. Obama’s offer could pass the Senate but would still be a “tough sell” within the party because of the Social Security proposal and the retreat from the $250,000 income threshold on tax increases.

Stocks Rise on Cliff Deal Hopes

European stocks, German Bund yields, oil futures and gold prices climbed amid signs of progress in the U.S. budget negotiations.


Sun  All 50 States Have Gas Below $4 for First Time in 2012  Gasoline prices have been falling for weeks, and have now reached a new low for the year.

The national average pump price of regular gasoline fell 9.2 cents a gallon last week to $3.248 a gallon today, the lowest price since December 2011, AAA Daily Fuel Gauge reports. Prices are still a bit higher than they were at this time last year.

Prices have fallen each day this month on rising supplies and are down 16% since mid-September




Sales jumped 4.3% last week, past their Thanksgiving week peak, to their highest level since April. The 4-wk m.a. is back to its September 15 level, up 3.3% Y/Y.




Smile  Power consumption growth rate hits record for 2012  China’s electricity consumption reached 413.9 billion kilowatt-hours in November with 7.6 percent growth year-on-year, a record high in 2012.

The commission said on Monday that it was the first time all provinces and autonomous regions realized positive growth in power consumption since April. The country’s electricity consumption increased 5.1 percent year-on-year in the first 11 months.

Smile  Chinese Housing Provides Cheer

A government survey released Tuesday showed that average housing prices in China rose at a faster pace in November from the month before, following largely marginal gains since June. Sales and investment picked up in recent weeks in part because of a growing perception that prices have bottomed out, analysts said.

[image]The data came after Beijing signaled a potential subtle shift in its nearly three-year-long property tightening campaign. Policy makers at a weekend meeting reiterated a pledge to crack down on speculative investment but conspicuously refrained from emphasizing the need to bring prices down. (…)

The Wall Street Journal calculations based on data released Tuesday by the National Bureau of Statistics showed that average prices in 70 cities polled increased by 0.24% on average in November from a month earlier, compared with a 0.05% increase in October. Compared with a year earlier, prices fell 0.6% on average in November, decelerating from a 1% decrease in October. Prices of newly built homes in 53 of the 70 surveyed cities rose in November compared with the previous month, more than the 35 cities in October.

U.K. Inflation Holds Steady  The annual rate of inflation in the U.K. held steady in November after accelerating in October, underscoring Bank of England concerns that price pressures will persist despite weak economic growth.

The Office for National Statistics said consumer prices rose 2.7% on the year in November, the same annual rate measured in October. Prices rose 0.2% between October and November. The annual rate of core inflation, which excludes volatile food and energy prices, also held steady at 2.6% in November, official data showed.

Riksbank Cuts Main Rate

Sweden’s central bank lowered its main interest rate, seeking to help overcome a drop in growth as European demand for Swedish exports slows.

Red rose  Wal-Mart Takes An Assault Rifle Off Its Virtual Shelves  America’s biggest gun seller is backing away from a now-notorious assault rifle on sale on its shelves, removing the weapon from its online catalogue. Peace


NEW$ & VIEW$ (11 DECEMBER 2012)



Fiscal Cliff Talks Make Progress Fingers crossed

Budget negotiations between the White House and Republican House Speaker Boehner have progressed steadily in recent days, breathing life into talks that appeared to have stalled.

The people familiar with the matter say talks have taken a marked shift in recent days as staff and leaders have consulted, becoming more “serious.” Both sides have agreed to keep details private, according to the people, who declined to detail where new ground was being broken.

U.S. Fiscal Dispute Shows Sign of Thaw Before Deadline

Obama sounded conciliatory notes at a Daimler AG plant in Michigan yesterday. In his first comments since meeting with Boehner Dec. 9 at the White House, the president didn’t repeat frequent complaints about Republicans holding tax cuts for most Americans “hostage” because they oppose higher rates for wealthiest, and said he was ready to come to an agreement. Since Boehner complained Dec. 7 that Obama had wasted a week, statements from the speaker’s office have been milder, too.

Obama calls for extra push on fiscal cliff

After calling on Congress to pass a law to prevent the tax hikes “right now”, Mr Obama added: “That’s the bare minimum we should be doing in order to grow the economy. But we can do more … I understand people have a lot of different views. I’m willing to compromise a little bit.” Flirt male

Ryan, Cantor Work to Protect Boehner Plan From Tea Party

Without support for a deal from Ryan and Cantor, Boehner — in his second year as speaker — risks repeating the anti-tax Tea Party uprising that doomed his 2011 effort to reach a budget deal with Obama.

Meanwhile, chain store sales are hanging in, by the nails…



China Resource Production Soars

China’s copper and crude-oil output records in November reinforce an optimistic outlook and also support indications of an uptick in industrial demand.

Copper production rose to 531,000 metric tons in November, up 2.1% on month and 11.6% on year, data from the National Bureau of Statistics showed Tuesday. This followed data from the bureau that showed Chinese refiners processed 10.17 million barrels a day of crude oil in November, up 4.2% on month and 9.1% on year. (…)

At least it appears that crude oil refined in the country is staying there—whether it is consumed or stockpiled. China continued to be a net importer of oil products in November, shipping in 1.35 million tons more than it shipped out, according to customs data.

In another sign of rising industrial confidence, China’s largest listed steelmaker, Baoshan Iron & Steel Co. in November raised its December prices for key steel products, ending five months of flat or reduced levels.

Baoshan’s products are largely used for appliance, automotive and other manufacturing purposes, and the increases suggest that the non-construction steel-consuming sector is seeing rising demand. Baoshan had cut prices in July through September, but left them unchanged for October and November. (…)

Power consumption up 9% in Nov: Sources

Power consumption growth rallied in November to nine percent year-on-year, extending the acceleration to two months in a row and signaling an industrial sector that is stabilizing.

China Bank Loans Edge Higher

Chinese financial institutions extended 522.9 billion yuan ($83 billion) of new yuan loans in November, up from 505.2 billion yuan in October, data from the central bank showed Tuesday.

Total social financing—an alternative measure of credit supply which includes other sources of financing such as bond issuance and trust lending—also declined, falling to 1.14 trillion yuan in November from 1.29 trillion yuan in October, the PBOC said.

Meanwhile, M2—the broadest measure of money supply—rose 13.9% at the end of November, down from 14.1% growth at the end of October.




Netherlands Warns on Economy

The Dutch central bank said the Netherlands faces a prolonged period of economic contraction and warned that the euro-zone’s fifth-largest economy will likely miss the European Union’s budget deficit target next year.

[image]DNB now forecasts Dutch GDP to shrink by 0.6% in 2013 compared with its June estimate for growth of 0.6%. As a result, the government’s budget deficit will continue to exceed the EU’s ceiling of 3% of GDP and is expected to come in at 3.5% in both 2013 and 2014, down from a 4.1% gap this year, DNB said.

The Netherlands is very sensitive to economic conditions in the euro zone, as about 60% of its exports go to other countries in the currency bloc, DNB said. The country’s economic woes are aggravated by a slump in the housing market, which is hurting private consumption and squeezing local banks. (…)

Belgium’s national bank also cut its earlier forecast. It said it expected its economy to contract 0.2% this year, down from an earlier growth projection of 0.6%, and for the economy to stay flat next year. “Only net exports will continue to support growth, while domestic demand, excluding public spending, will record a marked fall,” the Belgian Central Bank said, adding it expects the country to meet its 2.8% deficit goal for this year.

The energy game changer:

North American Energy Switch

North America will become a net energy exporter by 2025, Exxon Mobil predicts in its latest long-term energy outlook.

(…) The closely watched annual forecast of energy trends, set to be released Tuesday, concludes the growth of U.S. and Canadian oil and gas production has staying power and could lead to more international shipments of oil and gas, said Bill Colton, Exxon’s vice president of corporate strategic planning, who led the study.

Exxon’s forecast follows similar estimates by the U.S. Energy Information Administration and the International Energy Agency, which have recently predicted North America will produce more energy than it uses in just a few decades, a shift with geopolitical as well as economic ramifications.

Exxon predicts that an anticipated decline in coal usage by power plants will accelerate as more efficient natural-gas-fired plants are built. The Irving, Texas, company forecasts coal use will drop 33% from 2010 to 2025,substantially more than its previous 23% estimate.

“The economics of natural gas in the power-generating sector continue to look even better over time,” Mr. Colton said. (…)

OPEC is meeting this week. Here’s a handy infographic on the state of the OPEC nations, courtesy of @djopec (via WSJ).

Cut Capital Gains Tax Rate To Boost ‘Cliff’ Revenue

Capital Gains Tax: Revenue Has Risen After Rates Are CutIf President Obama and Congress want more tax revenue as part of a deal to avoid the fiscal cliff, they should consider cutting the capital gains tax rate. Since 1981, every four-year period after the capital gains tax rate was reduced saw an increase in the amount of capital gains revenue the government received.

Worker Liberation in Michigan  Another state gives individuals the right not to join a union.

(…) The Michigan law is a particular breakthrough because it comes in what used to be America’s industrial heartland and in a state where 17.5% of workers are still unionized. Nationwide, the share is 11.8%, though only 6.9% in the private economy.(…)

Michigan would become the 24th right-to-work state and it could be the best thing to happen to its economy since the internal combustion engine. Michigan still has the nation’s sixth highest state jobless rate at 9.1%, and it had one of the lowest rates of personal income growth between 1977 and 2011. A flood of economic evidence shows that right-to-work states have done better at attracting investment and jobs than have more heavily unionized states. (…)


NEW$ & VIEW$ (10 DECEMBER 2012)


The Labor Department’s latest job-market overview showed employers added 146,000 jobs in November. That is better than the previous two months, which were revised down, but still too weak to get many of America’s 4.8 million long-term unemployed back to work.

The biggest surprise in the report was the government’s pronouncement that Superstorm Sandy didn’t significantly affect the findings. (WSJ)

The change in total nonfarm payroll employment for September was revised from +148,000 to +132,000, and the change for October was revised from +171,000 to +138,000. Most of the downward revisions were in government employment.


Few people accept the BLS view that Sandy had little impact on the November data.

As it happens, the week the household survey was conducted was around the time Sandy made landfall. Oddly, by the Bureau’s own count, some 369,000 workers couldn’t make it to work, yet it insists the hurricane did not “substantively impact the national employment and unemployment” totals for last month. Go figure. (Barron’s A. Abelson)


The BLS’ own household numbers point to a meaningful impact from Sandy. In addition, the 20k drop in construction employment is highly suspicious in light of the clear improvement in construction spending in recent months (chart below from Lance Roberts and AAR).



Here’s what the National Federation of Small Businesses said recently:

Sandy will have a substantial impact on the jobs numbers. Although large
national firms will not experience much of an employment impact, thousands of small firms were shut down along the East Coast, and large numbers have not re-opened and their customers can’t shop. Segregating the responses in the “Sandy States” from the rest of the U.S. (including western Pennsylvania and New York which weren’t affected), it is clear that there was less hiring and more job loss in Sandy States. (NFIB via John Mauldin)

Meanwhile, up North where Sandy had no impact: Canada Nov. Employment Rises More-Than-Expected 59,300

Canadian employment rose almost six times faster than economists forecast in November, countering recent signs of slowing economic growth.

The increase of 59,300 lowered the unemployment rate to 7.2 percent from 7.4 percent, the first decline in five months, Statistics Canada said today in Ottawa.

Full-time employment rose by 55,200 in November and part- time positions increased 4,100, Statistics Canada said. Private companies added 48,200 workers and public-sector employment climbed 5,400.


LEI Says Slow Growth, Not Recession

For now, leading economic indicators are not pointing toward recession—but they continue to suggest “stall-speed” growth. The Conference Board’s Composite of Leading Economic Indicators just hit a new high for the current expansion. As you can see in the chart and table below, the six-month rate of change in the LEI is consistent with nearly 2% gross domestic product (GDP) growth. Going off the fiscal cliff would almost certainly take the economy into a recession, but the present fundamental picture remains out of the contraction zone.

LEI Says Slow Growth, Not Recession

LEI Says Slow Growth, Not Recession

Smile Rail stats point up

Excluding coal and grain, U.S. carloads were up 2.2% M/M in November and 5.5% Y/Y, the biggest percentage increase in six months. (AAR)image image

Pointing up Also, the diffusion index of ISI’s company surveys made a new high last week.

But there is the cliff:

[image]As recently as September, about half of consumers were largely ignoring the issue, according to a regular survey by RBC Capital Markets. But in the most recent survey, completed last week, 71% of respondents said they were following the cliff debate, and more than half said the threat had hurt their confidence or led them to hold back on spending.

Will Churchill is already seeing the issue affect his business. Mr. Churchill, co-owner of Frank Kent Motor Co. in Fort Worth, Texas, saw strong sales growth at his Cadillac and Honda dealership until early November.

But sales started to slow after Election Day, with many customers attributing their caution to the Washington budget debate. “Fifty percent of the customers we talk to, it comes up at some point,” he said. “They’re in the market, they want to buy, but the hesitation is that they don’t know what’s going to be the result in Washington.” (WSJ)

In the twilight zone:

Boehner Says Week Wasted in Talks to Avert Fiscal Changes

An agreement won’t be possible “if the president insists on his position, insists on my way or the highway,” he said. “That’s not the way to get an agreement.”

High five Boehner said that Friday but before Nancy Pelosi met with President Obama and came out with:

“It’s not about the rate—it’s about the money,” Mrs. Pelosi told reporters. She said the point was not “about being punitive to the high end—it’s about getting money to reduce the deficit, to grow the economy.”

To me, this sounds like progress: “It’s not about the rate—it’s about the money,”

Who will blink first?

Pointing up  In the end, the President of the U.S.A. is Barrack Obama. He is the ultimate person responsible for what happens. No president would knowingly do anything that would clearly and effectively result in a recession which, after all, would make things even worse for the United States and the world.

Obama will blink.


Pay attention to this Ned Davis Research chart via Liz Ann Sonders (Charles Schwab & Co.):

Investors' Extreme Pessimism Starting to Reverse

Investors' Extreme Pessimism Starting to Reverse

And to this basic technical reading which suggests that equities have decent support around the still rising 200-Day MA (1390) and resistance on the 50-Day MA (1420).

Stocks Move Back Above Trendlines



Earnings Growth Rate Cut By Nearly 2/3 since September 30 (Factset)

The estimated earnings growth rate for Q4 2012 is 3.5% this week, slightly below last week’s estimate of 3.8%. Estimate cuts to companies in the Financials sector were mainly responsible for the decrease in the growth rate this past week. Overall, the growth rate for the Financials sector decreased to 20.0% from 20.9% during the week.

Since the start of the quarter (September 30), the estimated earnings growth for the index has dropped to 3.5% from 9.3%. Seven of the ten sectors have witnessed a decline in expected earnings growth over this time frame, led by the Materials, Information Technology, Financials, and Industrials sectors.

The estimated earnings growth rate for the Materials sector is 6.4% today, down from an expectation of 24.0% at the start of the quarter. The projected earnings growth for the Information Technology sector is -2.4%, down from an expectation of 8.7% at the beginning of the quarter. The predicted earnings growth rate for the Financials sector is 20.0%, below an expectation of 27.8% at the start of the quarter. The expected earnings growth rate for the Industrials sector is -4.2%, down from a projection of 3.3% on September 30.

Guidance: High Percentage of Information Technology Companies Guide Lower

The reduction in expected earnings growth for Q4 2012 can attributed in part to a high percentage of companies issuing negative EPS guidance for the quarter, particularly in the Information Technology sector.

Of the 108 companies that have issued EPS guidance for the fourth quarter, 79 have issued projections below the mean EPS estimate and 29 have issued projections above the mean EPS estimate. Thus, 73% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the five-year average of 61%, but below the percentage at this same point in time in Q2 2012 (80%).

An unusually high percentage of companies in the Information Technology sector have issued negative guidance. Of the 32 Information Technology sector companies that have issued EPS guidance, 29 (or 91%) have issued EPS projections below analyst estimates. This percentage is well above the five-year average of 56%.

I did the calculation for you. Excluding IT, 76 companies have issued Q4 guidance and 50 (66%) were below the mean estimate.

Slow demand is hurting revenue but operating margins are necessarily impacted by lower capacity utilization (charts from AAR):


Pointing up The current decline in capacity utilization is similar to the early 2008 experience. Then we had the Lehman failure and all hell broke loose. Nothing similar is expected in 2013, barring the fiscal cliff, but capacity utilization needs to stabilize if current margin expectations are realized:


Smile  China’s recovery gains momentum 

The monthly flood of Chinese data:

  • [image]Industrial output rose 10.1% Y/Y in November, up from 9.6% in October and the strongest since March. On a MoM basis, VAI rose 0.86%, up from 0.82% in October and the fastest pace since May. 
  • Electricity production accelerated to 7.9% growth from 6.4%. That was the fastest pace for 2012.
  • Retail sales rose 1.5% M/M vs. 1.4% in October. Retail sales growth rose to 14.9% Y/Y from 14.5% in October. Real retail sales rose 13.6% Y/Y, up from 13.5% in October and the fastest pace of the year.
  • Investment in fixed assets grew 20.7% Y/Y, down from 22.2% in each of the prior two months. FAI rose 1.3% M/M vs. 1.9% in October. FAI by state-owned firms rose 17.1% Y/Y last month, while FAI by private firms rose 22.7%.
  • Real estate investment showed a marked rebound, registering 16.7% in the first 11 months, compared with 15.4 percent for the first 10 months.
  • China’s exports rose just 2.9% Y/Y in November, much lower than October’s 11.6% rise. Imports were flat against a 2.4% increase in October. Exports to the EU fell 18% Y/Y in November. For the first 11 months of the year, China’s exports to the EU were down 7%. China’s exports to the U.S. fell 2.5% Y/Y after rising between January and November.
  • China property November 2012, floor space sold, new starts - UBSNew floor area under construction in the real-estate sector showed signs of recovery, as residential sales rose 31.6% year-to-year,up from 25% in October and from -3.3% in November 2011. In the nine months through June, sales were down Y/Y each month, while since then sales have been up Y/Y in four of five months. Residential investment rose 21.8% Y/Y in November, up from 13.2% in October and 10% in September.
  • New home starts jumped 6.3% Y/Y last month, following declines of -9.4% in October and -28.1% in September. 
  • Land purchases by developers rose 16.8% last month, after -36.6% in October.
  • The Consumer Price Index rose to 2% Y/Y in November. CPI rose 0.1% M/M with food prices up 0.4% and non-food prices flat.
  • China’s PPI dropped 2.2% in November, the ninth straight month of decline.

Auto  November vehicle sales hit top gear  Passenger-vehicle sales in China hit a record in Nov as a series of positive indicators boosted the market.

A total of 1.419 million cars, sports utility vehicles, multi-purpose vehicles and minivans were sold in November, a 13 percent year-on-year increase, according to data from the China Passenger Car Association on Friday.

The number showed that total sales for the first 11 months jumped 6.6 percent year-on-year to 13.12 million, paving the way for an increase of at least 5 percent in passenger-vehicle sales this year.

Cui Dongshu, deputy secretary-general of the association, said the Guangzhou Auto Show last month helped passenger-vehicle sales surge more than 20 percent in the last week of November.

“More impressively, China’s homegrown brands recovered in the domestic market as their share of the passenger-car sector reached 35.1 percent, the highest in 20 years,” Rao said.



Chinese Survey Shows Higher Jobless Rate

A new survey shows that the real unemployment rate in China is double the official level, and layoffs rose sharply among migrant workers in the past year, underlining the challenge for China’s new leaders to maintain growth.

The survey of 8,000 households shows the urban unemployment rate hit 8.05% in June, up slightly from 8% in August 2011 and nearly twice as high as the official 4.1% rate.

The unemployment rate for China’s army of 160 million migrant workers has risen sharply to 6% in June 2012, up from 3.4% in August 2011 according to the survey, suggesting 10 million unemployed as a result of the sharp slowdown in exports and real-estate construction.

China’s official unemployment rate is based on urban residents registering for unemployment benefits. That measure leaves out key sections of the workforce—notably migrant workers, who go uncounted because they can’t register for such benefits in the cities where they go to work. For the last 15 years it has stayed in a tight range between 3.1% and 4.3%, failing to capture wrenching changes in China’s labor markets.

Mr. Gan’s survey attempts to overcome the problems of the official data by dispatching student researchers into households up and down the country.

OECD Composite Leading Indicators, December 2012

The CLIS for Canada, Japan, Russia, Germany, France and the Euro Area as a whole continue to point to weak growth. In Brazil tentative signs have emerged that the positive growth momentum predicted in recent months is dissipating.

In China and Italy, on the other hand, signs of turning points in the cycle are beginning to emerge. Tentative signs of a stabilisation in growth have also emerged in India.

In the United States and the United Kingdom, where consumer confidence picked up strongly last month, the CLI continues to point to economic growth firming.



Lightning  Japan sinks into fresh recession Revised GDP indicates contraction in six months to September

Japan quarterly qoq annualised seasonally-adjusted GDP - Soc Gen Revised quarterly gross domestic product data on Monday showed that output fell 0.9 per cent in the three months to September, in line with earlier estimates. However, the government also marked down its previous estimate of 0.1 per cent growth in the second quarter to a shade below zero, with growth in net exports cut almost in half. That meant that the six-month period met the textbook definition of a technical recession.

Storm cloud  Turkish growth below expectations
Exports perform less well than hoped

Gross domestic product grew 1.6 per cent in the third quarter compared with the same period last year, significantly below analysts’ consensus forecast of about 2.6 per cent.

GDP advanced 2.6 per cent the first nine months of the year on the same period in 2011. The government forecast for the year as a whole is 3.2 per cent, but some economists say such projections will now be revised downwards.

Storm cloud  Mexico warns of economic headwinds New government says finances in US and Europe will hit growth

Mexico’s new centrist administration says weakness in Europe and concerns about US finance will limit economic growth next year to 3.5 per cent. The figure is in line with previous official forecasts, but below that of most independent economists who had expect 4 per cent growth.

ECB – symbolism matters  Central bank should have cut its benchmark interest rate this week

(…) the ECB also appears to be signalling that a cut is more likely than not, and probably soon. But why wait, especially since it is the symbolism as much as the fact of the cut that really matters?

Lightning  Italian bond yields jump sharply higher
Monti’s decision to step down early leads to wave of uncertainty


Italy’s Bersani Vows Steady Hand

Pier Luigi Bersani, the center-left politician tipped in polls as Italy’s next leader, pledged to uphold his country’s economic commitments to Europe and not dismantle the current government’s overhauls, if he is elected.

Pointing up  Spain Bailout Caution Grows as Business Lobby Backs Rajoy

Spain’s biggest business lobby is getting as cautious as Mariano Rajoy’s government on a possible bailout request because of concern how stringent conditions might be to trigger European Central Bank bond-buying.

A rescue “could impose a criminal pace of reduction in public spending,” Alberto Nadal, vice secretary-general of CEOE, Spain’s main business group, said in an interview.

The group’s newfound skepticism contrasts with their earlier support for a request following the ECB’s unveiling of its bond-buying program in September after President Mario Draghi committed to do “what it takes” to save the euro. Rajoy has refrained from seeking such aid and pressure on him to do so has eased, with the yield on Spain’s 10-year bonds now 214 basis points lower than in July.

Encouraged by the impact of the ECB’s announcement on borrowing costs, business leaders share Rajoy’s optimism that the five-year slump is reaching a low and that measures to overhaul the economy will pave the way to a recovery next year, with already resilient exports and declining labor costs helping resorb Spain’s current account deficit.

…until yields rise again


Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the
imagedynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs.

Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced
consumption. Those approaching their seventh decade need fewer cars and new homes. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years. (Bill Gross, Pimco)

The Collapse Of Microsoft’s Monopoly

(…) This chart comes from Goldman Sachs, and it shows Microsoft losing its market dominance of computing devices as smartphones and tablets have come into the market. (…)

Microsoft’s inability to make a smartphone people really love could be a deadly mistake. As people became comfortable with the iPhone, they became open to the idea of the iPad. As the iPad takes off, it is slowing PC sales. As people become comfortable with the iPad, they’re going to be more inclined to buy a Mac to stay in Apple’s ecosystem.


Here’s my humble contribution: two shots taken at the Aventura Mall in Florida within 5 minutes. Guess which is which.

image image


To Quote Thomas Jefferson, ‘I Never Actually Said That’

(…) Mr. Langworth says Chris Matthews, a fellow Churchill Centre board member and host of MSNBC’s “Hardball,” has misquoted Churchill. Last year Mr. Matthews made a promotional ad for MSNBC in which he recounted Churchill being told during World War II that he should cut government funding for the arts.

“Then what are we fighting for?” Churchill replied, according to Mr. Matthews.

Mr. Langworth says Churchill never said it, though many over the years have used what Mr. Langworth calls “this famous ‘red herring’ nonquote.”

Mr. Matthews, a self-described “Churchill nut,” insists he hasn’t misquoted his hero, but adds, “How can you prove someone never said something?” Confused smile


NEW$ & VIEW$ (14 NOVEMBER 2012)


Obama Sets Steep Target On Taxes

Obama will start talks by calling for $1.6 trillion in additional tax revenue in the next decade, far more than Republicans will likely accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans. In one sign of conciliation, he made no specific commitment to leave unscathed domestic programs such as Medicare, leaving the door open to spending cuts many fellow Democrats oppose. (…)

Treasury Secretary Timothy Geithner said higher tax rates on upper-income Americans were a central part of the White House’s deficit-reduction proposal because there was no way to raise enough revenue by only limiting tax breaks. Mr. Geithner’s comments, made at the Journal’s CEO gathering, marked the White House’s most forceful defense of its tax proposal since the election. (…)

Senate Majority Leader Harry Reid (D., Nev.), in his first floor speech of the session, signaled little interest in concessions (…)

Meanwhile, in the real world:

Companies Warn About Cutbacks

imageSome big American companies are making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.

A range of businesses, including defense contractors and hospitals, will be directly affected by the $600 billion in cuts to government spending and end of tax breaks if Washington doesn’t otherwise lower the deficit.

Other employers worry the reduced spending will hurt them indirectly by slowing economic growth. (…)

David Cote, CEO of Honeywell International Inc., another big military supplier, said his company has reduced normal hiring in the U.S. and Europe—it now is replacing just one out of every four workers who leave—because of concern about the U.S. fiscal situation.

Home Depot Inc. is taking a similarly conservative approach to hiring and spending. The retailer says uncertainty around the budget could disrupt the expected housing-market recovery that underpins the company’s investment plans. Home Depot also has delayed borrowing money until the fiscal situation is resolved.

“We don’t want to get into a position where we have to lay people off,” Chief Financial Officer Carol Tome said. (…)

Industrial companies also are preparing. Xylem Inc. CEO Gretchen McClain said the water technology company’s customers are pulling back on capital spending, and state and local governments are waiting to place orders until their funding sources clear up. In response, Ms. McClain’s company is pulling back on investments and tightening discretionary spending. (…)

Corporations are finalizing their 2013 budgets amid all this uncertainty. Given what they saw from politicians since 2008, they have to place high odds on the worst cases and plan accordingly.

Call me  Broad Concern about ‘Fiscal Cliff’ Consequences Public Is Skeptical Deal Will Be Reached

The public is skeptical that President Obama and congressional Republicans will reach an agreement by the end of the year to avoid the fiscal cliff. About half (51%) say the two sides will not reach an agreement, while just 38% say they will. If no deal is reached, more say that congressional Republicans would be more to blame than President Obama (53% vs. 29%).

(…) nearly identical majorities say the effect of the changes would be mostly negative for the economy (62%) and their personal financial situation (60%).


Economic divergences remain, with the US economy a relative bright spot, China improving somewhat, and a renewed weakening in the eurozone. However, on a global combined basis, enough areas of growth have offset weakness, and the JP Morgan Global Composite Purchasing Managers Index (PMI) has stayed above the 50 level that separates contraction from expansion; coming in at 51.3 in October. (Liz Ann Sonders, Charles Schwab)


image(Chart from Markit)

Lightning  Euro-Zone Data Point to Contraction

[image]Eurostat figures showed industrial production slumped 2.5% on the month in September, the largest fall since January 2009 and compared with August’ s 0.9% increase. On the year, output dropped 2.3% after a 1.3% decline in August. (…)

A Eurostat statistician said poor car production was a key driver of the 2.1% monthly decline in German industrial production, which was the biggest drop since November last year. Portuguese output fell a record 12.0% on the month, hampered by strike action—being repeated Wednesday—across the country. (…)

Gross domestic product in Portugal reflected that steep decline, falling for an eighth straight quarter in the third quarter, by 0.8% on the quarter and by 3.4% on the year.

Other data, this time from Greek statistics agency Elstat, showed the contraction in Greek GDP deepened in the third quarter as activity fell 7.2% compared with a year earlier after a 6.3% drop in the second quarter.

Pointing up  The summer rebound was just a head fake. The Eurozone economy is literally nosediving!





  • German IP declined 2.1% MoM in September, -1.1% in Q3 after -0.7% in Q2.
  • Spain IP: -2.8% in September, -1.5% in Q3 after -0.5% in Q2.
  • France IP: -2.7% in September, -0.6% in Q3 after -0.4% in Q2.
  • Italy: -1.5% in September, 0 in Q3 after -2.2% in Q2. (Eurostat)


I missed that stat last week. Core retail sales dropped 0.6% in real terms in September. Core retail volume thus declined 0.3% in Q3 after -0.5% in Q2.image

Lightning  Euro Crisis Weighs on Germany’s Economy

Economic expectations in Germany fell well below consensus forecasts in November, the latest sign that the euro zone’s largest economy is likely to deteriorate over the next six months.

The Center for European Economic Research, also known as ZEW, said its closely watched economic index fell to -15.7 in November from -11.5 in October.

European Banks Still Hoarding Money

Worries about the euro-zone debt crisis, economy and regulatory uncertainty mean that European banks still prefer to hoard cash with their central banks rather than lend it out. WSJ’s David Enrich has been crunching the figures that show little change in the trend.


(Chart from Liz Ann Sonders, Charles Schwab)


Italy’s Banks Struggle Under Austerity

Italy’s two largest banks continue to suffer under the weight of deteriorating loans, but one-off gains from bond buybacks have helped offset sluggish core business.

Intesa said provisions for bad loans surged to €1.2 billion in the third quarter, up 72% from the same period last year. The bank said loan-loss provisions for the first nine months stood at €3.3 billion, up 48% from a year earlier.

Anti-austerity protests sweep Europe  Portugal and Spain focus of union day of action

Alien  Meanwhile, in the twilight zone:

EU standoff stokes tension before summit

Commission must draft new 2013 budget after talks collapse

The abrupt collapse of talks on the EU’s budget for 2013 has amplified concerns about the bloc’s ability to negotiate a seven-year €1tn budget, in what is set to be a fraught summit in Brussels next week. (…)

Under EU law, the commission will have to draft a new budget – a process that could take weeks and distract from other business. But the larger concern was that the failure to resolve a relatively small dispute could undermine a much more consequential negotiation over the EU’s long-term budget, which will take centre stage next Thursday when European leaders willconverge on Brussels for a special summit.

Some diplomats are already predicting the gathering will end in failure. The stand-off over the current-year budget rehearsed the same deeply entrenched positions that have featured in the larger negotiations, pitching the UK’s determination to curb spending against other governments – supported by parliament and the commission – that believe more EU funding is essential to revive the bloc’s economy. (…)

If you want a “good laugh”, read the whole FT piece. Pitiful! Crying face



Home Depot Begins to Believe in Housing


Chief Executive Frank Blake said the third-quarter performance was stronger than Home Depot itself expected, thanks in part to the start of a healing housing market.

“We can start to see the housing market as an assist to our growth rather than an anchor,” Mr. Blake said on a conference call to discuss results. (…)

RBC Capital Markets analyst Scot Ciccarelli noted that up until the last two quarters, Home Depot was among the more bearish firms about housing. “They’re starting to get comfortable that this isn’t a one-time blip, that this is the beginning of a home-improvement recovery,” he said. (…)

Fewer homes for sale in October, study finds

The number of homes for sale last month fell 17% year-over-year in the nation’s leading housing markets, yet median list prices remained flat, new data show. (…)

Other companies that track asking prices do show annual increases for October. Trulia’s data show asking prices up 2.9% for the month year-over-year. That was the biggest annual increase of the year. The increases were also broad, occurring in 69 of 100 major markets.

“We see no slowdown,” says Jed Kolko, Trulia economist.

On a year-over-year basis, the for-sale inventory declined in all but five of the 146 markets covered by List prices increased in 71 of the markets.

Both data trackers see prices rising faster in markets where inventories have shrunk the most. (…)

Pointing up  The nation’s homeowner vacancy rate fell to its lowest level in seven years in the third quarter, he says. That indicates that “builders are going to have to ramp up,” Newport says. “We’ve gotten rid of all of the excess supply.”


Rainbow  China’s power consumption growth quickens in Oct 

Growth of China’s electricity consumption accelerated to 6.1 percent year-on-year in October from September’s 2.9-percent rise, the National Energy Administration said Wednesday.

The country’s electricity consumption climbed 4.9 percent in the first ten months compared with one year earlier. The pace of increase was also higher than the 4.8-percent growth registered during the January-September period.

Japan PM calls December election  Ruling DPJ expected to lose the poll

Panasonic prepares for “garage sale”, to axe 10,000 jobs  About a fifth of Panasonic Corp’s 88 business units are losing money and only half so far meet a target for at least 5 percent operating margin, the Japanese electronics group’s finance chief said in an interview on Wednesday.


NEW$ & VIEW$ (18 OCTOBER 2012)

China’s Growth Slows

China said its economy continued to slow in the third quarter, just weeks before a once-a-decade change in leadership.

Growth in China’s gross domestic product fell to 7.4% in the third quarter compared with a year earlier, down from 7.6% in the second quarter and the weakest since the beginning of 2009. The seventh consecutive deceleration reflected a combination of weak demand from abroad, flagging investment at home, and insufficient spending by China’s households to pick up the slack. (…)

Data for September showed some signs of stabilization. Industrial output growth rose to 9.2% year-over-year, from 8.9% in August. Exports also bounced back, up 9.9% year-over-year in September, after 2.7% in the previous month. And Chinese refineries processed a record high amount of crude oil, 7% more than a year earlier.

Retail sales were up 14.2% year-on-year in September, ticking up from 13.2% growth in August. (…) A manager of a supermarket chain in Wenzhou said that “supermarket shoppers now hold their purse strings even tighter” and figures the chain will miss its 2012 sales target by 20%.


Remember that the retail sales stats in China are not very useful as they exclude services and also tally some corporate and government expenditures. A more accurate stat is urban household consumption spending, based on a quarterly NBS survey, which rose 7.9% in 3Q in nominal terms, down from 11.6% in 2Q and from 15% a year ago.  Rural household spending slowed to 13.2 in 3Q from 15.4% in 2Q and from 22.9% a year earlier. Interestingly, real urban disposable income rose 9.8% during the first 9 months. Rural PDI rose 12.3% during the same period.

Fixed-asset investment, a flawed stat which includes both capital formation and asset sales, rose 22.2% in September, up from 19.1% in August. Private firm investment rose 24.8%, up from 21.5% in August, while SOE investment rose 17.5%, up from 14.5% in August.


Pointing up  China also reported a 2.2% QoQ seasonally adjusted growth rate in Q3/12, +9.1% annualized, up from Q2 which was also up from Q1. This quarterly acceleration in China’s economy is completely foreign to the reality of the first 9 months. No other details from that GDP black box was released.

China seems to have stabilized although electricity consumption and freight volume have yet to confirm that. Next week’s flash PMIs will help in that regard. (Charts above from CLSA)

Pointing up  Electricity consumption slows  China’s electricity consumption growth slowed in September, underlining the nation’s moderating economic growth.

imageThe National Energy Administration said on Wednesday that the country’s total electricity consumption grew just 2.9 percent month-on-month in September to 405.1 billion kilowatt-hours. That is 9.3 percentage points lower than last September, and 0.7 percentage points lower than in August.

In the year to September, the country’s electricity consumption grew 4.8 percent, slowing from 12 percent in the same period last year. Electricity consumption is widely seen by economists as one of the most reliable indictors of a country’s economic strength.

The industrial sector’s consumption grew just 0.9 percent year-on-year. Among heavy industries, the country’s main electricity consumers, consumption dropped by 0.1 percent.

The agricultural sector used 3.4 percent more electricity than last September, whereas the service sector’s consumption grew by 8.4 percent. Both of these sectors consumed less electricity than in August.

China Home Prices Rise in Fewer Cities as Market Stabilized

Prices climbed in 31 cities of the 70 the government tracks from the previous month, compared with 35 cities in August, according to data released by the statistics bureau today. Prices fell in 22 cities, the data showed.

Sad smile  China’s business climate index falls in Q3  China’s business climate index, a major gauge of the country’s macroeconomic outlook, continued to fall in the third quarter.

The quarterly index dropped to 122.8, 4.1 points lower than in the second quarter. This is a steeper decline compared with the 0.4 dip in the previous quarter, the National Bureau of Statistics said Thursday. (…)

This was the result of a survey conducted among 21,000 industrial enterprises.

Businessmen in IT, wholesale and retail industries felt most optimistic.

Those in manufacturing industries, entrepreneurs from steel, petroleum and chemical fibre sectors felt the worst about their economic operations, with indices under 100.

Open-mouthed smile  U.S Home Building Surges

Residential construction picked up momentum in September and now is running at its highest level in four years, a turn that could have a positive effect on the jobs market and the broader U.S. economy.

Housing Starts Soar To 4-Year High, But Is Upside Limited?Builders started work on new houses and apartments at a seasonally adjusted annual rate of 872,000 units last month, the Commerce Department said Wednesday, up 15% from August and 34.8% from September a year ago. The level of starts was the highest since July 2008. (…)

Starts on single-family homes, which made up 69% of housing starts last month, rose 11% in September to a rate of 603,000 units, a 43% improvement from a year earlier.

Pointing up  The National Association of Home Builders, a trade group, estimates that each home built generates three full-time jobs and $90,000 in new tax revenue. (…)

Building rose 20.1% in the West, 19.9% in the South and 6.7% in the Midwest. New construction fell 5.1% in the Northeast.

In September, the number of new building permits, an indication of future construction, rose 11.6% to an annualized level of 894,000, also the highest level since July 2008. (…)

Builders have started construction on about 1.5 million new homes a year since 1959, to keep up with household formation which has run at an average of 1.27 million new homes a year, according to Census data analyzed by Moody’s Analytics.

U.S. households, many of which doubled up during the economic downturn in order to save money, have been growing by just over one million a year since 2008. (…) (Chart from IBD)

Shoppers Raise Hopes for U.K. Economy

The volume of retail sales rose 0.6% on the month and 2.5% on the year in September. In August, sales fell a revised 0.1% on the month and were up 2.5% on the year.

High five September’s retail figures benefited from higher sales of school uniforms and new collections of warmer clothing, both temporary factors. An ONS spokeswoman said sales of school uniforms rose because of the later start to the school year, which saw families holding off on purchasing items that more traditionally are bought in August. Girl

September’s rise helped boost sales over the third quarter, which increased 1.0% from the second quarter, and marked the strongest rise since the three months to June 2010.

Storm cloud  Output of new vehicles fell 7% in September from August, as demand for cars and vans across Europe fell, figures from the Society of Motor Manufacturers and Traders showed.

Storm cloud  Germany cuts 2013 growth forecast
Minister blames eurozone crisis and global slowdown

The German government has cut its forecast for growth next year to 1 per cent due to the eurozone sovereign debt crisis and the global slowdown as it made the case for stimulating Europe’s largest economy with tax cuts.

In its traditional autumn forecast, the government revised down gross domestic product growth next year from an earlier spring forecast of 1.6 per cent, but slightly revised up this year’s forecast to 0.8 per cent from 0.7 per cent. The government forecasts match those made by the country’s top four economic institutes last week. (…)

Snail  Fears grow over EU banking union plan
‘Legacy assets’ at heart of debate

(…) “The eurozone can only get together and act when the market puts pressure on it,” lamented an EU diplomat from a country allied with Paris. “The things people are being asked to do are very difficult and they don’t want to do them.”

Concern has focused on the inability to agree a way forward on a deal reached in June in which Berlin agreed to allow the eurozone’s €500bn rescue fund to take on debts of failing banks once a new centralised bank supervisor for the single currency is established.

German, Dutch and Finnish finance ministers called the deal into question last month when they insisted that “legacy assets” – such as banks in trouble before the supervisor was established – would be excluded in the rescue scheme, a position that caused howls of protest in Ireland and Spain which both have spent billions bailing out banks. (…)

German reluctance has led diplomats involved in detailed talks to become doubtful that a deal is possible before year’s end. One noted Berlin was still sending mid-level officials to talks on the single supervisor; others suggested talks could run for a year or more. (…)

More on the “peaceful” EU: Germany shocks EU with fiscal overlord demand

There must be an EU “currency commissioner” with sweeping powers to strike down national budgets; a “large step towards fiscal union”; and yet another EU treaty.

Finance minister Wolfgang Schaeuble dropped his bombshell in talks with German journalists on a flight from Asia, and apparently had the blessing of Angela Merkel, the chancellor. “When I put forward such proposals, you can take it as a given that the chancellor agrees,” he said.

Officials in Brussels reacted with horror. “If that is the demand, they are not going to get it. Nobody in the Council wants a new treaty right now,” said one EU diplomat.

Here’s something to motivate people to act:

Lightning  Spain Banks Face More Pain as Worst-Case Scenario Turns Real  Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality.

Bad loans as a proportion of total lending jumped to a record 10.5 percent in August from a restated 10.1 percent in July as 9.3 billion euros ($12.2 billion) of loans were newly classified as being in default, according to data published by the Bank of Spain on its website today. The ratio has climbed for 17 straight months from 0.72 percent in December 2006, before Spain’s property boom turned to bust. (…)

Lending in Spain’s banking system fell 1.1 percent in August from July and 5 percent from the same month a year earlier, the Bank of Spain said. Deposits dropped 1.1 percent in the month and 8.7 percent from a year ago. (Chart below from Scott Barber)



It’s still early, but this earnings season is so far looking a lot like last earnings season.  Last earnings season, the percentage of stocks that beat earnings estimates was 59%.  So far this season, the earnings beat rate also stands at 59%.  Last earnings season, revenues were awful, and the revenue beat rate finished at 48%.  So far this season, revenues have also been awful with a beat rate of just 43%.

Bespoke readers will remember that while the earnings beat rate was weak for all US stocks last season, it was strong for just the stocks in the S&P 500.  The same thing is happening this season, as the beat rate for S&P 500 stocks so far stands at 75%. (Bespoke Investment)

Also remember that the beat rate last season declined throughout the season.


NEW$ & VIEW$ (15 OCTOBER 2012)


Warnings on fourth quarter add to U.S. earnings worries

Outlooks for the fourth quarter – just two weeks old – are so far decidedly more negative than positive. Thomson Reuters data shows 11 negative outlooks so far from Standard & Poor’s 500 companies and no positive outlooks.

Third-quarter guidance, meanwhile, at the comparable period showed 6 negative outlooks and no positive. (…)

U.S. companies so far are having a tougher time beating analyst expectations in the third quarter, with 59 percent of companies exceeding forecasts, below the 62 percent long-term average, based on Thomson Reuters data. (…)

Revenue trends have also been weak: Just 50 percent of companies that have reported have beaten estimates on revenue, compared with the 62 percent average, he said.

Warnings continue to come in for third-quarter reports, helping to drag down earnings estimates for the period. Several of those warnings have come from Kohl’s (KSS.N) and other retailers, which do not report results until early November. (…)

Europe was cited more than any other reason for negative forecasts from S&P 500 companies for the third quarter, a Thomson Reuters survey showed, but China is a growing concern.

  Factset adds:

The 32 companies that have reported to date have surpassed estimates by just 3.0%. Over the last four quarters on average, actual earnings have surpassed estimates by 4.7%.

If the final surprise factor is 3.0%, it would be the lowest final surprise factor since Q4 2008. However, even if the remaining companies were to only beat estimates by 3.0%, the final earnings growth rate for the quarter would still finish in the positive, at 0.15%.

Banks stocks were hit hard late last week after WFC and JPM reported. Yet, banks were supposed to be among the stronger gainers in Q3…


J.P. Morgan, Wells Fargo: Housing Is on Mend  J.P. Morgan Chase and Wells Fargo both reported solid gains in profit and pointed to a recovery in the housing market. Low interest rates, however, continue to pose problems.

“The housing market has turned the corner,” J.P. Morgan Chase & Co. Chief Executive James Dimon said Friday. Wells Fargo & Co. Chief Financial Officer Tim Sloan was just as definitive: “We do believe that we’ve seen a turn,” he said.

At the same time, the headwinds that have kept a lid on the U.S. recovery and weighed on bank stocks were plainly in evidence. Profit margins are being crimped by the same low interest rates that spurred the mortgage-refinancing wave, and investors continue to scrutinize the companies’ operating costs and legal expenses. Bank stocks tumbled on a relatively flat day in the broader stock market. (…)

Surprised smile  J.P. Morgan and Wells Fargo emerged as the two of the sturdiest U.S. banks in the aftermath of the 2008 crisis and together are now responsible for more than 44% of all mortgage volume, according to Inside Mortgage Finance. (…)

Pointing up J.P. Morgan Chase said 75% of third-quarter mortgage volume came from refinancings; Wells Fargo said 72% of its applications during the quarter were for refinancings.

Margin squeeze:

[image]J.P. Morgan’s net interest margin—measuring what it makes on its loans—dropped to 2.43% from 2.66% a year earlier. Wells Fargo’s net interest margin slid to 3.66% from 3.84% a year ago.(…)

With deposit rates already near zero, banks have limited room to further lower their cost of funding. Wells said that its average deposit cost in the third quarter was just 0.18 percentage point, down only marginally from 0.19 percentage point the prior quarter.

Meanwhile, each quarter banks see higher-yielding loans and securities mature, only to replace them with ones that yield significantly less. That contributed to a 0.25 percentage point fall in the margin at Wells to 3.66%. J.P. Morgan’s margin fell 0.04 percentage point to 2.43%. (…)

“We have to be very careful at this point in time not to just go out there and stretch for yield and take on a lot of interest-rate risk,” Mr. Stumpf said on Friday’s call.

Buyers Are Back After Foreclosure

Millions of families lost their homes to foreclosure after the housing crash hit six years ago. Now, some of those families are back in the housing market. Call them the “boomerang” buyers.

(…) Using the three-year benchmark it takes to get an FHA-guaranteed loan, in this year’s second quarter there were 729,000 households that were foreclosed upon during the bust that are now eligible to apply for an FHA mortgage, up from 285,000 in the second quarter of 2011, according to an analysis of foreclosure data by Moody’s Analytics. The company projects that number will grow to 1.5 million by the first quarter of 2014. (…)

Until recently, many of the people who had lost their home to foreclosure or short sale have rented homes, leaving many economists and industry watchers to wonder if the nation would become more of a renter society. In the second quarter, the national home-ownership rate came in at 65.5%, down from 65.9% a year earlier and 69.2% in the second quarter of 2004. Each percentage-point decline represents about one million households.

But as rental rates continue rising—they climbed 0.8% in the third quarter to a national average of $1,090 per month, according to Reis Inc. homeownership is increasingly becoming cheaper than renting. (…)

A housing boom will lift the US economy

Roger Altman, former US deputy Treasury secretary from 1993-94, writes in the FT that the housing market

(…) will be powerful enough, together with rising oil and gas production and other factors, to lift the entire US economy. Indeed, the resultant US economic growth rate may be higher than the Federal Reserve’s long-term forecast of 2-2.5 per cent.

This surge will be driven by a combination of improving house prices, a lower inventory of homes for sale, rising rates of household formation and population growth, and improving access to mortgage credit. Together, they should push residential investment, which includes both new construction and remodellings, to annual growth of 15-20 per cent during the next five years. This alone may contribute 1-2 percentage points to annual growth in gross domestic product and up to 4m jobs over that period.

(…) housing demand is going to be strong, driven by demographics. The International Monetary Fund forecasts that the US population will increase by 15m during the 2012-17 period, more than the increase of the past five years. The two groups of the population that are growing fastest are the over-55s and the so-called echo boomers, the grandchildren of the baby-boom generation. The first group has the highest rate of home ownership. The second has been renting disproportionately, and is primed to start buying. JPMorgan estimates that 6m new units of housing are needed by 2017 just to serve the bigger population.

Then there is the coming recovery in household formation. According to JPMorgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years. (…)

In Canada, mirror image: Why TD thinks Canada is ‘overbuilt’

(…) The latest numbers from Canada Mortgage and Housing Corp., released this week, showed housing starts in September dipping to an annual pace of about 220,000, which TD economist Francis Fong notes tops the average of about 209,000 over the past decade. (…)

image“The current pace of construction is also well north of the average rate of household formation in Canada. According to the 2011 census, only 177,000 new households were created each year since 2006. This would imply that, over time, we have been building more than the demographic need requires.” (…)

The bottom line for Mr. Fong is that the bank believes there’s a “moderate   level of overbuilding” in some cities that will lead to a “gradual price correction” over the course of the next several years as the rate of construction eases.

Also: Canadian housing market peers over the edge


Charting the future of crude oil

image(…) The most dramatic change to the global oil map is the boom in the United States, with the “light, tight oil” that is now being produced in North Dakota’s Bakken field and Texas’ Permian and Eagle Ford plays. The IEA forecasts that the U.S. will increase its production by 3.3 million barrels per day over the next five years to 11.4 million barrels, a level that exceeds the current output of Saudi Arabia.

And it expects Canada’s oil production to grow by 1.1 million barrels a day, primarily from the oil sands. Domestic oil production was about 3 million barrels a day last year. (…)

Some have written about this “potential” game changer in the past year. Doubters claim that optimistic projections take little account from declining production at many mature fields and the apparent high decline rates in shale wells. Political and environmental issues also add to the uncertainties.

Nonetheless, the fact is that U.S. production is growing fast and faster than previously forecast. image

The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results – given the fact that most shale/tight oil resources in the world are still unknown and untapped. What’s more, the application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world’s oil production. (L. Maugeri, Harvard Kennedy School)

I will be shortly posting on that very important trend.

Devil  Iran’s Secret Plan to Contaminate the Strait of Hormuz

Iran could be planning to create a vast oil spill in the Strait of Hormuz, according to a top secret report obtained by Western intelligence officials.

The goal of the plan seems to be that of contaminating the strait so as to temporarily close the important shipping route for international oil tankers, thereby “punishing” the Arab countries that are hostile to Iran and forcing the West to join Iran in a large-scale cleanup operation — one that might require the temporary suspension of sanctions against Tehran.


Wholesale Prices Rise

The producer price index increased a seasonally adjusted 1.1% in September from a month earlier, the Labor Department said Friday. The gain was largely due to energy prices that jumped 4.7% during the month, following a 6.4% rise in August. (…) So-called core prices, which strip out volatile energy and food components, were unchanged from August.

A 1.1% monthly increase in wholesale prices can be rapidly dismissed as inconsequential if it appears to come from rising energy prices. But when it follows a 1.7% jump which itself came after 0.2% and 0.3% gains the two months previous, one should begin to pay attention.

During the first 5 months of 2012, the PPI declined 0.8% or 2.4% annualized. Over the next four months through September, the U.S. PPI rose 3.3%. That’s a 10.2% annualized rate. The core PPI rose 0.9% during the last 4 months or 2.7% annualized, the same annualized rate as for the whole of 2012 so far. Such high inflation is happening while the U.S. economy is barely growing…


Finance Chiefs at Odds

A weekend gathering of the world’s top finance officials deepened—rather than eased—conflicts among some of the largest economies, raising fresh doubts about boosting the flagging recovery.

At the annual meetings here of the International Monetary Fund and World Bank, European officials bickered about the damage caused by austerity; this week they head into a major euro-zone summit with no clear rescue plan for Greece. A territorial row between China and Japan, the world’s second- and third-largest economies, bled into the conference with no sign of resolution, highlighting a new risk to growth. And many top finance officials pointed fingers at the U.S. for casting a new cloud over global markets by failing to make progress on the budget mess in the world’s largest economy. (…)

Some officials at the Tokyo meetings acknowledged that a new round of fear in financial markets could help force action in areas such as the euro zone. “Markets are doing their job,” said IMF chief economist Olivier Blanchard. “They scare policy makers into doing the right things…I’m relatively optimistic that we’ll get there. How we get there, whether it’s completely smooth or not, we’ll have to see.”



China’s Trade Surplus Widens

China’s trade surplus widened in September as exports rose on improved overseas demand and imports recovered slightly, but analysts warned the healthier trade picture may not hold up over the coming months.

(…) Exports were at a record monthly level of $186.4 billion in September, rising a solid 9.9% from a year ago, data from the General Administration of Customs showed Saturday. This was much higher than the 2.7% rise in August (…). Imports were up 2.4%, compared with a 2.6% fall in August (…).

Exports to the U.S. have held up fairly well this year, showing a 9.6% year-on-year gain in the January-September period. But exports to the EU have struggled, falling 5.6% over the same period (…).

Exports climbed to a record last month, with sales to the U.S. increasing at the fastest pace in three months. Shipments to Japan rose for the first time since June and those to Southeast Asian nations jumped 25.5 percent. The gains helped counter a 10.7 percent drop in exports to the European Union.

High five  Before getting too excited on China:

  • Beware of Chinese data.
  • Chinese exporters fear grim outlook
  • On the ground in China the situation looks grimmer than the data reflects. Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

  • Alarm bells jingle over Xmas exports

The traditional export powerhouses in eastern China say many European companies are not buying Christmas products, and those that do put in an order are buying less, or asking for much lower prices – sometimes even lower than the production cost.

  •   ISI’s weekly China Sales Survey broke below 40 and is not far from the 2009 low of 36.1.


  • The generally more reliable electricity stats continue to show weakness:

Statistics from the National Energy Administration showed that in the first eight months, China’s total electricity consumption grew 5.1 percent year-on-year to 3.28 trillion kWh, further easing from the 5.4-percent growth seen in the first seven months.

  • World economies remain weak:

Just 10 of the 30 countries covered by manufacturing PMIs saw an improvement in business conditions in September, and in three of those 10 the increase was only marginal. The remaining seven which saw growth were either north American or non-Asian emerging markets, with a notable exception of India. The bottom of the PMI league table was again dominated by Eurozone and Asia-Pacific countries. (Markit)




image                (Chart from Schwab Market Perspective: Teetering on the edge?)


China’s central bank governor, Zhou Xiaochuan, cast doubts about any fresh monetary stimulus Sunday by saying in a central-bank publication that global policy makers should be vigilantly focused on fending off inflationary risks. (WSJ)

China Inflation Eases

The consumer price index rose 1.9% in September from the same month a year earlier, slower than a 2.0% on-year gain in August, data from the National Bureau of Statistics showed Monday. In sequential terms, the CPI increased 0.3% in September from August, when it rose 0.6% from July.


Food prices, which account for nearly one-third of the weighting in the calculation of China’s CPI, rose 2.5% YoY last month. This was down from the 3.4% YoY increase in August.

(…) the producer price index fell 3.6% in September from the same month a year earlier, after a 3.5% on-year decline in August. The PPI declined 0.1% in September from August, when it fell 0.5% from July.

India’s Inflation Accelerates to 10-Month High

The wholesale-price index rose 7.81 percent from a year earlier, after climbing 7.55 percent in August, the Commerce Ministry said in a statement in New Delhi today.

Fuel prices advanced 11.9 percent in September from a year earlier, today’s report showed. Non-food manufactured goods prices, a measure of core inflation, rose 5.57 percent compared with 5.58 percent in August, calculations by Bloomberg showed.

Auto  Volvo Halts Production at Sweden Plant

Volvo Car Corp. Monday said it would halt production for a week from Oct. 29 at its plant in Torslanda, Sweden, in the latest response to shrinking demand from an auto maker.

“The recession in Europe is deepening and that impacts customers’ willingness to buy new cars,” said Volvo spokesman Per-Ake Froberg. “Therefore we have to continue to adjust production.” (…)

Volvo last month said it would decelerate production at Torslanda, citing the weakness in China. Since Oct. 1, the plant has made 50 cars an hour, having previously produced 57 an hour. The temporary shutdown at the end of this month will further reduce Volvo’s production by about 3,000 cars, representing 0.7% of its total sales in 2011.

The company has also reduced production at its plant in Ghent, Belgium, where it made most of its 449,000 cars last year, and Mr. Froberg said further reductions there are possible.

Tata Motors Global Sales Fall

Tata Motors Ltd. Monday said its global vehicle sales for September fell 4% from a year earlier to 103,656 units, hit by lower volume in the passenger-car segment.

India’s biggest auto maker by sales said its U.K.-based luxury-car unit, Jaguar Land Rover PLC, sold 4% fewer vehicles at 26,461 units. Total passenger-car sales dropped 11% to 48,895 vehicles.

Poland pledges to boost spending  Prime minister warns of difficult year ahead

Poland will fight the economic slowdown by boosting investment spending, Donald Tusk, the Polish premier, promised in a speech to parliament on Friday, breaking with the government’s traditional emphasis on fiscal consolidation.

Money, politics and fear: What the BAE-EADS fiasco says about Europe

(…) Blame the political agenda in Paris, Berlin and London. The rights and independence of the executives and the shareholders were quickly buried under an avalanche of fears that the head office would be in the wrong country; there would be too much state control, or too little; jobs would disappear in one country and pop up in another; and industrial decision-making left entirely in the hands of management and owners risked damaging national agendas and the preservation of national corporate champions.

And so on. The whole affair descended into what’s-in-it-for-me political bedlam.

Now you know why it’s taking so long to fix the euro crisis. (…)


My friend Hubert Marleau at Palos Management Inc. explains why dividend paying stocks keep outperforming.

(…) What is going on? Three Institutional reports may have the answer. These are Black Rock, Columbia Management and Eagle Asset Management.

Firstly, they argue that the demographic shifts to a new generation of retirees are not fully understood by the population at large. A world retirement boom is underway; the number of people aged 60 and older will triple to 2 billion in 2050 from 780 million in 2009. Eighty million Americans will reach retirement age in the next 20 years.

Secondly, quality driven companies that offer both dividends and growth are the few securities that can fill the bill. The dividend payout ratio of the S&P 500 is about 28%. This is far away from the normal range of 40 to 60 percent. Moreover, corporate cash levels are high making it possible for cash flow driven companies to pay more dividends. For example, S&P 500 index companies’ cash as a percentage of market value is very near the historical record level of 13%.

Thirdly, institutional investors have more clout than retail ones and a growing number of them are pushing for favorable dividend actions from companies that can afford to do so.

Goat Schumer to Tax Reform: Drop Dead

A Senate Democratic leader lays down a partisan 2013 marker.

Mr. Schumer says the only way to reform is to broaden the tax base and raise tax rates.