NEW$ & VIEW$ (5 NOVEMBER 2013)

WEAK HALLOWEEN SALES

Weekly sales declined 0.6% last week, and the 4-week m.a. is down for the 12th consecutive week (+1.6% YoY).

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Nobody should be surprised as BloombergBriefs explains:

(…) the pace of per capita disposable personal income was 2 percent for the 12 months ended in August. This equates to a 1.8 percent increase in GAFO retail sales, which represents sales at stores that sell merchandise traditionally sold in department stores.

Credit conditions are similarly poor and indicative of a consumer reluctant to spend. During August, the pace of revolving credit (credit cards) contracted at an annualized 1.2 percent — the third consecutive monthly drop.

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TAPER WATCH

Three Fed Policy Voters Signal Prolonged Easing to Stoke Growth

“Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said yesterday in a speech in San Francisco. Boston Fed President Eric Rosengren backed further easing to “achieve full employment within a reasonable forecast horizon,” while James Bullard of the St. Louis Fed said in an interview on CNBC he wants the Fed to “meet our goals,” singling out inflation.

And now this: Fed’s Bullard: Need to see “tangible evidence” inflation moving back towards 2% before Taper
Is the Fed getting worried about deflation?

SAME SURVEY DATA, SEVERAL ACCOUNTS:

Domestic banks are making loans more readily available, easing lending policies to businesses as competition stiffens and relaxing standards on mortgages as demand for home loans cools, a Federal Reserve survey shows.

“Banks eased their lending policies for commercial and industrial loans” as well as standards on prime residential mortgage loans in the third quarter, the central bank said in its survey of senior loan officers released today in Washington. The share of banks relaxing mortgage standards was described as “modest.”

Banks reported “on net, weaker demand for prime and nontraditional mortgage loans” while demand for business loans “experienced little change,” according to the report. For other types of lending to consumers, banks “did not substantially change standards or terms.”

(…) Nearly 80% of banks said their credit standards for mortgages remained basically unchanged from July through September, according to a quarterly Fed survey of bank loan officers released Monday. Only about 15% of banks said their standards for mortgages have eased somewhat. (…)

More than 40% of banks said they saw a lower volume of mortgage applications since the spring, prior to the increase in mortgage rates. About a third of banks said demand was about the same or stronger.

(…) “Very few banks” reduced fees, lowered the minimum required down payments or accepted borrowers with lower credit scores, the report said. Several banks also reduced staff allocated to processing mortgage applications. (…)

Separately, very few banks said they have changed lending standards for approving credit cards or auto loans. Only about a quarter of banks saw stronger demand for auto loans since the spring.

But increased competition has driven some banks to loosen their commercial and industrial lending standards, the report said. Banks said they have experienced little change in demand for those loans.

  • Easing Loan Standards No Match for Higher Rates  (BMO)

More U.S. banks eased lending standards in Q3 but higher mortgage rates still resulted in weaker demand for residential mortgages. This could point a further slowing in home sales in the fourth quarter

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However,  banks are loosening standards for commercial real estate loans and demand is rising (charts via CalculatedRisk)

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EU Lowers Euro-Area Growth Outlook as Debt Crisis Lingers

Gross domestic product in the 17-nation currency bloc will rise by 1.1 percent in 2014, less than the 1.2 percent forecast in May, the Brussels-based European Commission said today. Unemployment, now at its highest rate since the euro was introduced, will be 12.2 percent in 2014, higher than the 12.1 percent predicted six months ago. (…)

Next year’s projected return to growth will come after the euro-area economy contracts an estimated 0.4 percent in 2013, the commission said in today’s report. That follows a decline in GDP of 0.7 percent in 2012, the first time output has fallen in two consecutive years since the introduction of Europe’s single currency in 1999.

Signs of a fragile recovery in 2014 disguise a north-south divide in the euro area, in which the economies of Germany, Belgium, Estonia and Ireland are predicted to gain momentum next year, while Spain, Greece, Italy and Portugal are projected to experience much weaker growth rates. The exceptions are Finland and the Netherlands, whose growth figures now lag behind their northern neighbors.

Italy’s finance minister warns on euro
ECB urged to ease monetary policy

Italy’s finance minister has warned of the risks of a strengthening euro to Europe’s fragile recovery, urging the European Central Bank to ease monetary policy to help the continent’s small and medium enterprises.

 

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Li Says China Needs 7.2% Expansion to Maintain Job Growth

Expansion at that pace would create 10 million jobs a year to maintain the urban registered jobless rate at about 4 percent, Li said in an Oct. 21 speech to the All-China Federation of Trade Unions published yesterday on its website. China’s growth has entered a stage of medium-to-high speed, meaning about 7.5 percent or above 7 percent, Li said.

Kellogg to Cut 7% of Workforce by 2017

Kellogg Co. said Monday that it will cut about 2,000 jobs, or 7% of its global workforce, over the next four years as part of a billion-dollar cost-cutting plan.

“We do see weaker top-line growth than we expected as some of our categories remain challenging,” Chief Executive John Bryant said in an interview, citing cereal in the U.S. as one of those segments.

 

NEW$ & VIEW$ (18 OCTOBER 2013)

PHILLY FED SURVEY POSITIVE

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from 22.3 in September to 19.8 this month. The index has now been positive for five consecutive months. The percentage of firms reporting increased activity this month (36 percent) was greater than the percentage reporting decreased activity (16 percent).

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The demand for manufactured goods, as measured by the current new orders index, increased 6 points, to 27.5, its highest reading since March 2011. Shipments continued to expand: The index fell 1 point to 20.4, following a 22 point increase last month. The diffusion indexes for inventories, delivery times, and unfilled orders were all positive and higher than last month.

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Labor market indicators showed improvement this month. The current employment index increased 5 points, to 15.4, its highest reading since May 2011. The percentage of firms reporting increases in employment
(23 percent) exceeded the percentage reporting decreases (8 percent).

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With respect to prices received for manufactured goods, 21 percent of firms reported higher prices, and 7 percent reported lower prices. The prices received index increased 2 points, to 14.2.

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HOME BUILDERS SENTIMENT WEAKENS

Wednesday’s release of the NAHB sentiment survey showed that sentiment among homebuilders unexpectedly fell from a revised reading of 57 down to 55. (Bespoke)

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Growth Picks Up in China

China’s growth accelerated in the third quarter, putting to rest for now fears that the world’s No. 2 economy was headed for a sharp slowdown that would rattle world markets.

China’s gross domestic product grew 7.8% from a year earlier, according to data from the National Bureau of Statistics released Friday. That compares with 7.7% in the first quarter and 7.5% in the second. It also matched the median forecast of 18 economists surveyed by The Wall Street Journal.

On a quarter-to-quarter basis, growth rose by 2.2%, suggesting an annualized rate of growth of 9.1%.

China grew at 7.7% year-over-year over the first three quarters of 2013, making it likely that the economy would top the country’s annual growth target of 7.5%.

The FT warns:

But in a sign the rebound may not be sustained in the coming quarters, a raft of monthly data released on Friday by China’s National Statistics Bureau showed growth in industrial activity, retail sales and fixed asset investment slowed slightly in September compared with previous months.

Industrial production in September increased 10.2 per cent from a year earlier, down from a 10.4 per cent rise in August, while fixed asset investment and retail sales both decelerated slightly to grow 20.2 per cent and 13.3 per cent respectively.

Other data from last month, including the closely watched purchasing manager’s index, electricity consumption and exports all disappointed, with exports contracting 0.3 per cent from a year earlier, compared with 6 per cent average growth in the preceding two months.

Consumption accounted for 46% of growth in the first nine months, compared with 56% for investment. Exports subtracted 1.7% from growth.

But CLSA’s Andy Rothman is upbeat:

China remains the world’s best consumer story, with retail, new home and car sales healthy and inflation modest.  Restructuring is well under way, with private firms, not SOEs, driving growth in investment, employment and profits, and with, for the first time, the tertiary sector overtaking secondary as the largest share of GDP.  The government has taken a proactive approach to the trust sector, and overall credit growth continues to cool a bit – – not so much tightening as an effort to normalize credit growth and improve its quality.

We all need to stop obsessing over the GDP growth numbers; Chinese consumers and corporates don’t care about them, and even Party leaders are paying less attention.  We also need to put more emphasis on the base.  For example, if real GDP growth is 7.7% this year, that is a lot slower than 10% a decade ago.  But the economy is 3 times larger than it was back then, so even with a slower growth rate, the incremental increase in GDP is almost 200% bigger this year.

More significantly, for the first time, the tertiary sector (which includes services, retail sales and real estate) now accounts for a slightly larger share of China’s economy (45.5%) than the secondary sector (45.3%) – – clear evidence of rebalancing.  The tertiary sector remains very healthy, growing by 8.4% YoY YTD  (8.1% last year) and outpacing secondary sector (industry and construction) growth, which was 7.8% for the first 3Q (7.9% last year). (…)

More importantly, investment by privately-owned firms has risen at a faster pace than total FAI and investment by SOEs in each of the last 15 months, and in every month except one since March 2010.  Private sector investment rose 22.1% YoY in September, while SOE investment slowed to 14.9%, the slowest pace all year, and further evidence of the absence of a government stimulus.  (Moreover, fiscal spending is up 8.8% YTD, down from 21.1% during the first nine months of last year.) (…)

Real urban income rose 6.8% YoY YTD, up a bit from 6.5% in 1H but down from 9.8% in the first three quarters of last year.  Real rural income followed a similar path, rising 9.6% in the first nine months after 9.2% in 1H and 12.3% in the first three quarters of last year.  We also note that household debt is very low, and is primarily mortgages (with a minimum of 30% down) for primary residences.

It is also important to recognize that, unlike in many developed countries, wages continue to rise rapidly for China’s low-income workers.  Wages for the migrant workers who hold the majority of manufacturing and construction jobs in Chinese cities are up 13% this year.  In our view, strong income growth at the lower end of the pay scale, along with rising government spending on health care and education, is far more important than the wide gulf between rich and poor.

Global Growth Expectations: Too Pessimistic

Bloomberg consensus expectations for real GDP growth next year in the U.S. and in the other major economies have dipped to just 2.6 and 3%, respectively. This represents only a mild acceleration in growth relative to 2013 and is too pessimistic in our view.

global growth expectations

In a recent research piece we highlighted that a global resynchronization in growth is underway: the easing in fiscal drag next year alone will add 0.6 percentage points to growth for the G7, including more than 1.5% in the U.S., according to the latest IMF projection. Moreover, the recent break-out in business confidence shows that ‘animal spirits’ are gradually returning to boardrooms around the world, albeit from depressed levels. From the Tankan survey, to the IFO, to the regional Fed surveys, capital spending plans are being revised up.

And see below on M&A activity.

TAPER WATCH

  • October Unlikely for Fed Tapering The Fed is unlikely to start curtailing its bond buying at its next policy meeting Oct. 29-30, given the uncertainty left by the government shutdown. Officials could act at one of the following two meetings—Dec. 17-18 or Jan. 28-29—but that, too, is uncertain.

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It will be some weeks yet before all of the economic data releases that were postponed during the government shutdown are published. As the shutdown will have severely delayed the collection process for this month, some of October’s reports may not come out until late November. That means the Fed will remain in the dark for a bit longer yet. (…)

Overall, the Fed may not have a complete picture of the economy when it meets on 29th/30th October. And although the statistical agencies will probably have caught up by the Fed meeting scheduled for 17th/18th December, by then the greater uncertainty may come from the respective budget and debt ceiling deadlines of 15th January and 7th February.

Clock  Data release schedules:

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BofA Sees Strong M&A Pipeline Building

“As we head into the last quarter of the year, the [M&A] pipeline looks quite strong,” said Bruce Thompson, BofA’s chief financial officer, in a post-earnings conference call with analysts.

Moody’s concurs:

M&A’s Exceptionally Low Relative to Record High Market Value of US Common Stock

The current pace of mergers and acquisitions (M&A) lags far behind what otherwise might be inferred from the record high market value of US common stock. By way of statistical inference, the value of acquisitions involving US businesses could rise by 40% from its recent yearlong pace if the equity prices merely hold steady. Cheap corporate debt might soon help to fund a sharp upturn by acquisitions provided that potential buyers do not view too many business assets as being dangerously overvalued.

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NEW$ & VIEW$ (14 OCTOBER 2013)

Democrats in Senate Press New Front in Budget Battle

Lawmakers attempting to avoid a debt default remained at loggerheads and escalated the standoff by reopening the contentious issue of automatic spending cuts.

Capitol Hill at sea(…) Democrats made plain that one of their top priorities was to diminish the next round of across-the-board spending cuts, known as the sequester, due to take effect early next year.

Many Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), oppose retreating from those cuts. That set up a clash that seemed almost as intense as the one that caused budget talks between House Republicans and President Barack Obama to collapse Friday.

“Total federal spending has now gone down for two years in a row—the first time that’s happened since the Korean War,” Mr. McConnell said Sunday. With the additional sequestration cuts on tap for 2014, the budget limits have produced “the most significant spending reduction in modern history and Senate Republicans will not accept anything that undoes these cuts.” (…)

Confused smile  Lawmakers said they would watch Monday’s opening of financial markets to see whether investors, already jittery, show greater concern. That, in turn, could affect the climate for further negotiations. Crying face

(…) a possible compromise that sources familiar with Senate budget talks said that Mr. Reid floated to Mr. McConnell on Sunday: Continue spending at current levels until mid-December, set up a mechanism for negotiating over the across-the-board cuts and other budget matters for the rest of the year, and extend the debt limit for about six months. It wasn’t immediately clear what Mr. McConnell’s response was.

Thinking smile  Europe Stocks Slip as Stalemate Drags On

U.S. Stock Futures Fall on Debt Concerns

 

EARNINGS WATCH

In case you forgot, we are entering Q3 earnings season with some 161 companies reporting this week including 70 S&P 500 companies.

Earnings rose an estimated 1.4 percent for Standard & Poor’s 500 Index companies last quarter, trailing gains of 3.8 percent in the previous three months and an average 10 percent over 15 years. Analysts have reduced the quarterly estimate by 75 percent since June, according to data compiled by Bloomberg.

The official S&P estimates are now $26.62 for Q3, down 0.8% from the September 30 estimates. Q4 estimates have been shaved a nickel to $28.83. Here’s Zacks Research’s early read:

Total earnings for the 31 S&P 500 companies that have reported results are up +9.8% with 51.6% beating earnings expectations, while total revenues for these companies are up +1.4% and 45.2% are beating top-line expectations.

This is still early going, but the results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +9.8% earnings growth in Q3 for these companies compares to +18.2% in Q2 and the 4-quarter average of +17.8%, while the +1.4% revenue growth is below Q2 and the 4-quarter’s average of +4.2%. The beat ratios are similarly tracking lower.

The weak comparisons are primarily because of the Finance sector. If we exclude results from the Finance sector, the remaining companies that have reported results are tracking better than what those same companies reported in Q2 and the last few quarters. (…)

Ghost  This good analysis should worry you:

Total earnings growth for the remaining 469 companies is barely in the positive relative to the same period last year (+0.1%) and in the negative excluding the Finance sector (-1.1%). The composite earnings growth rate, combining results from the 31 companies that have reported with the 469 still to come, is +0.9% for the S&P 500. (…)

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.

Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector.

But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $259.5 billion in Q2, surpassing Q1’s $255 billion record. But they are expected to reach $269.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +4.9%.

Pointing up  The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.

Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.

Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

Punch  I suggest you also read “Myths about cash” below.

Eurozone production grows 1%
Data are latest sign of recovery in currency bloc

Industrial production in Germany, Europe’s largest economy, grew 1.8 per cent in August, lifting the entire eurozone, while in France, the second-largest economy, it rose by a much slower 0.2 per cent.

However, the most encouraging news came from Portugal and Greece, two of the countries worst affected by the sovereign debt crisis, which recorded robust growth in industrial production. In Portugal it rose 8.2 per cent while in Greece it increased 1 per cent.

I am more concerned by the facts that France’s IP rose only 0.2% after cratering 2.3% in the four months previous and that Italy’s IP declined 0.3% after falling 1.0% in July and 0.8% in the March-June period. These are two heavyweights.

The reality is that Eurozone IP rose 1.0% in August, offsetting July’s 1.0% decline. During the 4 months to June, IP rose 1.5%, thanks primarily to automobile production as IP of durable consumer goods rose 2.3% between March and June and 0.6% in July-August. A very slow grind (full Eurostat report)

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Here’s the YoY trend:

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Housing Affordability Hits Four-Year Low

Housing affordability hit a four-year low in August amid steady gains in home prices during the spring and higher interest rates during the summer.

(…) At prevailing interest rates in August, the mortgage payment on the median priced home stood at $851, or around 16% of the median U.S. income. By contrast, the equivalent mortgage payment one year earlier, at $683, accounted for 13.3% of the median income. (…)

But the affordability figures show unmistakable evidence of how rising interest rates hurt housing affordability in July and August because median prices didn’t rise in those months, even as the average monthly payment went up due to rising rates. The average monthly payment rose from $787 in June to $851 in August — even though median prices fell slightly from June to August.

Monthly payments last stood above $850 in November 2008, and monthly payments as a share of income last stood at 16% in July 2009.

Mortgage rates have declined modestly since August, which means that the 16% figure could be — for this year, at least—the high watermark for the payment-as-a-share-of-income metric. (…)

Home for Sale, With Freebies Home builders, concerned by flagging sales due to rising prices and higher mortgage rates, have boosted cash incentives and materials upgrades in some markets.

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China’s Exports Shrink

(…) Exports fell 0.3% in September compared with the year-ago period, data from the General Administration of Customs showed Saturday. This was sharply down from August’s 7.2% growth and far below economists’ median forecast of a 5.5% expansion.

The drop in exports was broad-based, with volumes to the European Union, Hong Kong and Taiwan dropping. Exports to many developing economies also fell. (…)

The overinvoicing of exports to disguise capital inflows—which started in the second half of last year and lasted into the first half of this year but has since waned—inflated the base in September 2012, said RBS economist Louis Kuijs, adding that actual export growth for September is estimated at about 1.7% in U.S. dollar terms.

(…) Chen Weiqiang, president of Guangdong Xinyi Underwear Group Co., a garment maker in the southern Chinese city of Foshan, said the slowdown in demand for his products hit last year and hasn’t abated.

“I have no obvious feelings that exports are recovering in the garment industry,” he said. “My company can still get orders, but profits are really pathetic due to rising labor costs, and we have actively cut export volume.” (…)

Compared with a year earlier, China’s exports to Hong Kong slipped 4.1%, while exports to Taiwan decreased 8.6% and exports to the European Union fell by 1.1%. However, exports to the U.S. rose 4.2% and to Japan rose 1.3%. (…)

September imports rose 7.4% compared with a year ago, slightly up from the 7% rise in August and beating economists’ median forecast of a roughly 6.8% increase. (…)

China’s crude-oil imports in September surged to 6.27 million barrels a day, surpassing a previous record set in July of 6.17 million barrels a day. September’s crude imports were up 28% when compared with the corresponding month last year. (…)

China inflation at 7-month high, limits room for easing despite export tumble

China’s annual consumer inflation rate rose to a seven-month high of 3.1 percent in September as poor weather drove up food prices, limiting the scope for the central bank to maneuver to support the economy even as exports showed a surprise decline.

The inflation rate was higher than a median forecast of 2.9 percent in a Reuters poll and August’s 2.6 percent, but was still below the official target of 3.5 percent for 2013.

Month-on-month, consumer prices rose 0.8 percent, the National Bureau of Statistics said, bigger than a rise of 0.5 percent expected by economists.

Food prices gained 1.5 percent in September from August due to droughts and floods in some areas, pushing up the CPI by 0.51 percentage points, Yu Qiumei, a senior statistician at the bureau, said in a statement.

In annual terms, food prices jumped 6.1 percent.

Producer prices fell 1.3 percent from a year earlier, a smaller fall than the 1.4 percent expected by the market and the 1.6 percent drop in August.

However, there was some relief to manufacturers struggling to cope with profit-eating price declines, as producer prices rose 0.2 percent from August.

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Inflation in China: veg now, pork later From Nomura via FT Alphaville:

We see a rising risk of CPI inflation sitting above 3.5% for some months in 2014, as pork prices enter the upswing phase of the cycle, given that the ratio of corn prices to pork prices was below the important level of 6x for most of H1 2013 (Figure 10). Historically, pork prices have exhibited long cycles, with upswings preceded by this ratio dropping below 6x. Concerns over inflation will make monetary policy easing unlikely in 2014, because with the benchmark deposit rate at only 3% there is little room to cut rates.

India’s headline inflation at 7-month high, another rate hike seen
 
Gulf oil production hits record
Region defies fears of impact from US shale revolution

(…) Saudi Arabia, Kuwait, the United Arab Emirates and Qatar set aggregate production records in each of the last three months, according to fresh estimates from the International Energy Agency. In September they accounted for 18 per cent of global demand – a level only matched twice in IEA data stretching back to the 1980s. (…)

As a result Gulf states are capturing more of the fast growing Asian market. India imported 44 per cent of its crude from Saudi Arabia, Kuwait, Qatar and the UAE in July, up from 36 per cent in 2011, while China relies on the countries for a quarter of its imports compared to 21 per cent in 2007.

A rapid return to production among other Opec members, for example through a resolution to Iran’s nuclear standoff with the US, could yet leave the Gulf states exposed to the US shale revolution. And some analysts argue that Opec could yet need to discuss production cuts when its oil ministers next meet in Vienna in December.

The record output has provided a windfall for the oil-dependent monarchies. The 16.4m barrels a day produced by the four states during the third quarter was worth more than $150bn at today’s prices of more than $100 a barrel.

The principal beneficiaries have been Saudi Arabia, which has increased output more than 10 per cent since the start of the year to a record of 10.19m b/d in August, and the UAE where the 2.77m b/d produced in September was a record, and 7 per cent higher than at the start of the year. Kuwait has also set a series of production records this year, but Qatar has been unable to raise production significantly.

It also means the region remains crucial to the world’s major powers. The US continues to import almost 60m barrels a month from the Gulf, a number that has actually increased in the last three years even as US imports overall have fallen.

The WSJ digs deeper:

Increasing oil output in the U.S. and Canada are already redirecting global oil flows, but those being hit the hardest are West Africa’s crude-oil producers and the refineries of Western Europe that are suddenly competing with cheap North American products.

The four Gulf kingdoms that dominate OPEC have actually increased their exports to the U.S. over the past three years, the Financial Times reports, taking advantage of Nigeria’s fragile infrastructure and Libya’s political chaos.

Instead, the rise of Asia as a consuming region is having just as big a sway on the flows of money, products and political capital. (…)

A report from the Asian Development Bank anticipates that oil-deficient Asia will have to increase net imports of crude and refined products by more than 10 million barrels a day by 2035, The Wall Street Journal’s Simon Hall reports.

The ADB’s forecast echoes that of the International Energy Agency, which forecasts Southeast Asia’s oil imports will more than double by 2035. This is a region that excludes China, which is just beginning what should be a lengthy stay at the top of the list of the world’s crude-oil importers. (…)

This great shift brings with it new factors—logistical, political and financial—for the oil markets to consider.

Singapore will become a sweet spot for the new trade flows, with the Malacca and Singapore straits joining the Strait of Hormuz as the oil market’s narrow waterways of note, the Journal’s Eric Yep writes. The New York Times pinpoints Fujairah, in the United Arab Emirates, as a products hub to rival Singapore and Rotterdam.

Economically, surging crude-oil imports will put strain on the Asian economies.

The IEA says that spending on net oil imports for the whole region is expected to reach $240 billion, from $77 billion today, and that the $51 billion the region currently spends each year on annual fossil-fuel subsidies should be reorganized to discourage wasteful consumption. (…)

Nerd smile  MYTHS ABOUT CAPEX

Conventional wisdom says that corporate America is flush with cash which it refuses to invest. Sometimes, aggregated data can be misleading. Factset just published an analysis of S&P 500 companies which reveals the true picture:

Cash & short-term investment balances (“cash”) in the S&P 500 (ex-Financials) rose by 13.5% year-over-year and settled at a balance of $1.27 trillion at the end of Q2 2013. The elevated growth in cash partially resulted from 13.3% growth in free cash flows (operating cash flows less capital expenditures) and continued net debt issuance. The $39.4 billion in cash flows represented the twelfth consecutive quarter of cash inflows from net debt issuance.

Index-level, fixed capital expenditures increased by 4.1% in Q2. This marks the second consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Though seven of the nine sectors under consideration increased year-over-year CapEx spending in Q2, the Energy sector, which represented a third of all spending, reduced CapEx by 0.1% for the second consecutive quarter. Chesapeake Energy’s prior divestments and strategic shift were again the primary reason for the decline—the company’s move to bring spending in line with cash flow continues to be compared against periods of higher investment. In addition, Hess Corp. and Occidental Petroleum also reduced capital expenditures. Hess cited the need for a balance with cash inflows, while Occidental Petroleum cited a need for cost reductions. Hess should also experience reduced capital spending expectations following its close of the multi-billion dollar divestiture of Samara-Nafta ZAO and its Russian oilfield properties in Q2.

S&P 500 companies have thus been growing capex at an 18.5% annual rate for 18 consecutive quarters until a few oil companies decided, because of their own particular situation, to strategically reduce their capex. In spite of this:

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 7.5% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit an 11% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales are in-line with the ten-year average.

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Low capex at the national level may thus have more to do with smaller businesses as this NFIB chart suggests:image

Nerd smile  MYTHS ABOUT CASH

S&P 500 (ex-Financials) cash and marketable securities balances grew 13.5% year-over-year to a balance of $1.27 trillion at the end Q2. In particular, the growth of 15.4% in the Information Technology sector was most significant due to the sector’s enormous cash weight in the
overall index (36.7%). The sequential growth rate for the aggregate cash balance was 3.3%.

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However, 10 companies account for 37% of the cash pile which they have grown 20% in the past year. The remaining 490 companies’ cash grew 10% YoY. Furthermore, only 4 of the S&P’s 9 main sectors had positive free cash flow growth in Q2.

Shareholder distributions in the form of dividends and the repurchase of stock ($164.3 billion) increased 22.3% year-over-year and 23.5% sequentially. On the other hand, Cash inflows from debt issuance were positive ($39.4 billion) for the twelfth straight quarter.

As this next chart shows, average net debt has increased over the last 10 years and all sectors but one currently have higher debt levels than their 10-year average.

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This confirms Moody’s findings shown in my N&V post of October 7: corporate America is getting more leveraged, not cash rich as some aggregated stats make us believe.

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Ghost  The capex and cash myths having been debunked, we can now more objectively assess how the economy would fare in the event of rising interest rates. Capex would slow even more and corporate profits would feel the adverse effect of leverage. And even though the Fed controls short-term rates, it has little control on longer-term market rates it found out in recent months.

 

NEW$ & VIEW$ (10 OCTOBER 2013)

U.S. Mortgage Applications Show Little Bounce

The Mortgage Bankers Association reported that the total mortgage market index improved by 1.3% (-54.7% y/y) last week following their slight down-tick during the prior week. Applications to refinance an existing loan led the gain with a 2.5% increase, but remained down by two-thirds versus last year. Homepurchase mortgage applications slipped 0.7% (-5.6% y/y) and were 14.7% below the early-May peak.

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German industrial production growth adds to signs of third quarter economic expansion

Looking at the three months to August, which avoids some of the volatility in the monthly data, industrial production increased 1.4% on the previous three month period, with manufacturing up 0.9% and
construction posting a healthy gain of 3.8% over the same period. While the gains in total industrial production and manufacturing output fell slightly short of the 1.5% and 1.2% respective increases seen in the
second quarter, the upturn in construction in the three months to August was the largest since May 2011.

The industrial production data follow factory orders numbers, which showed a 0.3% drop in orders in August following a 1.9% decline in July. However, orders were nevertheless still 2.1% higher in the latest three months compared with the prior three months,which is the second- strongest quarterly rate of expansion since early 2011.

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  • France’s IP rose 0.2% MoM in August (+0.6% consensus). Manufacturing production +0.3%.
  • Italian IP decreased 0.3% in August following a 1.0% drop.

Lightning Greek Deflationary Pressures Push Nation Further Into Insolvency, Increased Funding Needs

Deflation in Greece is pushing the country further into a state of insolvency.

The embattled nation has slid into deflation. The headline consumer price
index declined 1 percent year over year in September. The core reading fell 2.7 percent year over year in August. The gross domestic product deflator dropped 2.3 percent year over year during the first quarter of 2013. (BloombergBriefs)

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Li Sees China Growth Topping 7.5% in First Nine Months

(…) China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent. (…)

IMF fears $2.3tn bond losses from taper
Fund issues warning in global financial situation assessment

(…) If the Federal Reserve’s likely move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt raise long-term interest rates by 1 percentage point, the IMF’s Global Financial Stability Report (GFSR) estimates that the market losses on bond portfolios could reach $2.3tn.

Brazil raises rate for fifth time since April
Central bank move brings Selic rate close to double digits

(…) Brazil’s central bank raised its benchmark interest rate for the fifth time in a row on Wednesday night, bringing it close to double digits and raising questions about how much longer the tightening cycle has left to run.

The bank increased the Selic rate by 50 basis points to 9.5 per cent amid debate about whether it plans to continue the cycle at the next meeting in six weeks’ time, which would bring the rates to the politically sensitive 10 per cent level.

The monetary policy committee “evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year”, it said, repeating the brief statement issued at its last meeting in August.

The bank has been keen to underline the credibility of its inflation-targeting regime after perceptions of political interference earlier in the year.

(…) analysts said use of the same language in the terse statement that accompanies the monetary policy committee meeting decisions indicated that the bank would be likely to tighten by another 50 basis points in November. (…)

Inflation in September of items whose prices are freely determined by the market has been moderating but remained high at 7.4 per cent year on year, while inflation on items controlled by the government was declining and running at an “unsustainably” low 1.1 per cent.

Supply of copper set to outstrip demand Miners and traders expect lower prices

(…) The expectation of a shift into surplus in the copper market was echoed by many of the traders, analysts and hedge fund managers assembled in London for LME Week, the largest annual gathering of the metals and mining industry. For the first time since 2008, investors polled by Macquarie did not pick copper as their favourite metal for next year.

However, few expect a collapse in prices, as a recovering global economy lifts copper demand. “The surplus we are forecasting is very modest,” Mr Keller of Codelco said, predicting a “really marginal” oversupply of 300,000-400,000 tonnes, compared to annual consumption of more than 20m tonnes. (…)

INTERNATIONAL EQUITY VALUATIONS

James Y., a reader, asked if I have ever applied the Rule of 20 to other major indices. I don’t have data for other markets. Here’s how Société Générale, which does good work on valuation, looks at many world markets based on the P/BV vs ROE relationships (via Advisor Analyst).

The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.

This is a snapshot which provides little historical info. SoGen also shows this interesting chart on U.S. non-financial ROE since 1980 which suggest a cyclical peak is nearby.

Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.

Hmmm…

Chinese Think Tank Puts Shadow Banking at 40% of GDP As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago.

(…) The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.

But the calculation is conservative compared with those done by international research houses. Fitch Ratings estimated earlier this year that China’s total credit including various forms of shadow-banking lending may have reached 198% of the country’s GDP, while J.P. Morgan estimates have put it at as much as 69% of GDP, or 36 trillion yuan. (…)

Based on available data from regulators, the academy’s report said shadow-banking activities involving wealth-management products and trusts stood at 14.6 trillion yuan by the end of last year, equivalent to 29% of the country’s GDP. (…)

The growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy, the think tank warned.

American Execs Say China is Getting Expensive, and Profitable Of all the challenges facing U.S. companies in China, costs top the list of concerns, with the majority saying they expect to give out hefty pay rises in the coming year

A survey of U.S. executives in China finds that, of all the challenges facing U.S. companies on the mainland, costs are at the top of their list of concerns

The cost of labor particularly has been rocketing in China, by double digits for many businesses the last few years. That’s prompted some U.S. manufacturing to leave China for other shores – including the U.S. and Mexico.

US-China Business Council

More than 90% of respondents said their China business is profitable, the highest level since the survey was started.

Overall, though, sentiment hasn’t changed much from the “tempered optimism” of recent years. Companies say that a range of longstanding problems – such as delays in licensing and other market barriers – generally have not improved.

Mobile Ad Spending Rises Sharply

Marketers are finally convinced that there’s money to be made advertising to the legions of consumers glued to their smartphones and tablets: Spending on mobile ads more than doubled in the first half of the year.

(…) Mobile-ad spending in the U.S. totaled $3 billion in the first half, up from $1.2 billion a year earlier, the Interactive Advertising Bureau estimates.

Adults in the U.S. are expected to spend an average of two hours and 21 minutes a day on smartphones and tablets this year, excluding time spent talking on phones, according to a recent study by eMarketer. In 2010, adults spent only 24 minutes on mobile devices, not counting talk time. (…)

Google is expected to capture 46.8% share of the U.S. mobile ad market this year, estimates eMarketer, thanks largely to Web searches conducted on mobile devices.

Facebook, too, is benefiting. After initially lagging behind in mobile, the Menlo Park, Calif., company has worked to bolster its mobile-ad products, an effort that is now bearing fruit.

Mobile accounted for 41% of its advertising sales in the second quarter, Facebook said. Facebook will have about 14.9% of the mobile ad market this year, eMarketer estimates.

Unilever said that 50% of its spending on Facebook goes to the social-network’s mobile products. (…)

Mobile’s share of total online ad spending in the U.S. more than doubled to 15% during the half, the IAB said. Overall U.S. online ad spending rose 18% to $20.1 billion during the period.

Spending on search and display ads continue to account for the bulk of the overall sector but their share of the total declined in favor of mobile advertising.

Spending on TV ads in the U.S. will increase 2.8% to $66.35 billion this year, eMarketer predicts. (…)

[image]Sad smile  Canadian Mogul Paul Desmarais Dead at 86 One of Canada’s wealthiest and most powerful businessmen, Paul Desmarais built a corporate empire by engineering a reverse takeover of Power Corp. of Canada and refocusing the company on financial services.

 

NEW$ & VIEW$ (3 OCTOBER 2013)

U.S. Showdown Bites Manufacturers Layoffs and Production Disruptions Loom at Firms Tied to U.S. Federal Government Shutdown Hits Military Contractors, Suppliers

The partial shutdown of the federal government is leading to layoffs and production disruptions at defense contractors and some manufacturing companies.

Retailers Weigh Into U.S. Shutdown Debate

The National Retail Federation, an industry trade group, came out with its annual holiday forecast Thursday, predicting sales will grow by a middling 3.9% from the year before to $602.1 billion. Early forecasts are sometimes off the mark, and the industry group warned the results could be worse if Washington doesn’t resolve debates over the budget and raising the debt ceiling.

Holiday sales rose by 3.5% in 2012, falling short of NRF’s initial forecast of 4.1% growth.

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 Fingers crossed Price of Gasoline Drops For 30th Straight Day

 

 

U.S. planned layoffs fall 20 pct in September: Challenger

Employers announced 40,289 layoffs last month, down from 50,462 in August, according to the report from consultants Challenger, Gray & Christmas, Inc.

High five  Still, the September job cuts were up 19 percent from the same month last year. For 2013 so far, employers have announced 387,384 losses, close to the 386,000 seen in the first nine months of last year.

The healthcare sector saw the biggest layoffs, with plans to cut 8,128 employees as health companies faced lower government payments, up from 3,163 in August.

The financial sector saw the next largest number of planned job cuts, with 6,932 in September compared with 3,096 a month earlier.

 China Services Index Increases in Sign of Sustained Rebound

The non-manufacturing purchasing managers’ index rose to 55.4 in September from 53.9 in August, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said today.

The federation said a gauge of new orders jumped, retail spending grew strongly and a logistics industry index rose.

 Italy’s Letta Survives but Battle Looms

Italian Prime Minister Enrico Letta won the fight to keep his government alive Wednesday. But the bigger battle will be to revive a sclerotic economy that is emerging as a major threat to the euro-zone recovery.

After days of political chaos, Mr. Letta won confidence votes in both houses of parliament when conservative leader Silvio Berlusconi at the last minute abandoned his bid to topple the government. But the near-death of the coalition, just five months after its formation, illustrates the challenges of pursuing an ambitious economic overhaul amid a fragmented and quarrelsome political scene. (…)

“The Italian political system is preoccupied with itself, it has no time for the country,” says a senior European policy maker. (…)

But don’t worry, Mario Draghi will do “whatever it takes” whatever mess they make!

The stakes are high. Italy’s sheer size, dysfunctional politics and faltering economy are a bigger headache for Europe’s crisis managers than even Greece, which represents only 2% of the euro-zone economy, compared with Italy’s 16%.

And the country’s €2 trillion ($2.7 trillion) public debt makes it too big for Europe’s bailout funds to rescue, should Italy ever lose access to bond markets. (…)

Italian GDP is now 9% smaller than at its precrisis peak in late 2007—a worse performance than Spain or Portugal, and second only to Greece for lost economic output.

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Large chunks of Italy’s manufacturing base—the second-largest in Europe after Germany—are in distress. Many of Italy’s signature industries, such as steel, white-goods manufacturing and textiles, are in deep distress. (…)

Italian labor costs today are 30% higher than in Spain, while productivity is 6% lower. So car companies such as Renault and Ford are moving production to Spain. In Greece, costs have fallen so sharply that Unilever has begun producing a new line of low-cost products there for the Greek market. (…)

Over the last five years, Italy attracted an average of just $12 billion of foreign investment a year, compared with $37 billion for France and $66 billion for the U.K.

Euro-Zone Retail Sales Rise

The European Union’s official statistics agency Thursday said sales volumes rose by 0.7% from July, although they were still 0.3% lower than in August 2012.

The figures for July were also revised higher, with Eurostat now estimating that sales volumes rose by 0.5%, having previously calculated they increased by 0.1%.

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High five  The details are not as positive. Core sales volume rose 0.6% MoM in August after dropping 0.1% and 0.8% in the previous two months, leaving core volume down 0.3% between June and August, much weaker than during the March-May period when core sales rose 1.1%. image

To repeat Markit’s Eurozone Retail PMI for September:

Retail PMI® data from Markit showed a renewed decline in eurozone retail sales in September. The Markit Eurozone Retail PMI eased below neutrality to 48.6, having signalled the first increase in sales in nearly two years in August.

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Malls Are Recovering From the Downturn

Large enclosed malls are recovering from the downturn faster than strip shopping centers, a sign that malls are being hurt less by online retailing.

The vacancy rate of U.S. malls in the third quarter declined to 8.2% from 8.3% in the second quarter, according to new statistics released by Reis Inc., a real-estate data firm. Mall vacancy was 8.7% in the third quarter of 2012, said Reis, which tracks the top 77 markets in the U.S.

But the improvement hasn’t been as strong with shopping centers—typically open-air retail strips that face parking lots. The average national vacancy rate for neighborhood and community shopping centers held steady in the third quarter at 10.5% from the previous quarter, down from 10.8% in the third quarter of last year.

The national average asking rent at shopping centers was $19.25 per square foot, up just 1.5% from the recession low of $18.97 in 2011. The average asking rent for malls in the largest 77 U.S. markets rose to $39.77 per square foot in the third quarter, up 1.4% from the same quarter last year, according to Reis Inc.

(…) Mall vacancy rates are now falling partly because there has been little to no new mall development since 2006, Mr. Calanog said. (…)

Reis: Office Vacancy Rate declines slightly in Q3 to 16.9%

Reis reported that the office vacancy rate declined to 16.9% in Q3 from 17.0% in Q2.  This is down from 17.2% in Q3 2012, and down from the cycle peak of 17.6%.
From Reis Senior Economist Ryan Severino:

Vacancies declined by 10 basis points during the third quarter to 16.9%. This is a marginal improvement after last quarter when the vacancy rate did not change. However, since the market began to recover in mid‐2011, the vacancy rate has been unable to decline by more than 10 basis points in any given quarter. While this is technically an improvement versus last quarter, it is nonetheless a weak result. On a year‐over‐year basis, the vacancy rate fell by just 30 basis points, in line with last quarter’s year‐over‐year decline.

On new construction:

Occupied stock increased by 6.652 million SF in the third quarter. … On the construction side, this quarter 4.099 million SF were completed, down from last quarter’s mini‐spike of 8.049 million SF. While last quarter’s bump in construction activity appears to be an aberration, construction activity for office has been slowly if inconsistently trending upward. Year‐to‐date, the market has developed 15.161 million SF. This is almost double the 8.820 million SF that were constructed through the third quarter of last year.

On rents:

Asking and effective rents both grew by 0.3% during the third quarter. This marks the third consecutive quarter in a row with slowing asking and effective rent growth. Though in reality, rental growth rates are so low that the quarter‐to‐quarter differences are rather minor and could simply be idiosyncratic. Nonetheless, asking and effective rents have now risen for twelve consecutive quarters. Yet, the simple truth is that with vacancy remaining elevated at 16.9%, it is far too high to be conducive to much rent growth. At that level of vacancy, landlords have little leverage to either increase face level asking rents or to remove concessions from leases. A meaningful acceleration in rent growth will not be possible until vacancy falls to pre‐recessionary levels.

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U.S. Rises to No. 1 Energy Producer

The U.S. is overtaking Russia as the world’s largest producer of oil and natural gas, a startling shift that is reshaping markets and eroding the clout of traditional energy-rich nations.

[image]The U.S. produced the equivalent of about 22 million barrels a day of oil, natural gas and related fuels in July, according to figures from the EIA and the International Energy Agency. Neither agency has data for Russia’s gas output this year, but Moscow’s forecast for 2013 oil-and-gas production works out to about 21.8 million barrels a day.

U.S. imports of natural gas and crude oil have fallen 32% and 15%, respectively, in the past five years, narrowing the U.S. trade deficit. (…)

The U.S. last year tapped more natural gas than Russia for the first time since 1982, according to data from the International Energy Agency. Russia produced an average of 10.8 million barrels of oil and related fuel a day in the first half of this year. That was about 900,000 barrels a day more than the U.S.—but down from a gap of three million barrels a day a few years ago, according to the IEA. (…)

Saudi Arabia remains the world’s largest supplier of crude oil and related liquids. As of July, Saudi Arabia was pumping 11.7 million barrels a day, according to the IEA. Russia was second, at 10.8 million barrels, while the U.S. was third, at 10.3 million. (…)

U.S. energy producers also are drilling more efficiently and cutting costs in other ways. Some companies have said that the amount of oil and gas produced by shale wells isn’t dropping as fast as predicted.

Ken Hersh, chief executive of NGP Energy Capital Management LLC, a private-equity fund with $13 billion under management, said the immense amounts of oil and gas uncovered in recent years indicate that the U.S. energy boom could last a long time.

“It is not a supply question anymore,” he said. “It is about demand and the cost of production. Those are the two drivers.” (Chart from Ed Yardeni)

SENTIMENT WATCH

One factor S&P Dow Jones indices uses in their stock classifications is an Earnings and Dividend Quality Ranking measurement. The basis for this measurement is to provide investors with a ranking that S&P evaluates based on a company’s stability of earnings and dividend over time. The highest ranking is A and the lowest is D (a company in reorganization).

With this as background S&P has constructed indices based on these rankings. The S&P 500 High Quality Rankings Index consists of stocks with a ranking of A and better. The S&P 500 Low Quality Rankings Index consists of stocks with a ranking of B or lower. The high quality index has a larger weighting in sectors like consumer staples that tend to hold up better in a more defensive or “risk off” market. As the below table shows, this year, the low quality index has outperformed the high quality index by a wide margin.


This pattern of the “risk on” and more cyclical stocks outperforming has continued in the the second half of September, in spite of a down equity market.

(From The Blog of HORAN Capital Advisors)

(…) One characteristic of lower quality stocks is many of them do not pay a dividend. True to form, through the end of the third quarter, the non dividend paying stocks in the S&P 500 Index are outperforming the payers by a wide margin. The return comparison is detailed in the below table.

Nerd smile  Hmmm…Remember, the cream always ends up at the top.

(…) In recent weeks, both Warren Buffett and Carl Icahn warned stocks aren’t cheap. Others are urging investors to move cautiously.

“The opportunity sets aren’t as robust and the margins of safety are smaller,” said David Perkins, who oversees the $1 billion Weitz Value fund at Weitz Investment Management, an Omaha, Neb., value-oriented fund manager that oversees $5 billion.

Mr. Perkins says the firm’s internal readings on the stocks they follow are at their most expensive levels since 2006. He is holding more cash as a result.

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  • It’s right here, sir!

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Hmmm…

GOOD READS

“Character” (Jeffrey Saut, Chief Investment Strategist, Raymond James)

“The true prophet is not he who predicts the future, but he who reads history and reveals the present.”

… Eric Hoffer, American moral and social philosopher

I could almost hear my history teacher espousing Eric Hoffer’s words last week as I was asked by a particularly prescient media type if trust and character would really command a “premium” price/earnings multiple for the stock market? My response was “of course,” and as an example I referred him to a quote from John Pierpont Morgan, who built his family’s fortunes into a colossal financial empire. The referenced verbal exchange took place when an aging J.P. Morgan testified before a House of Representatives’ committee investigating the financial interests of the “House of Morgan.” A tough lawyer named Samuel Untermyer queried him. The conversation went like this:

Untermyer: “Is not commercial credit based primarily upon money or property?”

Morgan: “No sir, the first thing is character.”

Untermyer: “Before money or property?”

Morgan: “Before money or property or anything else. Money cannot buy it … because a man I do not trust could not get money from me on all the bonds in Christendom.”

While Morgan’s language is from an era gone by, the essential insight is as clear today as it was decades ago. I recalled the Morgan/Untermyer exchange as I read Friday’s Wall Street Journal, in particular, “Robbery at J.P Morgan.” The article began, “Government lawyers are backing up the truck again at J.P Morgan Chase (JPM/$52.24/Strong Buy) to extract another haul from the country’s largest bank.” Recall that JPM is one bank that did not need taxpayer assistance during the financial fiasco of 2008, or ever since.

To me that speaks volumes about the character of JPM’s CEO, Jamie Dimon. This lack of government dependence, combined with Mr. Dimon’s remarks about how the Dodd-Frank financial reform act is hurting the economy, is likely what put Mr. Dimon in the government’s crosshairs. This also explains why the government is beating up on JPM again over the “London Whale’s” $6 billion trading loss, even though there were NO public costs.

The irony is that Jamie Dimon is one of the few bank CEOs who avoided the credit excesses. He also, at the pleading of the government, rescued Bear Stearns and Washington Mutual (WaMu). Then-FDIC Chairperson Shelia Bair said, “[The WaMu situation] could have posed significant challenges without a ready buyer. … Some are coming to Washington for help; others are coming to Washington to help.” Now it appears Washington is suing JPM for helping.

I have no doubt about Jamie Dimon’s character. I do, however, doubt the character of some of the folks inside the D.C. Beltway, on both sides of the political equation, who are about to close down the government.

HEALTH SYSTEMS

Compare the US health system to those of the other large high-income countries. The US spends 18 per cent of its gross domestic product on health against 12 per cent in the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada, though many people are left uncovered. US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK. What does the US get in return? Life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher. For males this must be partly due to violent deaths. But it is also true for women. (FT’s Martin Wolf)

Ingram Pinn illustration

 

NEW$ & VIEW$ (10 SEPTEMBER 2013)

Poll: Support Fades
For Syria Attack

Obama’s push for military action in Syria faces headwinds from an American public that increasingly is wary of overseas entanglements and doubtful that an attack would benefit the U.S.

GLOBAL GROWTH?
 
EUROZONE
 
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Advanced economies growing again but some emerging economies slowing, says OECD

Economic growth in the major advanced economies is expected to continue at a similar pace in the second half of 2013 as in the second quarter.  In the three largest OECD economies, the US, Japan and Germany, activity is expected to expand by about 2 ½ per cent annualised in the third andfourth quarters. France is forecast to grow by about 1½ per cent annualised in the second half of the year, while in Italy growth is expected to remain mildly negative.

GDP growth in China is forecast to pick up to about 8% by the final quarter, after a slowdown in the first half of 2013. Even that would represent a slower rate than in recent years, however.

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China data point to economic rebound
Industrial output and investment both strengthening

The national statistics bureau said on Tuesday that industrial output grew 10.4 per cent year on year in August, up from a 9.7 per cent pace in July and beating market forecasts. Retail sales were up 13.4 per cent year on year, accelerating from 13.2 per cent growth in July. Fixed-asset investment, expressed in year-to-date terms, rose 20.3 per cent in August, up from 20.1 per cent in July. (…)

The good economic news is also being reflected in China’s asset markets, with property prices growing at more than 10 per cent a year and stocks rallying over the past two months. (…)

Consumer prices rose 2.6 per cent from a year earlier, just a touch below July’s 2.7 per cent pace, the statistics bureau said on Monday.

Taiwan Export Growth Quickens

Taiwan’s exports grew more quickly in August, another sign that Asian exporters are starting to feel the pull from the gradual strengthening of demand in the U.S. and other major markets.

The island’s exports rose 3.6% last month from a year earlier to $25.64 billion, picking up from July’s 1.6% rise, Taiwan’s Ministry of Finance said Monday.

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In August, Taiwan’s exports to China, its biggest export destination, rose 3.6% from a year earlier, accelerating from 1.1% on-year growth in July.

Exports to the U.S., another major export market, grew 0.9% from the same period last year, tapering from the 1.4% on-year growth in the previous month, while those to Europe were up 4%, slowing from 6% growth in July.

Taiwan’s imports in August unexpectedly fell 1.2% to $21.06 billion, compared with 2.89% growth forecast by economists in the survey but improving from July’s 7.6% decline.

The ministry said imports of capital-generating equipment fell 7.7%, while that of consumer goods such as smartphones also dropped 9.1%.

In addition, Taiwan’s industrial production rose 2.1% on-year in July, following five straight months of decline, propelled by basic metals and chemicals.

Asia’s more export-oriented economies have seen some reason for optimism lately. July industrial production numbers from South Korea, Singapore and Thailand—all countries that depend heavily on trade—suggested that export-oriented sectors such as high-tech performed solidly, despite disappointing headline numbers, according to J.P. Morgan.

Americans’ Credit-Card Debt Declines

Consumers’ revolving credit, which primarily reflects money owed on credit cards, fell by $1.84 billion, or at a 2.6% annual rate, in July from a month earlier, the Federal Reserve reported Monday. That came after a 5.2% drop in revolving credit in June.

The report showed that Americans stepped up other types of borrowing, namely to buy cars and go to school. Nonrevolving credit, which reflects mostly auto and student loans, rose by $12.28 billion, or 7.4%, in July. That caused overall consumer debt, excluding mortgages, to grow at a 4.4% annual rate in July from June.

BANKS

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NEW$ & VIEW$ (9 SEPTEMBER 2013)

DRIVING BLIND (Continued)

Tepid Jobs Report Muddies Fed Plans

The disappointing jobs report released Friday leaves Fed officials without a clear-cut signal of an economy on the mend, creating a dilemma for the central bank as it contemplates pulling back on a bond-buying program.

Employers added a steady, if unspectacular, 169,000 jobs in August, and  unemployment rate fell to 7.3% last month. That’s notable improvement from the 8.1% unemployment rate when Fed officials launched the latest stimulus program late last year, but job growth has been anemic in recent months, below the 200,000-a-month level some officials want to see. (…)

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“Steady”? Payrolls growth has averaged 148,000 for the past three months, a notable decline from the 199,000 pace of the previous 5 months and well below the 184,000 average of the past twelve months.

Add the significant revisions (net downward revision for June and July of 74,000 jobs) and you get deep in the mud if your job is first to know where you are before finding the right direction.

Then, in the household survey, the total number of people employed declined by 115,000, but the size of the labour force fell by a much higher 312,000, accounting for the decline in the unemployment rate to 63.2%, which is the lowest rate since August 1978 and before the enormous influx of women in the workforce in the 1980s and 1990s.

Bespoke Investment adds:

While much, if not all, of the increase in the labor force participation rate in the 1970s was attributable to women entering the workforce, the shrinking of the labor force since the peak in early 2000 is due in majority to the exit of men from the work force.  For example, since the labor force participation rate peaked, the participation rate among women has declined by just 2.8 percentage points.  Men, on the other hand, have seen their participation rate decline by twice that at 5.6 percentage points.

Due to the fact that men are exiting the labor force at nearly twice the rate of women, the gap between the participation rate among men and women has been steadily shrinking.  The participation rate among men currently stands at 69.5%, while the rate among women is 57.3%.  With a spread of 12.2 percentage points, the gap between the sexes has never been narrower.

More important is that men employment (+ 947,000 or +1.3%) has seriously lagged women employment (+2,326,000 or +3.5%) since 2012. Given the (15-28% depending on industry) gender pay gap, this has probably contributed to corporate profit margins in the past 18 months.

EMPLOYMENT: MEN/WOMENimage

ONLY PIECE OF GOOD NEWS:

The only piece of good news came from the household survey, which despite the net job losses showed a second consecutive increase in full time jobs.

High five  But as today’s Hot Charts show, despite those gains in full-time positions the share of part-timers in total employment remains much too high. (…) That in turn is restraining the economy e.g. preventing an improvement in home ownership rates and capping wage growth and hours worked. The annualized growth rate in aggregate hours is tracking just +1% so far in Q3, a deceleration from Q2’s pace, suggesting a likely return to sub-2% GDP growth in Q3 after the spike in the last quarter. (NBF Economy & Strategy)

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The WSJ keeps hammering:

Part of the problem is also the growing attraction of not working. These columns have reported on the explosion in both the food-stamp and federal disability rolls since the recession ended. A new Cato Institute study shows that the full plate of welfare benefits—food stamps, housing assistance, Medicaid and so on—now pays more than a $12 an hour job in half the states. This, too, plays a role in the expanding number of people who are leaving the workforce. Reforms in those programs would help, but the real cure is faster economic growth.

Why Is One-Sixth of U.S. on Food Stamps? Food-stamp use grew 2.3% in June from a year earlier, with nearly one-sixth of the U.S. population receiving benefits.

One of the largest social safety net programs in the United States, food stamps – formally known as the Supplemental Nutrition Assistance Program, or SNAP – expanded substantially during and after the recession, with enrollment rising about 70% from 2007 to 2011. At the same time, the government also temporarily increased benefits and allowed users in the hardest-hit areas to receive aid for longer-than-usual periods of time. The average monthly benefit was $133 last year.

Critics clamor against what they see as a disturbing rise in government dependency. But new economic research suggests the program’s expansion isn’t alarming and can, in fact, be explained by business cycles. (…)

The 2009 fiscal stimulus program’s temporary increase in food stamp benefits, which may have also boosted incentives to enroll, is set to expire Nov. 1. Congress is not expected to mitigate the scheduled cuts.

Surprised smile

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Fingers crossed A Hire Calling for Companies

Companies remain reluctant to add jobs. They may not be able hold off for too much longer.

image(…) One indication companies may need to step up hiring is that there hasn’t been much firing going on. The four-week moving average of initial jobless claims, at 328,500, has reached its lowest level since October 2007. Companies also had workers clocking more time last month, with private payroll hours rising 0.4%. To add that many hours of work without increasing each worker’s time on the job, private employers would have had to increase payrolls by 464,000 positions, rather than the 152,000 they delivered.

High five  What the WSJ fails to mention is that last month’s increase in weekly hours was tiny and left average hours near the low end of their range of the last 3 years. There is thus no immediate need to boost payroll as the WSJ article suggests.image

Here’s a more solid sign of hope from the August NFIB survey (via John Mauldin):

Job creation plans rose a very large 7 points to a net sixteen percent planning to increase total employment, the best reading since January, 2007 and historically a very strong reading. Not seasonally adjusted, 15 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (down 1 point). If this reading is not a fluke, it signals a substantial resumption of hiring in the coming months. Hopefully, the September survey will validate the August readings and reports of actual hiring will turn positive.

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SO, TAPER OR NO TAPER?

How about a baby taper? One little step at a time…

One option that has gained support among some Fed officials in recent weeks: Reduce monthly bond purchases by a small amount, say by $10 billion, to $75 billion a month, and signal as loudly as possible the next step will depend on more evidence the job market is continuing to improve and inflation is moving back toward 2% from its current low levels.

Obama will copycat, one little tomahawk at a time…

Obama’s Limited Strikes Plan Faces Risks of Escalation

An old military mantra — “the enemy has a vote” — describes the situation President Barack Obama is confronting as he tries to muster support for U.S. military strikes against Syria.

Facing a divided Congress and a war-weary public, Obama has promised that any U.S. action will be “limited and proportionate.” Syrian President Bashar al-Assad and his allies, though, will also help decide how long and how big any American military mission in Syria will be.

Canadian Job Creation Triples Forecasts in August

Employment increased by 59,200 and the jobless rate fell to 7.1 percent from 7.2 percent, Statistics Canada said today in Ottawa. (…)

Part-time employment in Canada rose by 41,800 in August, with full-time jobs rising by 17,400, Statistics Canada said. Service industry employment increased by 40,600 and goods-producing companies hired 18,600.

Canada has added 38,400 full-time jobs so far this year, the second-least in that period since 1995. (…)

Job gains have averaged 12,700 this year, compared with 25,900 in 2012. The world’s 11th largest economy needs to add more than 22,000 jobs a month for the rest of 2013 to avoid suffering the weakest annual gain since 2001, except for the recession years of 2008-2009.

Bank of Mexico Takes the Plunge, Surprises With Rate Cut

(…) The central bank, led by Governor Agustín Carstens, was clear in its reasons for cutting the overnight rate target to 3.75%: the economic downturn in the second quarter was “faster and deeper” than expected, and the slack in the economy is likely to remain for a prolonged period.

The bank acknowledged that economic growth this year will be well below the 2%-3% estimate it gave in August, about a week before the National Statistics Institute released the bad news about second-quarter gross domestic product, which contracted 0.7% from the first quarter and was up just 1.5% from a year earlier.

Credit Suisse economist Alonso Cervera, who alone had predicted a quarter-point reduction in the overnight rate Friday, says it’s significant that the Bank of Mexico didn’t call this a one-off cut, as it had done with the half-point reduction in March. (…)

The central bank was sanguine about inflation, which it said is likely to follow a lower path than the 3.5% it recently predicted for coming months. The bank’s permanent CPI target is 3%.

German Factory Output Drops

[image]Data indicators across the euro zone Friday reinforced remarks made Thursday by European Central Bank President Mario Draghi to the effect that while signs of recovery are indeed apparent, they remain weak and somewhat inconsistent.

Industrial output in Germany fell 1.7% on the month in July, the country’s economics ministry reported Friday. This was well below expectations of a 0.5% dip in a Dow Jones Newswires survey of analysts. The data followed an earlier release from the statistics agency that showed exports dropping on the month and the country’s trade surplus narrowing.

CHINA

China’s Exports Accelerated in August

China’s economy shows new signs of resilience in August, with key trade data pointing to a sustained strengthening in global demand for goods from the country.

Exports continued to gather steam, rising 7.2% in August from a year earlier, according to data released Sunday by the General Administration of Customs. This was up from a 5.1% rise in July and a contraction of 3.1% in June. Imports rose 7.0% from a year earlier in August, down from 10.9% in July.

Shipments to the U.S. rose 6.1% on-year in August, up from 5.3% in July, which marked an improvement from shrinking sales earlier in the year.

Sales to countries in the Association of Southeast Asian Nations — a 10-nation grouping that includes Indonesia, Malaysia, Thailand and Singapore — rose 30.8%.

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Credit Suisse analysts track the quarterly change in China premier’s three favoured economic measures in a forward-looking indicator they call the Li Keqiang Momentum Index (LKMI):

Graph China

(…) all three of the LKMI’s indicators have started to gather steam in the third quarter, which reflects the positive news the economist and his team of analysts have been hearing anecdotally (…).

ChinaCreditSuisseIII

(…) None of the new supports to growth are robust. But they should at the very least keep things in China from getting much worse. (…)

SENTIMENT WATCH

Mutual-Fund Investors Halt March Into U.S. Stocks

Investors pulled a net $226 million out of U.S. equity mutual funds in the week ended Sept. 4, their first week of outflows since the week ended June 5, according to fund tracker Lipper. That was a reversal from the $1 billion of inflows the previous week. (…)

ETF investors have pulled $23 billion from U.S. stock funds over the past four weeks, after sending cash to U.S. stock ETFs for six weeks in a row. In the latest week, they pulled $4.8 billion from U.S. stock ETFs.

TRAVELLING for the rest of the month. Why not?

image(BMO Capital)

 

NEW$ & VIEW$ (20 AUGUST 2013)

Fear of Easy Money Retreat Roils India

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

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

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

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

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

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

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

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

 

Brazil’s Currency Slides to New Low

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

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

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

Bond Market Bear Markets

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

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

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

Ghost  This a.m.:

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

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

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

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

Stocks are Tapering Themselves (Barron’s)

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

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

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

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BUT HOW ABOUT THE ECONOMY?

The Philly Fed ADS Business Conditions Index

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

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

The index is based on six underlying data series:

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

Hmmm…

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

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

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

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

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

CHINA: SLOW AND SLOWER

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

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

Work or Welfare: What Pays More?

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

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

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

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

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

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

Follow up on The Coming Arctic Boom:

From China to Europe, Via Arctic

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

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

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

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

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

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

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

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

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

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

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

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