NEW$ & VIEW$ (9 JANUARY 2014)

Yellen Eyes Turnover as U.S. Workers Leave Jobs

More Americans are voluntarily quitting their jobs as they become increasingly confident about business conditions — a trend that Janet Yellen, the next Federal Reserve chairman, is monitoring.

Almost 2.4 million U.S. workers resigned in October, a 15 percent increase from a year earlier, based on seasonally adjusted data from the Department of Labor. These employees represent 56 percent of total separations, the 13th consecutive month above 50 percent and highest since April 2008. November figures are scheduled to be released Jan. 17. (…)

The quits ratio is highly correlated with how Americans feel about the job market and is especially helpful because it separates behavior from intentions, showing “what people are doing, not what they say they’ll do,” Colas said. “Voluntarily leaving one’s position requires a fundamental level of confidence in the economy and in one’s own personal financial story.” The ratio in November 2006, about a year before the recession began, was 58 percent.

The share of Americans who say business conditions are “good” minus the share who say they are “bad” rose in December to the highest in almost six years: minus 3 percentage points, up from minus 4.2 points the prior month, based on data from the Conference Board, a New York research group.

Job seekers also are more optimistic about the hiring environment. Sixty-three percent of callers to a job-search-advice help line Dec. 26-27 said they believed they could find new employment in less than six months, up from 55 percent a year ago, according to Challenger, Gray & Christmas Inc., a human-resources consulting company. (…)

U.S. December planned layoffs plunge to lowest since 2000: Challenger

The number of planned layoffs at U.S. firms plunged by 32 percent in December to the lowest monthly total in more than 13 years, a report on Thursday showed.

Employers announced 30,623 layoffs last month, down from 45,314 in November, according to the report from consultants Challenger, Gray & Christmas, Inc.

The last time employers announced fewer job cuts was June of 2000, when 17,241 planned layoffs were recorded.

The figures come a day ahead of the closely-watched U.S. non-farm payrolls report, which is forecast to show the economy added 196,000 jobs in December. (…)

The December figure fell 6 percent from a year earlier, when planned layoffs totaled 32,556, and marked the third straight month that announced workforce reductions dropped year over year. (…)

U.S. Consumer Credit Growth Eases

The Federal Reserve Board reported that consumer credit outstanding increased by $12.3 billion (6.1% y/y) during November following an unrevised $18.2 billion October gain. The latest monthly gain was the weakest since April.

Usage of non-revolving credit increased $11.9 billion (8.2% y/y) in November. Revolving credit outstanding gained $4.3 billion (1.0% y/y) in November.

Auto Markit Eurozone Sector PMI: Automobiles & auto parts posts its best quarterly performance since Q1 2011

Despite recent growth being high in the context of historical survey data, automobiles & auto parts still maintains some forward momentum heading into the New Year. New orders increased sharply and to the greatest degree in three years in December, leading to a substantial build-up of outstanding business. Job creation, which has until now been muted relative to the trends in output and new business, therefore looks set to pick up.

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German Industrial Output Rises First Time in Three Months

Output, adjusted for seasonal swings, increased 1.9 percent from October, when it fell 1.2 percent, the Economy Ministry in Berlin said today. Economists predicted a gain of 1.5 percent, according to the median of 32 estimates in a Bloomberg News survey. Production climbed 3.5 percent from a year earlier when adjusted for working days.

German Orders Surge Back But Domestic Orders Lag

German orders rose by 2.1% in November, rebounding from a 2.1% drop in October. The headline trend shows solid growth with three-month growth at a 12.7% annual rate, up from a 6.2% annual rate over six-months and a 6.8% annual rate over 12-months. The strength is led by foreign demand.

Foreign orders rose by 2.2% in November from a 2.2% drop in October but also logged a 6.3% increase in September. As a result, foreign orders are rising at a 27.1% annual rate over three-months, up from a 12.8% annual rate over six-months, and a 9% annual rate over 12-months.

In contrast, domestic orders rose by 1.9% in November, unwinding a 1.9% drop in October. However, domestic orders also fell by 0.9% in September. As a result, the trend for domestic orders is poor. It is not just weaker than foreign orders – it is poor. Domestic orders are falling at a 3.8% annual rate over three-months following a 1.9% annual rate drop over six-months and a 3.9% annual rate gain over 12-months. The domestic sector is in a clear deceleration and contraction.

China’s 2013 Vehicle Sales Rose 14%

The CAAM said sales of both passenger and commercial vehicles totaled a record 21.98 million units, up 14% from a year earlier, the fastest pace since 2010. Passenger vehicles led the way, with sales up 16% to 17.93 million units.

Sales gain in December quickened due in part to local consumers’ habit of spending ahead of the Lunar New Year, which falls in the end of January this year. Auto makers shipped 2.13 million vehicles to dealers, up 18% from a year earlier. Among the total, sales of passenger vehicles were 1.78 million units, up 22% on year.

Even as China’s economy displayed clear signs of a slowdown, consumers bought new vehicles, motivated by some cities’ pending restrictions on car purchases to alleviate traffic congestion and air pollution. Within hours after the northern city of Tianjin announced a cutback on new license plates last month, thousands of residents rushed to buy cars. Some used gold necklaces as collateral, said local media.

CAAM said it expects gains to continue this year, though at a slower pace. The association projected a rise of 8%-10% for the overall auto market, to about 24 million units, and as much as an 11% gain for passenger vehicles, to nearly 20 million units.

“China’s auto market is still at the period of rapid expansion and growth has gradually shifted to small-sized cities where demand is significant,” said Shi Jianhua, deputy secretary-general at the CAAM.

China Consumer Inflation Eases

The consumer-price index rose 2.5% in December from a year earlier, slower than the 3.0% year-over-year rise in November, the National Bureau of Statistics said Thursday.

In the December price data, food remained the key contributor to higher prices, rising 4.1% year on year in December. But that was down from the 5.9% rise the previous month. Nonfood prices were up 1.7% in December, compared with November’s 1.6% gain.

But in a continued sign of weak domestic demand, prices at the factory level fell once again, declining for the 22nd consecutive month. They were down 1.4% in December, falling at the same rate as in November.

Stripped of food prices, inflation edged up to 1.7% YoY from 1.6% in November.

OECD Inflation Rate Rises

The Organization for Economic Cooperation and Development said Thursday the annual rate of inflation in its 34 developed-country members rose to 1.5% from 1.3% in October, while in the Group of 20 leading industrial and developing nations it increased to 2.9% from 2.8%.

The November pickup followed three months of falling inflation rates, but there are indications that it will prove temporary. Figures already released for December showed a renewed drop in inflation in two of the world’s largest economies, with the euro zone recording a decline to 0.8% from 0.9%, and China recording a fall to 2.5% from 3.0%.

Key Passages in Fed Minutes: Consensus on QE, Focus on Bubbles

Federal Reserve officials were largely in agreement on the decision to begin winding down an $85 billion-per-month bond-buying program. As they looked to 2014, they began to focus more on the risk of bubbles and financial excess.

    • Some … expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.
    • Several [Fed officials] commented on the rise in forward price-to-earnings ratios for some small cap stocks, the increased level of equity repurchases, or the rise in margin credit.

Pointing up Something the Fed might be facing sooner than later:

Bank dilemma Time for Carney to consider raising rates

When your predictions are confounded, do you carry on regardless? Or do you stop, think and consider changing course? Such is the remarkable recovery in the UK economy since the first quarter of last year that the Bank of England is now facing this acute dilemma.

Just five months ago, the bank’s new governor pledged that the BoE would not consider tightening monetary policy until unemployment fell to 7 per cent so long as inflationary pressures remained in check. (…)

The question is what the BoE should now do. Worst would be to show guidance was entirely a sham by redefining the unemployment threshold, reducing it to 6.5 per cent. Carrying on regardless of the data is no way to run monetary policy. Instead, the BoE should be true to its word and undertake a thorough consideration of a rate rise alongside its quarterly forecasts in its February inflation report. (…)

EARNINGS WATCH

I have been posting about swinging pension charges in recent months. Most companies determine their full year charge at year-end which impacts their Q4 results.

Pendulum Swings for Pension Charges

Rising interest rates and a banner year for stocks could lift reported earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Rising rates and a banner year for stocks could lift earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Companies including AT&T Inc. and Verizon Communications Inc. could show stronger results than some expect when they report fourth-quarter earnings in coming weeks. They and about 30 other companies in the past few years switched to “mark-to-market” pension accounting to make it easier for investors to gauge plan performance.

With the switch, pension gains and losses flow into earnings sooner than under the old rules, which are still in effect and allow companies to smooth out the impact over several years. Companies that switch to valuing assets at up-to-date market prices may incur more volatility in their earnings, but it offers a more current picture of a pension plan’s health and its contribution to the bottom line.

In 2011 and 2012, that change hurt the companies’ earnings, largely because interest rates were falling at the time. But for 2013, it may be a big help to them, accounting experts said, a factor of the year’s surge in interest rates and strong stock-market performance.

“It’s going to account for a huge rise in operating earnings” at the affected companies, said Dan Mahoney, director of research at accounting-research firm CFRA.

Wall Street analysts tend not to include pension results in their earnings estimates, focusing instead on a company’s underlying businesses. That makes it hard for investors to know what the impact of the change will be. Some companies may not see a big impact at all, because of variations from company to company in how they’ve applied mark-to-market changes. (…)

Some mark-to-market companies with fiscal years ended in September have reported pension gains. Chemical maker Ashland Inc. had a $498 million pretax mark-to-market pension gain in its September-end fourth quarter, versus a $493 million pension loss in its fiscal 2012 fourth quarter. That made up about 40% of the Covington, Ky., company’s $1.24 billion in operating income for fiscal 2013. (…)

Not all mark-to-market companies will see gains. Some such companies record adjustments only if their pension gains or losses exceed a minimum “corridor.” As a result, Honeywell International Inc. says it doesn’t foresee a significant mark-to-market adjustment for 2013, and United Parcel Service Inc. has made similar comments in the past.

Moody’s adds: US Corporate Pension Funded Ratios Post Massive Increase in 2013

At year-end 2013, we estimate pension funding levels for our 50 largest rated US corporate issuers increased by 19 percentage points to 94% of pension obligations, compared with a year earlier. In dollar terms, this equates to $250 billion of decreased underfundings for these same issuers. We expect this reduction to be replicated across our entire rated universe. These improved funding levels will result in lower calls on cash, a credit positive.

Big Six U.S. Banks’ 2013 Profit Thwarted by Legal Costs

Combined profit at the six largest U.S. banks jumped last year to the highest level since 2006, even as the firms allocated more than $18 billion to deal with claims they broke laws or cheated investors.

A stock-market rally, cost cuts and a decline in bad loans boosted the group’s net income 21 percent to $74.1 billion, according to analysts’ estimates compiled by Bloomberg. That’s second only to 2006, when the firms reaped $84.6 billion at the peak of the U.S. housing bubble. The record would have been topped were it not for litigation and other legal expenses. (…)

The six banks’ combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7 billion, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413 million, and Morgan Stanley (MS), which reported a 14 percent decline to $211 million. (…)

Legal costs that averaged $500 million a quarter could be $1 billion to $2 billion for a few years, Dimon told analysts in an Oct. 11 conference call. The firm is spending also $2 billion to improve compliance by the end of 2014, he said last month. (…)

VALUATION EXPANSION?

This is one of the main narratives at present, now that earnings multiples have expanded so much. The other popular narrative is the acceleration of the U.S. economy which would result in accelerating earnings, etc., etc… Here’s Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

It’s also possible valuations could continue to expand even if earnings growth doesn’t meet expectations. There is a direct link between valuation and the yield curve. A steep curve (long rates much higher than short rates); which we have at present and are likely to maintain; suggests better growth and easy monetary policy. This environment typically co-exists with rising valuation.

Low inflation is also supportive of higher multiples. Why? Earnings are simply more valuable when inflation is low; just like our earnings as workers are worth more when inflation is taking less of a bite out of them.

Lastly, as noted in BCA’s 2014 outlook report: In a liquidity trap, where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero short rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking. Over time, higher asset values begin to stimulate stronger consumption and investment demand—the so-called “wealth effect.” We could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Global capital spending has begun to show signs of a rebound; while US consumers are beginning to borrow and spend again.

A few remarks on the above arguments:

imageThe yield curve can steepen if short-term rates decline or if long-term rates rise. The impact on equities can be very different. My sense is that the curve, which by the way is presently very steep by historical norms (chart from RBC Capital), could steepen some more for a short while but only through rising long-term yields. This is not conducive to much positive valuation expansion, especially if accompanied by rising inflation expectations which, normally, follow economic acceleration.

The next chart plots 10Y Treasury yields against the S&P 500 Index earnings yield (1/P/E). The relationship between the two is pretty obvious unless you only look at the last Fed-manipulated 5 years. Rising rates are not positive for P/E ratios.

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Low inflation is indeed supportive of higher multiples as the Rule of 20 clearly shows. What is important for market dynamics is not the actual static level of inflation but the trend. Nirvana is when the economy (i.e. profits) accelerate while inflation remains stable or even declines. Can we reasonable expect nirvana in 2014?

The wealth effect was in fact Bernanke’s gambit all along. And it worked. But only for the top 20% of the U.S. population. What is needed now is employment growth. Can we get that without triggering higher inflation?

Miss Sonders reminds us that

This bull market is now the sixth longest in S&P 500 history (of 26 total bull markets). As of year end 2013, it’s run for 1,758 days, with the longest ending in 2000 at 4,494 days. It is the fourth strongest in history; up over 173% cumulatively as of year-end 2013.

Emerging Market Currencies Suffer as Dollar Rises

The South African rand sank to a fresh five-year low Thursday, as a rise in the dollar, fueled by strong U.S. jobs data, kept emerging market currencies under pressure.

The Turkish lira also suffered, closing in on its all-time low against the dollar reached earlier in the week. The rand and the lira are widely considered to be among the most vulnerable emerging market currencies, as both South Africa and Turkey are reliant on foreign investment flows to fund their wide current account deficits.

 

NEW$ & VIEW$ (8 JANUARY 2014)

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

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

Discounts drive U.S. holiday retail growth: ShopperTrak

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

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

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

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

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

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

Growth Picture Brightens as Exports Hit Record

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

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

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

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

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

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

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

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

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

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

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

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

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

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

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

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

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

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

Euro-Zone Retail Sales Surge

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

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

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

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

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

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

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

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

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

Meanwhile:

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

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

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

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

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

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

Record-Setting Cold Hits Eastern U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging Markets See Selloff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

NEW$ & VIEW$ (3 JANUARY 2014)

Global Manufacturing Improves At Fastest Pace Since February 2011

The end of 2013 saw growth of the global manufacturing sector accelerate to a 32-month high. The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by JPMorgan and Markit in association with ISM and IFPSM – rose to 53.3 in December, up from 53.1 in November, to signal expansion for the twelfth month in a row.

imageThe average reading of the headline PMI through 2013 as a whole (51.5) was better than the stagnation signalled over 2012 (PMI: 50.0). The rate
of expansion registered for the final quarter of 2013 was the best since Q2 2011.

Global manufacturing production expanded for the fourteenth straight month in December. Moreover, the pace of increase was the fastest since February 2011, as the growth rate of new orders held broadly steady at November’s 33-month record. New export orders rose for the sixth month running.

Output growth was again led by the G7 developed nations in December, as robust expansions in the US, Japan, Germany, the UK (which registered the highest Output PMI reading of all countries) and Italy
offset the ongoing contraction in France and a sharp growth slowdown in Canada.

Among the larger emerging nations covered by the survey, already muted rates of increase for production eased in China, India and Russia, and remained similarly modest in Brazil and South Korea despite slight  accelerations. Taiwan was a brighter spot, with output growth hitting a 32-month high.

December PMI data signalled an increase in global manufacturing employment for the sixth consecutive month. Although the rate of jobs growth was again only moderate, it was nonetheless the fastest for
almost two-and-a-half years. Payroll numbers were raised in the majority of the nations covered, including the US, Japan, Germany,
the UK, India, Taiwan and South Korea. Job losses were recorded in China, France, Spain, Brazil, Russia, Austria and Greece.

Input price inflation accelerated to a 20-month peak in December, and was slightly above the survey average. Part of the increase in costs was passed on to clients, reflected in the pace of output price inflation reaching a near two-and-a-half year peak.

U.S. Construction Spending Advances Further

The value of construction put-in-place gained 1.0% in November (5.9% y/y) following a little-revised 0.9% October rise. The September increase of 1.4% was revised up substantially from the initially-estimated 0.3% slip.

Private sector construction activity jumped 2.2% (8.6% y/y) in November after no change in October. Residential building surged 1.9% (16.6% y/y) as spending on improvements recovered 2.2% (10.2% y/y). Single-family home building activity gained 1.8% (18.4% y/y) while multi-family building rose 0.9%, up by more than one-third y/y. Nonresidential building activity surged 2.7% (1.0% y/y) paced by an 8.8% gain (37.7% y/y) in multi-retail and a 4.6% rise (11.5% y/y) in office building.

Offsetting these November gains was a 1.8% decline (-0.2% y/y) in the value of public sector building activity. (…)

Surprised smile Euro-Zone Private Lending Plunges

Lending to the private sector in the euro zone plunged in November at the sharpest annual rate since records began over 20 years ago, data from the European Central Bank showed Friday, suggesting that the region will struggle to get its anticipated economic recovery in full gear.

Private sector lending in the euro zone declined by 2.3% on the year, after a 2.2% decline in October, the ECB said. (…)

On the month, lending to households declined by 3 billion euros ($4.1 billion) reversing the €3 billion increase in October, while lending to firms fell by €13 billion, following a €15 billion drop in the previous month. Loans to firms were down by 3.9% on the year. (…)

The ECB’s broad gauge of money supply, or M3, grew by only 1.5% in November in annual terms, above the 1.4% rise in October, while the three-month average grew by 1.7%, after 1.9% in the previous month. The monetary growth data remain well below the ECB’s “reference value” of 4.5%, which it considers consistent with its price stability mandate.

Auto Decline in German car sales accelerated in 2013: KBA

The decline in German car sales accelerated last year, falling below 3 million vehicles for the first time since 2010, reflecting troubles in Europe that have sent auto demand close to a two-decade low.

New car registrations in Germany fell 4.2 percent to 2.95 million last year, the German Federal Motor Transport Authority (KBA) said, after a decline of 2.9 percent in 2012.

Germany’s premium carmakers BMW (BMWG.DE), Mercedes-Benz (DAIGn.DE) and Audi (NSUG.DE) each lost market share, suffering sales declines of 5.8 percent, 1.4 percent and 5.5 percent respectively. (…)

German mass market brand Opel, owned by General Motors (GM.N), lost 2.9 percent market share last year while Volkswagen (VOWG_p.DE) sales fell by 4.6 percent in its home market. (…)

Imported volume brands fared worse than their German rivals, with Citroen (PEUP.PA) registrations down 20.6 percent, Chevrolet dropping 17.7 percent and Peugeot down 23.4 percent.

The gainers were South Korean value brands such as Hyundai (005380.KS), which achieved a 0.7 percent increase, and Kia (000270.KS), which boosted sales by 1.6 percent. (…)

Fingers crossed The blow of the overall annual decline was softened by December’s sales figures, with registrations up 5.4 percent on the same month last year, in line with a trend seen in other European countries.

EARNINGS WATCH

 

The Morning Ledger: Rising Rates Buoy Pension Plans

Pension-funding levels surged last year and we could see more gains in 2014. Towers Watson estimates levels last year rose by 16 percentage points to an aggregate 93% for 418 Fortune 1000 companies. That’s still below the 106% reached in 2007, but companies could see triple digits this year if long-term interest rates continue to rise and the stock market remains strong, Alan Glickstein, senior retirement consultant for Towers Watson, tells CFOJ’s Vipal Monga. (…)

Towers Watson said that the discount rate rose to an estimated 4.8% in 2013 from 3.96% in 2012. Meanwhile, the S&P 500 index rose 26% last year, the biggest gain since 1997, which boosted the asset values of the pension funds and helped to further shrink the funding gap. Towers Watson said that pension-plan assets rose an estimated 9% in 2013 to $1.41 trillion, from $1.29 trillion at the end of 2012, while companies cut the amount they contributed to the plans last year by 23% to $48.8 billion.

Heard on the Street’s David Reilly says that the discount rate should keep rising in 2014, even if not briskly as last year. The U.S. economic recovery is gaining strength, and the Fed is tapering its bond purchases. Higher rates should chip away at pensions’ overall liabilities.  “Improvement on both the asset and liability fronts means many companies may be able to begin lowering their pension expense, supporting earnings,” Reilly writes.

Pointing up The report noted that the higher funding levels caused many companies to reduce the amounts they contributed to the plans last year to $48.8 billion. That was 23% less than in 2012.

For example, Ford Motor Co. said in December that the improved environment could help the automaker halve its expected pension contributions to an average annual range between $1 billion to $2 billion over the next three years. That’s down from an earlier outlook of $2 billion to $3 billion.

SENTIMENT WATCH

We are seeing more and more of these thesis “explaining” that markets are expensive but they can carry on. For almost 5 years, most of the “bull” was produced by the bears. Funny how things just never change Crying face. This FT piece tells us all the “uneasy truths”. Well, some of it is not really truth, which is perhaps what makes it uneasy. Sounds like capitulation is very near.

Running with the bulls
Uneasy truths about the US market rally

US stocks may be overpriced and profit margins at a high but even bears say the rally has room to run

(…) Why is there such belief in a long-lived bull market? First, bond yields remain historically low, with 10-year Treasury bills yielding barely 3 per cent. When yields are low it is justifiable to pay a higher multiple for stocks because cheaper credit makes it easier for companies to make profits. Paying more for stocks also seems more palatable when bond yields are low.

Further, there is no evidence that investors are growing overexcited, as they usually do towards the end of a bubble. The American Association of Individual Investors’ weekly poll of its members has long been a reliable contrarian indicator. When large numbers say they are bullish it is generally a good time to sell. When the majority are bearish (the record for this indicator came in the second week of March 2009 when despair was total and the current bull market began) it is a good time to buy. Today, 47 per cent consider themselves bulls and 25 per cent bears, numbers a long way from an extreme of optimism.

However, stocks are unquestionably overpriced. Robert Shiller’s cyclically adjusted price/earnings multiple (Cape), long regarded as a reliable indicator of long-term value, is now at a level at which the market peaked before bear markets several times in the past. However, it remains below the levels it reached during true “bubbles” such as the dotcom mania. The same is true of “Tobin’s q”, which compares share prices with the total replacement value of corporate assets.

Further, profit margins are at a historic high and over time have shown a strong tendency to revert to the historic mean. The combination of high valuations being put on profits benefiting from cyclically high margins suggests markets are overvalued.

Why, then, are brokers calling for rising prices in 2014 or even a melt-up?

First, markets have their own momentum. On all previous occasions when earnings multiples have expanded this far this quickly, research by Morgan Stanley’s Adam Parker shows that they have carried on expanding for at least another year. And while the extent of US stocks’ rise since March 2009 is impressive, the duration of this rally is not unusual. Typically, bull markets carry on for longer. Also, this market has low levels of volatility and has not had a correction in a while. The approaching end of a bull market is generally marked by corrections and rising volatility.

Another reason to believe the bull market could eventually become a bubble lies in the record amounts of cash resting in money market funds, even though these funds pay negligible interest. The bull run is unlikely to peak until some of this money has found its way into stocks.

Finally, and most importantly, there is the role of monetary policy. The Federal Reserve’s programme of “quantitative easing” , in which it has bought mortgage-backed and government bonds in an attempt to force up asset values and push down yields, has had a huge impact on market sentiment.

Although the Fed said in December it would start tapering off its monthly bond purchases, it also says interest rates will stay at virtually zero until well into 2015. The S&P hit a record after the taper announcement. (…)

How can a “melt-up” be averted? Mr Parker of Morgan Stanley suggests that a significant correction would require fear that earnings will come in well below current projections – so the season when companies announce their earnings for the full year, which starts late in January, could be important. But with the US economy exceeding recent forecasts for growth, a serious earnings disappointment seems unlikely without a catalyst from outside the US – such as a big slowdown in China or a renewed crisis in Europe.

Failing these things, it could be left to the Fed itself to do the job by raising rates or removing stimulus faster than the market had expected.

Chris Watling of Longview Economics in London says US equity valuations are undoubtedly “full” – but are no more expensive than when Alan Greenspan, then Fed chairman, tried to talk down the stock market by warning of “irrational exuberance” in December 1996. On that occasion the bull market carried on for three more years and turned into an epic bubble before finally going into reverse.

“They’ll become more expensive,” says Mr Watling. “It’s not until we see tight money that we talk about the end of this valuation uplift in the US.”

This last comment comes from a fellow working at Longview Economics…Winking smile

Ritholtz Chart: Why ‘Wildly Overvalued’ Stocks May Keep Rising

(…) somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding.

Further P/E inflation is what BCA (Bank Credit Analyst) is expecting. They point out “a clear link between equity multiples and the yield curve [with] a steeper yield curve indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity  multiples.”

If we are entering a rising rate environment, a steeper yield curve is a likely stay. BCA notes that “the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed.”

image
 
High five Return of inflation is inevitable
Fund manager Michael Aronstein bets on the lessons of history

Markets are underestimating a coming rout in bond prices, and missing early signs of the return of inflation, according to the US mutual fund manager who has raised more money than any other in the past year. (…)

He and his team pore over price data from hundreds upon hundreds of commodities and manufactured goods, and he highlights proteins – shrimp, beef, chicken – and US lumber among the areas where price spikes are already developing. It is outwards from these pressure points, he says, that the world will finally move from asset price inflation to real consumer price rises.

And as that happens, bonds will tumble and investors will reassess the safety of emerging markets that till now have been fuelled by unprecedentedly cheap money. There are profits to be made buying the companies with pricing power and betting against those without, he says, and from concentrating investment in developed economies and staying cautious beyond.

Party smile Hey! Who invited this Aronstein guy to the party?

OIL AND SHALE OIL

TheTradersWire.com posted this from hedge fund manager Andy Hall earlier this week with the following intro:

Phibro’s (currently Astenback Capital Management) Andy Hall knows a thing or two about the oil market – and even if he doesn’t (and it was all luck), his views are sufficiently respected to influence the industrial groupthink. Which is why for anyone interested in where one of the foremost oil market movers sees oil supply over the next decade, here are his full thoughts from his latest letter to Astenback investors. Of particular note: Hall’s warning to all the shale oil optimists: “According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month… Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.”

Here’s Hall’s very interesting note but FYI, Reuters’ had this piece on Dec. 6: Andy Hall’s fund losses deepen after wrong bet on U.S.-Brent crude

From Astenback Capital Management

The speed with which an interim agreement was reached with Iran was unexpected. Equally unexpected was the immediate relaxation of sanctions relating to access to banking and insurance coverage. This will potentially result in an increase in Iranian exports of perhaps 400,000 bpd. Beyond that it is hard to predict what might happen. The next set of negotiations will certainly be much more difficult. The fundamental differences of view that were papered over in the recent talks need to be fully resolved and that will be extremely difficult to do. Also, Iran’s physical capacity to export much more additional oil is in doubt because its aging oil fields have been starved of investment.

As to Libya, it seems unlikely that things will get better there anytime soon. The unrest and political discontent seems to be worsening. Whilst some oil exports are likely to resume – particularly from the western part of the country (Tripolitania), overall levels of oil exports from Libya in 2014 will be well below those of 2013.

Iraqi exports should rise by about 300,000 bpd in 2014 as new export facilities come into operation. But there is a meaningful risk of interruptions due to the sectarian strife in Iraq that increasingly borders on civil war. Saudi Arabia’s displeasure at the West’s quasi rapprochement with Iran is likely to add fuel to the fire in the Sunni-Shia fight for supremacy throughout the region.

If gains in 2014 of exports from Iran are assumed to offset losses from Libya, potential net additional exports from OPEC would amount to whatever increment materializes from Iraq. Saudi Arabia has been pumping oil at close to its practical (if not hypothetical) maximum capacity of 10.5 million bpd for much of 2013. It could therefore easily accommodate any additional output from Iraq in order to maintain a Brent price of $ 100 – assuming it wants to do so and that it becomes necessary to do so. Still, $ 100 is meaningfully lower than $ 110+ which is where the benchmark grade has on average been trading for the past three years.

So much for OPEC, what about non-OPEC supply? Most forecasters predict this to grow by about 1.4 million bpd with the largest contribution – about 1.1 million bpd – coming from the U.S. and Canada and the balance primarily from Brazil and Kazakhstan. Brazil’s oil production has been forecast to grow every year for the past four or five years and each time it has disappointed. Indeed Petrobras has struggled to prevent output declining. Perhaps 2014 is the year they finally turn things around but also, perhaps not. The Kashagan field in Kazakhstan briefly came on stream last September – almost a decade behind schedule. It was shut down again almost immediately because of technical problems. The assumption is that the consortium of companies operating the field will finally achieve full production in 2014.

Canada’s contribution to supply growth is perhaps the most predictable as it comes from additions to tar sands capacity whose technology is tried and tested. Provided planned production additions come on stream according to schedule in 2014, these should amount to about 200,000 bpd.

Most forecasters expect the U.S. to add 900,000 bpd to oil supplies in 2014, largely driven by the continuing boom in shale oil. That would be lower than the increment seen this year or in 2012 but market sentiment seems to be discounting a surprise to the upside. As mentioned above, many companies have been creating a stir with talk of exciting new prospects beyond Bakken and Eagle Ford which so far have accounted for nearly all the growth in shale oil production. Indeed at first blush there seem to be so many potential prospects it is hard to keep track of them all. Even within the Bakken and Eagle Ford, talk of down-spacing, faster well completions through pad drilling and “super wells” with very high initial rates of production resulting from the use of new completion techniques have created an impression of a cornucopia of unending growth and that impression weighs on forward WTI prices.

But part of what is going on here is the industry’s desire to maintain a level of buzz consistent with rising equity valuations and capital inflows to the sector.

The hot play now is one of the oldest in America; the Permian basin. A handful of companies with large acreage in the region are making very optimistic assessments of their prospects there. These are based on making long term projections based on a few months’ production data from a handful of wells. We wonder whether data gets cherry picked for investor presentations. We hear about the great wells but not about the disappointing ones. Furthermore, many companies are pointing to higher initial rates of production without taking into account the higher depletion rates which go hand in hand with these higher start-up rates. EOG, the biggest and the best of the shale oil players recently asserted that the Permian – a play in which it is actively investing – will be much more difficult to develop than were either the Bakken or Eagle Ford. EOG figures horizontal oil wells in the Permian have productivity little more than a third of those in Eagle Ford. EOG has further stated on various occasions that the rapid growth in shale oil production is already behind us.

In part this is simple math. The DOE recently started publishing short term production forecasts for each of the major shale plays. They project monthly production increments based on rig counts and observed rig productivity (new wells per rig per month multiplied by production per rig) and subtracting from it the decline in production from legacy wells. According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.

Others have made the same analysis. A couple of weeks ago the IEA expressed concern that shale oil euphoria was discouraging investment in longer term projects elsewhere in the world that will be needed to sustain supply when U.S. shale oil production starts to decline.

Decelerating shale oil production growth is also reflected in the forecasts of independent analysts ITG. They have undertaken the most thorough analysis of U.S. shale plays and use a rigorous and granular approach in forecasting future shale and non-shale oil production in the U.S. Of course their forecast like any other is dependent on the underlying assumptions. But ITG can hardly be branded shale oil skeptics – to the contrary. Yet their forecast for U.S. production growth also calls for a dramatic slowing in the rate of growth. Their most recent forecast is for U.S. production excluding Alaska to grow by about 700,000 bpd in 2014. With Alaskan production continuing to decline, that implies growth of under 700,000 bpd in overall U.S. oil production, or 200,000 bpd less than consensus.

The final element of supply is represented by the change in inventory levels. The major OECD countries will end 2013 with oil inventories some 100 million barrels lower than they were at the beginning of the year. That stock drawdown is equivalent to nearly 300,000 bpd of supply that will not be available in 2014. Data outside the OECD countries is notoriously sparse but the evidence strongly suggests there was also massive destocking in China during 2013.

U.S. Warns on Bakken Shale Oil

The federal government issued a rare safety alert on Thursday, warning that crude oil from the Bakken Shale in North Dakota may be more flammable than other types of crude.

The warning comes after two federal agencies spent months inspecting Bakken crude, including oil carried in recent train accidents that resulted in explosions. The latest blast occurred earlier this week in Casselton, N.D., 25 miles west of Fargo. (…)

North Dakota statistics shows about three-quarters of Bakken crude produced in the state is shipped out by rail.

Manhattan apartment sales hit record high
Figures boosted as overseas buyers compete with New Yorkers

(…) The number of purchases rose 27 per cent compared with the same period the year before to 3,297, according to new data released on Friday. Although down from 3,837 in the third quarter, this was the highest fourth-quarter tally since records began 25 years ago, according to appraiser Miller Samuel and brokerage Douglas Elliman Real Estate.

Limited supply has led to buyers often making immediate all-cash offers, participating in bidding wars and making decisions based on floor plans alone, in an echo of the previous property boom. The number of days a property was on the market in the fourth quarter almost halved from the previous year to 95 days.

“Demand from foreign buyers has never been stronger. Those from the Middle East, Russia, South America, China have been on an incredible buying spree and it is these sales that are driving prices,” said Pamela Liebman, chief executive of property broker The Corcoran Group.

The median price of a luxury apartment – usually above $3m – jumped 10 per cent from a year ago to $4.9m. (…)

The pool of homes for sale is shrinking as many owners wait for prices to rise further before they list. The number of homes on the market at the end of December fell 12.3 per cent from a year earlier to 4,164, near all-time lows.

And new supply is limited – developers hit by the financial crisis have only recently revived projects, which are often luxury residences sought by deep-pocketed local and foreign buyers.

The overall median sales price in the fourth quarter rose 2.1 per cent from the previous year to $855,000. The increase was led by condominiums – largely accounting for the new developments that are the preferred choice of international buyers – which had a record median price of $1.3m.

MILLENNIALS SHUN CREDIT

(…) the 80 million Americans between the ages of 18 and 30 spend around $600 billion annually, but the proportion of that cohort that doesn’t even own a credit card rose from 9 percent in 2005 to 16 percent in 2012. According to credit-reporting firm Experian, Millennials own an average of 1.6 credit cards, while the 30- to 46-year-olds of Generation X own 2.1, and Baby Boomers 2.7. And they don’t even overload those cards they do carry: the average card balance for 19- to 29-year-olds is $2,682, around half that of older age groups. (…)

Most consumers dialed back on credit during the recession. But consumer credit has been rebounding since—except among Millennials. Student loans are one reason for that divergence. In the past 20 years, the cost of tuition and room and board at both private and public colleges has skyrocketed (60 percent and 83 percent, respectively) to $40,917 and $18,391, according to the College Board.  Outstanding student loan balances were more than $1 trillion in September—up 327 percent in just a single decade–according to the New York Federal Reserve Board. The result: Education loans now account for the second largest chunk of outstanding consumer debt after mortgages. Students who graduated from private colleges in 2012 carried $29,900 in debt, up 24 percent in ten years, and public school graduates weren’t far behind, with $25,000 (up 22 percent). With that kind of luggage to carry around, it’s understandable that young people aren’t crazy about adding to their burdens.

There’s also the fact that it’s simply more difficult for young people to get credit cards than it used to be.  (…) (Credit Suisse)

 

NEW$ & VIEW$ (31 DECEMBER 2013)

Smile Small Businesses Anticipate Breakout Year Ahead

(…) Of 937 small-business owners surveyed in December by The Wall Street Journal and Vistage International, 52% said the economy had improved in 2013, up from 36% a year ago. Another 38% said they expect conditions to be even better in 2014, up from 27%.

Three out of four businesses said they expect better sales in 2014, and overall, the small business “confidence index”—based on business owners’ sales expectations, spending and hiring plans—hit an 18-month high of 108.4 in December. All respondents, polled online from Dec. 9 to Dec. 18, had less than $20 million in annual revenue and most had less than 500 employees.

According to the latest data from the National Federation of Independent Business, a Washington lobby group, small-business owners in November ranked weak sales below taxes and red tape as their biggest headache, for the first time since June 2008.

In the group’s most recent survey, owner sentiment improved slightly in November but was still dismal compared with pre-2007. (…)

U.S. Pending Home Sales Inch Up

The National Association of Realtors said Monday that its seasonally adjusted index of pending sales of existing homes rose 0.2% in November from the prior month to 101.7. The index of 101.7 is against a benchmark of 100, which is equal to the average level of activity in 2001, the starting point for the index.

The November uptick was the first increase since May when the index hit a six-year high, but it was less than the 1% that economists had forecast.

Pointing up The chart in this next piece may be the most important chart for 2014. I shall discuss this in more details shortly.

Who Wins When Commodities Are Weak? Developed economy central bankers were somewhat lauded before the financial crisis. Recently, though, they’re finding it harder to catch a break.

(…) Still, here’s a nice chart from which they might take some solace.  Compiled by Barclays Research it shows the gap between headline and core consumer price inflation across Group of Seven nations, superimposed on the International Monetary Fund’s global commodities index. As can be seen at a glance, the correlation is fairly good, showing, as Barclays says, the way commodity prices can act as a ‘tax’ on household spending power.

During 2004-08, that tax was averaging a hefty 0.8 percentage points a year in the G7,  quite a drag on consumption (not that that was necessarily a bad thing, looking back, consumption clearly did OK). However, since 2008. it has averaged just 0.1 percentage points providing some rare relief to the western consumer struggling with, fiscal consolidation, weak wage growth and stubbornly high rates of joblessness.

So, what’s the good news for central bankers here? Well, while a deal with Iran inked in late November to ease oil export sanctions clearly isn’t going to live up to its initial billing, at least in terms of lowering energy prices, commodity-price strength generally is still bumping along at what is clearly a rather weak historical level.

And the consequent very subdued inflation outlook in the U.S. and euro area means that central banks there can continue to fight on just one front, and focus on delivering stronger growth and improved labor market conditions.

Of course, weak inflation expectations can tell us other things too, notably that no one expects a great deal of growth, or upward pressure on wages. Moreover, as we can also see from the chart, the current period of commodity price stability is a pretty rare thing. Perhaps neither central bankers or anyone else should get too used to it.

Coffee cup  Investors Brace as Coffee Declines

Prices have tumbled 20% this year, capping the biggest two-year plunge in a decade and highlighting commodity markets’ struggle with a supply deluge.

(…) The sharp fall in coffee prices is the most prominent example of the oversupply situation that has beset many commodity markets, weighing on prices and turning off investors. Mining companies are ramping up production in some copper mines, U.S. farmers just harvested a record corn crop, and oil output in the U.S. is booming. The Dow Jones-UBS Commodity Index is down 8.6% year to date.

In the season that ended Sept. 30, global coffee output rose 7.8% to 144.6 million bags, according to the International Coffee Organization. A single bag of coffee weighs about 60 kilograms (about 132 pounds), an industry standard. Some market observers believe production could rise again in 2014. (…)

The U.S. Department of Agriculture forecasts that global coffee stockpiles will rise 7.5% to 36.3 million bags at the end of this crop year, an indication that supplies are expected to continue to outstrip demand in the next several months. (…)

The global coffee glut has its roots in a price rally more than three years ago. Farmers across the world’s tropical coffee belt poured money into the business, spending more on fertilizer and planting more trees as prices reached a 14-year high above $3 a pound in May 2011.(…)

Americans on Wrong Side of Income Gap Run Out of Means to Cope

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

The result has been a downsizing of expectations. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. The lack of faith is especially pronounced among those making less than $50,000 a year, with close to three-quarters in the Dec. 6-9 survey saying the economy is unfair. (…)

The diminished expectations have implications for the economy. Workers are clinging to their jobs as prospects fade for higher-paying employment. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer rather than venturing out on their own.

In the meantime, record-high stock prices are enriching wealthier Americans, exacerbating polarization and bringing income inequality to the political forefront. (…)

The disparity has widened since the recovery began in mid-2009. The richest 10 percent of Americans earned a larger share of income last year than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

(…) The median income of men 25 years of age and older with a bachelor’s degree was $56,656 last year, 10 percent less than in 2007 after taking account of inflation, according to Census data.(…)

Those less well-off, meanwhile, are running out of ways to cope. The percentage of working-age women who are in the labor force steadily climbed from a post-World War II low of 32 percent to a peak of 60.3 percent in April 2000, fueling a jump in dual-income households and helping Americans deal with slow wage growth for a while. Since the recession ended, the workforce participation rate for women has been in decline, echoing a longer-running trend among men. November data showed 57 percent of women in the labor force and 69.4 percent of men. (…)

Households turned to stepped-up borrowing to help make ends meet, until that avenue was shut off by the collapse of house prices. About 10.8 million homeowners still owed more money on their mortgages than their properties were worth in the third quarter, according to Seattle-based Zillow Inc.

The fallout has made many Americans less inclined to take risks. The quits rate — the proportion of Americans in the workforce who voluntarily left their jobs — stood at 1.7 percent in October. While that’s up from 1.5 percent a year earlier, it’s below the 2.2 percent average for 2006, the year house prices started falling, government data show.

Millennials — adults aged 18 to 32 — are still slow to set out on their own more than four years after the recession ended, according to an Oct. 18 report by the Pew Research Center in Washington. Just over one in three head their own households, close to a 38-year low set in 2010. (…)

The growing calls for action to reduce income inequality have translated into a national push for a higher minimum wage. Fast-food workers in 100 cities took to the streets Dec. 5 to demand a $15 hourly salary. (…)

Cold Temperatures Heat Up Prices for Natural Gas

2013 by the Numbers: Bitter cold and tight supplies have helped spur a 32% rise in natural-gas futures so far this year, making it the year’s top-performing commodity.

(…) Not only are colder-than-normal temperatures spurring households and businesses to consume more of the heating fuel, the boom in U.S. output is starting to level off as well. These two factors are shrinking stockpiles and lifting prices. The amount of natural gas in U.S. storage declined by a record 285 billion cubic feet from the previous week and stood 7% below the five-year average in the week ended Dec. 13, according to the Energy Information Administration. (…)

Over the first 10 days of December, subzero temperatures in places such as Chicago and Minneapolis helped boost gas-heating demand by 37% from a year ago, the largest such gain in at least 14 years, according to MDA Weather Services, a Gaithersburg, Md., forecaster.

MDA expects below-normal temperatures for much of the nation to continue through the first week of January.

Spain retail sales jump 1.9 percent in November

Spain retail sales rose 1.9 percent year-on-year on a calendar-adjusted basis in November, National Statistics Institute (INE) reported on Monday, after registering a revised fall of 0.3 percent in October.

Retail sales had been falling every month for three years until September, when they rose due to residual effects from the impact of a rise in value-added tax (VAT) in September 2012.

Sales of food, personal items and household items all rose in November compared with the same month last year, and all kinds of retailers, from small chains to large-format stores, saw stronger sales, INE reported.

High five Eurozone retail sales continue to decline in December Surprised smile Ghost

image_thumb[5]Markit’s final batch of eurozone retail PMI® data for 2013 signalled an overall decline in sales for the fourth month running. The rate of decline remained modest but accelerated slightly, reflecting a sharper contraction in France and slower growth in Germany.

The overall decline would have been stronger were it not for a marked easing the rate of contraction in Italy, where the retail PMI hit a 33-month high.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, fell back to 47.7 in December, from 48.0 in November. That matched October’s five-month low and indicated a moderate decline in sales. The average reading for the final quarter (47.8) was lower than in Q3 (49.5) but still the second-highest in over two years.

image_thumb[4]Retail sales in Germany rose for the eighth month running in December, but at the weakest rate over this sequence. Meanwhile, the retail downturn in France intensified, as sales fell for the fourth successive month and at the fastest pace since May. Retail sales in France have risen only twice in the past 21 months. Italy continued to post the sharpest decline in sales of the three economies, however, despite seeing a much slower fall in December. The Italian retail PMI remained well below 50.0 but rose to a 33-month high of 45.3, and the gap between it and the German retail PMI was the lowest in nearly three years.

Retail employment in the eurozone declined further in December, reflecting ongoing job shedding in France and Italy. The overall decline across the currency area was the steepest since April. German retailers expanded their workforces for the forty third consecutive month.

EARNINGS WATCH

Perhaps lost among the Holidays celebrations, Thomson Reuters reported on Dec. 20 that

For Q4 2013, there have been 109 negative EPS preannouncements issued by S&P 500 corporations compared to 10 positive EPS preannouncements. By dividing 109 by 10, one arrives at an N/P ratio of 10.9 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.

Strangely, this is what they reported On Dec. 27:

For Q4 2013, there have been 108 negative EPS preannouncements issued by S&P 500 corporations compared to 11 positive EPS preannouncements.

Hmmm…things are really getting better!

On the other hand, the less volatile Factset’s tally shows no deterioration in negative EPS guidance for Q4 at 94 while positive guidance rose by 1 to 13.

The official S&P estimates for Q4 were shaved another $0.06 last week to $28.35 while 2014 estimates declined 0.3% from $122.42 to $122.11. Accordingly, trailing 12-months EPS should rise 5.1% to $107.40 after Q4’13.

Factset on cash flows and capex:

S&P 500 companies generated $351.3 billion in free cash flow in Q3, the second largest amount in at least ten years. This amounted to 7.2% growth year-over-year, and, as a result of slower growth in fixed capital expenditures (+2.2%), free cash flow (operating cash flow less fixed capital expenditures) grew at a higher rate of 11.3%. Free cash flows were also at their second highest quarterly level ($196.8 billion) in Q3.

S&P 500 fixed capital expenditures (“CapEx”) amounted to $155.0 billion in Q3, an increase of 2.2%. This marks the third consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Because the Energy sector’s CapEx spending represented over a third of the S&P 500 ex-Financials total, its diminished spending (-1.6% year-over-year) has had a great impact on the overall growth rate.

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 6.1% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit a 13.7% 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 were above the ten-year average.

image_thumb[1]

Going forward, however, analysts are projecting that the CapEx growth rate will slide, as the projected growth for the next twelve months of 3.9% is short of that of the trailing twelve-month period. In addition, growth for capital expenditures is expected to continue to slow in 2014 (+1.6%) due, in part, to negative expected growth rates in the Utilities (-3.2%) and Telecommunication Services (-3.0%) sectors.

Gavyn Davies The three big macro questions for 2014

1. When will the Fed start to worry about supply constraints in the US?

(…) The CBO estimates that potential GDP is about 6 percent above the actual level of output. This of course implies that the Fed could afford to delay the initial rise in short rates well beyond the 2015 timescale that the vast majority of FOMC participants now deem likely. The very low and falling rates of inflation in the developed world certainly support this.

But the suspicion that labour force participation, and therefore supply potential, may have been permanently damaged by the recession is gaining ground in some unexpected parts of the Fed, and the unemployment rate is likely to fall below the 6.5 percent threshold well before the end of 2014 (see Tim Duy’s terrific blog on this here)This is the nub of the matter: will Janet Yellen’s Fed want to delay the initial rate rise beyond the end of 2015, and will they be willing to fight the financial markets whenever the latter try to price in earlier rate hikes, as they did in summer 2013? I believe the answer to both these questions is “yes”, but there could be several skirmishes on this front before 2014 is over. Indeed, the first may be happening already.

2. Will China bring excess credit growth under control?

Everyone now agrees that the long run growth rate in China has fallen from the heady days when it exceeded 10 per cent per annum, but there are two very different views about where it is headed next. The optimistic version, exemplified by John Ross’ widely respected blog, is that China has been right to focus on capital investment for several decades, and that this will remain a successful strategy. John points out that, in order to hit the official target of doubling real GDP between 2010 and 2020, growth in the rest of this decade can average as little as 6.9 per cent per annum, which he believes is comfortably within reach, while the economy is simultaneously rebalanced towards consumption. This would constitute a very soft landing from the credit bubble.

The pessimistic view is well represented by Michael Pettis’ writing, which has been warning for several years that the re-entry from the credit bubble would involve a prolonged period of growth in the 5 per cent region at best. Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.

As I argued recently, there is so far no sign that credit growth has dropped below the rate of nominal GDP growth, and the bubble-like increases in housing and land prices are still accelerating. The optimistic camp on China’s GDP has been more right than wrong so far, and a prolonged soft landing still seems to be the best bet, given China’s unique characteristics. But the longer it takes to bring credit under control, the greater the chance of a much harder landing.

3. Will the ECB confront the zero lower bound?

Whether it should be described as secular stagnation or Japanification, the euro area remains mired in a condition of sluggish growth and sub-target inflation that will be worsened by the latest bout of strength in the exchange rate. Mario Draghi said this week that

We are not seeing any deflation at present… but we must take care that we don’t have inflation stuck permanently below one percent and thereby slip into the danger zone.

This does not seem fully consistent with the ECB’s inflation target of “below but close to 2 per cent”. Meanwhile, the Bundesbank has just published a paper which confidently denies that there is any risk of deflation in the euro area, and says that declining unit labour costs in the troubled economies are actually to be welcomed as signs that the necessary internal rebalancing within the currency zone is taking place.

The markets will probably be inclined to accept this, as long as the euro area economy continues to recover. This seems likely in the context of stronger global growth.

But a further rise in the exchange rate could finally force the ECB to confront the zero lower bound on interest rates, as the Fed and others have done in recent years. Mr Draghi has repeatedly shown that he has the ability to navigate the tricky politics that would be involved here, but a pre-emptive strike now seems improbable. In fact, he might need a market crisis to concentrate some minds on the Governing Council.

So there we have the three great issues in global macro, any one of which could take centre stage in the year ahead. For what it is worth, China currently seems to me by far the most worrying.

SENTIMENT WATCH

Goldman’s Top Economist Just Answered The Most Important Questions For 2014 — And Boy Are His Answers Bullish

Goldman Sachs economist Jan Hatzius is out with his top 10 questions for 2014 and his answers to them. Below we quickly summarize them, and provide the answers.

1. Will the economy accelerate to above-trend growth? Yes, because the private sector is picking up, and there’s going to be very little fiscal drag.

2. Will consumer spending improve? Yes, because real incomes will grow, and the savings rate has room to decline.

3. Will capital expenditures rebound? Yes, because nonresidential fixed investment will catch up to consumer demand.

4. Will housing continue to recover? Yes, the housing market is showing renewed momentum.

5. Will labor force participation rate stabilize? Yes, but at a lower level that previously assumed.

6. Will profit margins contract? No, there’s still plenty of slack in the labor market for this to be an issue.

7. Will core inflation stay below the 2% target? Yes.

8. Will QE3 end in 2014? Yes.

9. Will the market point to the first rate hike in 2016? Yes.

10. Will the secular stagnation theme gain more adherents? No. With the deleveraging cycle over, people will believe less in the idea that we’re permanently doomed.

So basically, every answer has a bullish tilt. The economy will be above trend, margins will stay high, the Fed will stay accommodative, and inflation will remain super-low. Wow.

High five But wait, wait, that does not mean  equity markets will keep rising…

David Rosenberg is just as bullish on the economy, with much more meat around the bones, but he also discusses equity markets.

Good read: (http://breakfastwithdave.newspaperdirect.com/epaper/viewer.aspx)

Snail U.S. Population Growth Slows to Snail’s Pace

America’s population grew by just 0.72%, or 2,255,154 people, between July 2012 and July 2013, to 316,128,839, the Census said on Monday.

That is the weakest rate of growth since the Great Depression, according to an analysis of Census data by demographer William Frey of the Brookings Institution.

Separately, the Census also said Monday it expects the population to hit 317.3 million on New Year’s Day 2014, a projected increase of 2,218,622, or 0.7%, from New Year’s Day 2013. (…)

The latest government reports suggest state-to-state migration remains modest. While middle-age and older people appear to be packing their bags more, the young—who move the most—are largely staying put. Demographers are still waiting to see an expected post-recession uptick in births as U.S. women who put off children now decide to have them. (…)

Call me   HAPPY AND HEALTHY 2014 TO ALL!

 

NEW$ & VIEW$ (26 DECEMBER 2013)

Signs Point to Stronger Economy

A pickup in business investment and robust new-home sales point to an economy on stronger footing as the year winds to a close.

(…) Orders for U.S. durable goods rose 3.5% last month, reversing a decline in October, the Commerce Department said Tuesday. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May.

Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the Commerce Department said in a separate report this week, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October’s upwardly revised annual rate of 474,000. October and November marked the two strongest months of new-home sales since mid-2008.

The pair of reports showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of the economy, and led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

The overall durable-goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October. (Chart and table from Haver Analytics)

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large image large image

 

U.S. Consumer Spending Up 0.5% in November

Americans stepped up their spending in November, boding well for holiday sales and offering the latest sign the U.S. recovery is gaining momentum.

Personal consumption, reflecting what consumers spend on everything from televisions to health care, climbed 0.5% in November from a month earlier, the fastest pace since June, the Commerce Department said Monday. The gain was driven by a boost in spending on big-ticket items, more than half of which came from automobile and parts buying, and on services.

But tepid income growth could limit future gains. Personal income increased 0.2% in November after falling 0.1% in October. As a result, consumers dipped into their savings to maintain their spending. (…)

cat

The price index for personal consumption expenditures, the Federal Reserve’s preferred gauge for inflation, was flat in November from a month earlier, the second consecutive month prices went unchanged. From a year earlier, prices were up 0.9% in November, after being up 0.7% in October.

Core prices, which exclude volatile food and energy costs, rose 0.1% from October and 1.1% from a year prior.

Nerd smile What’s wrong with this chart?

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Personal income gained a disappointing 0.2% (2.3% y/y) after a minimal dip in October. Disposable personal income increased just 0.1% (1.5% y/y), held back by a 0.8% rise (9.0% y/y) in tax payments. Wages & salaries increased 0.4% but the 2.2% year-to-year increase was the weakest since mid-2010.

Real disposable income rose 0.3% during the last 3 months, a very weak 1.2% annualized rate that lead to a very low 0.6% YoY increase in November. Meanwhile, real expenditures rose 1.1%, a 4.5% annualized rate. November real spending was up 2.6% YoY. Americans just keep dissaving to sustain their living standard. For how long?

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Meanwhile, Christmas sales are fuzzy:

This chart plots weekly chain store sales which have been in a narrow +2.0-2.3% YoY gain channel since the spring. Weak!

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But Online Sales Jumped 37% During Weekend

(…) After mall-traffic tracker ShopperTrak on Monday reported a 3.1% decline in holiday in-store sales and a 21% plunge in store traffic in the crucial shopping week ended Sunday, additional data again suggest a much brighter picture online. Total online sales from Friday through Sunday surged 37% year-to-year, with mobile traffic representing two-fifths of all online traffic, according to IBM Digital Analytics. Consumers buying from their mobile devices sent mobile sales up 53%, accounting for 21.5% of all online sales, IBM said. (…)

Sad smile With what looks to be a disappointing holiday season, Retail Metrics’ Ken Perkins said Tuesday that fourth-quarter retail sales for the 120 chains it tracks is now expected to rise just an average of 1.9%, the weakest since third-quarter 2009. Profit growth is expected to be just 1.3%, also the weakest since third-quarter 2009, “when retailers were still clawing their way out of the Great Recession.”

Fourth-quarter same-store sales are expected to rise an unimpressive 1.1%.

“It has been a very disappointing holiday season to date for most of retail,” said Mr. Perkins.

Late Surge in Web Buying Blindsides UPS, Retailers A surge in online shopping this holiday season left stores breaking promises to deliver packages by Christmas, suggesting that retailers and shipping companies still haven’t fully figured out consumers’ buying patterns in the Internet era.

(…) E-commerce accounts for about 6% of overall U.S. retail sales, according to the Commerce Department. This holiday season, online purchases will be nearly 14% of sales, estimates the National Retail Federation.

During the last shopping weekend before Christmas, Web sales jumped 37% from the year before, according to IBM Digital Analytics. Market research firm Forrester Research expects online sales to increase 15% this holiday season amid slow mall traffic and weak sales at brick-and-mortar retailers.

Coming back to the slow income growth trends:

 

Mortgage Applications Drop to 13-Year Low

The average number of mortgage applications slipped 6.3% to a 13-year low on a seasonally adjusted basis as interest rates rose from the previous week, the Mortgage Bankers Association said.

Following last week’s 6.1% drop, applications for purchase mortgages were down another 3.5% w/w to the lowest level since February 2012. The purchase index is currently tracking down 11.5% y/y. (…)  Application activity remains below both the recently reported y/y growth in new home sales (+22% in October) and existing home sales (-1.2% in November), led by a declining mix of first-time buyers within both segments. Recent data also suggests mortgage credit availability has tightened slightly more. (…)

The average contract rate on 30-year fixed conforming mortgages increased 2 bp w/w to 4.64%, matching the highest level since September, and is now up 105 bp since bottoming during the week ended May 3. Overall mortgage rates are up 113 bp y/y, as the spread relative to the 10-year Treasury note has now expanded 1 bp y/y to 175 bp.

BTW, FYI:

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Calm returns to China’s money markets Central bank skips open market operations

China Expects 7.6% Growth in 2013 China’s economy will post growth of 7.6% for all of 2013, a top planning official said, indicating that the world’s second-largest economy will exceed Beijing’s 7.5% target but that it also lost momentum in the final months of the year.

(…) China’s economy posted year-over-year growth of 7.8% in the third quarter after expanding at 7.7% in the first quarter and 7.5% in the second quarter amid a still sluggish global economy. A “mini-stimulus” of government investment in rail and subway construction coupled with tax and other business incentives helped boost growth in the July-September period. (…)

Ninja I suspect the Chinese are spying on NTU which revealed the Q4 slowdown on Dec. 18.

Christmas spirit does little for Spain
Subdued domestic demand weighs on the economy

(…) Retail sales are still a quarter lower than they were before Spain slid into economic crisis more than five years ago, and some shop owners say they have seen little change in consumer behaviour so far. (…)

Until now, the recovery has been driven almost exclusively by rising exports, with domestic demand acting as a drag on growth. The surge in shipments to foreign markets was sufficiently strong to lift Spain out of recession in the third quarter this year, and has given companies the confidence to start investing in plants and machinery. But economists warn that Spain will be stuck with anaemic growth at best as long as domestic demand remains as subdued as it is now.

There are some signs of hope. According to the Bank of Spain, the decline in overall household consumption slowed in the third quarter. Spanish retail sales actually rose 2.1 per cent on an annual basis in September, the first such increase in more than three years, but fell back into negative territory the next month. Consumer confidence has risen sharply and car sales – helped by a government subsidy programme – are also up.

Javier Millán-Astray, director-general of Spain’s association of department stores and retail chains, notes that sales on the first big shopping weekend of the holiday season were up 8 per cent compared with last year, and predicts an overall rise in Christmas sales of 6-7 per cent compared with 2012. “We have seen a change in the trend since August. Sales have still been falling but the drops are much smaller than before. And the truth is that the first weekend of the Christmas season was much better than the year before.” (…)

 

NEW$ & VIEW$ (23 DECEMBER 2013)

Surprised smile Economy Gaining Momentum The U.S. economy grew at a healthy 4.1% annual rate in the third quarter, revised figures showed, boosting hopes that the recovery is shifting into higher gear after years of sluggishness.

Friday’s report showed consumer spending—a key driver of the economy—grew at a 2% annual rate in the summer, instead of the previously estimated 1.4%.

U.S. Economy Starts to Gain Momentum

ZeroHedge drills down:

(…) many are wondering just where this “revised” consumption came from: of the $15 billion revised increase in annualized spending, 60% was for healthcare, and another 27% was due to purchases of gasoline. The third largest upward revision: recreation services. On the flip side, the biggest revision detractors: transportation services and housing and utilities.

No boost to retailing from these revisions.

Meanwhile, profit margins keep defying the naysayers, this time because of lower taxes:

(…) after-tax corporate profits in the third quarter topped 11% of gross domestic product for the first time since the records started in 1947. At the same time, taxes paid by corporations has declined nearly 5% in the third quarter compared with a year earlier.

Another positive sign?

The U.S. economy seems to be getting “a little bit better,” said General Electric Co. Chief Executive Jeff Immelt, speaking after an investor meeting this past week. “We’ve seen some improvements in commercial demand for credit,” he said, a positive sign that companies are investing.

Wells Fargo CEO said same 10 days ago.

Is it because companies are finally investing…or because companies must now finance  out of line inventories due to the lack of growth in final demand?

real final sales

 

On the one hand, the official GDP is accelerating beyond any forecasts. On the other hand, final demand is slowing to levels which most of the time just preceded a recession. Go figure! Confused smile

But don’t despair, on the next hand, here’s David Rosenberg painting a “Rosie” scenario for us all (my emphasis):

(…) But things actually are getting better. The Institute for Supply Management figures rarely lie and they are consistent with 3.5% real growth. Federal fiscal policy is set to shift to neutral from radical
restraint and the broad state/local government sector is no longer shedding jobs and is, in fact, spending on infrastructure programs again.

On top of that, manufacturing is on a visible upswing. Net exports will be supported by a firmer tone to the overseas economy. The deceleration to zero productivity growth, which has a direct link to profit margins, will finally incentivize the business sector to invest organically in their own operations with belated positive implications for capex growth.

But the centrepiece of next year’s expected acceleration really boils down to the consumer. It is the most essential sector at more than 70% of GDP. And what drives spending is less the Fed’s quest for a ‘wealth effect,’ which only makes rich people richer, but more organic income, 80% of which comes from working. And, in this sense, the news is improving, and will continue to improve. I’ll say it until I’m blue in the face. Freezing

Indeed, all fiscal policy has to do is shift to neutral, and a 1.5-percentage-point drag on growth — the major theme for 2013 — will be alleviated. With that in mind, the two-year budget deal that was just cobbled together by Paul Ryan and Patty Murray at the least takes much of the fiscal stranglehold off the economy’s neck, while at the same time removing pervasive sources of uncertainty over the policy outlook.

Since the pool of available labour is already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernibly in coming years, unless, that is, you believe the laws of supply and demand apply to every market save for the labour market.

Pointing up Let’s get real: By hook or by crook, wages are going up next year (minimum wages for sure and this trend is going global). With this in mind, the most fascinating statistic this past week was not ISM or nonfarm payrolls, but the number of times the Beige Book commented on wage pressures: 26. That’s not insignificant. Again, when I talked about this at the Thursday night dinner, eyeballs rolled.

There was much discussion about the lacklustre holiday shopping season thus far, with November sales below plan. There was little talk, however, about auto sales hitting a seven-year high in November even with lower incentives. And what’s a greater commitment to the economy — a car or a cardigan?

As I sifted through the Beige Book to see which areas of the economy were posting upward wage pressure and growing skilled labour shortages, I could see it cut a large swath: technology, construction, transportation services, restaurants, durable goods manufacturing.

Of the 115 million people currently working in the private sector, roughly 40 million of them are going to be reaping some benefits in the form of a higher stipend and that is 35% of the jobs pie right there. That isn’t everyone, but it is certainly enough of a critical mass to spin the dial for higher income growth (and spending) in the coming year. Macro surprises are destined to be on the high side — take it from a former bear who knows how to identify stormy clouds. (…)

On the consumer side, the aggregate debt/disposable income ratio has dropped from 125% at the 2007 peak to 100%, where it was a decade ago (down to 95% excluding student loans, an 11-year low). In other words, the entire massive 2002-07 credit expansion has been reversed, and, as such, the household sector is in far better financial position to contribute to economic activity.

On the government side, the U.S. federal deficit, 10% of GDP just four years ago, is below 4% today and on its way to below 3% a year from now, largely on the back of tough spending cuts and a big tax bite.

Then throw in the vast improvement in the balance-of-payments situation, courtesy of the energy revolution. With oil import volumes trimmed 5% over the past year and oil export volumes up a resounding 30%, the petroleum deficit in real terms has been shaved by one-quarter in just the last 12 months. This, in turn, has cut the current account deficit in half to 3% of GDP from the nearby high of 6%. (…)

In a nutshell, I feel like 2014 is going to feel a lot like 2004 and 1994 when the economy surprised to the high side after a prolonged period of unsatisfactory post-recession growth. Reparation of highly leveraged balance sheets delayed, but, in the end, did not derail a vigorous expansion.

High five That by no means guarantees a stellar year for the markets, because, as we saw in 2013 with a softer year for the economy, multiple expansion premised on Fed-induced liquidity can act as a very powerful antidote. Plus, a rising bond-yield environment will at some point provide some competition for the yield delivered by the stock market.

While 1994 and 2004 were hardly disasters, the market generated returns both years that were 10 percentage points lower than they were the prior year even with a more solid footing to the economy — what we gained in terms of growth, we gave up in terms of a less supportive liquidity/monetary policy backdrop.

But make no mistake, the upside for next year from a business or economic perspective as opposed to from a market standpoint is considerable.

Just kidding It is open for debate as to how the stock market will respond, but it is not too difficult to predict where bond yields will be heading (up) since they are, after all, cyclical by nature. Within equities, this means caution on the rate-sensitives and the macro backdrop will augur for growth over value.

Thanks David, but…

First, let’s set the record straight:

  • According to Edmunds.com’s Total Cost of Incentives (TCI) calculations, car incentives on average were flat from a year ago, though some automakers increased their incentives and even others lowered them. One car dealer said that manufacturers are pushing retailers to buy more vehicles, “slipping back into old habits”.
  • The S&P 500 Index peaked at 482 in January 1994, dropped 8% to 444 at the end of June and closed the year at 459. EPS jumped 18% that year while inflation held steady around 2.5%.
  • In 2004, equity markets were essentially flat all year long before spiking 7% during the last 2 months of the year. Profits jumped 24% that year while inflation rose from 1.9% to 3.3%.
  • In both years, equity valuations were in a correction mode coming from Rule of 20 overvalued levels in the previous years.

Second, we should remember that car sales have been propelled by the huge pent up demand that built during the financial crisis. Like everything else, this will taper eventually. The fact remains that car sales have reached the levels of the previous 4 cyclical peaks. Consider that there are fewer people actually working these days, even fewer working full time, that the younger generation is not as keen as we were to own a car and that credit conditions remain very tight for a large “swath” of the population. And just to add a fact often overlooked by economists, car prices are up 8% from 2008 while median household income is unchanged. (Chart from CalculatedRisk)

Third, it may be true that the ISM figures rarely lie but we will shortly find out if recent production strength only served to grow inventories. To be sure, car inventories are currently very high, prompting some manufacturers to cut production plans early in 2014.

Fourth, building an economic scenario based on accelerating wages invites a discussion on inflation and interest rates, both key items for equity valuation and demand. There is no money to be made from economic scenarios, only from financial instruments. Rosie’s scenario may not be as rosy for financial markets if investors become concerned about labour demand exceeding supply. (See Lennar’s comments below).

Ghost  Gasoline Heats Up in U.S.

Futures prices rose 5.9% last week in response to signs of unusually srong demand for the fuel.

Gasoline for January delivery rose 4.3 cents, or 1.6%, to $2.7831 a gallon Friday on the New York Mercantile Exchange.

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Pressure builds as retailers near the holiday finish line

(…) Thom Blischok, chief retail strategist and a senior executive adviser with Booz & Company’s retail practice in San Francisco, said many U.S. shoppers are holding back this season because they have fewer discretionary dollars.

“Sixty-five percent of (Americans) are survivalists. They are living from paycheck to paycheck,” he said. “Those folks simply don’t have any money to celebrate Christmas.”

People with annual income of $70,000 and up account for 33 percent of U.S. households, but 45 percent of spending, according to U.S. Census data crunched by AlixPartners. That group has seen the most benefit from the improving economy as rising home and stock prices bolster their net worth.

But even those with higher incomes are holding back.

“The era of ‘living large’ is now officially in the rear-view mirror,” said Ryan McConnell, who heads the Futures Company’s US Yankelovich Monitor survey of consumer attitudes and values.

Responses to the 2013 survey suggested that the “hangover effect” of the so-called Great Recession remained prevalent with 61 percent of respondents agreeing with the statement: “I’ll never spend my money as freely as I did before the recession.” (…)

Competing for shoppers led major retailers to significantly ramp up the frequency of their promotions in the first part of December, according to data prepared for Reuters by Market Track, a firm that provides market research for top retailers and manufacturers.

A group of eight major retail chains, including J.C. Penney Co Inc, Wal-Mart Stores Inc  and Best Buy Co Inc, increased the number of circulars they published between December 3 and December 18 nearly 16 percent over the comparable period a year earlier.

Those retailers, which also include Sears and Kmart, Macy’s Inc, Kohl’s Corp and Target Corp, ramped up the online deals even more, increasing the number of promotional emails by 54.5 percent, according to the Market Track data.

The battle for shoppers has also led to the most discount-driven season since the recession, according to analysts and executives.

“There is a quicker turnover of promotions this year, and now several times, within a day,” eBay Enterprise CEO Chris Saridakis said. “It’s an all-out war.”

Clock  Shoppers Grab Sweeter Deals in Last-Minute Holiday Dash

U.S. shoppers flocked to stores during the last weekend before Christmas as retailers piled on steeper, profit-eating discounts to maximize sales in their most important season of the year.

Retailers were offering as much as 75 percent off and keeping stores open around the clock starting Friday. “Super Saturday” was expected to be one of the busiest shopping days of the year, according to Chicago-based researcher ShopperTrak. (…)

Holiday purchases will rise 2.4 percent, the weakest gain since 2009, ShopperTrak has predicted. Sales were up 2 percent to $176.7 billion from the start of the season on Nov. 1 through Dec. 15, said the firm, which will update its figures later today. The National Retail Federation reiterated on Dec. 12 its prediction that total sales will rise 3.9 percent in November and December, more than the 3.5 percent gain a year ago.

Factset concludes with the important stuff for investors: Most S&P 500 Retail Sub-Industries Are Projected to Report a Decline in Earnings in Q4

In terms of year-over-year earnings growth, only five of the thirteen retail sub-industries in the S&P 500 are predicted to report growth in earnings for the fourth quarter. Of these five sub-industries, the
Internet Retail (66.7%) and Automotive Retail (10.3%) sub-industries are expected to see the highest earnings growth. On the other hand, the Food Retail (-20.2%), General Merchandise Stores (-10.6%), and Apparel Retail (-8.8%) sub-industries are expected to see the lowest earnings growth for the quarter.

Overall, there has been little change in the expected earnings growth rates of these thirteen retail subindustries since Black Friday. Only four sub-industries have recorded decreases in expected earnings growth of more than half a percentage point since Black Friday: Drug Retail, Food Retail, General Merchandise, and Hypermarkets & Supercenters. On the hand, no sub-industry has recorded an increase in expected earnings growth of more than half a percentage point since November 29.

These folks are unlikely to be jolly unless Congress acts, again at the last hour:

Tom Porcelli, chief U.S. economist at RBC Capital Markets, estimates that 1.3 million folks will lose their unemployment checks after this week, forcing some to take jobs they previously passed up or join the legions of workforce dropouts. If even half do the latter, the jobless rate could slip to 6.6% in fairly short order. (Barron’s)

This could have interesting consequences as JP Morgan explains:

(…) the potential expiration of federal extended unemployment benefits (formally called Emergency Unemployment Compensation) at the end of this month could push the measured unemployment rate lower.

The state of North Carolina offers a potential testing ground for this thesis. In July, the North Carolina government decided to no longer offer extended benefits, even though the state still met the economic conditions to qualify for this federal program. Since July, the North Carolina unemployment rate has fallen 1.5%-points; in the same period the national unemployment rate has fallen 0.4%-point. (…)

The information from one data point is a long way from statistical certainty, but the limited evidence from North Carolina suggests that the potential expiration of extended benefits will place further downward pressure on the measured unemployment rate. In which case the Fed could soon have some ‘splainin’ to do about what “well past” 6.5% means with respect to their unemployment rate threshold.

GPSWebNote ImageGPSWebNote Image

Rampant Returns Plague E-Retailers Behind the uptick in e-commerce is a secret: As much as a third of all Internet sales gets returned, in part because of easy policies on free shipping. Retailers are trying some new tactics to address the problem.

(…) Retailers are zeroing in on high-frequency returners like Paula Cuneo, a 54-year-old teacher in Ashland, Mass., who recently ordered 10 pairs of corduroy pants in varying sizes and colors on Gap Inc. GPS +0.73% ‘s website, only to return seven of them. Ms. Cuneo is shopping online for Christmas gifts this year, ordering coats and shoes in a range of sizes and colors. She will let her four children choose the items they want—and return the rest.

Ms. Cuneo acknowledged the high costs retailers absorb to take back the clothes she returns, but said retailers’ lenient shipping policies drove her to shop more.

“I feel justified,” she said. “After all, I am the customer.” (…)

HOUSING WATCH

FHFA to Delay Increase in Mortgage Fees by Fannie, Freddie

The incoming director of the regulatory agency that oversees Fannie Mae and Freddie Mac said he would delay an increase in mortgage fees charged by the housing-finance giants.

(…) Upon being sworn in, “I intend to announce that the FHFA will delay implementation” of the loan-fee increases “until such time as I have had the opportunity to evaluate fully the rationale for the plan,” he said in a statement.

The FHFA signaled that it would increase certain fees charged by Fannie and Freddie that are typically passed on to mortgage borrowers on Dec. 9, on the eve of Mr. Watt’s Senate confirmation. (…)

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to a top of 850.) (…)

Surely, the housing market does not need more headwinds. ISI’s homebuilders survey is continuing to plunge, existing house sales have declined sharply, and existing house prices are down -1.6% from their peak.  In addition, ISI’s house price survey has been flat for five months. On the other hand, NAHB’s survey is at a new high, and housing starts surged in November. Inventory accumulation?

Pointing up Meanwhile, costs are skyrocketing:

Lennar noted that while its “aggressive” pricing strategies led to significant margin improvements, labor and construction material costs last quarter were up about 12% from a year ago, and that labor costs were up by “more” than material costs. (CalculatedRisk)

I remain concerned that higher inflation is slowly sneaking in, hidden behind weighted indices while un-weighted measures suggest that prices are being regularly ratcheted up. The median CPI, measured by the Cleveland Fed, is still up 2.0% YoY even though the weighted CPI is down to +1.0% YoY.

Differences between changes in the CPI and the median consumer price
change underscore the impact of the distribution of price movements on our monthly interpretation of inflation. The median price change is a potentially useful indicator of current monetary inflation because it minimizes, in a nonsubjective way, the influence of these transitory relative price movements.

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Assume there is no abnormal inventory accumulation and that David Rosenberg’s scenario pans out, we might get both demand pull and cost push inflation simultaneously. Far from a rosy scenario. Mrs. Yellen would have her hands full.

Thumbs up Economic Conditions Snapshot, December 2013: McKinsey Global Survey results

As 2013 draws to a close, executives are more optimistic about economic improvements than they have been all year, both at home and in the global economy. They also anticipate that conditions will continue to improve, thanks to the steady (though modest) improvements in the developed world that many expect to see.

imageIn McKinsey’s newest survey on economic conditions, the responses affirm that economic momentum has shifted—and will continue to move—from the developed to the developing world, as we first observed in September. Indeed, executives say the slowdown in emerging markets was one of the biggest business challenges this year, and respondents working in those markets are less sanguine than others about the current state of their home economies.

Respondents from all regions agree, though, on the world economy: for the first time since we began asking in early 2012, a majority of executives say global conditions have improved in the past six months.
Looking ahead to 2014, many executives expect economic progress despite growing concern over asset bubbles and political conflicts—particularly in the United States. Respondents there say that ongoing political disputes and the government shutdown in October have had a
notable impact on business sentiment, despite the less noticeable effect on the country’s recent economic data. Still, at the company level, executives maintain the consistently positive views on workforce size, demand, and profits that they have shared all year. (…)

Amid the shifting expectations for growth that we saw in 2013, executives’ company-level views have held steady and been relatively positive throughout the year. Since March, respondents most often reported that their workforce sizes would stay the same, that demand
for their companies’ products would grow, and that their companies’ profits would increase over the next six months; the latest results are no different.

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Pointing up Executives are still very focused on increasing margins!

Across regions, executives working in developed Asia are the most optimistic—and those in the eurozone are the most pessimistic—about their companies’ prospects. Forty-four percent of those in developed Asia say their workforces will grow in the next six months, while just 7 percent say they will shrink; in contrast, 31 percent of executives in the eurozone expect a decrease in workforce size. Two-thirds of respondents in developed Asia expect demand for their companies’ products and services to increase in the coming months, and they are least likely among their peers in other regions to expect a decrease in company profits.

In their investment decisions, though, executives note a new concern: rising asset prices, which could affect company-level (as well as macroeconomic) growth in the coming year. Of the executives who say their companies are postponing capital investments or M&A decisions they would typically consider good for growth, the largest shares of the year now cite high asset valuations as a reason their companies are waiting.

Strains Grip China Money Markets

Borrowing costs in China’s money market soared again, as the central bank’s recent fund injection failed to appease jittery investors amid a seasonal surge in demand for cash by banks.

Borrowing costs in China’s money market soared again after a brief fall earlier Monday, as the central bank’s recent fund injection failed to appease jittery investors amid a seasonal surge in demand for cash by banks.

The seven-day repurchase-agreement rate, a benchmark measure of the cost that banks charge each other for short-term loans, rose to 9.8%, up from 8.2% Friday and its highest level since it hit 11.62% on June 20, at the peak of China’s summer cash crunch. (…)

The stress in the banking system has spread elsewhere, with stocks in Shanghai falling for a ninth straight day Friday to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.

Vietnam’s Growth Picks Up

The country’s gross domestic product grew 5.42% this year, compared with 5.25% in 2012, the government’s General Statistics Office said Monday. Last year’s GDP, the slowest since 1999, was revised up from 5.03%. Inflation was down as well.

The government said on-year growth in the fourth quarter was 6.04%, compared with 5.54% in the third quarter.

Japan forecasts GDP growth of 1.4% for 2014
Planned sales tax increase forecast to hit consumption

The Japanese government forecast on Saturday that real gross domestic product will grow by 1.4 per cent for the fiscal year starting March 2014, slowing from an expected 2.6 per cent growth for the current year as a planned sales tax increase is seen dampening consumption. (…)

The government also forecast that consumer prices will rise by about 1.2 per cent in the 2014 fiscal year, without considering an impact from the sales tax hike. Consumer prices are expected to show a rise of 0.7 per cent in the current fiscal year. The Bank of Japan launched a massive monetary stimulus programme aimed at pushing the inflation rate up to 2.0 per cent in two years, in a bid to wrench the country out of a long phase of deflation.

SENTIMENT WATCH

 

U.S. Economy Begins to Hit Growth Stride

 

Even Skeptics Stick With Stocks

Money managers and analysts say they are beginning to think the Federal Reserve is succeeding in restoring economic growth.

(…) Ned Davis, founder of Ned Davis Research in Venice, Fla., and a skeptic by nature, told clients last week that the economic picture is brightening. “There are still mixed indicators regarding economic growth, but most of our forward-looking indicators are suggesting the economy is accelerating to at least ‘glass-half-full’ growth rates,” he wrote. (…)

Because they now think the economy is on the mend, many money managers share the view that, while 2014 probably won’t match 2013, indexes probably will finish the year with gains. (…)

Ageing stocks bull can still pack some power

(…) While the S&P 500 is unlikely to match the 27 per cent jump it achieved in 2013, the odds favour another strong year for equities. Investors with a long time horizon have little to fear from wading into the market, even after a 168 per cent run-up from the index’s post-financial crisis nadir. (…)

It is no secret that companies have cut their way to profitability growth. They have put off investment, including in wages and hiring; they have slashed their financing costs by issuing record amounts of debt at this year’s rock-bottom interest rates; and they have juiced earnings per share further by buying back and cancelling shares at a pace not seen for five years.

These are trends that will all be slow to reverse. Slack in the economy will keep the lid on what companies have to spend on employees, and the benefits of those low financing costs are locked in for years to come. To the extent that wages and interest rates rise, it will be because the economic outlook is brightening, which will fill in the missing piece of the puzzle: top line revenue growth. (…)

In the historical context, current return on equity for the S&P 500 is not high; at 14.1 per cent during the last quarterly reporting season, it was only 5 basis points above the average since 1990. Profit growth, in other words, is as likely to carry on rising as it is to U-turn. Confused smile

The path of least resistance for equities is still up. There is a whole swath of bond investors who are yet to reassess their overweights in that asset class, who may do so when January’s miserable annual statements land. The diversifying “alternative” investments – hedge fund-like mutual funds and their mutant brethren – remain too expensive to become significant parts of a portfolio for most investors.

The S&P 500’s down years have all, with the exception of 1994, been recession years. Of course, the spectre of 1994 is haunting, since that was precisely when the Federal Reserve last attempted a big reversal of policy and began to raise interest rates to choke off inflation.

There is an asterisk to even the most bullish equity forecast, which is that all bets will be off if the Fed loses control of rates, dragging bond yields higher not just in the US where they might be justified, but also across the world, where they could snuff out a nascent recovery in Europe and cause untold harm in emerging markets.

After the smooth market reaction to the announcement of a slowdown in quantitative easing last week, a disaster scenario looks even more unlikely. And lest we forget, tapering is not tightening, so 2014 is not 1994.

If the S&P 500 closes out the year where it began this week, 2013 will go down as the fifth best year for share price gains since the index was created in 1957. Each of the four occasions when it did better – 1958, 1975, 1995 and 1997 – were followed by an additional year of strong returns, ranging from 8.5 per cent to 26.7 per cent.

Equity markets should maintain their positive momentum as long as the global economy maintains its, and the odds look good. Even in middle age, a bull can pack some power.

Bull Calls United in Europe as Strategists See 12% Gain

Equities will rise 12 percent in 2014, according to the average projection of 18 forecasters tracked by Bloomberg News.Ian Scott of Barclays Plc says the StoxxEurope 600 Index can rally 25 percent because shares are cheap even after a 49 percent gain since 2011. (…)

The average estimate is the most bullish since at least 2010, with no strategist predicting a gain of less than 3.3 percent, and comes even as company analysts reduced income forecasts for an 85th straight week. While more than 2.7 trillion euros ($3.7 trillion) has been restored to European equity values since September 2011, shares would have to gain another 65 percent to match the advance in the Standard & Poor’s 500 Index during the last five years.

“You would have lacked credibility being bullish on Europe 18 months ago, although stocks were very cheap and the economy was bottoming,” said Paul Jackson, a strategist at Societe Generale SA inLondon, who predicts a 15 percent jump for the Stoxx 600 next year. “As soon as the market started to do well, suddenly everybody wants to listen. And now not only is everybody listening, but everyone is saying the same thing. The time to worry about the Armageddon scenario is gone.” (…)

Analysts have downgraded earnings estimates on European companies excluding the U.K. for 85 weeks, a record streak, according to Citigroup Inc. data on Bloomberg. Mark Burgess, chief investment officer at Threadneedle Asset Management Ltd., says European earnings will probably disappoint again. (…)

“The region remains beset by relatively poor growth dynamics compared with the rest of the developed world,” Burgess, who helps oversee $140 billion from London, said in e-mailed comments on Dec. 11. “This year’s stock market recovery could easily herald a false dawn. While for the first time in three years we believe Europe is likely to return to positive GDP growth in 2014, earnings growth is likely to be steady rather than dramatic.” (…)

Evans at Deutsche Bank says his team at Europe’s largest bank has become “increasingly convinced” that lending in the region will rebound and will help companies beat estimates in what he calls investors’ “complete loss of confidence in the earnings cycle.”

The ECB said in a quarterly survey released Oct. 30 that banks expect to relax standards on corporate lending this quarter. That’s the first such response since the fourth quarter of 2009 and, if it occurs, would mark the first easing of conditions since the second quarter of 2007. Lenders also plan to simplify access to consumer loans and mortgages, and predicted a rise in loan demand.

Everybody is jumping on the bandwagon on the basis of an accelerating economy and equity momentum.

Time to stay rationale and disciplined. Good luck, and happy holidays! Gift with a bow

 

NEW$ & VIEW$ (17 DECEMBER 2013)

Industrial Output Hits a Milestone

Industrial production, which measures the output of U.S. manufacturers, utilities and mines, surged a seasonally adjusted 1.1% from the prior month, the Federal Reserve said Monday. That was the biggest jump in a year.

The ascent in part reflects big gains for volatile mining and utilities components, though underlying figures point to steadily rising demand for an array of industrial goods.

Manufacturing, the largest component of industrial production, remains below its prerecession peak. But the sector expanded 0.6% in November, the fourth straight month of gains. Overall factory output is up 2.9% from a year earlier.

Rising auto output led the increase, with motor-vehicle assemblies at the highest level in eight years. (Chart from Haver Analytics)

Strong report overall, indicating a rising momentum in most sectors. Capacity utilization keeps rising, a positive for profit margins.

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Here’s the LT Cap. Ute. chart from CalculatedRisk:

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Meanwhile, other costs are rising faster (Charts from Haver Analytics):

But not in manufacturing:

Auto  European Car Sales Rise for Third Month of Increased Demand

European new-car sales rose a third consecutive month in November, the longest period of gains in four years, as demand for autos from Volkswagen AG and Renault SA contributed to signs that an industrywide decline is ending.

Registrations in November increased 0.9 percent from a year earlier to 975,281 vehicles, the Brussels-based European Automobile Manufacturers Association, or ACEA, said today in a statement. The growth followed gains of 4.6 percent in October and 5.5 percent in September.

Among Europe’s five biggest car markets, demand increased 15 percent last month in Spain, which ranks fifth in the region, and 7 percent in the U.K., which places second. The Spanish government revived a cash-for-clunkers incentive program in October to boost car sales. Registrations dropped in Germany, France and Italy.

Asian, German Car Makers Seen Boosting Capacity in North America

Asian auto makers are expected to add the capability to build nearly one million more vehicles in North America over the next six years, and German auto makers could boost capacity by 700,000 in a challenge to the market stability that has helped boost profits for Detroit’s three big auto makers.

The new plants are aimed at supplying a projected growth in demand in the North American market, and could be used to ramp up exports, particularly to Europe and the Middle East and Africa, according to a new report by IHS Automotive—a division of business information firm IHS Inc.

Mike Jackson, a production forecaster with IHS Automotive, said that despite the two-million-unit increase forecast, overcapacity shouldn’t be a serious concern.

“We still anticipate a 90% to 95% utilization rate,” he said.

Mr. Jackson estimates that by 2020, two million vehicles will be exported from North America, a 60% increase over today. By then, 35% of exports will be going to Europe, 25% to South America and 22% to the Middle East and Africa, which is forecast to have strong growth. (…)

Global Car Sales Seen Rising to 85 Million in 2014

The global auto industry is expected to produce 85 million sales in 2014, up from an estimated 82 million this year, IHS Automotive said in a forecast Monday.

By 2018 sales are forecast to break 100 million, according to the unit of business-information provider IHS Inc.

This global growth is driven by rising wealth in emerging markets as well as relatively moderate gasoline prices. (…)

The U.S. market may rise 2.4% to 16.03 million from 15.65 million this year and to peak in 2017 at nearly 17 million before leveling off. (…)

Production in North America also is forecast to rise by 2.1 million vehicles between now and 2020, driven by new plants in the U.S. and Mexico. Asian auto makers are expected to add more than one million units of that capacity.

In a separate report, Deutsche Bank estimates global automobile sales will rise 4% in 2014, to 87.4 million light vehicles. That would be slightly ahead of the 3.5% growth the industry is on track to hit for this year, when global auto sales are expected to total 84 million vehicles. Total auto sales estimates can vary because of inconsistencies in reporting by different countries and whether heavier duty vehicles are included in the total.

The key drivers will be a return to growth in Europe and continued strong demand in the U.S. and China.

After six years of declines in new-car sales, Europe should see a rise of 3% in 2014, to about 14 million light vehicles, according to Deutsche Bank’s forecast. While that total would be an improvement from 2013, it would still be well below the 18 million new cars and light commercial vehicles that were sold in 2007. The bank says an aging fleet of cars on European roads, and a shortage of used cars, will prod more buyers to showrooms next year. (…)

The U.S. should also get a lift as consumers who signed three-year leases on new cars in 2011 look to trade in for new vehicles. Leasing plunged between 2008 and 2010, and the rebound in leasing since them should provide a steady stream of ready customers for 2014, 2015 and 2016, Deutsche Bank wrote.

The Chinese market for cars should grow 10% next year, to 23.8 million cars and light trucks. That is still a robust rate but down from the 13% increase the market will see for 2013. For this year auto sales are seen reaching 21.7 million vehicles.

Euro-Zone Prices Fall

Despite the decline in euro-zone prices during November, the European Union’s statistics agency said the annual rate of inflation rose to 0.9% from 0.7%, in line with its preliminary estimate. But even after that pickup, the rate of inflation was well below the European Central Bank’s target of just below 2.0%, and slowing labor costs suggest a significant increase is unlikely in the months to come.

According to Eurostat’s figures, energy prices fell by 0.8% during November, and were down 1.1% from the same month of 2012. But services prices also fell during the month, while prices of manufactured goods and food rose slightly.

Pointing up In a separate release, Eurostat said total labor costs in the three months to September were 1.0% higher than in the same period of 2012, while wages were 1.3% higher. In both cases, the rate of increase was the smallest since the third quarter of 2010. (…)

Wages fell in Ireland, Portugal, Cyprus and Slovenia, and were flat in Spain. That indicates that some rebalancing of the euro zone’s economy is under way.

But that relabancing would be aided by a more rapid rise in wages in stronger economies such as Germany. While the rate of wage growth there was higher than in the euro zone as a whole, it slowed significantly from the second quarter, to 1.7% from 2.2%.

OIL

US oil production to test record high
Shale boom sends output soaring

(…) The EIA said on Monday that it had revised sharply higher its estimates of future US crude output to about 9.5m barrels a day in 2016. That is very close to the previous peak in US production of 9.6m b/d in 1970 and almost double its low point of 5m b/d in 2008. (…)

A year ago, the EIA was predicting US crude production of about 7.5m b/d in the second half of this decade, a level that has already been surpassed this year. It has now revised sharply higher its estimates of future output in its central “reference case”, which assumes that current laws and regulations remain generally unchanged. (…)

The EIA now predicts that US crude output will begin to tail off slowly after 2020, but says there is still great uncertainty over the outlook. Adam Sieminski, the administrator of the EIA, said factors influencing the outlook for production would include future discoveries about the geology of US shale oilfields, regulatory requirements imposed on producers and investment in new pipelines.

Sustaining the surge in US oil production will require prices that are high by the standards of a decade ago. Mr Sieminski said US shale production would be profitable at prices above $90 a barrel, and possible at above $80-$85 a barrel. (…)

For natural gas, meanwhile, the EIA is predicting continued indefinite growth in production. Gas is easier to produce than oil from shale and other “tight” rocks, and by 2040 the EIA expects US production to be 56 per cent higher than in 2012. (…)

Oil Supply Surge Brings Calls to Ease U.S. Export Ban

The U.S. is meeting 86 percent of its own energy needs, the most since 1986, Energy Department data show.

A surplus of crude could overwhelm Gulf Coast and Canadian refineries that weren’t built for the type of oil now in abundance from new fields in North Dakota and Texas, forcing the issue, McKenna said.

U.S. refineries invested more than $100 billion in the past two decades on upgrades to handle heavy crudes from Mexico, Venezuela and the Middle East, according to Michael Wojciechowski, a Houston-based refining analyst at Wood Mackenzie, an industry research and consulting company.

“We’re going to have two choices, really — export production or shut-in production,” McKenna said. “That’s an ugly choice.”

Or build new refineries.

Once refined, oil may be exported as fuels, which aren’t restricted. The U.S. became a net exporter of petroleum products in June 2011 and shipped a record 3.37 million barrels a day for three weeks in October, Energy Department data show.

Profit Growth Outpaces Dividends at S&P 500 Firms

(…) Members of the S&P 500 index paid out just 33% of their reported earnings per share in the form of dividends during the third quarter. That’s down from the quarterly average of almost 45% since 1988 and an average of nearly 52% since 1936, according to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. (…)

Companies also are expected to pay out about 33% of profit in the fourth quarter, Mr. Silverblatt says, as profit growth outpaces dividend increases. (…)

Airplane  Boeing boosts dividend and buybacks
Jet maker voices confidence as it returns cash to shareholders

Boeing intends to increase its dividend by 50 per cent and ask investors to approve up to $10bn of share buybacks, the commercial jet maker said on Monday, calling the move a mark of confidence in its own future.

The quarterly dividend would increase from 48.5 cents to 73 cents, Boeing said. The new $10bn buyback programme would allow repurchases to continue once the company has exhausted the remaining $800m of an outstanding buyback authorisation granted in 2007.

Easy Money Delays Retail Shakeout

Investors are eagerly lending to risky retail borrowers like RadioShack, Sears Holdings and J.C. Penney, buying the chains time to try to turn around their businesses but delaying the overbuilt industry’s day of reckoning.

Thumbs down Loehmann’s Files for Bankruptcy

The discount retailer files for bankruptcy Sunday under the weight of more than $100 million of debt. The company employs 1,600 people at some 39 stores.

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NEW$ & VIEW$ (12 DECEMBER 2013)

Budget Deal Picks Up Steam House Republican leaders threw their weight behind a two-year budget deal, planning to bring it to a vote Thursday as opposition in both parties failed to gain enough traction to threaten passage.

HOUSING WATCH

Homebuilders continue to digest Toll Brothers’ (TOL -1.8%) “leveling in demand”comments from yesterday’s earnings results – in the 19 weeks since August 1, business has been flat vs. last year, and in the first 5 weeks of FQ1 (beginning Nov. 1) business has also been flat from 2012 (though Hurricane Sandy makes a tricky comparison). (SA)

Pointing up Storm cloud  Container Exports at Lowest Point in Four Years; Imports Slow Against Growing Inventories

The month of November saw U.S. ocean container exports hit their lowest point since January 2010, when our Index begins. The November export index registered .934, compared to our baseline of 1.0 in January 2010. This is only the second time that the export index has fallen below 1.0. Imports were stronger than in two of the previous three years, but dropped 6.1 percent from October to November, a period where we have typically seen increases.

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Interestingly, volumes declined almost across the board for the 25 destination countries included in the export index. Matching our data, many of the nation’s ports are reporting drops in the number of
containers handled. Production of automotive and related products
slowed in November because of falling domestic and foreign demand, which in turn reduced shipments of parts and finished goods.

Container imports fell for the third month in a row, dropping 6.1 percent in November. What amounted to a peak season “bump” in July and August has given way to a steady decline in imports since. This is not unusual for November, and is by far not the worst November showing
since 2010. Retail and wholesale inventories have reached levels above
their pre‐recession highs without the spending activity to support the
growth.

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Hmmm…

Euro-Zone Industrial Output Falls

The European Union’s statistics agency said industrial production was 1.1% lower than in September, the second straight month of decline and the sharpest drop since September 2012. The decline was spread across most of the currency area, with only Italy and Estonia recording increases in output.

Surprised smile  The decline in output came as a surprise, with 24 economists surveyed by The Wall Street Journal last week having estimated that output rose by 0.2% during the month. It raises the possibility that the euro zone’s return to growth may come to a halt in the final quarter of this year, having already weakened in the third quarter. (…)

The decline in industrial output was led by the energy sector, which recorded a 4% drop in production during October. That wasn’t a great surprise, given that temperatures across Europe were higher than usual during that month. However, output of capital goods fell by 1.3%, while output of consumer durables fell by 2.4% and of non-durables by 0.9%.

That suggests the drop in production was a response to weak demand from businesses and consumers. Figures released last week showed retail sales in the euro zone fell in October, while a November survey of consumers recorded the first decline in confidence this year.

Stock Surge Fuels Pensions

A roaring stock market and rising interest rates are fueling the strongest recovery in the $2.4 trillion U.S. corporate-pension sector in more than a quarter-century.

Investments in the average company’s pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate by J.P. Morgan Chase & Co. A separate analysis by Milliman Inc., which provides actuarial products and services, puts the figure above 94%, while pension specialist Mercer says the figure was 91% at the end of October. Funding levels are up from 77% at the end of last year, according to J.P. Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on bonds continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates on corporate bonds, which are used to value future retirement obligations. (…)

Pension-funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year.  (…)

About 25% of corporate pensions now are overfunded, or have more investments than future obligations, J.P. Morgan estimates. (…)

SENTIMENT WATCH

Gift with a bow Waiting for That Santa Claus Rally

Say what you will about the stock market’s recent skid, investors have a very favorable tailwind at their backs heading into the final few weeks of the year.

(…) For now, the selloff isn’t causing much concern among market watchers. “This is more of a lack of buyers than any type of real panic,” Mark Newton, chief technical analyst at Greywolf Execution Partners, wrote to clients Wednesday afternoon.

Looking beyond the day-to-day gyrations, here are five trends, courtesy of WSJ Markets Data Group, that point to the December effect on stocks and the rally reaccelerating by the end of the year:

December Is the Best Month for Stocks: The Dow has risen in December 72% of the time throughout its history. It averages a 1.4% monthly gain, the best increase of all 12 months.

Don’t Fret About the Early December Weakness: The bulk of the December rally typically occurs in the final 10 trading days of a year, a trend that bodes well considering the Dow is down 1.5% this month. Historically the Dow is flat, on average, in the first two weeks of December. It then averages a 1.5% gain in the final 10 trading days of the month.

Yearly Highs Happen Most Often in December: There have been 36 times the Dow has hit its high of the year in December, more than twice the amount of the next highest month — January – which has had 16 highs in a given year.

Last-Day-of-the-Year Effect: The Dow has ended at a high on the final trading day of the year 11 times throughout its history. Ten of those 11 instances were record closes, with the most recent occurrence coming in 2003.

Santa Claus Is Good for Stocks: The Dow has risen in the five days before Christmas 65% of the time, including 10 of the past 12 years, averaging a 0.5% gain. The last five days of the year are typically even better for stocks: The Dow has risen 79% throughout this timeframe, averaging a 1.2% gain.

High five  World’s biggest investor BlackRock says US rally nearing exhaustion BlackRock has advised clients to be ready to pull out of global stock markets at any sign of serious trouble

(…) The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.

BlackRock, which manages funds worth $4.1 trillion, said the global system is still in the doldrums and far from achieving sustainable recovery. “The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody’s currency can fall at once,” it said.

The report said Wall Street is not in a bubble yet but BlackRock’s risk indicator – measuring “enterprise value” against earnings, adjusted for volatility – is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis,” it said. (…)

 

 

BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

“The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicentre of funding risk in 2014 due to big refinancings,” it said. BlackRock said the eurozone is “stuck in a monetary corset”, failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens. (…)

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013.

BlackRock said the profit share of GDP has soared to a modern-era high of 12pc of GDP, while the workers’ share has collapsed from 66pc to 57pc in one decade. “This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins.

Emerging markets are no longer accumulating foreign reserves at the same torrid pace. The annual growth rate of reserves has dropped to 7pc from 40pc five years ago, which implies far less money flooding into global bond markets. “This is bad news for struggling advanced economies and financial markets addicted to monetary stimulus,” it said.

There is a 25pc chance that the world navigates these reefs and achieves a “growth break-out”. Even if that happens it will not help stocks, and will be “bad for bonds”. The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles. What is good for investors is corrosive for societies, hardly tenable equilibrium.