NEW$ & VIEW$ (16 MAY 2013)

Posted on May 16, 2013 by Denis Ouellet

U.S. Industrial Production Moves Lower

Activity in the factory sector is weakening. Industrial production fell 0.6% during April following a 0.3% March increase, earlier reported as 0.4%. Declines in activity were broad-based amongst industries last month. Factory sector production fell 0.4% (+1.4% y/y) following its unrevised 0.2% March slip. Utility output reversed course and fell 3.7% (+3.4% y/y) following a 6.4% March owing to warmer-than-normal temperatures.
The drop in factory sector output reflected across-the-board industry weakness. Consumer goods production fell 0.6% (+2.3% y/y) as motor vehicle output dropped 1.2% (+5.2% y/y). Elsewhere, appliance, furniture & related goods production fell 0.8% and was unchanged y/y. In the nondurables area, apparel output fell 1.6% (-2.9% y/y) while paper production dropped 0.6% (-1.9% y/y). For business equipment, output fell 0.5% (+3.5% y/y). Output of information processing and related equipment fell 0.5% (+3.2% y/y) and transit equipment production fell 0.5% (+5.9% y/y). Excluding the output of high tech products & motor vehicles, production fell 0.5% (+1.8% y/y) during April.
The capacity utilization rate fell to 77.8% from a downwardly revised 78.3% in March.

Pointing up Everything is slowing! Might it be because of the following?

Currencies react to Bank of Japan’s recent monetary moves

These are big, big moves!

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.

EMPIRE STATE MANUFACTURING TURNS SOUTH

The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. Employment
indexes were mixed, showing both a modest increase in the number of
employees and a slight decline in the length of the average workweek.

New orders have been weakening for 3 months before crossing below the zero line (-1.17)in May.

Interesting:

After Prices Paid, the next largest decline came in the Average Workweek, which fell from 5.7 in April to negative 1.1 in May. The decline in the average workweek comes on the heels of the Non-Farm Payrolls report two weeks ago, where the average workweek also showed a sizable decline. It is still early, but this could be an early indication that employers are cutting hours in an effort to stay below the thresholds that would require providing health coverage under the Affordable Care Act. (Bespoke Investment)

Home-Sales Expectations Hit 5-Year High

The National Association of Home Builders said Wednesday that its housing-market index was 44 in May, up three points from April. All three components of the index rose, with builders’ expectations of sales for the next few months hitting the highest level since February 2007.

High five Curb your enthusiasm:

A reading above 50 in the NAHB index means that more builders view conditions as good rather than poor. The overall gauge hasn’t been in positive territory since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s.

(Charts from Haver Analytics)

Look at this next chart from BMO Capital remembering that Canada is the U.S. main trading partner.

JAPAN, the only growth game in town:

Japan Reports Growth Surge

The country’s gross domestic product, the broadest measure of goods and services produced across the economy, grew at an annualized pace of 3.5% in the first three months of the year, as consumers loosened their purse strings and exports to the U.S. picked up, lifted by a weaker yen.
The figures reported by the government early Thursday marked a sharp improvement from the tepid 1% growth rate at the end of last year, which followed six months of contraction.

A government official said the GDP data showed consumers spent more overall, particularly on recreation, cars and dining out, and exports were lifted by stronger car exports to the U.S.

The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.

Baring teeth smile It will not take much more before U.S. manufacturers start complaining about the weak Yen.

Of course, quite a lot happened after the end of Q1 as well.
It was just in early April that the BoJ announced open-ended QE and promised to double the monetary base, while prime minister Shinzo Abe pledged to boost competition in the quasi-monopolistic power sector. Since then the yen broke 100, the stock market continued soaring, and in recent days Japanese government bond yields have sold off. Even activist investors from the US are taking notice.
But it is early days yet. The unexpectedly strong first quarter growth numbers were driven mainly by exports — to be expected given the yen’s continued decline. (FT Alphaville)

How long will the ROW allow Japan to poach?

CHINA

Foreign Investment in China Lags

Foreign direct investment in China sputtered in the first four months of the year, despite renewed signs of strength from the U.S. and the European Union, showing only a modest 1.21% rise from a year ago.

Foreign direct investment in China was $38.3 billion in the January to April period, including $8.4 billion in April, for a feeble 0.4% rise from April 2012. (…)
Investment from the U.S. was up 33.2% over last year in the four-month period, inflows from the EU rose 29.7%, while Japanese investment climbed 9.2%. But investment from the rest of Asia was very weak, rising just 0.21% from a year earlier.

More signs of weakness: China’s freight traffic was unchanged MoM in April, +7.8% YoY, same as in March. YTD to April: +8.7% YoY, down from +12% in 2012. Looks slower to me. April coastal container throughput was up 8.6% YoY, +8.4% YTD.

China Signals Concern at Yen Weakness as Japan Growth Quickens

Japan’s policy of monetary easing “makes it hard for China to increase exports to Japan,” Shen Danyang, a ministry spokesman, said at a briefing in Beijing today. The rising yuan is eroding profit margins of Chinese exporters, he said. (…)

A survey by the ministry found that the profit margins of 78 percent of exporters are narrowing, and 73 percent will report flat or lower profits for 2013, Shen said. Exporters at the Canton Trade Fair in April and May didn’t want to accept long-term orders because of concerns that the yuan will gain, he said.

Beijing signals concern at rising jobless

Li warns on challenge of finding work for graduates

(…) In a nationwide teleconference on Monday that was widely reported in state media on Wednesday, Mr Li said that nearly 7m tertiary students would enter the job market in July in China, the largest number in the country’s history.
He said it was an “important task” to find jobs for all these graduates, who make up a demographic considered potentially threatening to Communist Party rule if they become disaffected in large numbers.
“In the first few months of the year, as economic growth has slowed the employment trend has remained stable but employment pressures remain and the problem of employment for tertiary students is particularly prominent,” Mr Li said, according to a transcript of his speech.
But Mr Li also disappointed many investors by ruling out a large government-directed stimulus or investment boom this year.
“To achieve this year’s development targets the room to rely on stimulatory policies and direct government investment is not big and we will need to rely on market mechanisms,” Mr Li said. Relying on government efforts to boost growth “is not only difficult to sustain but also creates new problems and risks”. (…)
Disgruntled students have played a powerful destabilising role throughout modern Chinese history, leading enormous social movements in 1919, in the 1966-1976 Cultural Revolution and in the Tiananmen Square movement in 1989. (…)
Of the nearly 7m students who graduate in July most of them have not yet found jobs and the employment rate for these people is lower than in the past, according to state media reports.
By late last month, just 28 per cent of graduating students in Beijing had been hired while the rate was 29 per cent in Shanghai and 47 per cent in southern Guangdong Province.
The official urban unemployment rate in China was just 4.1 per cent by the end of March but the figure is regarded as deeply unreliable because it does not capture many demographic groups such as fresh graduates.

EUROPE

European Recession Is Longest Since War

The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era, with no recovery in sight for a broad swath of the continent.

(…) Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing and France is steadily contracting.

The 17-nation euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis. Social strains, political paralysis and rising debt burdens are reigniting doubts about its economic future. (…)
Business surveys for April suggest the euro-zone economy could well shrink again in the second quarter. (…)

Sustained Pain

Italy airs pessimistic view on recovery

Government has little room for stimulating growth

(…) “I don’t see any signs of recovery at the moment,” commented Emma Marcegaglia, president-elect of Business Europe.
“The credit crunch is strong, internal demand and the construction sector are very bad, exports are slowing and investments have stopped. The recession is very severe,” she told the Financial Times.
At best, she said, the eurozone’s third-largest economy might see a bottoming out of its longest postwar recession in the final quarter of 2013. On the bright side, analysts noted the pace of contraction was declining more slowly than in the final quarter of 2012 when GDP shrank 0.9 per cent. (…)
By July the government needs to find a further €2bn to avoid a scheduled increase in sales tax although declining tax revenues put that goal in doubt, with Rome promising Brussels that it will stick to its budget targets in order to escape from the European Commission’s excessive deficit procedure. (…)
Bankers are starting to sound rather more upbeat however. Reporting quarterly results in recent days, the heads of Italy’s largest banks share the view that the recession is bottoming out.
The strongest indicator came from loan loss provisions which fell in the first three months of the year from the end of 2012 at UniCredit, Italy’s largest bank by assets. Intesa Sanpaolo, its largest retail bank, said inflows of bad loans were down by a third, quarter on quarter.

Euro Zone Runs Record Trade Surplus

Adjusting for seasonal effects, exports grew 2.8% from February, while imports fell 1.0%, to give a surplus of €18.7 billion, up from €12.7 billion in February.

March is really the first solid month in a while. Let’s see a couple more months, given that the EZ export markets all seem to be slowing now, perhaps because their own exports to the EZ are collapsing.

Slovenia Premier Bratusek Defies Markets With No-Aid Vow

(…) Bratusek says time is what she needs to fix the banks — by deploying a rescue package she opposed before she came to office — and that her nation won’t need an international rescue. By next month, she promises, her coalition government will begin swapping as much as 4 billion euros ($5.2 billion) in bad bank loans for government-guaranteed debt. After eight weeks in office, investors are questioning whether she can deliver.

“Talk is cheap,” Egon Zakrajsek, a Slovenian-born Federal Reserve economist in Washington, said in an e-mail. Slovenia needs “fundamental economic and social reforms” to restore market confidence and “neither the current government nor any of its predecessors has been able to deliver.” Zakrajsek said he was commenting in a private capacity. (…)
Slovenia’s overhaul drive has “failed to deliver on transparency and thus credibility, consistent with our concerns about implementation risks,” Mai Doan, an emerging-markets economist at Bank of America Merrill Lynch in London said in a note to clients today. The program could “disappoint the European Commission, which would probably prefer more rigorous measures and transparency.”
Opening the door to a bailout would expose Bratusek to the risk of having to impose Greece-like austerity measures in return for aid.

EARNINGS WATCH

Wal-Mart Second-Quarter Forecast Trails Estimates

Wal-Mart Stores Inc., the world’s largest retailer, forecast second-quarter profit that was less than analysts estimated as shoppers struggle amid the slow U.S. economy and higher taxes.
Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said today in a statement. Analysts had projected $1.29, the average of 24 estimates compiled by Bloomberg.
Sales at U.S. Wal-Mart stores open at least 12 months excluding fuel fell 1.4 percent, the first decline after six straight gains. Analysts estimated a 0.1 percent decline.

Look at the rare long flattening in earnings. The tail wind to equities from rising profits has disappeared. Hmmm….

NEW$ & VIEW$ (9 APRIL 2013)

Posted on April 9, 2013 by Denis Ouellet

U.S. employment growth slows along with small biz mood. Participation rate influenced by social security issues. Fed’s impact on economy, markets. Gas prices decline some more. Beware Slovania. Car loans. Chinese inflation eases. Inflation warning. China wages. U.K. economy. German, Chinese exports. arnings watch.

Employment Index Signals Modest Gains Ahead

The Conference Board said its March employment trends index fell 0.2% to 111.20 from 111.43 in February, first reported as 111.14. The latest index is up 3.7% from a year ago.

Small Business Optimism Down in March

After three months of sustained growth, the March NFIB Index of Small
Business Optimism ended its slow climb, declining 1.3 points and landing
at 89.5. (…) Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations.

Workers Stuck in Disability Stunt Economic Recovery

(…) Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences. (…)

Payments, tied to a worker’s wage history, average $1,130 a month, which totals $13,560 a year. That is about $2,000 a year more than the federal poverty level for a single person and about $2,000 less than full-time wages at the federal minimum of $7.25 an hour. After two years, people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.

Between December 2007, when the recession started, and June 2009, when it ended, the number of Americans receiving federal disability benefits grew to 7.6 million from 7.1 million. Then the rolls swelled, reaching 8.9 million in March, about 5.4% of the civilian workforce ages 25 to 64, according to J.P. Morgan estimates. That compares with 1.7% of the U.S. workforce in 1970.
Economic growth is driven by the number of workers in an economy and by their productivity. Put simply, fewer workers usually means less growth.
Since the recession, more people have gone on disability, on net, than new workers have joined the labor force. Mr. Feroli estimated the exodus to disability costs 0.6% of national output, equal to about $95 billion a year. (…)

Easy Money: Fed Policies Spur Corporate Spending

CFOs at 202 firms, about 45% of the survey respondents, said low interest rates had led them to increase borrowing.

BlackRock urges Fed to rein in QE3

Money manager says ‘dull hammer’ tactics distort market

(…) “Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy,” he told the Financial Times. “It is a very large and dull hammer for markets.” (…)
BlackRock estimates that interest rates on 10-year Treasuries are about 100 basis points below where they would be normally. Mr Rieder said that as such interest rates normalise, “losses that occur to fixed-income portfolios will be more and more acute”.

Gasoline at U.S. Pumps Drops to Lowest for Season in Three Years

Regular, unleaded gasoline at the pump declined 3.7 cents, or 1 percent, to $3.608 a gallon, the U.S. Energy Information Administration said on its website yesterday.

Retail gasoline prices have retreated for six straight weeks and are 33.1 cents a gallon below year-earlier levels.

Gasoline “probably has another 6 or 7 cents a gallon to fall in the short-term as the decline in crude prices last week flows through from refining operations,” James Williams, president of energy consulting firm WTRG Economics in London, Arkansas, said by telephone yesterday. “The drops should continue for several days to a week.”

OECD Warns on Slovenia Banks

Slovenia’s government may exceed its estimate of the €1 billion ($1.3 billion) needed to boost the capital of the country’s ailing banks because it has based its cost estimates on a “most likely already outdated” analysis, the OECD said.

“The authorities evaluate recapitalization needs at up to 3% of GDP (€1 billion),” the OECD said in its latest report on Slovenia. “Yet, capital needs are uncertain and could in fact be significantly higher.” (…)

Three state-owned Slovenian banks, which together account for about two-thirds of the country’s banking sector, are saddled with large amounts of nonperforming loans. This has added pressure to Slovenia’s economy, which shrank 2.3% last year.

Another template coming?

Introducing the 97-Month Car Loan

Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.

The average price of a new car is now $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465—the result of longer loan terms and lower interest rates.

In the final quarter of 2012, the average term of a new car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17% of all new car loans in the past quarter were between 73 and 84 months and there were even a few as long as 97 months. Four years ago, only 11% of loans fell into this category. (…)

Experts say there is an appetite for more risk because banks see limited downside in auto lending. The delinquency rates on car loans are near record lows, and used car values are at record highs. And if a buyer defaults, the bank can repossess and sell cars with limited losses.

Chinese Consumer Inflation Eases

China’s year-to-year consumer inflation fell to 2.1% in March, a lower-than-expected result that suggests the threat of inflation in the world’s No. 2 economy is ebbing.

Rises in food prices have been moderating, up 2.7% year to year in March after a 6% year-to-year rise in February.

The producer-price index, which measures wholesale prices, remains in negative territory, falling to 1.9% in March, against expectations of a drop of 2%.

The average increase in consumer prices in the first quarter was 2.4 per cent, up only a little from the final quarter of 2012.

The CPI fell 0.9 percent from February, the biggest drop in seven years.

(Charts from China Daily)

ADB Issues Inflation Warning

Asian policy makers should carefully monitor inflation and beware of asset bubbles as money flows into the region and local economies grow strongly, the Asian Development Bank said. (…)

The Manila-based lender noted that production in most Asian economies is already near capacity, which raises the risk of inflation taking off. The ADB also said fuel-subsidy cuts—while beneficial from a fiscal perspective—would push up prices.
“Currently inflation remains in check, but we are concerned that pressures are building up,” ADB Chief Economist Changyong Rhee told The Wall Street Journal. “If these trends continue unchecked, then asset bubbles with rising capital inflows can be an issue in the near future.” (…)
Inflation in developing Asia should pick up to 4.0% in 2013 and 4.2% in 2014 from 3.7% last year, the ADB said, with growth also accelerating to 6.6% in 2013 and 6.7% in 2014, from 6.1% in 2012. But the ADB warned central banks they should be ready to act.

China Surging Wages Threaten Economy’s Competitiveness, ADB Says

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the ADB said in a report published today.
The labor market is being squeezed across the nation as the pool of working-age people shrank last year.(…)
China’s labor productivity has grown quickly even as it remains less than 10 percent of the level in Singapore and the U.S., and about 20 percent of South Korea’s rate, Niny Khor, a Beijing-based economist for the ADB, said at the briefing.
Rising wages and other costs are being exacerbated by restrictions on workers’ mobility through the household registration system known as hukou, the ADB said.(…)
China’s pool of 15- to 39-year-olds, which supplies the bulk of workers for industry, construction and services, fell to 525 million last year from 557 million five years earlier, according to data compiled by Bloomberg News from the U.S. Census Bureau’s international population database. The number employed in industry rose to 147 million from 117 million in the five years through September.

U.K. Housing Market, Retail Sales Pick Up

Activity in the U.K.’s housing market and on the high street picked up in March despite unseasonably cold weather, giving the economic outlook a boost for the first quarter and suggesting the U.K. may avoid a triple-dip recession.

German Exports Fell in February Amid Euro-Area Recession

Exports, adjusted for working days and seasonal changes, dropped 1.5 percent from January, when they gained 1.3 percent, the Federal Statistics Office in Wiesbaden said today.

Shipments from Germany to the euro area dropped 4.1 percent in February from a year ago, while those to the European Union decreased 3.4 percent. Exports to non-EU members fell 1.9 percent, today’s report showed.

China Export-Data Skepticism Deepens From Goldman to Nomura

China’s unprecedented run of better- than-forecast export growth has spurred deeper skepticism of the data at banks including Goldman Sachs Group Inc., casting doubt on the strength of the recovery.

EARNINGS WATCH

Alcoa Net Rises 59%

Excluding special items, earnings per share came to 11 cents, up from 10 cents a year before. The result for the latest quarter exceeded the Wall Street forecast of eight cents per share, according to FactSet.

What’s the big deal? Here’s how the WSJ’s Market Beat column treats AA’s results this morning:

Studies have shown that how the aluminum maker performs relative to analysts’ expectations over the past decade has been a good gauge of the market’s short-term performance.
Consider these stats, courtesy of John Butters, senior earnings analyst at FactSet: Over the past 10 years prior to Monday’s results, Alcoa’s quarterly figures have exceeded analysts’ expectations 50% of the time (20 out of 40 quarters). When Alcoa beats, the S&P 500 has averaged a 4.4% gain over the ensuing three months and has been positive 80% of the time. When it misses, the S&P 500 has averaged a 0.9% decline and has been positive only 44% of the time.

But Factset also says:

Since 2009, Alcoa has reported earnings above the mean EPS estimate 56% of the time (9 out of 16 quarters). In the nine quarters that Alcoa reported actual EPS above the mean EPS estimate, 73.6% of companies in the S&P 500 reported earnings above EPS estimates for the quarter on average.

In the seven quarters that Alcoa reported actual EPS below the mean EPS estimate, 72.6% of companies in the S&P 500 reported actual EPS above the mean EPS estimate for the quarter on average.

While there is a slight difference in the numbers, it appears that Alcoa’s earnings performance relative to estimates has little predictive value in determining the earnings performance of the remaining companies in the index.

NEW$ & VIEW$ (21 FEBRUARY 2013)

Posted on February 21, 2013 by Denis Ouellet

Eurozone woes continue. U.S. housing and construction. China housing, employment. Currency wars. Sentiment watch. Earnings watch.

Bloc’s Downturn Set to Continue Euro-zone business activity shrank further in February, suggesting an economic downturn that started last April will continue in the first quarter of 2013 at least

Big market-depressing headline this morning as market hopes of a “stabilizing” Eurozone are significantly shaken by Markit’s flash PMI report for February. As I have repeatedly shown in recent weeks, market hopes on Europe were not based on facts. The auto market is a good case in point. These charts from ZeroHedge summarize the recent bad news on this important industry. No green shoots there!

U.S. HOUSING

New Single-Family Homes Buoy Market

Construction of single-family homes rose to the highest level since the financial crisis last month as the housing market improved, though the overall results for all types of housing starts were pulled down by a drop in apartment and condominium construction.
Housing starts fell 8.5% last month to a seasonally adjusted annual rate of 890,000, the Commerce Department said Wednesday, driven by a 26.1% decline in multifamily home construction. December’s figures were revised upward to a rate of 973,000 new homes started. Compared with a year ago, new home construction was up 23.6%.
Construction of single-family homes, which made up about two-thirds of housing starts last month, rose 0.8% in January to a rate of 613,000 units and was up 20% from a year earlier. That figure is the highest since July 2008. (…)
Meanwhile, the number of new building permits, an indication of future construction, rose 1.8% to an annualized level of 925,000 in January, the highest level since June 2008.

(Charts from Have Analytics)

(Bespoke Investment)

Pointing up Note: ISI Homebuilders Survey In Mid-Feb Surges to 65.7

Gauge of Planned US Construction Activity Hits Five-Year High

The American Institute of Architects said Wednesday that its Architecture Billings Index rose to 54.2 in January from 51.2 in December. The index of new project inquiries rose to 63.2 in the three months to end-January from its previous reading of 57.9.
The indices are viewed by analysts as a leading indicator of building activity, with a typical lag of nine to 12 months between clients billing architects and starting construction.(…)
The mixed-practice segment – buildings that combine retail and residential space – remains the most buoyant, according to the institute, followed by multi-family homes and commercial and industrial construction, all of which are seeing expanded activity.

(CalculatedRisk)

CHINA

China drains cash to curb liquidity

Record $146bn withdrawn from the economy since Monday

The move was partly a technical reversal of liquidity injections made before last week’s Chinese New Year holiday, but analysts said it also heralded a cautious shift to tighter monetary policy as the world’s second-largest economy heated up.

Property price controls to stay Property price controls will be maintained, Premier Wen Jiabao vowed on Wednesday, in response to a rebound in the real estate market in some cities.

There was a massive surge in the amount of residential floor space sold during the Spring Festival holiday week.
Tracking by the China Index Academy, a real estate research body, saw 21 of 27 cities monitored register sales of floor space more than five times the area of the corresponding holiday week last year and at higher prices.

TIGHT MARKET: Major Cities May Face Partial Shortage of Property Supply

According to the CEBM Property Survey, developers’ potential property supply will be at a limited level in major cities in 2013 as developers decelerated their land purchases and starts of new property projects. Thus, we expect the inventory to sales ratio to be on a continuous downward trend in 2013 and to decrease further and faster in 1H13. Some major cities may face a partial shortage of new property supply. (CEBM Group)

Companies struggle to find, keep workers A labor shortage is sweeping through both the Pearl River Delta and Yangtze River Delta regions, the country’s two major economic powerhouses.

A labor shortage is sweeping through both the Pearl River Delta and Yangtze River Delta regions, the country’s two major economic powerhouses.
(…) “We’ve got about 2,000 vacancies available at the moment, but few contracts were signed in the past week as some of the migrant workers haven’t returned from their hometowns, and some demanded higher-income jobs,” Li said.
A majority of the listed vacancies in Li’s company offer jobs with a monthly salary of over 2,000 yuan, while most of the applicants require a minimum income of 3,000 yuan.
“It has been difficult for a company to hire an ordinary worker without any specific skills with a monthly salary of 2,000 yuan, a salary that was unacceptable for migrant workers in Shanghai,” Li said.
Li added that migrant workers now pay more attention to working conditions, social welfare and leisure time.
(…) Guangzhou will still face a shortage of 110,000 workers, according to the city’s human resources and social security bureau.
A survey of 326 enterprises involving 219,300 migrant workers found that more than 80 percent of the enterprises expressed an urgent hiring demand, mainly for general workers.
Enterprises are offering 9 percent to 12.5 percent pay rises to newly hired workers, the survey found. (…)

CURRENCY WARS

Brazil’s Growth Slows in December

Brazil’s economy expanded at a slightly slower pace in December, rounding out a full year of meager economic growth, a central bank advance indicator shows.

The IBC-Br index rose 0.26% from the previous month on a seasonally adjusted basis and 1.35% for all 2012.

Incoming South Korea President Signals Won Stability

Incoming South Korean President Park Geun-hye on Wednesday gave a clear indication that she will stick with the currency management policy of the outgoing administration, saying she would try to ensure the stability of the Korean won to help the nation’s companies.
“I understand that securing stability in foreign exchange rates is very important. I will take pre-emptive action to help Korean companies avoid making losses,” Ms. Park said in a meeting with local business leaders, according to a spokesman.
South Korean exporters have been vocal recently in complaining about the ascent of the Korean won, which makes their products more expensive in overseas markets and diminishes overseas earnings when they are repatriated.

SENTIMENT WATCH

With Stock Prices Soaring, Investors Fear Another Crash

Fed doubtful on open-ended QE3 policy Concerns grow over risks of ongoing quantitative easing
Fed and Bank of England head in different directions Scope for confusion over central banks’ future intentions
Pound Sinks Amid Rift Over Stimulus Bank of England Governor Mervyn King and two other members of the U.K. central bank’s Monetary Policy Committee were defeated in a push for extra stimulus at its February policy meeting.

EARNINGS WATCH

Wal-Mart Profit Forecast Trails Estimates on Tax Increase

Wal-Mart Stores Inc. projected first-quarter profit that trailed analysts’ estimates as an increase in the payroll tax curtails spending among its lower-income shoppers.
Earnings per share in the current quarter will be $1.11 to $1.16, the Bentonville, Arkansas-based company said today in a statement. Analysts projected $1.19, the average of 18 estimates compiled by Bloomberg.
Profit in the year ending January 2014 will be $5.20 to $5.40 a share, Wal-Mart said. The average of 25 analysts’ estimates compiled by Bloomberg was $5.39 a share.

Chain store sales rose 2.7% during the week ended Feb. 16 but the 4-wk m.a. Y/Y growth rate keeps falling.

Federal Furloughs Likely to Hit by April

Federal workers are expected to begin taking unpaid leave by late March or early April if the government absorbs $85 billion in spending cuts set to start March 1, according to estimates from different agencies.
Even though the process begins March 1, many federal agencies must notify employees 30 days before beginning furloughs.(…)
In addition to roughly 700,000 Department of Defense workers, the reductions, if they take effect, would affect employees in many other agencies, according to government officials. More than one million workers could be affected. They include food inspectors, according to the U.S. Department of Agriculture; Transportation Security Administration security personnel, according to the Department of Homeland Security; and White House and congressional staff.
In many cases, workers would be forced to take one unpaid day off each week or every two weeks through September, agencies said. (…)

Obama Rated at 3-Year High in Poll, Republicans at Bottom

NEW$ & VIEW$ (25 OCTOBER 2012)

Posted on October 25, 2012 by Denis Ouellet

U.S. Firings Highest Since 2010 as Ford to Dow Face Sales Slump

North American companies have announced plans to eliminate 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011. (…)

Among western European companies, there have been 47 job- cut announcements so far this year involving at least 1,000 workers, compared with 32 in the same period of 2011, according to the data compiled by Bloomberg. The peak month was July, with 39,800 firings. That brings the year-to-date total for the region’s companies to 165,700, up from 162,420 in the same period a year earlier, the data show.

Reuter’s Analysis: Americans to face tougher 2013 on rising prices, taxes

(…) But an expiration of payroll tax cuts in early January and a spike in food prices could wipe 0.8 percentage points off U.S. economic growth next year, according to some economists.

Economists at JPMorgan say expiration in January of a temporary 2 percentage-point cut in the payroll tax would reduce household spending by $125 billion and lower gross domestic product by about 0.6 percentage point next year.

Another area of concern for consumers is food prices. Rises in the prices of corn and soybeans and other field crops as a result of drought this year in the U.S. Midwest are expected to feed through into food prices late this year and in early 2013.
“We are starting to see evidence of food prices moving up so that’s definitely going to be a drag on disposable incomes,” said Hoyt of Moody’s Analytics.
The U.S. Department of Agriculture sees food price increases of 3.5 percent to 4.0 percent next year, greater than this year.
Hoyt says that could cut 0.2 percentage point from economic growth over the winter, when food prices could peak.
Another big extra outlay will be in healthcare premiums, which on average are costing employees more than $2,200 in 2012, according to Aon Hewitt, a human resource consulting firm.
Average health care premiums are forecast to jump by 6.3 percent in 2013, according to Aon Hewitt
Over the last five years, employees’ share of healthcare costs will have increased more than 50 percent, it said.

Outsourcing Turns Inside-Out as Indians Open U.S. Centers

(…) These companies and others, including software developer GalaxE.Solutions Inc., say some complex functions, such as human-resources and software development, are better to have closer to their own operations and to respond to customers. Indian outsourcing companies are finding it tougher to get visas for workers brought from India, and some U.S. businesses want to outsource — yet keep jobs in the country. State tax breaks also provide incentives to hire locally.
“It used to be just about getting the job done at the lowest cost,” said Madhusudan Menon, who heads Infosys’s Atlanta center and delivery of U.S. business-process outsourcing. “Now companies are saying some jobs are best done closer to where they are, not cheap as possible somewhere else. They’re rebalancing their onshore and offshore outsourcing.”

U.S. companies with more than $1 billion of revenue sent 1.1 million technology and back-office jobs offshore during the past decade, according to the Hackett Group , a Miami-based consulting company. While it forecasts a slowing outflow beginning in 2013, it calculates another 400,000 positions will be lost offshore through 2016.
A survey of 617 outsourcing industry executives by Boston- based HfS Research in July and August found the U.S. is seen as the most desirable region in the world to expand IT and business-services delivery centers in the next two years. India was second.

Gasoline Losing Streak Hits Longest in 26 Years on Supply

Gasoline for November delivery dropped 0.2 cent to settle at $2.603 a gallon on the New York Mercantile Exchange, a four- month low. This is the longest down streak since futures began trading in May 1986.
Demand for the motor fuel sank 2.7 percent to 8.49 million barrels a day, the lowest level since March 16, department data show. Over the past four weeks, consumption was down 1.8 percent from a year ago. (…)
The average nationwide price for regular gasoline at the pump declined 2.3 cents to $3.625 a gallon yesterday, AAA, the largest U.S. motoring organization, said today on its website. That’s the lowest level since Aug. 5. The pump price reached a 2012 high of $3.936 on April 4.

By election day, the national average will slide to about $3.40 to $3.50, Heathrow, Florida-based AAA said on Oct. 22.

Gas prices have thus dropped 7% from their mid-September peak and are set to decline another 4-5% during the next 2 weeks. Big relief just in time for Christmas!

MORE ON MARKIT’S FLASH PMIs

China: hope?

Having suffered the largest decline for three-and-a-half years in September, manufacturers saw a marked easing in the rate of loss of export orders in October, reporting the smallest fall since May. However,
companies reported that the dispute between Japan and China continued to act as a drag on trade, while weak demand from North America and Europe also hit export sales.

Further encouraging news that production growth may improve in coming months was provided by an increase in the forward-looking orders-to-inventory ratio to a one-year high. The ratio rose due to the
easing in the rate of decline of orders while inventories of finished goods fell for the first time in six months, dropping at the fastest rate since September of last year. The drop in inventories was in part due to
warehouse stock being depleted by stronger than expected sales, as well as better stock control by producers.

Employment continued to fall, however, dropping at a similar rate to September, as firms sought to reduce costs. Furthermore, backlogs of work fell at the steepest rate since January 2009, suggesting further job losses could be seen in coming months unless inflows of new orders pick up to keep workers sufficiently occupied.

Europe: despair!

The flash German PMI numbers for manufacturing and services both came in below expectations, suggesting the country is sinking into a mild downturn again. The downbeat message from the PMI was corroborated by the near-simultaneous publication of the IFO survey, for which the Business Climate Index also disappointed relative to expectations, dropping from 101.4 in September to 100.0. its lowest for two-and-a-half years.

While Germany’s downturn still looks mild, French business surveys are pointing to a steep contraction of the economy. The INSEE survey’s business climate index, which fell on Tuesday to its weakest since September 2009, was followed on Wednesday by the flash PMI, which rose only slightly from September’s three-and-a-half year low. The two surveys send a consistent message that the French economy contracted at a worrying pace in the third quarter and that the severe downturn persisted at the start of the fourth quarter. (chart below from Reuters)

That said, the Goldman Sachs Global Leading Indicator has turned up lately, mainly because of better than expected September data, many of which seem to be weaker in October.

China Aluminum Stockpiles Seen at Two-Year High Amid Glut

“There is no improvement in demand this October,” SMM’s Zhang said in a phone interview on Oct. 23 in Shanghai. “As new capacities continue to be installed in the west, we expect inventories to climb further.”

China accounted for 42 percent of global aluminum demand last year, according to Bloomberg Industries research.

U.K. Posts Surprise 1% Growth

Chart The U.K. emerged from its longest double-dip recession since World War II, data showed, but one-off factors such as the London Olympics may mask deep-rooted problems and economists expect growth to be weak for some time to come.

Bank deposits rise in Spain and Greece Flow of cash into banks ends months of decline

Private sector deposits at Spanish banks rose to €1.505tn at end-September from €1.492tn a month earlier, reversing the August fall.
Greek bank deposits rose to €160.1bn from €158.7bn. They have been relatively stable since June elections eased fears the country might drop out of the currency bloc, but are still about a third below their December 2009 peak.

EARNINGS WATCH

Quarterly results are compiled by many organizations. Their findings do not always match perfectly. S&P is the “official” source and, as of last Friday, based on 115 reports, they were estimating that Q3 earnings would decline 1.7% YoY.

Thomson Reuters’ calculations on 186 reports are pointing to a more difficult season: U.S. Earnings Fall Victim to Europe’s Woes Europe’s economic woes are washing over U.S. multinational companies, contributing to a season of weak corporate earnings.

(…) Third-quarter earnings have fallen 3.9% at the 186 members of the Standard & Poor’s 500-stock index that have reported results, according to Thomson Reuters. An unusually high share of companies—62%—have reported lower revenue than predicted by analysts.
Greg Harrison, a Thomson Reuters analyst, says firms have offset sluggish sales by cutting costs, keeping average profit margins steady around 9% to 10%.
“We are seeing companies talk about weakness in Europe and finally slower growth in emerging markets and China,” said John Butters, an analyst at FactSet.
On average, Europe accounts for about 20% to 25% of sales for big U.S. companies.
U.S. firms face another hurdle: the dollar has gained 7.4% in value against the euro in the past three months. That makes American goods more expensive and reduces the dollar value of European sales. (…)
“Europe’s still sliding,” Mark Rohr, chief executive of Celanese Corp., a Dallas chemical maker. (…)

Bloomberg adds a few more companies

So far, out of 204 S&P 500 companies that have released third-quarter earnings, 120 (59%) have reported sales that trailed analysts’ estimates, according to data compiled by Bloomberg.

WPP Cuts Growth Forecast Again

WPP, the world’s largest advertising company, cut its full-year outlook for a second time in three months, warning of further slowdown in ad markets in the final quarter, in particular in the U.S., Europe and Latin America.

Like-for-like sales rose 1.9% at WPP in the third quarter, slowing from the 3.6% growth posted in the first half and missing market expectations for a 3.5% rise. Revenue in North America fell 0.4% in the quarter on a like-for-like basis. Continental Europe dropped 2.1%.
September was a particularly poor month, WPP said. “Clients seem to be increasingly cautious and this has impacted most geographies and functions,” it noted.

Europe’s Car Makers Act to Stem Losses

The maker of Mercedes-Benz autos said a weakening economy would reduce its full-year earnings before interest and taxes to about €8 billion ($10.37 billion), down from last year’s and its prior 2012 forecast of about €9 billion. It also said it assumes 2013 financial targets “will not be met.” (…)

But amid a “significant worsening of the market environment in major markets in recent months,” it was forced to lower its forecast for the entire group, it said. (…)

Ford said the deteriorating outlook for the European car industry, with new vehicle sales at a near 20-year low and unlikely to recover next year, explained its decision to close the factory in Genk, Belgium. (…)

Ford said it would shift production of the next generation of its autos built in Belgium to an existing Ford factory in Valencia, Spain, where production costs are lower.

NEW$ & VIEW$ (11 SEPTEMBER 2012)

Posted on September 11, 2012 by Denis Ouellet

FAT TAIL RISK STUFF: One day to go

German newspapers are outlining the options of the court; there seems to be a consensus that the court cannot simply strengthen the role of the parliament any further, as it did in previous rulings; one option would be to demand opt-out rights, but this would weaken Germany’s overall position; a majority of commentators believe the court will approve the ESM and fiscal pact

If you think the German court will simply bow to the pressure to save the euro, read Only the German people can renounce their sovereignty

Employment Index Points to Slow Improvement Overall

The board said its August employment trends index increased 0.51% to 108.59, from a revised 108.04, first reported as 108.11. The latest index is up 6.2% from a year earlier.
Despite the gain, the index is barely above its February level, leading the board to be cautious about future hiring.
The Conference Board’s index is an aggregate of eight labor-market indicators, including jobless claims, job openings data from the Bureau of Labor Statistics, and industrial production figures from the Federal Reserve. It seeks to facilitate forecasts for employment, unemployment and wages by filtering out the noise and volatility of monthly labor market indicators and showing underlying trends more clearly.

U.S. SMALL BIZ OWNERS IN BAD MOOD (NFIB)

UNINTENDED CONSEQUENCES? Lowered Borrowing Costs Give Spain Hope

(…) “[The ECB] has sent a message that the euro is here to stay and that no country will be allowed to fall,” Mr. Rajoy said in a televised interview with state-owned broadcaster TVE. “This message alone has sent borrowing costs for many European Union countries, including ours, much lower,” he said.

“Now we will see if it’s a good idea” to ask for a bailout, “if it’s necessary to do so now,” Mr. Rajoy added. (…)
There is already disagreement among euro-zone countries about what kind of spending cuts and economic reforms Spain would have to carry out in return for bond-market support from the rescue funds. At their June summit—in an effort to reduce the stigma attached to asking for help—euro-zone leaders said conditions should be based on recommendations already made by the European Commission, the EU’s executive arm. For Spain, that would include pushing back Spain’s retirement age, establishing an independent agency to oversee fiscal policy and a revamp of public job-placement services, among other things.

But an EU official said Madrid is already balking at even those conditions, while some states are asking for more. “Even the reference to the country-specific recommendations is currently not acceptable for Spain,” the official said. “What Spain wants is a copy-paste of what they already have done.” He declined to say which countries are lobbying for even tougher conditions.

ZeroHedge adds

Rajoy added that he “will not accept that they tell us which are the concrete policies which we have to cut or not cut”, although Rahoy did express confidence that should his country request aid, it would indeed receive it. There were some more upbeat comments from German Finance Minister Schauble who was reported as saying to German coalition members in a closed-door meeting that Spain doesn’t need a full sovereign bailout. Schauble praised Spanish and Italian reform efforts and said that Spain doesn’t need to apply for a full program because economic and fiscal progress made since implementing reforms mean that a full bailout isn’t necessary.

Italian downturn steeper than previously thought

Italian GDP was revised down, showing a 0.8% decline in the second quarter rather than the previously-thought 0.7% fall. The decline was broadly in line with the weakness signalled by PMI data, which also suggest the rate of economic contraction has remained severe in the third quarter. The average composite PMI reading is so far only marginally above on the average seen in the second quarter. (Markit)

Philips Set to Cut Another 2,200 Jobs

Dutch electronics company Royal Philips Electronics announced a further $382.7 million of cost savings and said another 2,200 jobs will be lost globally.

Kodak CFO Steps Down; 1,000 More Jobs to Cut

Kodak replaced its CFO and moved to cut another 1,000 jobs in an effort to slow its consumption of cash and better position the company to emerge from bankruptcy court.

Burberry Profit Warning Rocks Luxury Sector

Burberry gave the strongest indication yet that the luxury goods industry could be facing long-term problems as it warned of slowing sales.

Burberry’s share prices tumbled 18% in London after the announcement, leading to a slew of downgrades from equities analysts. The company said same-store sales in the 10 weeks to Sept. 8 were flat compared with a year earlier. It said the slowdown in sales happened mainly in the last few weeks and was a result of the broader macro environment.

“Burberry is saying there are problems with the entire luxury industry and not just the company.”

European crisis darkens Asian growth outlook further

“The growth side (of Europe’s crisis) has a profound impact on the global economy,” Zhu said, adding that IMF models predicted as much as 1.5-2.0 percent being cut from economic activity in the U.S. and Japan and 1 percent from activity in China if there was a further deterioration in Europe.
The impact on Asian trade could be dramatic as Europe buys about a third of the region’s valued added exports.
“When the growth in the euro area drops to zero, you will see export growth from this region drop to zero too. This is very important,” Zhu said. (…)
Latest economic data for August gave ammunition to critics who say more Beijing-backed spending is needed to repair damage done to the domestic economy by firms cutting production, inventories and imports in the face of anemic global demand.
Exports generate 25 percent of gross domestic product in China and support an estimated 200 million jobs.(…)

U.S. EXPORTS DECLINED 1% IN JULY (Goods -1.5%)

China: Official data add to survey evidence of third quarter economic slowdown

Official data from China’s National Bureau of Statistics confirm early signs from business surveys that the rate of economic growth in the world’s second-largest economy continued to weaken in the third quarter.

The data showed that industrial production grew at the slowest rate for over three years, held down by disappointing export growth in the first two months of the third quarter. Imports meanwhile fell at the fastest
pace for three years, reflecting the weakening of industrial growth as well as signs of slowing domestic consumer demand. Retail sales grew at the slowest rate since early 2006.

A key cause of the slowdown in industrial production has been the deteriorating export environment, and notably the downturn in demand from the euro zone. Official data showed exports rising just 2.7% on a year ago in August. With exports having shown annual growth of just 1.0% in July, exports have collapsed in the third quarter compared to the strong increases seen in the second quarter and earlier in the recovery. By comparison, exports rose 15.3% on a year ago in May and annual growth averaged 21% throughout 2011.

Economic slowdown cools labor market China’s economic slowdown is starting to have an impact on the labor market, a human resources official said on Monday.

Charting the China slowdown…

China New Loans Rise, Pointing to Stimulus

China’s new yuan loans surged in August, pointing to a pickup in lending as the government tries to spend its way to faster growth for the world’s second-largest economy.

New loans rose to 703.9 billion yuan ($110.9 billion) in August, from 540.1 billion yuan in July. Corporate-bond issuance and loans from trust companies also rose.

Bloomberg adds:

Aggregate financing, which includes bank lending, off- balance sheet loans and bond and stock sales, increased 16 percent in August from a year earlier to 1.24 trillion yuan, central bank data showed today. The figure was 1.04 trillion yuan in July. The PBOC introduced the measure, also known as total social financing, last year to have a clearer picture of credit creation in the economy. (Chart below from Reuters)

China money supply, new loans and GDP

CHINA’S FISCAL CLIFF: China’s fiscal revenues rise 4.2% in Aug China’s fiscal revenues grew 4.2 percent year-on-year to 786.3 billion yuan ($124 billion ) in August, the Ministry of Finance said Tuesday.

The country’s central fiscal revenue dropped 6.7 percent year-on-year to 376.5 billion yuan last month, while that of local governments was up 16.8 percent to 409.8 billion yuan, according to a statement of the ministry.

Pointing up FYI, China’s fiscal revenues were +8.2% in July and +12.2% in the first half.

Rumours swirl as China’s Xi vanishes

Disappearance of leader-in-waiting sparks speculation over leadership

Where is Xi Jinping? The man anointed to run the world’s most populous nation and second-largest economy has disappeared from public view just weeks before his expected elevation to lead the Chinese Communist Party.
Over the past week Mr Xi has cancelled at least four scheduled meetings with visiting dignitaries including a Russian delegation, Singapore’s prime minister and US secretary of state Hillary Clinton last Wednesday and the prime minister of Denmark on Monday. (…)
Mr Xi’s mysterious disappearance has sparked speculation about his whereabouts and renewed political infighting just months after the purge of senior Chinese leader Bo Xilai shook the ruling party. It also underscores the opacity and lack of a strong institutionalised mechanism for transferring power in China’s authoritarian one-party political system.

Consumer Debt Declines, Even as Student Loans Grow

Consumer credit declined from June by a seasonally adjusted $3.28 billion to $2.705 trillion, a Federal Reserve report showed Monday. Consumer credit declined at a 1.45% annualized rate during July, its first contraction since a 3.95% decline in August 2011.
The decline was primarily due to a 6.8% decrease in revolving credit, which includes credit-card debt. That fell by $4.82 billion in July to $850.73 billion.
Nonrevolving credit, which includes student loans and auto financing, rose by a seasonally adjusted $1.55 billion to $1.854 trillion in July. That is 1.0% higher than the previous month.
In June, consumer credit grew a revised $11.82 billion, up from an initial estimate of a $6.46 billion gain. (Charts from Haver Analytics)

THE BIG CONSUMER SQUEEZE

Japan Cost-Cutting Leaves Pay Near Crisis Low as BOJ Eyes Easing: Economy Cost-cutting by Japanese companies is dragging on wages, resulting in weaker consumer demand and a stronger case for monetary easing to counter deflation.

Nationwide compensation fell to 243.5 trillion yen ($3.1 trillion) in the second quarter, according to a government report in Tokyo yesterday. The number, which is seasonally adjusted, was only 0.7 percent above the level in the final quarter of 2009, which was the lowest since 1991. (…)
Unit labor costs, measured by the difference between growth in compensation for workers and real gross domestic product, fell 3.6 percent in the three months through June from a year earlier, the largest decline since the July-September period in 2010, according to data compiled by Bloomberg.

Stagnant Incomes Signal Curbs on U.S. Consumer Spending: Economy

Wages are stagnating as the job market cools, restraining the consumer spending that is needed to sustain the U.S. economic recovery.
Average hourly earnings were little changed in August from the prior month and up 1.7 percent from a year earlier, matching the smallest gain since records began in 2007, the Labor Department reported last week.

DON’T COUNT ON CHEAP OIL

Saudi Arabia may have increased its oil output but most of the increase is for its own consumption needs as Ambrose Evans-Pritchard (UK Telegraph) explains:

(…) The basic point – common to other Gulf oil producers – is that Saudi local consumption is rocketing. Residential use makes up 50pc of demand, and over two thirds of that is air-conditioning.
The Saudis also consume 250 litres per head per day of water – the world’s third highest (which blows the mind), growing at 9pc a year – and most of this is provided from energy-guzzling desalination plants.
From Heidy Rehman at Citi:

• Saudi Arabia Could be an Oil Importer by ~2030 — Saudi Arabia is the world’s largest oil producer (11.1mbpd) & exporter (7.7mbpd). It also consumes 25% of its production. Energy consumption per capita exceeds that of most industrial nations. Oil & its derivatives account for ~50% of Saudi’s electricity production, used mostly (>50%) for residential use. Peak power demand is growing by ~8%/yr. Our analysis shows that if nothing changes Saudi may have no available oil for export by 2030.
• It Already Consumes All Its Gas Production — Saudi Arabia produces 9.6bn ft3/day of natural gas. This is entirely consumed domestically. It is looking to raise gas production to 15.5bn ft3/day by 2015E, implying a 2011-15E CAGR of 12.7%. However, peak power demand is growing at almost 8% pa. We believe Saudi Arabia will need to find new sources to meet residential & industrial demand.

CHINA’S INFRA PROGRAM:

Workers build a plank road on the side of Shifou Mountain, Hunan Province, China

Workers build a plank road on the side of Shifou Mountain, Hunan Province, China Photo: Rex Features via The UK Telegraph

Big Banks Hide Market Risk Transforming Collateral for Derivatives Traders JPMorgan Chase & Co. and Bank of America Corp. are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system.

Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market. (…)
The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.(…)
Adding to the concern is the reaction of central clearinghouses, which collect from losers on derivatives trades and pay off winners. Some have responded to the collateral shortage by lowering standards, with the Chicago Mercantile Exchange accepting bonds rated four levels above junk. (…)
The banks’ new lending business “smells like trouble,” said Anat Admati, a finance and economics professor at Stanford who studies markets and trading and advises bank regulators on systemically important firms.
“The point of the initiatives on derivatives was that derivatives can hide a lot of risk,” Admati said. “Now they’re going to just shuffle the risk around.”

U.S. ELECTIONS (Chart from IBD)

Obama's Lead Slips As Support Stalls And Romney Gains

NEW$ & VIEW$ (27 July 2012)

Posted on July 27, 2012 by Denis Ouellet

DAYDREAM BELIEVER

You once thought of me
As a white knight on a steed.
Now you know how happy I can be.
Oh, and our good times starts and end
Without dollar one to spend.
But how much, baby, do we really need.
(The Monkeys)

Central banks are trying to keep market hopes high…The now traditional August “Shock and Awe”! Liquidity flooding is their only tool here. Can it really work this time?

ECB Chief Vows to Do ‘Whatever It Takes’

“Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough,” Mr. Draghi said in a speech in London, one week ahead of the ECB’s next policy meeting.

Mr. Draghi’s willingness to reverse course after showing reluctance to push the bank further into a crisis-fighting role reflects how serious the situation in European markets has become. It also suggests that government efforts to stem the crisis through austerity and greater integration of their economic policies have fallen short, as have the ECB’s own policies so far.

Unlike politicians who must navigate parliaments and other euro-zone member nations to get things done, the ECB’s ability to print unlimited euros means it can match words with actions almost immediately, if it chooses.

One option is for the ECB to start buying bonds again, but on a much larger scale. A more extreme step would be to set a ceiling on interest-rate spreads between weak and strong countries, though that would require an unlimited commitment that officials so far have been unwilling to make. It could also buy bonds of strong and fragile countries alike to jump-start the bloc’s economy.
“To the extent that the size of these sovereign premia hamper the functioning of the monetary-policy transmission channel, they come within our mandate,” Mr. Draghi said. His remark suggests a broad interpretation of the ECB’s sole responsibility to keep inflation just below 2%. Annual euro-zone inflation is 2.4%.
Still, questions linger over how much a divided ECB will be able to do. The ECB bought around €45 billion in Greek bonds, a sizable share of the country’s outstanding debt, but was unable to keep Athens from careening into default. Purchases of Italian and Spanish bonds during the second half of last year failed to keep borrowing costs down for long. These countries have deep-seated economic problems the ECB can’t solve. Germany’s central bank fiercely opposes buying bonds and anything else that uses ECB money to support governments. Mr. Draghi would likely have enough support within the ECB’s 23-member governing council to outvote Bundesbank President Jens Weidmann. But opposition from the bloc’s largest economy could weaken the tonic effect on markets.

‘Whatever It Takes’ Is Familiar Refrain From Europe

“We have to ensure whatever it takes that we don’t have a recession coming from the funding pressure,” Draghi said last December, hoping to prevent a recession generated by a credit crunch as banks cut lending. Banks are facing a capital shortage because “the situation has changed profoundly,” he said at the time.
This January, after warning of a “very grave state of affairs,” Mr. Draghi again pledged to do “whatever it takes to ensure financial stability” as long as its actions fit with its mandate of price stability.
“Whatever it takes” appears to have been the phrase of choice across Europe around prior bouts of market turmoil. European Council President Herman Van Rompuy, German Chancellor Angela Merkel and Mr. Draghi himself — along with numerous other euro-zone officials — have repeatedly pledged to do “whatever it takes” during a debt crisis that’s now well into its third year.

Whatever It Takes

And if you give me a chance

Believe it, I can change

I’ll keep us together

Whatever it takes

(Lifehouse)

Bundesbank Stays Opposed to Bond Buys

Germany’s influential central bank poured cold water on hopes the European Central Bank will take a more aggressive approach to the euro-zone debt crisis.

For Markets, Draghi’s Talk Isn’t Cheap

While the ECB has raised expectations that it will muscle in to ease the sovereign debt crisis, there are still big hurdles to action.

Reactivation of bond purchases might provide some short-term relief, but the SMP is flawed in practice. Most important, the ECB’s decision not to take losses on Greek bonds meant that investors now see SMP purchases as subordinating their existing holdings. That means even deeper losses if there is ever a default as happened in Greece.

The ESM has been held up by the German Constitutional Court until at least mid-September. The ECB previously has said the ESM can’t be a counterparty because it would breach the European Union treaty ban on central-bank financing for governments. And a banking license alone doesn’t lift the ESM’s lending cap of €500 billion ($610 billion), raising questions about the real firepower unlocked.

On the banking license, the FT adds:

This would also break EU treaty rules, the Bundesbank said. The German government on Friday also stressed its opposition to granting a banking licence to the bailout fund, while saying that it “will do all that is politically required to maintain the euro”.

Now, here’s a variation on the “whatever it takes” theme.

Reuters’ Exclusive: ECB may take losses in second Greek debt restructuring

Draghi Boxes Himself Into a Corner With Bond Signal

Now he has to deliver, or face deep disappointment on financial markets, analysts said.

MEANWHILE IN THE REAL WORLD, cloudy at best most everywhere

The Conference Board Leading Economic Index® for the Euro Area Declines

The Conference Board Leading Economic Index® (LEI) for the Euro Area decreased 0.3 percent in June, falling to 104.8 (2004=100), following decreases of 0.3 percent in May and 1.0 percent in April.

The leading indicators are consistent with a picture of very slow growth or even economic contraction for the remainder of the year, with risks tilted to the downside given the high level of uncertainty about the resolution to the current financial crisis.”

Euro-Zone Gloom Deepens

The CEPR and the Bank of Italy Friday said their Eurocoin indicator —which is intended to estimate quarter-on-quarter growth in gross domestic product, excluding erratic components, such as seasonal variations and short-run volatility—fell to -0.24% in July from -0.17% in June, its lowest level since July 2009.

Spanish Unemployment Advances to Highest Rate in Post-Franco Era

The number of homes with all breadwinners unemployed has reached 1.7 million, up 27 percent from a year ago.
“The prospect of further employment losses and the end of the tourism season is likely to push the unemployment rate above 25 percent,” Raj Badiani, an economist at IHS Global Insight in London, said in an e-mailed note. “This presents a significant obstacle to any recovery impetus as Spain is set for a deep and prolonged recession.”

KC FED INDEX UP BUT NEW EXPORT ORDERS COLLAPSE

The month-over-month composite index was 5 in July, up from 3 in June but down from 9 in May. Manufacturing growth increased at most nondurable goods-producing plants, while growth was flat to slightly negative for durable goods production. Other month-over-month indexes were mixed in July. The production index fell further from 12 to 2, and the shipments index dipped into negative territory.

The new orders for export index dropped from -7 to -13, almost matching the all-time low of -14 in early 2009. However, the new orders index edged up from -7 to -4, and the employment and order backlog indexes also improved over last month. Both inventory indexes rose considerably.

Sad smile U.S. Pending Home Sales Decline

Pending sales of single-family homes fell 1.4% last month after a little revised 5.4% May rise, according to the National Association of Realtors (NAR). Sales have risen nearly one-third versus the 2010 low. Nevertheless, the sales index of 99.3 was down 21.8% versus the April 2005 peak.

U.S. Durable Goods Orders Buoyed by Aircraft

New orders for durable goods jumped another 1.6% last month following a similar May increase (initially reported as 1.1%). The Consensus forecast was for a 0.5% June rise. Resurgent orders for aircraft & parts accounted for much of last month’s gain with a 17.2% jump (21.8% y/y). Less the transportation sector altogether, durable goods orders fell 1.1% last month. The y/y gain slowed to 3.1% from its 8.6% rise last year and 2010′s increase of 18.0%.
In most industry categories orders were weak. Computers & electronic products orders dropped 4.9% (-2.3% y/y). Machinery orders fell 1.1% (-2.9% y/y) and electrical equipment orders were off 0.7% (+1.4% y/y). Primary metals bookings rose 0.9% (16.8% y/y).

Non-def. cap. goods ex-aircrafts declined 1.4% in June. They have declined 0.2% in the last 3 months.

CHINA JULY MNI FALLS FROM 53.2 TO 49.7 That’s 3 consecutive monthly declines from 56.0 in April.

China’s Industrial Profit Slows

Profit at China’s major industrial enterprises in June fell 1.7% from a year ago to 468.2 billion yuan ($73.97 billion), slowing from a 5.3% drop in May, the National Bureau of Statistics said Friday.
Industrial profit fell by 2.2% in the first half of 2012 from a year earlier to 2.31 trillion yuan, slowing from a decline of 2.4% in the January-May period, according to data from the bureau.
Profits of state-owned enterprises fell 10.9% on year to 690.5 billion yuan in the January-June period.
Foreign companies posted the largest decline, with profits down 13.4% from a year earlier to 522.1 billion yuan in the January-June period.

Zhejiang enterprises scale down output

Weak demand, rising labor costs and strained liquidity are ravaging enterprises in East China’s Zhejiang province, a traditional stronghold of China’s entrepreneurship, and forcing them to scale down or even halt production, a Zhejiang government report said.
The report, based on a month-long investigation and interviews with local government officials and businessmen, said the falling earnings, rising production costs and dwindling orders are now plaguing most of Zhejiang companies.
In Wenzhou alone, 60.43 percent of the industrial enterprises have scaled down or halted production.
In the first five months of the year, the net profit of large companies dropped 23.8 percent, for medium companies decreased 18.3 percent and for small and micro enterprises declined 14.3 percent.
The report warned that the bleak situation for Zhejiang’s enterprises could snap their capital chains and threatens to cripple the credit system.

China Shipyards Falter as Glut Triggers 49% Slump in Orders

China Job Market for Graduates Shows Stress on Slowdown

“Graduate unemployment matters to the government because of the concern about the risk of social unrest,” said Willy Wo- Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong. “Graduates are the ones who are well educated and know how to mobilize the public to protest.”

China will have 6.8 million new graduates in 2012, compared with 6.6 million in 2011 and 6.3 million in 2010, Ministry of Human Resources and Social Security data show. Students finish their studies each summer.

China Moves to Contain Cooking-Oil Prices

Singapore-based producer Wilmar International Ltd. said on Friday that the Chinese government has advised edible-oil producers in China to avoid raising prices “unless absolutely necessary.” Wilmar and another company, state-owned China National Cereals, Oils & Foodstuffs Corp., known as Cofco, control about 70% of China’s retail cooking oil market.

The move falls short of an outright price cap like the one officials put in place two years ago, when inflation was surging.
Still, the government’s move signals it is again wary of resurgent food prices—of which cooking oil is a bellwether—after a sharp rally in U.S. grain prices late last week drove up Chinese soybeans.

Japan Falters as Ito Calls for Euro Buys to Rein in Yen

Consumer prices excluding fresh food fell 0.2 percent in June from a year earlier, the statistics bureau said in Tokyo today. The median estimate in a Bloomberg News survey was for no change in prices. Retail sales rose 0.2 percent, a separate report showed, the smallest gain since November and less than a median forecast for a 1.1 percent increase.

“We must realize that a much bigger plunge in the euro may occur,” Ito, who was deputy vice finance minister from 1999 to 2001, said in an interview in Tokyo on July 25. BOJ purchases of euro bonds would be “surprising” and also show investors that Japan is supporting Europe, he said.

U.S. EARNINGS SHOW DECLINE YoY

As derived from the results of the 53% of the S&P 500 member companies that have released second-quarter results, their total income from continuing operations that excludes some extraordinary gains and losses dipped by 0.7% year-to-year. By comparison, the year-to-year increases by income from continuing operations were 6.2% in Q1-2012 and 16.2% in Q2-2011.

After posting year-to-year gains of 5.4% in Q1-2012 and 11.1% in Q2-2011, the sales growth of Q2-2012’s reporting companies slowed to a meager 2.2% thus far. Excluding the financial company members of the S&P 500, the Q2-2012-to-date results showed a limp 2.3% annual rise in sales and a 0.8% dip of operating profits. (Figure 4.) (Moody’s)

Facebook shares hit as ad growth slows Stock falls more than 10% to new low

(FT’s Lex column has this great headline: Facebook – social notworking) (Chart from IBD)

Amazon Profit Evaporates

The Seattle-based company reported a 96% drop in second-quarter profit, reflecting heavy investments in its business. Even as revenue swelled 29% to $12.83 billion, its bottom line was left with just $7 million.

Starbucks Outlook Short of Expectations

Starbucks reported a 19% rise in quarterly earnings but cut its outlook, sending its shares lower in after-hours trading.

Merck Affirms Full-Year Forecast as Second-Quarter Earnings Top Estimates

NEW$ & VIEW$ (25 July 2012)

Posted on July 25, 2012 by Denis Ouellet

Fed Moves Closer to New Action

Fed officials, impatient with the economy’s sluggish growth and high unemployment, are moving closer to taking new steps to spur activity.

Central bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act.

Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including a new program of buying mortgage-backed or Treasury securities, new commitments to keep short-term interest rates near zero beyond 2014 or an effort to push already-low benchmark short-term interest rates even lower.

More information? The key word is contagion.

The recent weak PMI trends in all three economies can be linked to declining exports, with July data indicating that global trade flows continued to fall in the wake of the uncertainty and caution caused by the ongoing Eurozone crisis. Although the rate of decline in Chinese new export orders eased during July, it was the fifth contraction in the past six months and June’s decline had been the largest since March 2009. Meanwhile, US new export orders fell for the second successive month, showing the first back-to-back monthly decline since mid-2009. The Eurozone registered a fall for the thirteenth consecutive month, with the rate of decline approaching the steep pace seen late last year. (Markit)

Confidence Drops Across Europe

Data suggest economic weakness in the euro zone is penetrating the currency bloc’s stronger countries at a time when these same states could be called upon to provide more aid to the euro-zone’s weaker states.

Germany’s Ifo index was much weaker in July than expected and fell to its lowest level in over two years. The Munich-based institute said the country’s key manufacturing sector saw its current business situation “much less favorably” than in the previous month, adding that capacity utilization was “clearly lower.” Manufacturers’ expectations also dropped sharply, Ifo said, but observed that export expectations fell “only slightly.”
The retail sector, on the other hand, offered “a ray of hope,” Ifo said, as the business climate in that sector continued to rise. The institute said that the crisis in the euro zone “is having an increasingly negative impact on the German economy.”
The Ifo’s monthly indicator of business confidence fell to 103.3 in July compared with the previous month’s 105.2, which was lowered from the estimated 105.3 that was originally reported.
Both components of the survey—the current situation and expectations—fell with the former dropping to 111.6 from June’s 113.9, while the latter dipped to 95.6 from June’s 97.2. The expectations index has now fallen for four months in a row and is at its lowest level in three years.
Business confidence in other parts of the euro zone’s core also fell to historic lows. In the Netherlands, figures released by the official statistics agency Wednesday showed its measure of producer confidence fell in July to minus 5.2 from minus 4.8 in June. This was the lowest level since January 2010.

U.K.’s GDP Slumps 0.7%

U.K. economic output collapsed in the second quarter of 2012, raising questions about the wisdom of Chancellor of the Exchequer George Osborne’s austerity drive.

The contraction in the second quarter comes after GDP shrank 0.3% in the first quarter and fell 0.4% in the final three months of 2011—meaning the economy has contracted for nine consecutive months.

France Unveils Plan to Boost Car Sales

The plan centers largely on boosting French car sales by raising subsidies for electric and low-emission vehicles and penalizing gas guzzlers. The government will also encourage investment in new technologies and provide a €600 million loan package for cash-strapped small and medium companies in the industry.

The government will raise the subsidy for electric vehicles to €7,000 from €5,000, while it will raise the subsidy for hybrid cars to €4,000 from €2,000. French Industry Minister Arnaud Montebourg said the car subsidies will cost the government nearly €500 million in 2013.
To help finance the incentives, larger penalties will be levied on purchases of high-emission vehicles, which will be approved in the 2013 budget later this year.
The limited scope of the auto plan underscores the challenges Mr. Hollande faces as the euro zone debt crisis intensifies. Since coming to power in May, he has already raised taxes by over €7 billion to stay on track with deficit reduction targets this year. Next year’s budget will prove an even greater challenge, as the government will need to make around €30 billion of savings to meet its deficit targets.
Under these constraints, the government’s plan also alluded to measures to protect French car makers from foreign competition that don’t require any government cash outlay. Mr. Montebourg said the government wants the European Commission to put a free-trade agreement recently reached with South Korea under surveillance, calling competition from Korean cars “unfair.” The pact led to a surge in imports of South Korean cars to Europe.

Soft currency
A rapid fall in the euro can save Spain, says Martin Feldstein

(…) The declining value of the euro holds the key to the eurozone’s survival. (…)

In recent weeks I have discussed the case for a declining euro with current and former eurozone officials. I expected that they would just say that I am a long-time “eurosceptic” who is always critical of the euro. But the opposite happened. These eurozone experts all agreed that a lower value of the euro is necessary for the survival of the single currency. (…)
The decline of the euro can therefore occur without specific action by the European Central Bank. But a further shift by the ECB toward a looser monetary policy would speed the euro’s decline. (…)

France, Spain call for more ECB action

ECB’s Nowotny Sees Some Arguments for Giving ESM Banking License European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

Go figure! But Draghi is good at finding ways and means…

CONTAGION:

Toronto new condo prices fall 6 per cent in June

In the same period the price of brand new low-rise homes rose 10 per cent to $603,102.
Sales of new homes and condominiums totaled 3,461 in June, down 27 per cent from 2011, which had been a record year.
Despite the drop, new condo sales so far this year are still 38-per-cent higher than the long-term average, and this year is on course to be the second-highest level, stated Bryan Tuckey, the CEO of BILD, which represents developers and builders. Meanwhile, low-rise sales are 27 per cent below the long term average and June’s sales of low-rise homes were the lowest on record for that month.

CHINA EMPLOYMENT

Urban unemployment rate reaches 4.1 pct China’s urban registered unemployment rate stood at 4.1 percent at the end of June, the Ministry of Human Resources and Social Security said Wednesday.

The rate remained unchanged for the eighth consecutive quarter during the April-June period, and rested below the government’s 4.6-percent annual target set for this year. (…)

However, experts have warned that job cuts may be inevitable if the external demand remains sluggish.
Yin said the country will face bigger employment pressures in the second half as the impact of the economic slowdown on job creation might appear later in the year because of a delay effect.

EARNINGS WATCH

Generally not a great day for earnings.

Apple Suffers Rare Miss as Sales Cool

Apple delivered a rare earnings disappointment Tuesday with lower-than-expected sales of its iPhone, sending its stock down 5% in after-hours trading.

It was only the second time in 39 quarters the company reported results that missed analysts’ profit and revenue expectations—the previous was for its quarter ended September 2011—and came amid signs that sales of the world’s leading smartphone have lost steam this year. Apple sold 26 million iPhones in its quarter ended June 30, a 28% increase from the same quarter a year ago but down from the 35.1 million sold in the prior quarter this year.
At the heart of Apple’s stumble is what appears to be a tricky transition from current iPhone models to a new version expected later this year. The company also said the battered European economy is weighing on results there.
Apple said revenue rose 22.6% to $35 billion from a year earlier—but that growth was down from 59% in the previous quarter.
Profit increased 20.7% to $8.8 billion, or $9.32 a share, from a year earlier—though it was down from 94% growth the quarter before.
Analysts, on average, were expecting revenue of around $37.2 billion and earnings of $10.37 a share, according to Thomson Reuters.
Apple, known for traditionally giving conservative guidance, said it expects fourth-quarter earnings of $7.65 a share on revenue of about $34 billion. Analysts surveyed by Thomson Reuters forecast a profit of $10.23 a share on $38 billion in revenue.

UPS Cuts Full-Year Outlook

UPS reduced its earnings outlook for the full year to $4.50 to $4.70 a share from the $4.75 to $5 a share it projected in April.
The company reported second-quarter earnings of $1.12 billion, or $1.15 a share, up 2.2% from $1.09 billion, or $1.09 a share, a year earlier. Revenue edged up 1.2% to $13.35 billion.
Analysts surveyed by Thomson Reuters expected a profit of $1.17 per share on revenue of $13.7 billion.
The Atlanta-based shipping giant also continued to wrestle with soft demand for exports from Asia, and its U.S. domestic volume growth was fueled primarily by relatively low-value e-commerce shipments, which crimped revenue.

“Economies around the world are showing signs of weakening” and shipping customers are increasingly nervous, Chief Executive Scott Davis said Tuesday.
The company said it is planning another 10% reduction in its air capacity out of Asia after cutting the network by a similar amount in October because of steeper-than-expected declines in exports from the region to the U.S. and Europe. Asian exports to the U.S. and Europe slumped by a double-digit percentage basis in the second quarter.

Ford’s Net Profit Drops 57%

Ford’s second-quarter net profit slid 57%, as its overseas operations and a higher tax rate held back strong results from North America.

Netflix Profit Shrinks 91%

Currency Headwinds Hit PepsiCo

Arcelor Sees Difficult Conditions

Canon Cuts Full-Year Outlook

Rising Costs Weigh on WellPoint

Patent Expirations Hurt Bristol-Myers

Higher Costs Hurt Daimler

Eli Lilly Lifts 2012 Earnings Forecast After Second Quarter Tops Estimate

Caterpillar quarterly profit jumps 67 percent

Boeing profit up on rising plane deliveries

This ISI chart shows the extent of the downward earnings revisions. That was last week. The “soft patch” is getting rougher.

NEW$ & VIEW$ (23 July 2012)

Posted on July 23, 2012 by Denis Ouellet

Discontent everywhere today. No wonder:

Spanish yields are going through the roof
Equities are weak everywhere
Eurozone bank stocks plunged 7.6% last week
China shows no signs of landing as its GDP growth dangerously slips towards 7%
Oil prices are rising again
And the R word is back in America…

Lightning Spain Bedevils Markets Again

Spain continued to cast a long shadow over financial markets as a fresh selloff in Spanish bonds underscored concerns that the country may need a formal bailout.

Reports over the weekend that six more Spanish regions are poised to ask the central government for financial support, following such a request from Valencia on Friday, unnerved investors.

Short-dated Spanish government bond yields surged, with the yield on the two-year bond climbing around 0.89 percentage point to 6.51% by 10:35 a.m. GMT. The five-year bond yielded 7.28%. The 10-year yield continued to climb, albeit at a more modest pace, trading up at a fresh euro-era high of 7.45%.

Spain predicts its recession will continue into 2013.

Amid the renewed worries about the health of the euro zone’s fourth-largest economy, Spain’s benchmark stock index lost 5.8%, the most in a day since May 2010.

The pain was shared with Italy—the next-most-worrisome country for investors. Italian bond yields also shot up, and the stock market slumped 4.4%.

Austerity obviously has no effect. Financing costs are skyrocketing, deepening Spain’s fiscal hole. A full sovereign bail out seems more and more probable. But is there any money for that?

The legislation passed by the Bundestag today (Wednesday) made it clear that the government is entirely responsible for the cost of the bank package. “Spain made the request. The Spanish state will guarantee the money,” said finance minister Wolfgang Schäuble.
While the ESM is supposed to take over the burden once an EU banking supervisor is in place, this part of the summit deal seems to have withered and died in Berlin. “There will be no direct recapitalisation of Spain’s banks, at least not with us,” said Social Democrat (SPD) leader Frank-Walter Steinmeier. (…)
Twenty-two of Chancellor Angela Merkel’s own coalition voted against the Spanish package, forcing her to rely on opposition support.

Meanwhile, capital is flowing out of Spain at increasing speed: more than €122B in the first four months of 2012!

ECB’s Draghi says euro not in danger

(…) Asked in an interview with French newspaper Le Monde if the euro were in danger, Draghi said: “No, absolutely not. We see analysts imagining the scenario of a euro zone blow-up.”
“They don’t recognize the political capital that our leaders have invested in this union and Europeans’ support. The euro is irreversible,” he added.
(…) Turning to the economic outlook in the euro zone, Draghi said he did not see the risk that the bloc as a whole would enter a recession and that the situation would gradually improve towards the end of the year and the beginning of 2013. (…)

No risk? Really?

ECB Executive Board Member Benoit Coeure is more pessimistic:

Coeure was also asked how he regarded the global economic outlook, and offered a downbeat view of events. Europe may be sliding back into its second recession since 2009 and growth is also slowing in the United States and China.
“I don’t think we are moving toward a global recession; we are moving toward very low growth or no growth at all,” he said.

But Coeure sings Draghi’s political song:

In an earlier event on Friday, Coeure said there was a lack of understanding about the euro zone’s approach to tackling the region’s debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.
“I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk,” he said. “The ambition to provide long-term foundations for (the monetary union) in less than a decade is a historical step of great significance.”
He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had “clearly understood that the time of partial solutions and piecemeal reform is over”. (Reuter’s)

Just kidding The IMF and most Germans seem to sing a different tune, however:

The IMF said in its yearly report on the eurozone that the deepening crisis raises concerns about the “viability of the monetary union itself”. It warned that the “adverse links between sovereigns, banks, and the real economy are stronger than ever.”
The report said EMU is “unsustainable” as constructed and called for a radical shift in policy, including a monetary blitz by the ECB, a banking union, and debt pooling.
The plea seems starkly at odds with the mood in the Bundestag. Bail-out fatigue has reached exhaustion. “We create red lines, only to cross them. We can’t go on like this,” said Mr Steinmeier.
“It’s a bottomless pit,” said Free-Democrat (FDP) spokesman Frank Schäffler. (The Daily Telegraph)

Coming back to Draghi’s and Coeure’s “invested political capital and political commitment”, Bridgewater’s Ray Dalio would not pay much for such capital:

The unresolved European imbalances and the differences in their impacts on each country have produced widening differences in the self-interests of these countries, which have led to political divergences that have magnified the risks.

Unlike a year ago, Germany and France no longer stand in solidarity as backstops behind the euro system, but have been divided in their self-interest by divergent financial conditions which are leading to conflicting rather than unified political orientations. France’s deteriorating finances and economy have shifted its self-interest toward alliances with “recipient” (lower credit rated) countries like Italy and Spain and away from “contributor” (higher credit rated) countries like Germany and the Netherlands, leaving Germany more isolated as a guarantor of the risks in the euro system and in its views about how to manage the imbalances.

Given these shifts in the alliances between contributor and recipient countries we think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted. Said differently, we think that there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a viable Plan B in place. This fat tail event must be considered a significant possibility.

Draghi should read Dalio’s next paragraph slowly. His notion of “risk” might change (my emphasis):

Given the lack of global private sector credit creation, the world’s economies remain highly reliant on government support through monetary and fiscal stimulation. Now that the most recent round of global monetary stimulation has ended, world economic growth has slowed and central bankers are in the process of stimulating again.

We estimate that in the past few months, global growth has slowed from about 3.3% to 1.9% and that 80% of the world’s economies have slowed, including all of the largest. The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce. And at this point, while actions have been taken, none of the world’s largest economies are stimulating aggressively via either monetary or fiscal policy, further reducing the odds of a reversal.

How about the U.S. political commitment?

Besides the drag from Europe and the potential for a contagious debt blowup there, numerous US federal programs will expire in the fourth quarter, and given the likely political divisions after the election it will be a challenge for the new Congress to deal with these in a timely manner.

Without action, the expiration of these programs represents a fiscal drag on growth of about 2.5%. Given the lack of new aggressive Fed stimulation, the threat from Europe, the simultaneous decline in major country growth rates and the fiscal cliff, the risks to US growth are skewed to the downside. (Streettalklive)

THE DRAGON HAS NOT LANDED YET

China’s Stocks Decline After Central Bank Adviser Predicts Deeper Slowdown China’s stocks fell, dragging the benchmark index down to the lowest level since March 2009, after a central bank adviser said economic growth will slow this quarter and as Europe’s crisis worsened the outlook for exports.

China’s economic growth may cool to 7.4 percent this quarter, Song Guoqing, a member of the People’s Bank of China monetary policy committee, said at a forum in Beijing over the weekend. He also warned that a decline in producer prices in tandem with consumer inflation may hurt investment returns of industrial companies, damping their desire to expand.
“The consensus is that China’s economic growth rate will be close to 8 percent in coming months, but I personally am more pessimistic because there are problems on the export side,” Song said. With Europe’s debt crisis still unfolding, “there is a risk of insufficient government measures if Chinese exports fall more sharply than expected in coming months,” he said.

China GDP grew 7.6% in Q2 but data show that growth slowed throughout the month and continued to slow in July. Here’s more warning:

Wen warns of ‘complicated, grim’ job situation

Premier Wen Jiabao has warned of new employment pressure amid China’s economic slowdown, saying the country will face a more complicated and more severe situation in creating sufficient jobs.
Wen said the negative impact of the global financial crisis on China’s employment will linger for quite some time, leading to an imbalance between labor supplies and demand.
The premier urged authorities at all levels to work harder to create jobs, saying that expanding employment is a top priority in ensuring and improving people’s livelihoods.
He called for local authorities to implement more proactive employment policies and give more priority to job creation when making national economic development programs and restructuring the economy.

THE FRENCH DEVOLUTION (2)

In last Friday’s NEW$ & VIEW$, I posted an extract from a GaveKal piece on France. John Mauldin’s always excellent Frontline Thoughts uses an IMF study to show that France is frightfully following Greece’s path. The dotted lines are three paths that the debt-to-GDP ratio can follow. The top line is the trajectory without any actions by the individual governments. The middle dotted line is what the debt trajectory would look like with mild reforms to entitlements, and the bottom line is the debt trajectory if very draconian measures are taken.

Mauldin explains:

(…) notice that if Greece were to follow the suggested draconian path, it could stabilize its debt. And then notice that if France were to make the same level of draconian cuts, its debt-to-GDP ratio would merely rise to almost 200% within 25 years. Oops.
So, what has been the response of the new French government? It has decided to double down on what was already an irresponsible path. (…) do you think the average French politician understands how bad off France is? Certainly not the majority of them, and it is doubtful that their counterparts in Germany do, either. This is going to be a train wreck of truly biblical proportions. Think 12 plagues, not the run of the mill 10.
Hollande evidently has very good political instincts and knows how to work the system. Unfortunately, he has the economic understanding that God gave a goose. (…)
What happens when the markets realize that France is essentially bankrupt and cannot print its own currency? And that all the policies that this new government wants to enact will only make things worse? And that Hollande will be in power for at least four years?
It won’t be this year or even in 2013 (I think), but within a few years we will be writing about France in the same way we are writing about Greece and Spain, et al., today. And French banks are massively larger than French GDP (some four times, or so I seem to recall). France cannot backstop its banks any more than Spain can.

Markets are so focused on Spain that they don’t worry, yet, of France. (Chart from Bespoke Investment)

Money There’s more than political capital invested in the Euro. Moody’s took a look at The Cost of a Euro Zone Breakup from Germany’s viewpoint:

If the single-currency area were to fragment, Germany would suffer massive losses, estimated at €1.9 trillion. This includes money it has committed to the region’s bailout funds as well as loans from Germany’s central bank and private banks. Even a limited breakup of the euro zone, with only Greece leaving, would reduce German output by more than half a trillion euros. In sum, the estimated financial and economic losses mean Germany cannot afford to let the currency union fall apart.

EARNINGS WATCH

Q2 EARNINGS SCORECARD: Many organizations are tallying earnings reports, each with their own ways and often using somewhat different closing dates. Here’s the different scorecards, starting with S&P which is my main benchmark.

S&P calculates that of the 120 companies (31%) with full operating comparative date for Q2’12, 82 beat (68%) and 21 missed (18%). Keep in mind that analysts had reduced their Q2 estimates by 3.1% since mid-April.

Factset adds info on revenues:

Of the 104 companies that have reported earnings to date for Q2 2012, 74% have reported earnings above the mean estimate, but just 45% have reported sales above the mean estimate.

Over the past four years on average, 68% of companies have reported actual EPS above the mean EPS estimate at this same point in time in the earning season (56% for revenues).

The blended earnings growth rate for the second quarter currently stands at 2.7%.

In aggregate, companies are reporting earnings that are 5.3% above expectations. Over the past four quarters on average, actual earnings for the S&P 500 surpassed estimates by 4.8%.

In terms of revenues, the blended growth rate stands at 0.7%, down from an estimate of 3.4% at the start of the quarter.

Despite the low overall revenue growth rate for the index, nine of the ten sectors are reporting sales growth for the quarter. The only sector predicted a report decline in sales is Energy (-16.3%).

For Q3 2012, 18 companies have issued negative EPS guidance and 4 companies have issued positive EPS guidance. Thus, 82% of the companies issuing guidance to date for Q3 2012 have issued negative guidance. This percentage is well above the percentages recorded in Q2 2012 (70%) and Q1 2012 (60%).

Thomson Reuters (via IBD):

57% Of S&P 500 Firms Miss On Sales

So far, two-thirds of S&P 500 companies reporting Q2 results have exceeded low-ball earnings forecasts, according to Thomson Reuters. But fewer than half (43%) have met or topped sales estimates.

The revenue shortfall is concentrated in energy companies excluding which, the blended revenue growth rate seems to be near consensus.

This week marks the second “peak” weeks of the Q2 2012 earnings season as 172 companies in the S&P 500 and ten companies in the Dow 30 are scheduled to report earnings.

A BULLISH VIEW ON NATURAL GAS (Palos Management Inc.)

We have written in recent issues about our bullish long-term view for natural gas prices. A few data points have come out recently that support our view. The large storage surplus that existed this spring (owing to a warmer than usual winter) is quickly being worked off. This trend is likely to continue due to significant “fuel switching” – from relatively expensive coal to relatively cheap natural gas – that has occurred at power plants, steel mills, chemical companies, etc. This overall increase in demand for natural gas is not, however, being met by increased drilling for gas wells. Even a “normal” winter, in terms of temperatures, could push gas storage supplies into a deficit. Said another way, we expect natural gas demand and supply to quickly move back into balance. Longer term, it is clear to us that the switch to natural gas will continue and aggregate demand for natural gas will increase.

GOOD READ: Coming: The End of Fiat Money

A Barron’s interview with Stephany Pomboy, founder of MacroMavens. One extract:

You recently wrote an entire piece about the importance of the Bank of Kazakhstan. Why?
Economics is so dull! You have to inject a little levity when you can. We know that the Bank of China, India, and major emerging-market economies have been slowly diversifying out of their dollar reserves into hard assets. When you get to the point that the Bank of Kazakhstan is thinking: “We really need to figure out a way to diversify out of dollars,” it is a pretty profound statement about the quality of the dollar. Here in the U.S., it doesn’t seem like any investor is concerned about the risk of the demise of fiat money. I’m sure most people think I should be fitted for a straitjacket.
The real urgency for QE is not the economic outlook, but that the Fed has made itself the only natural buyer of Treasuries; during QE2 they were 61% of the market. At the peak of the housing bubble and globalization nirvana, foreigners absorbed 82% of Treasury issuance; today, it’s 26%. While we are enjoying a short flight-to-safety bid, courtesy of Germany’s Angela Merkel and the euro-zone crisis, that’s not a sustainable financing strategy. Now people are paying for the privilege, after inflation, of owning that paper. We have over $1 trillion annually in Treasury issuance, and our foreign creditors are buying $300 billion. That’s being absorbed by the flight-to-safety bid, as hedge funds cover short positions and bond managers extend duration.

Dimon Buys $17.1 Million in J.P. Morgan Shares

J.P. Morgan Chase & Co. Chief Executive James Dimon picked up 500,000 shares of his bank on Thursday and Friday, as he tries to convince investors and employees that the worst of a trading crisis is in the past.
The shares—purchased for himself, his wife and a limited liability corporation—cost $17.1 million.

Citic to Acquire CLSA From Crédit Agricole

Citic Securities Co. has sealed a deal to buy Hong-Kong based brokerage CLSA Asia-Pacific Markets from its struggling parent, France’s Crédit Agricole SA, for $1.25 billion, the first major acquisition by a Chinese broker of a foreign competitor.
The deal is a stark example of a powerful state-controlled Chinese company taking advantage of the global economic weakness to expand into new areas and become more competitive against western rivals. Taking over CLSA, a brokerage that specializes in stocks in Asia, increases Citic’s ability to raise capital for Chinese companies by tapping CLSA’s global client list of 1,700 investors. That had been a role almost exclusively played by western investment banks.

CHINA’S POLITICAL PYRAMID

JAPAN, the only growth game in town:

CHINA

Li warns on challenge of finding work for graduates

EUROPE

Government has little room for stimulating growth

Money manager says ‘dull hammer’ tactics distort market

The average increase in consumer prices in the first quarter was 2.4 per cent, up only a little from the final quarter of 2012.

Record $146bn withdrawn from the economy since Monday

SENTIMENT WATCH

Fed doubtful on open-ended QE3 policy Concerns grow over risks of ongoing quantitative easing

Fed and Bank of England head in different directions Scope for confusion over central banks’ future intentions

Pound Sinks Amid Rift Over Stimulus Bank of England Governor Mervyn King and two other members of the U.K. central bank’s Monetary Policy Committee were defeated in a push for extra stimulus at its February policy meeting.

EARNINGS WATCH

Reuter’s Analysis: Americans to face tougher 2013 on rising prices, taxes

Bloomberg adds a few more companies

Disappearance of leader-in-waiting sparks speculation over leadership

DAYDREAM BELIEVER

Central banks are trying to keep market hopes high…The now traditional August “Shock and Awe”! Liquidity flooding is their only tool here. Can it really work this time?

Whatever It Takes

And if you give me a chance

Believe it, I can change

I’ll keep us together

Whatever it takes

MEANWHILE IN THE REAL WORLD, cloudy at best most everywhere

U.S. EARNINGS SHOW DECLINE YoY

Facebook shares hit as ad growth slows Stock falls more than 10% to new low

CONTAGION:

EARNINGS WATCH