NEW$ & VIEW$ (13 JANUARY 2014)

DRIVING BLIND (Cont’d)

 

U.S. Hiring Slowdown Blurs Growth View

American employers added a disappointing 74,000 jobs in December, a tally at odds with recent signs that the economy is gaining traction and moving beyond the supports put in place after the recession.

The downbeat readings were partly attributed to distortions caused by bad weather, and many economists warned that the report may prove to be a fluke. Employers, too, are reporting a mixed take on the economy and their labor needs.

Government payrolls declined by 13,000 in December, and health care—usually a steady source of job growth—declined by 1,000. Construction jobs, which are often weather-dependent, declined by 16,000. Manufacturing payrolls expanded just 9,000.

Meanwhile, last month’s most significant job gains were in sectors that traditionally aren’t high-paying, such as retail, which added 55,000 positions. The temporary-help sector increased by 40,000.

One piece of good news in Friday’s report was a substantially revised increase in November’s tally, to 241,000 new jobs from 203,000.

Where Jobs Were Added

Weather or not? JP Morgan is rather cold about it (charts from WSJ):

The big question is how much of the disappointment was weather distortion. The 16,000 decline in construction payrolls is an obvious candidate as a casualty of cold weather in the survey week. Another clue comes from the 273,000 who reported themselves as employed but not at work due to bad weather, about 100,000 more than an average December. Caution should be taken in simply adding this 100,000 to the nonfarm payroll number, as the nonfarm number counts people as employed so long as they were paid, whether or not they were at work.

Our educated guess is weather may have taken 50,000 off payrolls. It’s hard to see how the weather — or anything else — was to blame for the 25,000 decrease in employment of accountants. Another outlier was health care employment, down 6,000 and the first monthly decline in over a decade, undoubtedly a data point that will enter the civic discussion on health care reform.

Weak personal income:

The weak payroll number was accompanied by a shorter work week and little change in hourly pay. The workweek fell by six minutes to 34.4 hours in December. Hourly pay for all employees increased only 2 cents, or 0.1%, to $24.17, less than the 0.2% gain forecasted.

The combination of weak net new jobs, fewer hours and very small pay raises suggests wages and salaries hardly grew last month. Since “wages and salaries” is the largest component of personal income, the household sector probably didn’t see much income growth in December. And the gain was even less when inflation is taken into account.

BloombergBriefs explains further:

A negative in the report was the underlying trend in average hourly wages, which slowed to a 0.1 percent month-over-month gain and 1.8 percent on a year-ago basis. Using data on hours worked and earnings, one can craft a labor income proxy that is up 1.8 percent, well below its
20-year average of 3 percent.

This is critical with respect to the growth outlook in the current quarter. During the past two quarters the growth picture has improved, due in part due to an increase in inventory accumulation. Given the increase in hourly wages and the labor income proxy, households may need to pull
back on spending in the first three months of the year, which increases the risk of a noticeable negative inventory adjustment in the first quarter.

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Fed Unlikely To Alter Course

Friday’s disappointing jobs report is likely to curb the Fed’s recent enthusiasm about the U.S. economic recovery, but it seems unlikely to convince officials they should alter the policy course Bernanke laid out.

That is even though the economy averaged monthly job gains of 182,000 positions last year. That is roughly the same as the 183,000-a-month pace of 2012 and 2011 average of 175,000. Is employment actually accelerating other than through the unemployment rate lens? The WSJ gets to the point:

(…) The report exacerbated another conundrum for officials.

The jobless rate, at 6.7% at year-end, is falling largely because people are leaving the labor force, reducing the numbers of people counted as unemployed.

Because the decline is being driven by unusual labor-force flows—aging workers retiring, the lure of government disability payments, discouraged workers and other factors—the jobless rate is a perplexing indicator of job-market slack and vigor.

Yet Fed officials have tied their fortunes to this mast, linking interest-rate decisions to unemployment-rate movements. Since late 2012, the Fed has said it wouldn’t raise short-term interest rates until after the jobless rate gets to 6.5% or lower. In December, officials softened the link, saying they would keep rates near zero “well past” the point when the jobless rate falls to 6.5%.

Most officials didn’t expect that threshold to be crossed until the second half of this year. At the current rate, it could be reached by February.

The jobless-rate movement and the Fed’s rhetoric create uncertainty about when rate increases will start. Short-term interest rates have been pinned near zero since December 2008, and officials have tried to assure the public they will stay low to encourage borrowing, investment, spending and growth.

Now, the public has more questions to consider: What does the Fed mean by “well past” the 6.5% threshold? Is that a year? A few months? How does it relate to the wind-down of the bond-buying program? What does it depend upon?

It will be Ms. Yellen’s job to answer the questions. Mr. Bernanke’s last day in office is Jan. 31.

To Tell the Truth 2000-2002.jpgRemember the To Tell The Truth game show?

  • Supply/demand #1: Oversupply

The total number of jobs in the U.S. hit a peak of about 138 million in January 2008, one month after the start of the most recent recession.

In the ensuing downturn, nearly nine million jobs disappeared through early 2010, when the labor market started turning around.

Job gains accelerated in 2011 and have remained fairly steady since, edging up a bit each year.

To date, almost 8 million jobs have returned, leaving a gap just shy of 1 million, which is likely to be closed this year. But that doesn’t account for changes in the population.

If the population keeps growing at that same rate, and the U.S. continues to add jobs near 2013’s pace, then the total number of nonfarm jobs in the U.S. won’t get back to where they should be until 2019. If the pace picks up in 2014 and beyond — say to 250,000 a month — the gap will narrow sooner, in 2017.

That said, the U.S. economy hasn’t added an average 250,000 jobs or more a month since 1999.

  • Supply/demand #2: Shortage

BlackRock: Jobs Report Shows Unemployment Is Structural

BlackRock fixed-income chief Rick Rieder says this morning’s disappointing December jobs report underscores the structural nature of an unemployment situation that’s beyond the control of the Federal Reserve.

“My view on unemployment is structural – you can’t fix it with quantitative easing,” Rieder tells Barron’s today. He said the disappointing number of jobs added can’t all be blamed on bad December weather, and that the labor force participation rate keeps dropping. “It means you have an economy that’s growing faster, and you don’t need people because of technology…. You’ve got all this economic data that’s strong but you don’t need people to do it.” (…)

  • Supply/demand #3: Dunno!

(…) imageAt least some of the decline in participation reflects demographic factors, including the Baby Boom generation moving into retirement age and younger people staying in school longer. But the participation rate for people age 25 to 54, which shouldn’t be affected much by such factors, has fallen to 80.7%, from 83.1% at the end of 2007.

Here’s the optimistic view…

This suggests the pool of people available for employment is substantially higher than the unemployment rate implies. So even if job growth does, as most economists expect, rev back up, it will be a while before companies need to pay up to attract workers. Indeed, average hourly earnings were up just 1.77% in December versus a year earlier, the slowest gain in more than a year. The net result is inflation may be even more subdued in the years to come than the Fed has forecast.

…but that optimism assumes that the drop-outs are simply waiting to drop back in, a view not shared by the Liscio Report (via Barron’s):

(…) But our friends at the Liscio Report, Doug Henwood and Philippa Dunne, find a rather different story, especially among younger groups: The vast majority of folks not in the labor force don’t want a job, even if one is available. That’s what they tell BLS survey takers anyway.

Data going back to 1994 show a steady uptrend in the percentage of young (16 to 24-year-old) and prime-age (25 to 54) Americans not in the labor force, with parallel rises in the number not wanting to work. Among younger ones, the percentage staying in school has remained around 1%, with no discernible trend, notwithstanding anecdotes of kids going to grad school while employment opportunities are scarce. Meanwhile, the overall share out of the labor force because they’re discouraged, have family responsibilities, transportation problems, illness, or a disability has stayed flat at around 1% since the BLS started asking this question in the current form in 1994, they add.

And, notwithstanding anecdotes of retiring boomers, the 55- to 64-year-olds were the only group in which the percentage not in the labor force and not wanting a job fell from 1994 to 2013. Perhaps they’ve got to keep working to support their kids, who aren’t? Annoyed

While there was some improvement in December, the number of those not in the labor force is surprising, to put it mildly — up some 2.9 million in the past year and up 10.4 million, or 13%, since July 2009, when the recovery officially began. The number of these folks who want jobs is down 600,000 in the past year, despite a 332,000 rise last month.

Pointing up “What is interesting,” Philippa observes, is that the number who wanted jobs “was climbing from late 2007 until the summer of 2012, when it hit 6.9 million. Since then, it’s been falling, and is down to 6.1 million, or minus 12%.”

Maybe there are a few millions there:

cat

I don't know smile For Yellen’s sake! Would the true supply/demand equation please stand up.

This is not trivial. We are all part of this extraordinary experiment by central bankers. History suggests that such massive liquefaction tends to fuel inflation but there are no sign of that in OECD countries. In fact, the JCB is fighting deflation while the ECB is pretty worried about it. In the U.S., the Fed has pegged its monetary policy on the unemployment rate but it is realizing that its peg is anchored in moving sands.

Actual employment growth is stable at a sluggish level but the unemployment rate is dropping like a rock. Could labour supply be much lower than generally thought? What is the U.S. real NAIRU (non-accelerating inflation rate of unemployment)? Truth is, nobody really knows.

But here’s what we know, first from David Rosenberg:

While it is true that employment is still lower today than it was at the 2007 peak, in some sense this is an unfair comparison. Many of those jobs created in the last cycle were artificial in the sense that they were created by an obvious unsustainable credit bubble. The good news is that non-financial employment has now recouped 95% of the recession job loss and is now literally two months away (390k) from attaining a new all-time high.  (…) it is becoming increasingly apparent that this withdrawal from the jobs market is becoming increasingly structural. (…)

With the pool of available labour already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernably in coming years, unless, that is, you believe that the laws of supply and demand apply to every market save for the labour market. Let’s get real. By hook or by crook, wages are going up in 2014 (minimum wages for sure and this trend is going global). (…)

With this in mind, the most fascinating statistic in the recent weeks was not ISM or nonfarm payrolls, but the number of times the Beige Book commented on wage pressures. Try 26. That’s not insignificant. (…)

As I sifted through the Beige Book to see which areas of the economy were posting upward wage pressures and growing skilled labour shortages I could see a large swath – Technology, Construction, Transportation Services, Restaurants, Durable Goods Manufacturing. (…)

Now this from yours truly:

Minimum wages are going up significantly in 2014 in states like California (+12.5%), Colorado (+12.5%), Connecticut  (+5.5%), New Jersey (+13.8%), New York (+10.3%). These five states account for 25% of the U.S. population and 28% of its GDP. Obama intends to push for a 39% hike in the federal minimum wage to $10.10. In effect, many wages for low-skill jobs are tied to minimum wages.

The irony is that minimum wages affect non-skilled jobs which are clearly in excess supply currently. As we move up the skill spectrum, evidence of labour shortages is mounting in many industries and wages are rising.

Small businesses create the most jobs in the U.S. The November 2013 NFIB report stated that

Fifty-one percent of the owners hired or tried to hire in the last three months and 44 percent (86 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. This is the highest level of hiring activity since October, 2007.

Twenty-three percent of all owners reported job openings they could not fill in the current period (up 2 points), a positive signal for the unemployment rate and the highest reading since January, 2008.

  • Unfilled job openings are almost back to historical peaks if we exclude the two recent bubbles.

image image

  • Employers have been more willing to hire full time employees:

image

  • Quit rates have accelerated lately, indicating a greater willingness to change jobs. People generally decide to change employers because they are offered better salaries.

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  • Hence, average hourly wages have been accelerating during the last 12 months.

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Nothing terribly scary at this point but the present complacency about labour costs and inflation is dangerous. Wages were rising by 1.5% in 2012 and they finished 2013 at +2.2%. Meanwhile, inflation decelerated from 2.0% in 2012 to 1.2% at the end of 2013 as did real final sales from +2.8% at the end of 2012 to +1.8% in Q313. What’s going to happen if the U.S. economy accelerates like more and more economists are now predicting.

Certainly, the economy can accelerate without cost-push inflation if there is as much slack as most believe. But is there really as much slack? Recent evidence suggests that there is less than meets the eyes. If that is true, investors will soon start to worry about rising corporate costs and interest rates.

All this so late in the bull market!

Punch Time to join the Fed and start tapering…your equity exposure.

Meanwhile,

Subprime Auto Lenders to Ease Standards Further: Moody’s

(…) Originations of subprime loans have increased to their highest levels since the financial crisis, with quarterly volume reaching $40.3 billion in the second quarter of last year, up from a recent low of $14.9 billion in late 2009 and the most since the second quarter of 2007, according to Equifax. Subprime auto loan volume was $39.8 billion in the third quarter.

Cheaper financing for lenders increases the difference between their costs and the rates they charge to consumers. In the third quarter, those rates averaged 9.64% and 14.25% for new and used cars, respectively, Moody’s said. High rates give lenders “room” to make weaker loans because of the cushion that the thicker profits provide against losses, the firm said. (…)

Lenders may cut standards more to grab market share as the pace of auto sales slow and the number of subprime borrowers stops expanding, the rating firm said.

Examples of weaker lending include larger amounts and longer loan terms, Moody’s said. The average term for subprime loans rose to 60.9 months from 59.9 months in the third quarter from a year earlier, it said. (…)

Why This European Is Bullish on America The billionaire founder of Ineos says the shale revolution is making the U.S. a world-beater again. It would be ‘unbeatable’ with a lower corporate tax rate.

(…) Seven or eight years ago in his industry, “people were shutting things down” in America “because it wasn’t competitive. Now it’s become immensely competitive.” (…)

On the contrary, Europe has “the most expensive energy in the world.” The Continent has been very slow to move on shale gas, and the U.K. has only lately, and somewhat reluctantly, started to embrace fracking. (…)

“There’s lots of shale gas around” in the U.K. and elsewhere, Mr. Ratcliffe says. But “in Texas there are 280,000 active shale wells at the moment. . . . And I think a million wells in the United States” as a whole. By contrast, “I think we have one, at the most two, in the U.K., and I don’t think there are any in France.” The French made fracking illegal in 2011, and the country’s highest court upheld the ban in October. (…)

Social protections in Europe make it much more expensive to shut down underperforming plants. Many Europeans will say, “Yes, that’s the idea. To protect jobs.” (…)

But Mr. Ratcliffe argues that European-style social protections lead to under-investment that ultimately benefits no one. (…)

By contrast, he says, in America “you’d just shut it down.” Which is why, he adds, “in America all our assets are good assets, they all make money.” That may sound like a European social democrat’s nightmare, but Mr. Ratcliffe takes a longer view, explaining that if the lost money had instead been invested in new capacity, the company would be healthier, employees’ jobs more secure and better-paying because the plant would be profitable. This logic is unlikely to persuade Europe’s trade unions, but Mr. Ratcliffe says that the difficulty and expense of restructuring is one of the things holding back Europe—and its workers.

(…)  Mr. Ratcliffe’s “only gripe” about the U.S.—”you have to have a gripe,” he says—is that America “has the highest corporate tax rates in the world: “They’re too high in my view, nearly 40%. And that’s a pity because in most other parts of the world corporate tax rates are about 25%.”

(…) If you weren’t paying all that tax, what you’d do is, you’d invest more. And we’d probably spend the money better than the government would.”

His suggestion for Washington on corporate taxes: “I think they should bring that down to about 30% or so. Then they’d be unbeatable. For investment, they’d be unbeatable, the United States.”

Light bulb Total joins UK’s pursuit of shale boom 
Oil group will be first major to explore British deposits

(…) The deal, to be announced on Monday, will be seen as a big vote of confidence in the UK’s fledgling shale industry. The coalition has made the exploitation of Britain’s unconventional gas reserves a top priority, offering tax breaks to shale developers and promising big benefits to communities that host shale drillers. (…)

George Osborne, chancellor, has argued that shale has “huge potential” to broaden Britain’s energy mix, create thousands of jobs and keep energy bills low. (…)

A boom in North American production from shale means natural gas in the US is now three to four times cheaper than in Europe. Cheap gas has driven down household energy costs for US consumers and sparked a manufacturing renaissance.

The coalition says Britain could potentially enjoy a similar bounty. It points to recent estimates that there could be as much as 1,300tn cubic feet of shale gas lying under just 11 English counties in the north and Midlands. Even if just one-10th of that is ultimately extracted, it would be the equivalent of 51 years’ gas supply for the UK. (…)

Italy’s November Industrial Output Rises

Italian industrial production rose for the third consecutive month in November, increasing by 0.3% compared with October in seasonally-adjusted terms, national statistics institute Istat said Monday.

Italy’s industrial production rose 0.7% in October compared with September, suggesting industry is on course to lift the country’s gross domestic product into expansionary territory in the fourth quarter.

Output rose 1.4% compared with November 2012 in workday-adjusted terms, the first annualized rise in two years, Istat said.

EARNINGS WATCH

The Q4 earnings season gets serious this week with bank results starting on Tuesday. So far, 24 S&P 500 companies have reported Q4 earnings. The beat rate is 54% and the miss rate 37% (S&P).

Still early but not a great start. Early in Q3, the beat rate was closer to 60%. Thomson Reuters’ data shows that preseason beat rate is typically 67%.

Historically, when a higher-than-average percentage of companies beat their estimates in the preseason, more companies than average beat their estimates throughout the full earnings season 70% of the time, and vice versa.

Q4 estimates continue to trickle down. They are now seen by S&P at $28.14 ($107.19 for all of 2103), rising to $28.48 in Q1 which would bring the trailing 12m total to $109.90. Full year 2014 is now estimated at $121.45, +13.3%. This would beat the 2013 advance of 10.7%. Margins just keep on rising!

SENTIMENT WATCH

Goldman Downgrades US Equities To “Underweight”, Sees Risk Of 10% Drawdown (via ZeroHedge)

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

We downgrade the US equity market to underweight relative to other equity markets over 3 months following strong performance. Our broader asset allocation is unchanged and so are almost all our forecasts. Since our last GOAL report, we have rolled our oil forecast forward in time to lower levels along our longstanding profile of declining prices. We have also lowered the near-term forecast for equities in Asia ex-Japan slightly. Near-term risks have declined as the US fiscal and monetary outlook has become clearer.

Our allocation is still unchanged. We remain overweight equities over both 3 and 12 months and balance this with an underweight in cash over 3 months and an underweight in commodities and government bonds over 12 months. The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields.

Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events.Still, we remain overweight, as near-term risks have also declined and as we are in the middle of the period in which we expect growth in the US and Europe to shift higher.

Regionally, we downgrade the US to underweight over 3 months bringing it in line with our 12-month underweight. After last year’s strong performance the US market’s high valuations and margins leaves it with less room for performance than other markets, in our view. Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

And this:

Ghost “Equity sentiment is, unsurprisingly, very bullish and Barron’s annual mid-December poll of buy- and sell-side strategists revealed near unanimity in terms of economically bullish sector views,” notes BCA Research in a note titled, “U.S. Equity Froth Watch.” Similarly, Citi strategists’ sentiment measure finds that “euphoria” has topped the 2008 highs and is back to 2001 levels. At the same time, the negativity toward bonds is nearly universal. (Barron’s)

But: Stock Bargains Not Hard to Find, JPMorgan Says

(…) Lee notes that by simply dividing the S&P 500 into equal groups leaves 125 stocks that have an average P/E of 11.8 times forward earnings, with a range of 8x to 13x. Not only are these stocks cheaper than the market, they’re not lacking for growth either, Lee says. The average member of this group should grow by about 11%, far lower than the most expensive stocks’ 20% growth rate, but at less than half the valuation.

“In other words,” Lee writes, “there remains a substantial portion of the market offering double-digit growth for a mere 11.8x P/E.”

Lee screened for stocks with low P/Es, positive net income growth, that had Overweight ratings by JPMorgan analysts and upside to analyst target prices. He found 19 (…)

GOOD QUOTES

Barron’s Randall Forsyth:

But truth to tell, the governor’s staff might not actually have been to blame. They may only have been taking active steps to stem the exodus from the Garden State’s sky-high taxes and housing costs. According to surveys by both United Van Lines and Allied Van Lines, New Jersey was at or near the top of states of outbound movers in 2013. And U.S. census data for 2011 showed 216,000 leaving the Garden State and 146,000 moving in, with New York the No. 1 destination. So, blocking access to the GW Bridge may simply have been a misguided effort to stanch the outflow.

Or the whole episode could have been the result of a simple misunderstanding on the part of the staff. According to one market wag, the governor’s actual order was to “close the fridge.”

Open-mouthed smile LAST, BUT CERTAINLY NOT LEAST, our third granddaughter, Pascale, will see the world today!

 

NEW$ & VIEW$ (31 DECEMBER 2013)

Smile Small Businesses Anticipate Breakout Year Ahead

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

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

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

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

U.S. Pending Home Sales Inch Up

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

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

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

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

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

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

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

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

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

Coffee cup  Investors Brace as Coffee Declines

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cold Temperatures Heat Up Prices for Natural Gas

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

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

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

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

Spain retail sales jump 1.9 percent in November

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

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

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

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

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

Hmmm…things are really getting better!

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

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

Factset on cash flows and capex:

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

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

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 6.1% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit a 13.7% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales were above the ten-year average.

image_thumb[1]

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

Gavyn Davies The three big macro questions for 2014

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

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

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

2. Will China bring excess credit growth under control?

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

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

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

3. Will the ECB confront the zero lower bound?

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

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

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

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

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

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

SENTIMENT WATCH

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

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

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

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

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

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

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

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

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

8. Will QE3 end in 2014? Yes.

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

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

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

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

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

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

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

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

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

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

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

Call me   HAPPY AND HEALTHY 2014 TO ALL!

 

NEW$ & VIEW$ (19 DECEMBER 2013)

Fed Slows Bond Buying 

Ben Bernanke gave the U.S. economy a nod of approval just a month before he leaves the Federal Reserve, moving the central bank to begin winding down a bond-buying program meant to boost growth with the recovery on firmer footing.

“Today’s policy actions reflect the [Fed’s] assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal,” Mr. Bernanke said.

After months of wringing their hands about the implications of less Fed stimulus, investors resoundingly approved of the latest action to begin paring the $85 billion-a-month program. They were cheered in part because the move came with new Fed assurances that short-term interest rates would stay low long after the bond-buying program ends. (…)

The Fed, which launched the latest round of bond buying in September 2012 in a bid to fire up the tepid recovery, will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. That will include $35 billion monthly of mortgage securities and $40 billion of Treasurys, $5 billion less of each. It will look to cut the monthly amount of its purchases in $10 billion increments at subsequent meetings, Mr. Bernanke said.

Although the Fed expects to keep reducing the program “in measured steps” next year, the timing and the course isn’t preset. “Continued progress [in the economy] is by no means certain,” Mr. Bernanke said. “The steps that we take will be data-dependent.”

If the Fed proceeds at the pace he set out, it would complete the bond-buying program toward the end of 2014 with holdings of nearly $4.5 trillion in bonds, loans and other assets, nearly six times as large as the Fed’s total holdings when the financial crisis started in 2008. (…)

The Fed has said it wouldn’t raise short-term rates, which are now near zero, until the jobless rate gets to 6.5% or lower. (…)

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials who participated in the policy meeting said they expected their benchmark short-term rate to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016. (…)

But What About Inflation

Barry Eichengreen Taper in a teapot (The writer is professor of economics and political science at the University of California, Berkeley)

(…) But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this month’s $10bn reduction is the first in a series of successive monthly steps in the same direction, it will take many months before the change has discernible impact on the Fed’s financial statement.

Wall Street may have had some trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the markets into a tizzy. But given a night’s sleep, stock traders should be able to recognise the Fed’s announcement for the non-event that it is. (…)

The value of this week’s FOMC decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates would have said, it has at least done no harm.

The Fed’s Shifting Unemployment Guideposts

Dec. 12, 2012. In an effort to bolster confidence, the Fed pledged to keep its interest-rate target low “at least as long as the unemployment rate remains above 6.5%” and inflation remained under control.

June 19, 2013. In a press conference, Fed Chairman Ben Bernanke qualified the 6.5% target, calling it a “threshold, not a trigger,” at which point the Fed would begin to “look at whether an increase in rates is appropriate.” But then the chairman offered a new guidepost, this one for the central bank’s bond-buying program. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%,” Mr. Bernanke said. (Unemployment reached that point last month.)

Sep. 18, 2013. A surprise decline in the unemployment rate despite relatively weak economic growth forced Mr. Bernanke to back away from the new 7% target at his very next press conference. “The unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall,” Mr. Bernanke said, noting the recent decline was primarily the result of people leaving the workforce, not finding jobs. “There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.”

Dec. 18, 2013. As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely. “It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” the Fed said in its statement following its latest meeting. In his press conference, Mr. Bernanke said the Fed will be looking at other gauges of labor-market health. “So I expect there will be some time past the 6.5% level before all of the other variables we’ll be looking at will line up in a way that will” give the central bank the confidence to raise rates.

Firm, but flexible…

But with the Fed projecting that the output gap will narrow, inflation will edge up, and unemployment will fall in the years ahead, even these more liberal Taylor rules suggest the Fed should be ratcheting up rates faster than it says it will. Indeed, Fed officials’ median projection is for the target rate to have risen to just 1.75% by the end of 2016; typical Taylor rules would prescribe over 3%. (WSJ)

For the record, here are the FOMC projections and how they have “evolved” since June 2013, courtesy of CalculatedRisk:

  • On the projections, GDP was mostly unrevised, the unemployment rate was revised down slightly, and inflation was revised down.

imageProjections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

  • The unemployment rate was at 7.0% in November.

imageProjections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

  • The FOMC believes inflation will stay significantly below target.

image

  • Here is core inflation:

image

Nerd smile  The only “significant changes since June are in the unemployment rate projections. Everything else is somewhat weaker. So much for an “economy that is continuing to make progress”.

Fingers crossed  WARNING: Another Soft Patch Ahead? (Ed Yardeni)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

I have been warning about this possible inventory cycle. See Ford’s warning below.

U.S. Home Building Hits Highest Level in Nearly 6 Years

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the highest level in nearly six years, in the latest sign of renewed momentum in the sector’s recovery.

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the Commerce Department said Wednesday. That was higher than the 952,000 forecast by economists and brought the average pace of starts for the past three months to 951,000.

Details of the report showed broad strength for housing. Starts for single-family homes, a bigger and more stable segment of the market, also rose to their highest level in nearly six years.

November building permits, an indicator of future construction, fell slightly to the still-elevated level of 1,007,000. Permits had jumped 6.7% in October.

The report showed home building returning to the brisk pace seen early this year, before the sector’s recovery took a hit from rising interest rates. Builders broke ground on an average 869,000 homes between June and August.

 

 

Mobile homes are also moving:

 

RV Sales Rebound as U.S. Economy Improves

(…) More Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. The total for all new units sold this year is projected to rise about 11 percent from last year to 316,300, Walworth said. Meanwhile, 2014 looks like “another good year,” as sales could top 335,000, the most in six years. (…)

More than four years since the 18-month recession ended in June 2009, sales of these units — with an entry-level price of about $80,000 — are up more than 30 percent from last year, he said, citing data from the Recreation Vehicle Industry Association, a trade group. Meanwhile, towable units — retailing for as little as $4,000 — have risen 8.5 percent. (…)

It’s useful for investors to monitor this industry because it’s proven to be “fantastic as a leading indicator of overall economic trends,” said Kathryn Thompson, a founder and analyst at Thompson Research Group in Nashville, Tennessee. Sales began to drop as interest rates climbed into 2006; the yield on 10-year Treasuries reached 5.24 percent in June of that year. By December, “the consumer was completely falling apart in the RV industry.”

That slump came one year before the U.S. entered the worst recession in more than 70 years. Now traffic at dealerships nationwide probably will be even better in 2014, Thompson said, adding that “very strong” sales have helped drive towable units near the pre-recession peak. (…)

EARNINGS WATCH

 

FedEx Bolsters Full-Year Forecast

FedEx Corp. said a shorter holiday shipping season stunted growth in its ground division, but the package-delivery company bolstered its full-year guidance and said it expects an improved financial performance next quarter.

Profit rose 14% to $500 million for the company’s fiscal second quarter ended Nov. 30, up from $438 million in the same period a year earlier. Per-share profit totalled $1.57 for the most recent quarter, less than the $1.64 that analysts surveyed by Thomson Reuters had expected.

Cyber Monday, one of the year’s busiest online-shopping days, fell on Dec. 2 this holiday season instead of in November, damping expected growth and keeping ground-business profits from reaching as high as analysts had predicted, FedEx said. The company added that its results were affected by costs associated with the expansion of its ground network. (…)

It seems that just about everybody was surprised that Cyber Monday occurred Dec. 2nd this year…But no worry, buybacks will save the year.

FedEx, based in Memphis, Tenn., indicated that it is poised for strong growth in the current quarter. Chief Executive Frederick W. Smith said FedEx’s 22 million shipments on Dec. 16 marked its third-straight record Monday this month.

The company increased its outlook for full-year earnings-per-share growth to a range of 8% to 14% above last year’s adjusted results, up from 7% to 13% previously, in part because of the effects from its share-buyback program announced in October.

Auto  Ford Warns on Earnings Growth

Ford Motor Co. warned on Wednesday its 2014 profits won’t match this year’s results because of higher costs and a currency devaluation. And it said it likely won’t meet operating profit projections of between 8% and 9% of sales by 2015 or 2016. That goal is “at risk” because of the recession in Europe and weaker results in South America. (…)

In the U.S., it blamed competition from Japanese rivals for a decision earlier this month to temporarily idle U.S. factories that build the midsize Fusion and the compact Focus to reduce inventories. The shutdowns came less than four months after Ford expanded Fusion output, citing a shortage of the cars. It also was hurt by warranty costs for Escape engine repairs. (…)

Sounds more like poor production planning leading to excess inventory, just as the Japs are benefitting from their weak Yen. What about GM and Chrysler?

GM executives also say ambitious new product programs will be vital to sustaining profitability in the next few years. “You’ve got to protect your product and you got to protect your cash flow and you have got to invest in the future,” GM CEO Akerson said earlier this week. “That may mean short-term disruptions in other priorities.”

Hmmm…”You’ve got to protect…” Sounds like a warning to me.

(…) However, the recent decline in the value of the Japanese yen against the dollar gives Toyota, Honda and Nissan more latitude to cut prices. All three have aggressive holiday promotions, a sign they want to regain market share lost after the 2011 tsunami and a period of yen strength. (…)

Which leads to

Surprised smile McDonald’s Japan slashes profit forecast by nearly 60%
Battered yen raises costs for the Japanese affiliate of the US fast-food giant

(…) It’s now forecasting net profit of Y5bn, down from Y11.7bn, according to a statement to the Tokyo Stock Exchange. Analysts had been looking for Y9.5bn in profit, according a Bloomberg poll.

The profit warning follows a Nov 7 earnings report that revealed net income had dropped 36 per cent from a year earlier in the third quarter.

Even after the Nov. 7 release, estimates remained 60% too high! Sleepy smile

McDonald’s Corp, which owns 50 per cent of the Japanese fast-food chain, doesn’t break out Japan in its earnings results but calls it is one of six “major markets” alongside the UK, France, China, Australia and the US, which together accounted for 70 per cent of revenues last fiscal year.

Jabil Circuit Warns, Stock Sinks

Shares of Apple Inc. AAPL -0.76% supplier Jabil Circuit Inc. JBL -20.54% fell more than 20% Wednesday after the components maker said an unanticipated drop in demand from a big customer would hurt revenue and profit in the current quarter.

Jabil’s warning raised concerns about sales of Apple’s iPhone 5C, a less-expensive model that Apple released in September. Apple is Jabil’s biggest customer, accounting for 19% of its revenue in the fiscal year ended Aug. 31. Analysts said Jabil produces the plastic cases for the iPhone 5C and the metal exteriors for the iPhone 5S.

THE AMERICAN ENERGY REVOLUTION (Cnt’d)

Cheap Natural Gas Could Put More Money in Americans’ Pockets

A surge in natural-gas production has driven prices down 50% in the last eight years, a stunning development that is reducing Americans’ energy costs, according to a study by the Boston Consulting Group. By 2020, these savings from low-cost energy could amount to nearly 10% of the average U.S. household’s spending after taxes and paying for necessities, or about $1,200 a year, the report said.

Economists say lower natural-gas prices will help U.S. businesses reduce costs, but there’s an important impact on consumers, too: The average U.S. household devoted about 20% of its total spending last year to energy, both directly (things like electricity and heating) and indirectly (higher costs for goods and services), BCG says. If Americans save more on energy and see lower prices when they buy goods, they might ramp up discretionary spending and propel the sluggish recovery. (…)

Consumer spending, which accounts for roughly two-thirds of the nation’s economic activity, has been resilient this year despite higher taxes and stagnant wages. One possible explanation is lower energy costs. Indeed, BCG says the average American household is already saving more than $700 a year. On Tuesday, the Labor Department said energy prices fell in November, helping muffle overall inflation. Prices at the gasoline pump have also fallen on average from nearly $3.70 in mid-July to below $3.25 as of Monday, according to the Energy Information Administration. (…)

 

NEW$ & VIEW$ (21 OCTOBER 2013)

Today: update on earnings and market valuation.

Euro Zone May Not Have Emerged from Recession

An influential group of European economists that calls periods of expansion and recession said Friday it is too early to declare that the euro zone has emerged from recession, and the single-currency area’s return to growth in the second quarter may prove temporary.

The Centre for Economic Policy Research, a network of more than 700 economists primarily based in European universities, dates periods of expansion and recession. Its Euro Area Business Cycle Dating Committee provides judgments on the currency area’s entry into and emergence from recession that is independent of policy makers in much the same way as the National Bureau of Economic Research’s Business Cycle Dating Committee in the U.S. (…)

“While it is possible that the recession ended, neither the length nor the strength of the recovery is sufficient, as of 9 October 2013, to declare that the euro area has come out of recession,” the committee said. (…)

THE AMERICAN ENERGY REVOLUTION (Continued)

Cheap U.S. Gas Attracts Norway Interest

Norwegian fertilizer producer Yara International said it and BASF would decide next summer whether to build a world-scale ammonia plant along the U.S. Gulf Coast, a potential $1 billion investment.

(…) “If you look at the U.S. now, the cheapest area to construct something in is actually the Gulf [Coast]. If you get up in the middle of the Bakken [Shale] area, there is a peak, and farther north, in Canada, [costs are] even higher,” Mr. Haslestad said.

Yara recently postponed expansion plans at its Canadian Belle Plaine plant due to rising construction costs. The Regina, Saskatchewan, plant has a capacity of 700,000 tons of ammonia, as well as 1.2 million tons of urea and urea ammonium nitrate a year.

Construction costs are higher in Canada than along the U.S. Gulf Coast partly due to less competition, cold weather, and a lack of infrastructure, Mr. Haslestad said.

The U.S. has a huge potential to establish more chemical plants amid low energy prices, Mr. Haslestad said, while in Europe high energy prices prevent companies from investing in activity that would create jobs. (…)

SENTIMENT WATCH

 

Top Bear’s Bullish Tilt Has Followers Growling

One of Wall Street’s leading bears has turned more bullish, riling some longtime clients. (…)

Lately, though, Mr. Rosenberg has changed his tune, a rare turn for a Wall Street strategist with a large following and a high-profile market stance. This past spring, he upgraded his outlook for the U.S. economy, urging investors to buy more stocks and dump Treasury bonds, citing an improving labor market, among other things. (…)

Mr. Rosenberg hardly has been telling investors to bet it all on stocks. He simply has toned down his usual caution, recommending that investors put just over half of their portfolios in stocks, up from about 35% in early 2012, while urging them to flee from bonds, which usually do well in difficult times.

Mr. Rosenberg switched to the more-bullish camp this year after he saw unemployment dropping, detected early signs of wage inflation and observed more workers leaving the workforce for reasons beyond their frustration over job prospects. He also viewed deflation as no longer a concern, as the Federal Reserve aggressively eased policy, and saw other signs of economic improvement for the U.S. (…)

Fiscal Crisis Leaves Stocks in a Sweet Spot

Despite the market disruptions Washington’s mess caused over the past few weeks, analysts who have studied past market behavior say that the current backdrop—moderate economic growth with low inflation and strong central-bank backing—is excellent for stocks.

(…) ‪Analysts who have studied past market behavior say that backdrop—moderate economic growth with low inflation and strong central-bank backing—is excellent for stocks. That may help explain why financial markets remained fairly calm throughout the crisis and how the S&P 500 stock index finished Friday at 1744.50, a record high. The S&P 500 is up 22.3% this year.

“This is the best environment for stocks right now. You don’t have rising interest rates becoming a problem. You don’t have inflationary pressures. You do have earnings growth,” said Tim Hayes, chief global investment strategist at Ned Davis Research in Venice, Fla. ‪The firm has studied stock performance in a wide variety of economic environments going back decades.

Stocks also do better when earnings growth is below 5% on a year-over-year basis than when it is above 5%, according to the Ned Davis studies. That is because moderate earnings growth is less likely to spur inflation or push interest rates higher.

‪Another big boost for stocks is the growing hope that low inflation and worries about economic growth will induce the Federal Reserve to keep stimulating the economy by holding down long-term interest rates. (…)

Fed stimulus helps stocks because low interest rates hold down corporate costs, and the stimulus money itself leaks into the stock market, fueling investment there. (…)

A big question for the future, he said, is how and when central banks around the world unwind their financial stimulus. ‪Mr. Hayes thinks how that is handled could determine when stocks next face a bear market, most commonly defined as a 20% decline from a high. ‪While he is optimistic about the immediate future, he said he wouldn’t be surprised to see stocks pull back by next summer.

Such a decline is common after stocks have risen strongly for years, Mr. Hayes said. That is especially true when stock prices are above average when compared to corporate earnings, as they are today. The S&P 500 trades at more than 18 times its component companies’ earnings for the past 12 months, above the historical average of about 16. ‪(…)

Earnings and inflation, that’s the recipe.

EARNINGS WATCH

A quarter of the way into the Q3 earnings season, many aggregators have released their tally. Remember that there is no “common consensus estimate” and no unique way to assess earnings among aggregators so that beat rates, as well as growth rates, can vary. I try to compare beat rates against each aggregator’s own history. S&P remains the official data provider, giving both operating and “as reported” earnings in a consistent manner..

It is interesting to note that the narratives during this earnings season are clearly tilting on the negative side (my emphasis).

We’re now a week and a half into earnings season, and 190 US companies have reported their third quarter numbers so far.  By the end of earnings season, more than 2,000 companies will have reported, so we’re still in the very early stages of this quarter’s reporting period.

Below is a look at the historical earnings beat rate for US stocks by quarter since 2001.  As shown, 60.5% of the companies that have reported so far this season have beaten consensus analyst EPS estimates.  This is a mediocre reading compared to the average beat rate of 63% that we’ve seen since the bull market began in March 2009.

Top-line numbers have also been mediocre so far this season.  As shown below, 50.9% of the companies that have reported have beaten revenue estimates, which is 9 percentage points below the average of 60% that we’ve seen since the bull market began.

The picture emerging from the 2013 Q3 earnings season is far from inspiring or reassuring. There hasn’t been much growth in recent quarters and not much was expected from Q3 either, particularly after the sharp estimate cuts in the run up to the reporting season. But companies are struggling with meeting and exceeding even those lowered expectations.

Total earnings for the 99 S&P 500 companies that have reported results already, as of Friday October 18th, are up +1.0% from the same period last year, with 62.6% beating earnings expectations with a median surprise of +2.1%. Total revenues for these companies are up +2.1%, with 43.4% beating revenue expectations with a median surprise of +0.0%.

All of the growth is coming from the Finance sector. Excluding Finance, total earnings growth for the companies that have reported falls in the negative category – down -6.2%. This is a weaker performance than what we have seen from the same group of companies in Q2 and the 4-quarter average.

Total Q3 earnings for all S&P 500 companies, combing the 99 that have reported with the 401 still to come, are expected to be up +0.2%, which reflects +0.8% revenue growth and modest gains in margins. Estimates have come down sharply over the last few months, with the current +0.2% growth down from +0.5% last week and +5.1% in early July.

  • S&P’s tally gives a 59% earnings beat rate and a 26% miss rate. Q3 estimates are currently $26.72, down $0.12 from Sept. 30. Q4 estimates dropped from $28.88 to 28.67.

Pointing up At about the same time during the Q2 earnings season, the beat rate on S&P’s tally was 63% and the miss rate 27.5%. All of the deterioration comes from Financials. At that time, the beat rate from Financials was 80% vs 63% this season. Non-Financials’ beat rate is about the same at 57%. Miss rates have been relatively high among Industrials (31%), Consumer Discretionary (36%) and Financials (33%).

Overall, 97 companies have reported earnings to date for the third quarter. Of these 97 companies, 69% have reported actual EPS above the mean EPS estimate and 31% have reported actual EPS below the mean EPS estimate. Over the past four quarters on average, 70% of companies have reported actual EPS above the mean EPS estimate. Over the past four years on average, 73% of companies have reported actual EPS above the mean EPS estimate.

In aggregate, companies are reporting earnings that are 2.3% below expectations. Over the last four quarters on average, actual earnings have surpassed estimates by 3.7%. Over the past four years on average, actual earnings have surpassed estimates by 6.5%.

In terms of revenues, 53% of companies have reported actual sales above estimated sales and 47% have reported actual sales below estimated sales. The percentage of companies beating sales estimates is above the percentage recorded over the last four quarters (48%), but below the average over the previous four years (59%).

In aggregate, companies are reporting sales that are 0.6% below expectations. Over the previous four quarters on average, actual sales have exceeded estimates by 0.4%. Over the previous four years on average, actual sales have exceeded estimates by 0.7%.

At this early stage of Q3 2013 earnings season, 18 companies in the index have issued EPS guidance for the fourth quarter. Of these 18 companies, 14 have issued negative EPS guidance and 4 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 78% (14 out of 18). This percentage is well above the 5-year average of 63%.

Using S&P’s numbers, trailing operating earnings are now expected at $102 after Q3, down 1% from what was expected on Sept. 30 and 1.6% from June 28. Nonetheless, trailing earnings would be 2.7% higher than their level after Q2 and cross the $98-99 wall that they have been hitting since March 2012.

imageThe next 2 weeks will be crucial for market sentiment, not only for Q3 results but importantly for company guidance into Q4 since estimates for the last quarter of 2013 have held up reasonably well so far. The current $28.67 estimate remains nearly 24% above Q4’12 ($23.15) which was impacted by big pension fund provisionings which S&P rightly treated as operating expenses but which is a highly discretionary management decision often made after yearend (see below).

If analysts are right, trailing 12-month EPS would jump to $107.52 after Q4, 8.3% above their level after Q2.

The chart below uses $102 as trailing EPS and 1.5% as trailing inflation. On these basis, the Rule of 20 P/E fair P/E of 18.5 means 1887 for the S&P 500 Index, 8% above its current level. We will get the September CPI on October 30.

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Assuming Q4 estimates hold, the ensuing jump in trailing earnings would bring the Rule of 20 fair value to 1980 (+13.5%) if inflation stays at 1.5% (1926 at 2.0%). As I said, the next 2 weeks are crucial.

Pointing up BTW, from this weekend’s FT:

US corporate defined benefit pensions gain some lift

(…) Funding ratios for the 100 largest DB pension plans at US companies, which boast close to $1.4tn in combined assets, rose to an eye-catching 91.4 per cent last month, having climbed from just 74 per cent in September 2012, according to Milliman, the actuarial firm. The improvement was largely due to shifting projections for interest rates, changes in strategy and stronger investment returns.

It marks the highest funding ratio for US DB schemes since the collapse of Lehman Brothers in October 2008.

The improvement has mainly been driven by a rise in market interest rates. This has reduced the estimated value of pension scheme liabilities, as these liabilities can be discounted at a faster rate in the future.

This process may have further to run. Actuaries at Milliman forecast that pension managers at the aforementioned 100 US companies will see their funding ratios rise to an impressive 98.1 per cent by the close of next year. Their deficits should drop from $132bn at the end of September to as little as $29bn over the same period, Milliman predicts.

John Ehrhardt, a principal and consulting actuary at Milliman, explains: “As interest rates come up, it will reduce the cost of maintaining these plans.”

He adds: “If the Federal Reserve takes its foot off the floor on interest rates, rates could go up significantly.

Confused smile  What will happen to pension asset values when rates rise? Bond losses could far exceed past equity losses given current excessively low interest rates. And I am not so sure the pension funding problem is near the end:

(…) However, there are a number of corporate stalwarts in the US whose DB plans are still open to further accrual by existing members, such as Boeing (which has a pension funding ratio of roughly 74 per cent), General Electric (70.6 per cent), AT&T (76.5 per cent), Lockheed Martin (67.2 per cent), ExxonMobil (63.4 per cent), UPS (78.1 per cent), Pfizer (71.8 per cent), Johnson & Johnson (80.3 per cent) and Federal Express (78.1 per cent). (…)

And this from Pensions & Investments:

This slide lays out year by year the allocations to fixed income. Starting in 2008, you can see a dramatic change to fixed income by corporations. Numerous corporate plan sponsors now have allocations to fixed income of more than 75%. Intel’s DB plan, for example, has an 85% allocation to fixed income.

FIxed income allocations of corporate and public pension funds

Ford's asset allocation

 

S&P 500 funded status in $ bil.

 

Back to Financials:

 

Banks Facing Profit Squeeze

The nation’s biggest banks are getting squeezed from almost every direction, quarterly reports show, from slumping mortgage demand to a sluggish economy and tumultuous bond markets.

The 10 largest traditional commercial banks and securities firms in the U.S. that have reported earnings thus far posted a 6.9% decline in combined adjusted net income, to $17 billion. Adjusted revenue totaled $116 billion for the quarter, a 4.8% decrease from the same period in 2012. (…)

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There are pockets of strength in the banking sector. Commercial real-estate loans are picking up, and consumer banking has been healthy. But plunging mortgage lending is weighing heavily on banks’ results. (…)

Among the six biggest banks and securities firms in the U.S., Morgan Stanley was the lone bright spot, in part because of its smaller fixed-income operation. It swung to a third-quarter profit, outpacing Goldman in total revenue for the first time in two years. (…)

U.S. vs EUROPEAN BANKS

Thomson Reuters writes:

Tracking the Top 50 Global Financials for our third consecutive quarter of TRust Index metrics, Q3 saw a continuation of several trends that we’ve been observing throughout 2013. According to our media sentiment analysis, trust in global financial institutions remains negative overall, but regional differences have shifted. For the first time since January, European financials have moved higher than US financials, while US financials have remained flat but have the lowest levels of confidence overall. Q3 data also shows the continued proliferation of regulatory activity, essentially double since the introduction of the Dodd-Frank Act.

Interesting, but my money would rather buy the view of Chuck Clough, CEO of Clough Capital Partners on European banks:

We think Europe’s banks are not as healthy as they claim to be. Many pledged much of their risk weighted assets as long-term refinancing operation collateral and the improvement in capital ratios is ephemeral in our opinion. Eventually these assets must be repurchased and that is the difference between what the European Central Bank (ECB) and the US Federal Reserve have done in efforts to resuscitate their respective banking systems.

Via the quantitative easing programs and troubled asset relief program the Fed outright purchased troubled assets. That passed the cost onto shareholders and taxpayers but cleared balance sheets so banks could renew lending. Nothing of the sort is happening in Europe. Europe’s banks still own the toxic assets they hypothecated with the ECB and time
worsens the state of those assets.

In an op-ed article in the Financial Times, Wolfgang Munchau cited a report which estimated that the size of any bad bank which might be set up to absorb losses would have to be capitalized at more than 1 trillion Euros (out of a total Euro bank balance sheet of 27 trillion Euros) and reportedly that does not include hidden losses from loans about to default but which were rewritten to make them good, the “pretend and extend” strategy. Even German banks are not free of issues since Germany’s
current account surplus has forced its banks to take on a lot of peripheral debt. Recapitalization will likely occur at much lower equity . If they are low enough we could be buyers.

Thomson Reuters continues:

image(…) the aggregate changes to recommendations over the quarter by sector analysts on the Top 50 Global Financial institutions show that downgrades outnumbered upgrades across all regions. While the Asian institutions scored the highest number of upgrades in Q2, these were outpaced by the number of downgrades in Q3 – again, increasing concerns about Chinese banks appears to be having a particularly strong influence.

This next comment was before the Q3 earnings season:

In Q3, earnings growth estimates for the U.S. Financials sector regained their top spot (having slipped to second in Q2) based on high expectations by analysts for financials. At 9%, earnings growth estimates for the sector are lower this quarter, but still well ahead of the other S&P 500 sectors.

And here’s Factset after 30% of S&P Financials have reported Q3 (including the largest ones):

The Financials sector has the second lowest earnings growth rate (-2.1%) of any sector. Four of the eight industries in the sector are reporting or are expected to report a decline in earnings for the quarter, led by the Diversified Financial Services (-32%) industry.

Factset drills down:

At the company level, Bank of America and Morgan Stanley are the not only the largest contributors to growth for the sector, but for the entire S&P 500 as well. Bank of America reported actual EPS of $0.20, relative to year-ago actual EPS of $0.00. Morgan Stanley reported actual EPS of $0.50, compared to year-ago actual EPS of -$0.55. If both of these companies are excluded from the index, the growth rate for the Financials sector would fall to -11.9%, while the growth rate for the S&P 500 would be -0.5%.

On the other hand, JPMorgan Chase is not only the largest detractor to growth for the sector, but for the entire S&P 500 as well. The company reported actual EPS of -$0.17, compared to year-ago actual EPS of $1.40. If this company is excluded from the index, the growth rate for the Financials sector would improve to 14.0%, while the growth rate for the S&P 500 would rise to 3.8%.

S&P differentiates between “operating” and “as reported” earnings. In JP Morgan’s case, S&P treated most of Q3’s “extraordinary costs” (mainly litigation expenses) as non-operating (or at least “non-recurring”, hopefully!). JPM’s Q3 “operating” EPS are thus $1.43 vs $1.41. Using only operating EPS, the 22 Financials that have reported Q3 so far are showing average EPS growth of 18.1%. But that is heavily influenced by BAC’s and SLM’s respective +211% and +87% jumps. The median growth rate is a more modest +4.1%, so far.

Finally, Thomson Reuters keeps track of regulatory activity worldwide:

The proliferation of regulatory activity over the past two years (and its clear implications for the financial sector in terms of managing compliance) can no longer be considered a post-crisis tsunami (which would imply a surge and then receding level) but must be seen as the growing and permanent conditions under which the global financial industry will rebuild.

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MORE SENTIMENT WATCH

expandBARRON’S COVER Return of the Bulls 

America’s money managers expect stocks to rise 7% from now through the middle of next year.

The managers’ subdued forecasts reflect the fact that 71% of poll participants now regard stocks as fairly valued, compared with 58% in the spring. Only 15% consider the U.S. market undervalued, down from 26% last April.

Just over half of the Big Money managers expect the price/earnings multiple to expand in the next 12 months, while 11% see a contraction, and the rest see no change.

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71% say equities are fairly valued and 68% are bullish. Personally, I tend to be less bullish when stocks are fairly value.

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52% expect higher P/Es.

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Lastly:

Condos Go Back Up for Sale

Many condominium developers who rode out the real-estate downturn by renting out their units are reverting to for-sale housing, in another sign of the market’s continued recovery.

(…) Now, in big markets from San Francisco to South Florida, “Condos for sale” signs are popping up at a steady pace as the improving housing market creates an opening for landlords to sell off rental housing. That hot market also is spurring new construction of condo buildings. (…)

Reversions are being driven by a supply shortage in the single-family-home market, which has sent prices upward. There were 2.07 million existing homes for sale at the end of August, up 5.1% from January but still down about 6% from a year ago, according data from the National Association of Realtors and Trulia, a real-estate listings site. The data include both condos and single-family homes. (…)

Few places have seen as big of a turnaround as South Florida. As of the second week of October, there were about 21,000 condos and townhomes for sale across Miami-Dade, Broward and Palm Beach counties. That was down 66% from the fourth quarter of 2008, according to multiple-listing-service data compiled by Condo Vultures Realty, but up about 14% from a June low of about 18,000 listings. (…)

We put our South Florida condo for sale in mid- August. We received 5 offers in 8 weeks. We signed yesterday for closing in 3 weeks! A hair below the ask price. All but one all-cash offers.

 

NEW$ & VIEW$ (3 OCTOBER 2013)

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

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

Retailers Weigh Into U.S. Shutdown Debate

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

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

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 Fingers crossed Price of Gasoline Drops For 30th Straight Day

 

 

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

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

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

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

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

 China Services Index Increases in Sign of Sustained Rebound

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

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

 Italy’s Letta Survives but Battle Looms

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

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

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

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

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

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

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

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

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

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

Euro-Zone Retail Sales Rise

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

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

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

To repeat Markit’s Eurozone Retail PMI for September:

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

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Malls Are Recovering From the Downturn

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

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

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

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

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

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

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

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

On new construction:

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

On rents:

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

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U.S. Rises to No. 1 Energy Producer

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

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

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

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

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

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

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

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

SENTIMENT WATCH

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

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


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

(From The Blog of HORAN Capital Advisors)

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

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

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

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

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

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  • It’s right here, sir!

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Hmmm…

GOOD READS

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

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

… Eric Hoffer, American moral and social philosopher

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

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

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

Untermyer: “Before money or property?”

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

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

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

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

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

HEALTH SYSTEMS

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

Ingram Pinn illustration

 

NEW$ & VIEW$ (2 OCTOBER 2013)

Global PMI rises to 27-month high

The global manufacturing economy saw a modest pace of expansion in September, rounding off its best quarter for just over two years. The ongoing recovery again failed to filter through to the labour market, however, as employment levels were broadly unchanged over the month.

At 51.8 in September, up from 51.6 in August, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – edged higher for the third month running to a 27-month peak.

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Growth tended to be centred on the developed world, with the UK at the top of the global rankings and expansions also seen in the US, the eurozone, Japan and Canada. Among the emerging markets, China, Brazil and Indonesia stagnated in September. India, Russia and South Korea saw marginal contractions, whereas conditions improved
in Taiwan, Turkey and Vietnam.

Global manufacturing production rose for the eleventh consecutive month in September, with the rate of expansion the sharpest since May 2011. Higher output was supported by improved market conditions, as incoming new business increased for the ninth month running.

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There was also positive news for international trade volumes, as new export orders posted the most noteworthy increase since May 2011. The export growth rankings were led by the eurozone nations, with the largest increases reported by Spain, Ireland, Italy and the Netherlands.

September data pointed to a negligible gain in staffing levels, continuing a sequence of near-stagnation in the labour market that has been seen through the year-to-date. Among the largest industrial regions covered by the survey, job creation was seen in the US, the UK, Canada, Taiwan and Turkey.

Cost inflation accelerated slightly during September, hitting a near one-and-a-half year peak. Manufacturer’s pricing power continued its nascent improvement, as average output charges rose slightly for the second straight month.

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Global growth? Read on:

Maersk Four Rate Rises Fail to Spread as Demand Falls

The average global rate to ship an FEU fell 7.9 percent to $1,665 for the week ending Sept. 26, the third straight weekly decline, WCI data showed. The drop was led by the Asia-Europe route, with the fee from Shanghai, China’s busiest port, to Rotterdam, Europe’s biggest, falling 19 percent to $1,703. That rate has fallen 41 percent from $2,881 on Aug. 8, the highest in almost a year. (…)

The spot rate to ship a 20-foot equivalent unit, or TEU, to northern Europe from Far East Asia is currently $765 per box, down from $1,501 at the beginning of August, Alphaliner said, citing Shanghai Containerized Freight Index data. It could fall to $500 per TEU in the next few weeks, the Paris-based industry consultant said in an e-mailed note distributed yesterday. (…)

With no potential fundamental catalyst to drive charges higher before the end of the year and capacity growth set to exceed demand at least through 2014, there probably won’t be any sustainable uplift in rates before 2015, Cantor’s Byde said. (…)

Goldman’s Global Leading Indicator Plunges Back To “Slowdown”

Everything looked so good in August. Goldman’s global leading indicator (GLI) “swirlogram” had recovered quickly from a ‘growth scare’ in Q1 and was holding firmly in “expansion” territory. Then reality hit as new-orders-less-inventories worsened, various manufacturing surveys rolled over, industrial metals gave up gains, and Korean exports provided no help. Among the few factors holding up the index from already plunging levels was the Baltic Dry Index (which has collapsed now in the last few days) and Consumer Confidence (which appears to also be rolling over).September’s plunge into “slowdown” for the GLI is the biggest drop in 8 months.

 

And commodity prices show no upward momentum (chart from Ed Yardeni:

Meanwhile, U.S. PMIs remain positive in September and…

CANADA’S PMI POINTS TO SOLID GROWTH

Canada’s manufacturing expansion accelerated to a 15-month high in September, according to the RBC Canadian Manufacturing Purchasing Managers’ Index™ (RBC PMI™).

The seasonally adjusted RBC PMI rose to 54.2 in September, up from 52.1 in August. This indicated further improvement in manufacturing business conditions, with the rate of growth above the series average and the fastest since June 2012.

The RBC PMI found that both output and new order growth accelerated in September. In particular, the latest rise in total new work intakes was strong and the fastest since June 2012. This partly reflected the greatest increase in new export orders for two-and-a-half years. Meanwhile, the rate of job creation also quickened to a 15-month high, as firms hired additional staff to handle increased business activity.

While in Mexico: Total new work intakes rose only slightly over the month, despite an increase in new export orders – the first in five months.

But:

September U.S. Auto Sales Fall 24%

(…) Industry executives said September sales were depressed because the Labor Day weekend occurred early in the month, and many cars sold during sales promotions tied to that weekend were counted in August rather than September.The selling rate for September was 15.28 million, down from an annualized selling pace of 16.09 million vehicles in August.

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image(Charts from CalculatedRisk)

Averaging August and September to smooth out the calendar perks, we get 15.68 million vehicles, down from 15.8 in July and in line with previous cyclical peaks if we exclude the bubbled 2000s.

 

Policy Makers Prepare For Siege

The federal government shutdown showed no signs of breaking, increasing the likelihood it will become entangled in an even larger battle over the Treasury’s ability to pay its bills.

Europe is not out of the wood just yet:

The rise of the currency has contributed to a tightening of monetary conditions. The IMF’s measure of the real effective exchange rate, which is deflated by the consumer price index, has risen to 98.72 from 98.24 over the last quarter and from 94.19 over the last year.

The strengthening of the currency has been accompanied by a rise in the cost of borrowing. Real three-month EUR LIBOR has risen to minus 0.94 percent from minus 2.45 percent over the last 12 months.

A monetary conditions index for the euro area has risen to 97.03 from 95.79 during the same period. The latest reading is 0.7 percent below the 10-year moving average. That compares with the figure having been 2.1 percent below that long-term mean one year ago.

The tightening of monetary conditions has occurred as a Taylor Rule model has called for the opposite to occur. A version of the monetary policy tool, based on coefficients estimated by the Federal Reserve Bank of San Francisco, suggests the main policy rate of the ECB should have been reduced to 0.25 percent from 1 percent during that period.

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Loans to non-financial corporations, adjusted for sales and securitization,
fell 2.9 percent year over year in August versus minus 2.8 percent in July. The equivalent figure for households stood at 0.4 percent year over year, unchanged from the previous month.

EARNINGS WATCH

Worrying About Profit Warnings Companies are cutting their profit forecasts at a record pace. Yet for investors, history shows the sour outlooks aren’t a reason to sell.

The number of companies projecting quarterly earnings results below analysts’ expectations climbed to 89 late last week, according to FactSet, which started tracking guidance data in 2006. The latest figure surpassed the previous records of 88 in the second quarter and 86 in the first quarter.

Earnings warnings have increased every quarter since the second-quarter of 2012, FactSet data show. Yet over that time frame, the S&P 500 has rallied 24%. (…)

“Third quarter earnings are expected to be the same as the second quarter – we will all be disappointed with low profit and sales growth, but in the end, the third quarter will set a new all-time record, beating out the current record set by the second quarter, by about 2%,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. (…)

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More Pain Looms for Banks  New troubles are piling up for U.S. banks as they prepare to release third-quarter earnings results amid warnings of weak trading revenue, a sharp decline in mortgage refinancings and rising legal costs.

(…) Analysts reduced revenue estimates for the six largest U.S. banks during the quarter and cut profit estimates for all but Wells Fargo.

Bank of America, which relies heavily on the trading and mortgage businesses, suffered the biggest drop. Analysts have reduced their third-quarter per-share earnings predictions for the Charlotte, N.C., lender by 27% since July 1. (…)

“For a while we thought a light was at the end of the tunnel,” said Gerard Cassidy, a banking analyst with RBC Capital Markets. “It seems to be a Mack truck.” (…)

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Weak third-quarter results are expected to accelerate plans for job cuts. Overall employment at the six largest U.S. banks declined by 26,254 jobs, or 2.2%, in the year ended June 30, company filings show. The largest was a 6.6% decline at Bank of America. Wells Fargo was the only gainer over the period, boosting its staff by 3.8%. (…)

Nowhere are banks hurting more than in mortgages. Banks long have braced for a slowdown, but the spike in interest rates this summer brought a yearlong boom to an abrupt end.

“It’s been brutal,” said Michael Menatian, a mortgage banker in West Hartford, Conn. “We were flat-out busy until May. Once rates went up, things went completely dead.” He said he closed around $4 million in loans every month through June, and about $1.5 million a month since then. (…)

J.P. Morgan, Bank of America, Wells Fargo and Citigroup already have cut more than 10,000 mortgage jobs this year, with plans for thousands more to come. J.P. Morgan is accelerating plans to cut as many as 15,000 jobs in its mortgage division by the end of 2014.

All told, the number of employees in the industry will likely shrink by 25% to 30% over the next year, estimates Christine Clifford, president of Access Mortgage Research & Consulting, Inc., a Columbia, Md., mortgage research and consulting firm. (…)

If you missed it, you may want to read the EARNINGS WATCH segment of Monday’s New$ & View$.

Merck to Cut Staff as Industry Trims R&D

Merck said it plans to slash its 81,000-strong workforce by 20% over the next two years, a stark show of the diminishing research-and-development capabilities of some of America’s biggest health companies.

The company also said it would close offices in New Jersey and discontinue some late-stage drug development, all in the service of saving about $2.5 billion annually by 2015. (…)

[image]After acquiring Schering-Plough Corp. for $41 billion in 2009, Merck’s workforce nearly doubled to reach a peak of 100,000. Assuming no new employees are added by 2015, the company’s total head count would fall to 64,800 after the layoffs, or just 17% more than before the merger.

Advancements in the understanding of genetics and biology have increasingly fuelled drug development in recent decades, and many of the most promising new drugs have been aimed at niche disease populations, developed in the labs of biotechnology competitors considered closer to the cutting edge of science. Merck has begun to catch up, most recently with an experimental cancer drug that harnesses the immune system to fight tumor cells. But some former executives worry that the company wasn’t quick enough to adapt and that its declining size mirrors the shrinking ambitions of other large drug makers. (…)

Merck lowered its earnings-per-share guidance to a range of $1.58 to $1.82, from a range of $1.84 to $2.05 previously; the company maintained its projected earnings per share, excluding restructuring items, at a range of $3.45 to $3.55.

Foreign Firms Tap U.S. Gas Boom

The U.S. boom in natural-gas production is luring investment from foreign manufacturers eager to tap a cheap, abundant supply of fuel and feedstocks.

Companies from the U.S. and abroad have invested or are planning to invest billions of dollars through the rest of the decade in plants that would churn out chemicals, fertilizers, plastics, metals and fuel from gas. Many foreign companies, alone or in joint ventures with U.S. partners, are taking advantage of gas that costs a fraction of what it does in Europe or Asia to expand production in the U.S.

Boston Consulting Group estimates that international companies will invest at least $50 billion through the end of the decade on projects that take advantage of low-price natural gas.

Linde AG, a German gas-and-engineering company, recently said it would spend $200 million to build a new air-separation unit in La Porte, Texas, that would provide synthetic gas for the petrochemical industry. The investment “is directly tied to the price and availability of natural gas,” said spokesman Uwe Wolfinger. “Five or seven years ago, this type of investment would have been far more likely elsewhere in the world.” (…)

Energy consulting firm IHS Cera said in a report last month that cheaper gas would kick-start the nation’s chemicals sector over the next dozen years, creating more than 300,000 jobs and driving half a trillion dollars in production through 2025. (…)

Chemicals accounted for one-quarter of the $160.5 billion in inbound foreign-direct investment in the U.S. last year, according to the U.S. Commerce Department. (…)

“If you think about the competitive advantages of an economy, having low-priced energy is about the most important,” Incitec Chief Executive James Fazzino said. Combined with a stable regulatory framework and a trained labor pool, the U.S. “is really the most attractive place in the world to invest,” he said. (…)

The Commerce Department, which for years has sought to help American companies boost exports, has put new emphasis on attracting foreign investment through a program called SelectUSA. (…)

Nomura Sees $690 Billion Flow Into Japan Stocks on Tax Break  (Tks Carl)

Japanese savers are poised to pump $690 billion into stocks to benefit from new tax breaks as the government tries to avert a retirement cash crunch in the nation with the world’s oldest population and lowest interest rates.

The Nippon Individual Savings Account program, which opens for applications tomorrow, will allow individuals to buy 1 million yen ($10,143) a year of risk assets that are exempt from taxes on dividends and capital gains for five years. The plan will draw as much as 68 trillion yen through 2018, with 65 percent of users pulling money out of bank deposits to purchase securities, estimates from Nomura Research Institute show. (…)

Equities made up just 7.9 percent of household assets as of March, compared with 34 percent in the U.S. and 15 percent in the euro zone, the most recent Bank of Japan data show. (…)

There have been other government policies that tried and failed to promote the shift of funds, and NISA is set to join them, said Yasuhiro Yonezawa, professor of finance at Waseda University in Tokyo.

“NISA will have limited impact on the investment attitude of Japanese people,” said Yonezawa. “I doubt they’ll behave rationally when it comes to asset management as they’ve been unresponsive to incentives offered by the government in the past.” (…)

The expiration of another incentive plan for investors at the end of this year will also limit NISA’s impact, according to Ichiro Takamatsu, a fund manager at Bayview Asset Management Co. Levies on dividends and capital gains will return to 20 percent after being cut by half for the past 10 years.

“Individual investors will sell shares toward the end of the year before the tax rate is raised back,” said Takamatsu. “Many are holding unrealized gains due to the Abenomics rally and that will spur profit-taking.” (…)

 

NEW$ & VIEW$ (27 AUGUST 2013)

Durable-Goods Orders Drop 7.3%

(…) Outside of the volatile transportation category, durable-goods orders were still relatively weak for the month, declining 0.6%, the Commerce Department said Monday.

July’s decline was the first in four months. In June, total orders rose 3.9%, but were up only 0.1% excluding transportation.

Pointing up A key gauge of business spending—nondefense capital goods orders, excluding aircraft—fell 3.3% in July after rising for five straight months.

Crying face  This 3.3% drop offsets the 3.4% gain of the previous 2 months, deflating hopes of a strong rebound in capex.

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(Doug Short)

So, housing is not as strong as it first appeared, now capex is deflating. What will Ben do? Oh! There also this coming:

Treasury to Hit Debt Limit In October

The Treasury said it would hit its borrowing limit in mid-October and be unable to pay all of its bills soon after, narrowing the window for maneuver on budget talks.

(…) The new mid-October deadline falls just two weeks after Congress and the White House must reach a separate agreement over how to fund government operations beyond Sept. 30, the end of the federal fiscal year. Failure to do so would trigger a partial government shutdown. (…)

The White House has spent several months working with a small group of Republican senators to discuss a budget agreement that some Democrats had hoped would clear the way for an increase in the debt ceiling. Those talks have not progressed beyond an early stage, people familiar with the process have said. (…)

Emerging Europe Haven in Selloff

Investors are turning to Central and Eastern Europe amid the selloff hitting markets in the developing world.

Stock markets in Central and Eastern Europe are up 1.2% in the past three months, compared with a 7.5% drop in emerging markets overall, according to index provider MSCI. These markets have risen 2.3% when Russian companies, which have been hard hit by falling commodity prices, are excluded.

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Mug  German Business Mood Brightens

The Ifo institute’s business confidence index increased for the fourth consecutive month, to 107.5 in August from 106.2 in July, and hitting its highest level since April 2012.

Fingers crossed  Fall in Thai Exports Hides Good News for Southeast Asia  A fall in exports would hardly seem reason for Thailand to celebrate, but there are signs that the slump in demand from its key trade partners is easing, a picture reflected across Southeast Asia.

Thailand’s exports slipped 1.5% on-year in July and rose only 0.6% in the January-July period.

But that was better than declines of 5.3% in May and 3.4% in June, reflecting the fact that demand from China, Japan, the U.S. and E.U. – Thailand’s four largest export partners – is improving.

Vietnam on Monday reported a robust 11.6% on-year rise in August exports, slightly softer than July’s 13.7% gain but still strong.

In Singapore, non-oil domestic exports improved to a 0.7% on-year fall in July, after June’s 8.9% drop. Indonesia’s exports fell 4.5% in June from a year earlier after dropping 8.6% in May, while Philippine exports rose 4.1% in June following a 0.8% fall in May.

In Malaysia, June exports contracted 6.9% compared with May’s 5.8% fall, but that was better than economists’ expectations for 7.5% contraction.

How Much Household Wealth Has Been Recovered?

This is from the St-Louis Fed’s 2012 annual report:

The Federal Reserve reported March 7, 2013, that aggregate household net worth at the end of 2012 was $66.1 trillion, nearly back to its precrisis peak of $67.4 trillion, reached at the end of the third quarter of 2007. After falling to $51.4 trillion at the end of the first quarter of 2009, the subsequent increase of $14.7 trillion through the end of last year represented a recovery of 91 percent of the losses suffered. Does this mean that the financial damage of the financial crisis and economic recession largely has been repaired?

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The simple metric of aggregate household net worth is misleading for at least three reasons. First, the effect of inflation is ignored. Consumer prices increased about 2 percent per year in the five and one-quarter years since the third quarter of 2007, reducing the purchasing power of a dollar by a total of about 10 percent. Therefore, a return to the previous nominal dollar peak does not mean that a given amount of wealth could buy as much as before.

Second, simple aggregate net worth does not adjust for population growth. The number of households increased by about 3.8 million between the third quarter of 2007 and the end of 2012, or about 3.4 percent. The wealth of all American households now is shared by more families than before.

Third, the recovery of wealth has not been uniform across families. Of the total recovery of $14.7 trillion between the first quarter of 2009 and the fourth quarter of 2012, $9.1 trillion, or 62 percent, of the gain was due to higher stock-market wealth. Stock wealth is unevenly held, with the vast majority of stocks owned by a relatively small number of wealthy families. Thus, most families have recovered much less than the average amount.

Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure. Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.

This next chart from the report is scary: the younger population lost 3 times as much as the median. Since they own little in equities, most of them are still deeply suffering from the crisis.

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Unsurprisingly, consumer confidence has thus recovered to its pre-crisis level for the higher income segment while people in the other income segments remain substantially less upbeat. Note in the chart below that the black line includes all incomes over $50,000. I suspect that the $50-75 bracket would also not come out so buoyant.

On the one “end”:

McMansions Make a Comeback

The average size of a new home now exceeds the levels reached during the housing boom, the latest sign the market is catering more to older, more affluent buyers and less to younger and first-time buyers.

imageData released by the Census Bureau this month confirmed the trend and showed that the average size of a new home was a record 2,642 square feet in the second quarter, eclipsing the record of 2,561 square feet set in the first quarter of 2009. The average size has bounced between small gains and declines for more than a year, but the 5.2% jump in the second quarter was the largest quarter-to-quarter gain since the Commerce Department began tracking the data on a quarterly basis in 1987. (…)

Some builders say they are intentionally building bigger homes to justify higher prices they must charge to recoup the rising cost of land. Prices for finished lots increased 24% in the second quarter from a year earlier, according to housing-research firm Zelman & Associates. “If you pay top dollar for land, you need to build a bigger home on it to make money,” said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. (…)

On the other “end”:

Stuck Working Part-Time? Blame the Economy

More than four years after the recession ended, nearly a fifth of American workers are part-timers, well above normal levels. More than 8 million people are working part-time because they can’t find full-time jobs. That’s given rise to fears of deep, structural shifts in the U.S. labor market due to technology, globalization or perhaps the new health care law, which will require companies to provide health insurance to full-time employees.

But a new paper from the Federal Reserve Bank of San Francisco argues there’s a simpler explanation for the rise of part-time work: the weak economy. (…)

The rise in part-time work during the latest recession wasn’t out of step with past downturns. At the height of the recession, about 20% of workers were part-timers, up from about 17% when the recession began. That’s worse than during the milder recessions of the 1990s and early 2000s, but actually a somewhat lower peak than in the severe recession of the 1980s.

What has been different this time around is the pace of recovery. The share of Americans working part-time has fallen since the recession ended in June 2009, but only very slowly. In recent months, it has even edged back up, though it’s too soon to say whether the uptick has been a real trend or a statistical oddity. (…)

But Mr. Valletta and Ms. Bengali dig a bit deeper into these involuntary part-timers, distinguishing between former full-timers whose hours have been cut back and those who have taken part-time jobs because they can’t find anything else. The first category has been declining fairly steadily during the recovery, though the progress has stalled a bit this year. But the second category has continued to trend upward.

In other words, fewer companies are cutting hours, but they aren’t yet hiring full-time workers. That pattern reflects another trend in the recovery: Layoffs have dropped back to pre-recession levels, but hiring remains slow. The problems are likely one and the same: Companies aren’t disproportionately hiring part-timers; they just aren’t hiring many workers at all. With jobs scarce, the unemployed are accepting whatever work they can find.

“It is more probable that the continued high incidence of individuals working part time for economic reasons reflects a slow recovery of the jobs lost during the recession rather than permanent changes in the proportion of part-time jobs,” the authors write. (…)

I am not convinced. The truth is that employment has increased since 2009 but unlike after past big recessions, full-time employment has seriously lagged. Companies have voluntarily cut full-timers and still improved productivity.

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Debt Drags on China’s Growth

As worries over China’s debt problem mount, the burden of paying off those loans could be the trigger that tips runaway credit into slower economic growth and financial stress.

(…) Nationwide, four-and-a-half years of breakneck growth in lending has significantly increased China’s debt burden. Outstanding borrowing by businesses and households rose to 170% of gross domestic product at the end of 2012 from 117% in 2008, according to data from the Bank for International Settlements. The 2012 figure for the U.S. was 157%. (…)

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There are few signs of imminent crisis. Bad debt levels in China’s banks are low. A high savings rate means bank deposits continue to accumulate, and a tightly controlled capital account makes it hard for funds to go anywhere else.

And Beijing has multiple tools to manage problems. In many cases, lenders and borrowers are both state-owned. Central government debt is low.

Even without a crisis, though, rising costs of repayment still threaten to choke growth, already testing a 20-year low. If money is used to service debt, companies can’t invest as much as they otherwise would and local governments might have to limit what they spend on crucial public services. (…)

That adds fragility to an overstretched financial sector, which might have to slow lending if bad debts mount. Bank loan books have already doubled in size since the end of 2008. (…)

Given existing debt levels, an increase in lending rates of one percentage point would add almost two percentage points of GDP to the annual burden of repayment.

A key fault line is the repayment capacity of China’s local governments. Since the 2008 financial crisis, town halls around China have borrowed heavily to pay for a splurge in spending on roads, railway and airports. With many of those projects generating little or no returns in the short term, repayment is a challenge and some local governments are taking on more borrowing to repay existing loans. (…)

China also appears to be getting less bang for every dollar that is borrowed. Credit expanded about 20% year on year in the first half of 2013, while GDP increased just 7.6%. One possible reason: New debt is being used to repay interest on loans rather than make productive investments. (…)

The FT has been hitting on the same nail: The debt dragon
China’s credit habit proves hard to kick

Some of the FT charts:

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China Construction Bank Sees Bad-Debt Risk

China Construction Bank Corp. 601939.SH -0.47% encountered a surge in overdue loans during the first half of the year and could face a “hidden crisis” if the situation worsens, its top official warned on Monday.

Speaking at a news briefing on Monday, Mr. Wang said nonperforming loans remain a small portion of outstanding total loans. Still, he said, nonperforming loans at CCB had risen rapidly compared with a year earlier.

There has been “a big rise in overdue loans, and that is a hidden crisis for nonperforming loans.”

Loans are generally classified as overdue before a bank categorizes them as nonperforming.

ENERGY

 

Study Shines Light on Fracking

So much oil and water is being removed from South Texas’ Eagle Ford Shale that the activity has probably led to a recent wave of small earthquakes, according to a study that appears in the online edition of the journal Earth and Planetary Science Letters.

The Wall Street Journal reviewed the findings in advance of publication. The peer-reviewed study’s authors suggest that taking oil and water out of the ground allows surrounding rock and sand to settle, triggering small tremors that are typically too weak to be noticed on the surface.

The new study doesn’t find much evidence that the man-made fracturing is causing earthquakes all by itself.

Netherlands fracking moves step closer
Government report says risks are ‘manageable’

(…) The report by the consultancies Witteveen and Bos, Arcadis, and Fugro acknowledges the risks but says the possibility of groundwater pollution is “very small”, partly because Dutch shale gas reserves lie much deeper than those in the US, at three to four kilometres rather than 1.5. (…)

France and Bulgaria have banned fracking altogether, and there has also been strong resistance in some German states. Yet America’s Energy Information Administration puts Europe’s recoverable reserves on a par with America’s. (…)

The final word:

Winking smile  Washington DC Drivers Ranked Most Accident-Prone  That’s because they are DRIVING BLIND.

 

NEW$ & VIEW$ (31 JULY 2013)

Home Prices Jump, but Headwinds Build

Home prices during the first half of 2013 posted their largest gain since the housing boom peaked seven years ago, but rising mortgage rates and the potential for more supply could eventually slow the run-up.

(…) home prices in 20 major U.S. cities rose by 12.2% in May from one year earlier. The Standard & Poor’s/Case-Shiller index shows that home prices are now down from their 2006 peak by 24.4%, compared with a peak-to-trough decline of 35.1% in March 2012. Prices in two cities, Dallas and Denver, reached an all-time high, surpassing peaks set in 2007 and 2006, respectively.

Some economists say the Case-Shiller index could overstate the magnitude of recent price increases because of how it counts foreclosures. Because foreclosures may be in greater disrepair than traditional homes, they tend to sell at a discount. As the share of distressed-property sales rises, as it did beginning in 2007, price falls can be magnified in markets with lots of foreclosures; later, when the share of distressed sales falls, as it has over the past year, prices appear to rebound faster. The Zillow index, by contrast, doesn’t include foreclosed properties, minimizing potential volatility from this shift in the sales mix.

Nationally, home values rose by 5.8% in June from one year ago, according to Zillow Inc., the real-estate website, the largest gain since 2006. So far this year, prices are up 2.7%, the strongest year-to-date gain in June since 2005.

For now, inventories remain tight in a majority of the nation’s major housing markets. The Wall Street Journal’s survey of quarterly housing-market conditions in 28 metro areas found that Phoenix, Seattle, Denver, and Sacramento, Calif., had less than a 2.5-month supply of homes for sale at the current sales pace. Dallas, Los Angeles, San Diego, Washington, D.C., and Orlando, Fla., had less than three months of supply, according to data compiled by John Burns Real Estate Consulting in Irvine, Calif.

Typically, real-estate agents consider a balanced market to have a six-month supply. Nationally, the supply of existing homes for sale stood at five months at the end of June, according to the National Association Realtors.

EU Jobless Rate Falls

Eurostat, the EU’s official statistics agency, said Wednesday that 10.9% of the workforce in the 27 nations that then formed the EU were unemployed in June, down from 11.0% in May. That is the first fall in the jobless rate since January 2011.

The number of unemployed in the 17 euro-zone countries edged down to 19.27 million from 19.29 million, the first decline since April 2011. The fall wasn’t sufficient enough to move the jobless rate overall, which held firm at 12.1%—its highest on record—for the fourth successive month.

The unemployment rate fell in Portugal, Spain and Ireland—three of the countries given forms of financial assistance since the bloc’s debt crisis began—but rose in Cyprus and Greece, as well as in the Netherlands and France.

Pointing up Eurozone Retail PMI improves to 21-month high in July

The eurozone retail sector neared stabilisation in July, Markit’s retail PMI® data showed. The value of retail sales fell for the twenty-first month running, but at the slowest rate over that period. Moreover, both Germany and France posted higher sales during the month, with the latter recording the first expansion since March 2012. The main negative finding from the latest survey was a sharper decline in Italian retail sales.

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Germany’s retail sector registered a third successive month of rising sales in July, the longest sequence of growth for a year. Moreover, the rate of expansion accelerated further, to the fastest since January 2011. The French retail PMI rose for the fourth month in a row in July, and registered above the no-change mark for the first time since March 2012. Moreover, the rate of growth signalled was the fastest since October 2011.

imageItalian retailers continued to weigh on the overall eurozone performance. Sales fell for the twenty-ninth month running, and at the strongest rate since April. Moreover, the gap between the Italian and German retail PMIs was the largest since February 2012.

Eurozone retail sales were lower on an annual basis in July, as has been the case since June 2011. That said, the rate of decline was the slowest
since March 2012, and sales in Germany and France posted year-on-year growth. Italy continued to register a severe annual drop in sales, however.

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Retail employment in the eurozone declined for the sixteenth consecutive month in July, albeit at the weakest rate in that sequence. German retailers hired extra staff for the thirty-eighth month running, while the rate of retail job shedding in France slowed to a marginal pace. Italian retail employment fell at the weakest pace in five months.

Retailers’ purchasing of new stock fell at a sharper rate in July. This partly reflected a build-up of unsold stock during the month, the first such increase since August 2012. Meanwhile, the rate of purchase price inflation eased on the month, and remained weaker than the historic survey average.

Euro-Area Inflation Holds at 1.6%, Providing ECB Some Leeway

Euro-area inflation held steady in July after accelerating for two months, adding leeway for the European Central Bank to loosen monetary policy as the 17-nation currency bloc struggles to pull out of a record-long recession.

CHINA STIMULUS WATCH
 
Pointing up  Beijing offers growth assurance in its economic balancing act

China’s authorities, mindful of the risk of a sharp economic slowdown that could derail their reform efforts, sent their clearest signal yet that they will safeguard growth and tweak policy when necessary.

The message from a meeting of China’s top decision-making body, the Politburo, sought on Tuesday to dispel market concerns about China’s near-term economic outlook by stressing stability of growth.

The main economic planning agency followed on Wednesday with assurances that this year’s growth goal was safe and that the authorities would supply markets with relatively ample funding. (…)

In particular, the politburo’s mention of “stable and healthy development” of the real estate sector caught markets’ attention, interpreted as a sign that Beijing would not risk any radical action to cool that market, concerned about the impact on overall economic growth.

Such a view was reinforced on Wednesday by comments from a senior central bank official, who dismissed any link between the property boom and easy credit. (…)

“Fiscal policy will play a bigger role in supporting the economy as we need to maintain prudent monetary policy,” said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank in Beijing.

“There will be more tax cuts and the fiscal deficit may exceed 2 percent of GDP (target),” he said, adding that this should allow growth to stabilize in the second half of the year. (…)

“The central authorities will continue to coordinate the multiple tasks of stabilizing growth, restructuring the economy and promoting reforms,” the official Xinhua news agency said, citing a statement released after the politburo meeting.

Both the party leadership and the planning agency highlighted plans to boost China’s urban population by 400 million over the next decade, with the planning agency’s chief, Xu Shaoshi, saying the government would unveil its urbanization plan in the second half of the year. (…)

Taiwan economic growth beats forecasts Rise in consumer spending drives 2.3% second-quarter growth

The economy grew 2.3 per cent between April and June from the same period of last year, the government said on Wednesday. That surpassed the consensus forecast of 2.1 per cent in a Bloomberg survey of economists, and followed first-quarter growth of 1.7 per cent.

The announcement came a week after South Korea also outperformed forecasts by reporting year-on-year growth of 2.3 per cent for the same period.

Taiwan’s struggling labour market means it is unclear whether that consumption growth is sustainable, economists say. While unemployment is low, real wages have been falling gradually for years. Data for May showed average earnings fell 0.3 per cent from a year earlier.

Nonetheless, consumption grew 5.3 per cent quarter on quarter, rebounding from a 0.4 per cent fall in the first three months of the year, according to seasonally adjusted estimates by JPMorgan.

Exports rose 5 per cent year on year in the second quarter, after growth of 4.8 per cent in the previous quarter.

But export orders fell 3.4% YoY in June…

Ford Truck to Use Natural Gas

Ford Motor Co. will begin selling an F-150 pickup truck later this year that is modified to run on compressed natural gas, as demand continues to grow among commercial fleet buyers.

Ford sold 11,000 trucks last year that run on natural gas, and that was double what the company sold in the years of 2009, 2010 and 2011 combined. Until now, Ford hadn’t made it an option available on the base F-150, reserving it for heavier-duty models and its Transit Connect delivery van.

With the addition of the F-150, Ford expects to sell about 15,000 CNG vehicles this year, the company said in a statement. (…)

Neither GM nor Chrysler would disclose how many CNG vehicles they have sold this year. The Natural Gas Vehicles for America—a trade group—estimates that there are about 130,000 natural gas vehicles on U.S. roads, primarily in commercial trucks and buses.

Companies, including Pioneer Energy Services and AT&T Inc., have been among Ford’s biggest clients for the compressed natural gas. The extra cost to build the trucks can quickly be covered because the companies use so much fuel at a higher cost and refueling isn’t difficult because they can install their own natural gas pumps. (…)