GOOD READ: The New Power Map

World Politics (and economics) After the Boom in Unconventional Energy

From Foreign Affairs

The energy map of the world is being redrawn — and the global geopolitical order is adrift in consequence. We are moving away from a world dominated by a few energy mega-suppliers, such as Russia, Saudi Arabia, and Venezuela, and toward one in which most countries have some domestic resources to meet their energy needs and can import the balance from suppliers in their own neighborhood. This new world will feature considerably lower energy prices, and in turn, geopolitics will hinge less on oil and gas. Within the next five to ten years, regimes that are dependent on energy exports will see their power diminished. No longer able to raise massive sums from energy sales to distribute patronage and project power abroad, they will have to tax their citizens.

(…) The economic and geopolitical shockwaves will be felt worldwide. Decreasing demand in the United States for liquid natural gas, oil imports, and domestic coal is already reducing global prices for these commodities. As a result, European countries have a stronger position in negotiations over natural gas imports with Russia, from which they receive a quarter of their supply.

The newfound leverage might have emboldened the European Union to open an investigation in September into a possible price-fixing scheme by Gazprom, the Russian energy giant. In addition, European countries have been negotiating fewer long-term gas contracts with Russia in which the agreed-upon price for the gas is pegged to that of oil — the kind that Gazprom favors. Instead, they are opting for spot purchases — short-term acquisitions based on market prices — in the expectation of rising supplies and falling prices. Russia has already granted some countries roughly ten percent discounts on existing contracts.

Until recently, Gazprom was in denial about the shale gas revolution, claiming that unconventional gas technology was not commercially viable, and that it posed severe risks to the environment. Given that Russia raises most of its federal revenue from energy exports — about 60 percent, according to most estimates — a reduction in natural gas sales would be politically catastrophic. Both the collapse of the Soviet Union and the downfall of former Russian President Boris Yeltsin in the late 1990s coincided with periods of low energy prices; Vladimir Putin, the current president, knows this history all too well.

The problem is that all of his options in a world awash with cheap energy are bad. His regime could try to maintain Russia’s market share in Europe by continuing to reduce prices, but that would mean accepting drastically smaller revenues. To make matters worse, Gazprom’s profit margins are low. Given that it sells 60 percent of its gas domestically at a loss, Gazprom must obtain wide profit margins from its European exports to stay afloat. (Currently, it sells gas in Europe at about a 66 percent profit margin.)

On its exports to Europe, Gazprom needs to earn $12 per thousand cubic feet of natural gas just to break even. (The price of natural gas in the United States today is below $3 per thousand cubic feet.) Part of the reason for this is that the state and the elite siphon billions from the politicized, inefficient, and opaque monopoly. Such plain corruption coincides with geopolitical maneuvering in large pipeline projects: just as neighboring Alaska has its infamous bridge, Russia has pipelines to nowhere.
Consider, for example, Nord Stream, the undersea natural gas pipeline that connects Russia directly to Germany, bypassing both Ukraine and Poland. The project had no economic rationale; it would have been far cheaper for Moscow to come to terms with Kiev over transit fees. But Russia was unwilling to do so. As usual, corruption played a role, too: Arkady Rotenberg, the owner of the company that laid the pipelines, is Putin’s childhood friend, and the Russian government paid him an exorbitant fee — amounting to a profit margin of 30 percent — for his work. Now, Gazprom is planning another pipeline folly, South Stream, which will again bypass Ukraine by traveling under the Black Sea to southern Europe.

Such outrageous infrastructure projects might become even more routine if Gazprom attempts to recoup its falling revenues in Europe by upping its sales to China. To do that, it would have to build long pipelines across unforgiving Siberian terrain. That task would pale in comparison to the challenge of convincing China to pay anything close to what Russia currently charges European countries — not only because the Chinese are tough negotiators but also because China possesses the largest deposits of shale gas of any country in the world (886 trillion cubic feet compared with the United States’ 750 trillion, the world’s second-largest deposits).

Although China is just beginning to tap its gas deposits, by the time any Sino-Russian pipeline project could be completed, it might be churning out enough unconventional gas to be energy self-sufficient. According to Chinese government estimates, the country has enough natural gas to provide for its domestic needs for up to two centuries. The only hope for Gazprom is that Chinese shale rock formations will not respond well to the new technologies — but there is no reason to believe that this will be the case.

For now, Russia has been attempting to protect its market share by simply preventing unconventional energy technologies from spreading. For its part, the United States, through its 2010 Unconventional Gas Technical Engagement Program, transfers technologies to nations that it would like to see become more energy independent, such as India, Jordan, Poland, and Ukraine. Countries that achieve greater energy independence, Washington assumes, will be less susceptible to bullying from unfriendly petro-states.

Russia, meanwhile, is attempting to block or at least slow the process. One of Moscow’s favorite tactics involves pressuring companies that want to do business in Russia not to explore for shale gas elsewhere. For example, Moscow might have pressed ExxonMobil to pull out of Poland, which could have the largest shale gas deposits in all of Europe, in exchange for a cooperation agreement with Rosneft. As always in the free market, however, when one company exits, another rushes to fill the void. The U.S. company Chevron has commenced shale gas and oil exploration throughout the region between the Baltic and Black Seas. The financier George Soros, moreover, has already invested $500 million in unconventional energy projects in Poland.

A more effective Russian tactic involves financing environmentalist groups to lobby against shale gas. So far, there is no credible scientific evidence that hydraulic fracturing has adverse effects on either air or water. Several studies, including ones conducted by the Royal Society, the U.S. Secretary of Energy Advisory Board, and the International Energy Agency, have concluded that hydraulic fracturing is reasonably safe when properly regulated. Yet, following a swell of environmentalist protests, both Bulgaria and the Czech Republic recently imposed moratoria on the use of the technology. The mark of outside influence is clear: In Bulgaria, there are rarely demonstrations of any kind, and in the Czech Republic, environmentalist groups have remained mum on other major issues, namely, the planned expansions of the nuclear power station in Temelín.

The former members of the Soviet bloc — such as Bulgaria, the Czech Republic, Poland, and Ukraine — still purchase all or most of their natural gas from Gazprom. Poland and Ukraine have enough potential shale deposits to free themselves entirely from this dependency. Although Bulgaria and the Czech Republic are not so blessed, even modest domestic production can challenge Gazprom’s monopoly power and reduce the price of imported natural gas.

Some analysts have predicted that Asian demand for energy is virtually endless, and thus that energy prices are unlikely to fall substantially. But as the Morgan Stanley analyst Ruchir Sharma has argued, Asian economic growth is slowing and might soon flatten. Meanwhile, with ever-growing energy supplies from unconventional sources, newly discovered undersea gas fields off the coast of East Africa and Israel, and increased drilling in the Arctic, the world may soon enjoy an energy glut.

At the very least, an era of lower global energy prices appears inevitable.
For Russia, the best scenario is that the energy glut will force structural reforms akin to those that Estonia and Poland underwent in the 1990s and that Russia started but never completed. Such changes could eventually lead to the establishment of real democracy and the rule of law there. In the coming years, sheer economic necessity and looming bankruptcy will force Russia to reform. But throughout Russian history, modernization has not normally resulted in liberalization; and there is little evidence that this time will be any different.

Nevertheless, unconventional energy technology has not only arrived — it is here to stay. As new lines are drawn on the energy map of the world, many of the oldest and most stable geopolitical truths will be turned on their heads. It would be prudent for the tyrants who depend on revenues from energy exports to start planning for retirement.


NEW$ & VIEW$ (11 JUNE 2013)

More volatility!

Treasury Fall Sends Shockwaves

European financial markets sold off, with stocks, bonds and commodities all under pressure and U.S. Treasurys leading the move as investors worried that the era of plentiful stimulus may be coming to an end.

Corporate Buyers Boosting Prices in New Housing Boom

In 2012, institutional buyers purchased about 138,540 of both distressed and non-distressed homes in the U.S., or about 3% of all sales, according to RealtyTrac. It estimates institutional buyers purchased 32,355 homes in the U.S. in the first quarter of this year, or about 3.5% of home sales.

That may sound like a small amount of purchases, but in certain markets institutional investors are taking a larger stake. For example, institutional buyers accounted for 5% and 8% of sales in Arizona and Nevada, respectively, so far this year.

And some of the hottest markets for big corporate buyers from 2010-2012 are seeing some of the biggest price jumps this year—Phoenix, Las Vegas, the San Franciso Bay Area, portions of Florida and elsewhere.

Alan Blinder: Fiscal Fixes for the Jobless Recovery

(…) The Brookings Institution’s Hamilton Project, with which I am associated, estimates each month what it calls the “jobs gap,” defined as the number of jobs needed to return employment to its prerecession levels and also absorb new entrants to the labor force. The project’s latest jobs-gap estimate is 9.9 million jobs. At a rate of 194,000 a month, it would take almost eight more years to eliminate that gap. (…)

The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do. Fiscal policy, however, has been worse than AWOL—it has been actively destroying jobs. (…)

In fact, the private sector created 6.56 million net new jobs over the past three years while about 1.14 million net government jobs were eliminated via layoffs and spending cutbacks.

Never before in postwar history has government employment declined during a recovery. Compared with historic norms, we’re down over two million government jobs. (…)

Real GDP growth has averaged a paltry 2% per annum over the past three years. But growth of GDP excluding government purchases—the things governments buy, including hiring workers—has averaged 3%. If government purchases had increased enough to leave overall GDP growth at 3% instead of 2%, history suggests that an additional three million to four million jobs would have been created. (…)

OPEC sees room for its over-target oil output

OPEC predicted world oil demand will grow more quickly in the rest of 2013 and indicated the group can keep pumping more oil than the output target it retained at a May 31 meeting without over-supplying the market.

The Organization of the Petroleum Exporting Countries in a monthly report forecast world oil demand would expand by 900,000 barrels per day (bpd) in the second half, up from 700,000 bpd in the first six months of 2013.

For 2013 as a whole, it forecast world oil use would grow by 780,000 bpd, slightly lower than 790,000 bpd previously expected.

Shale could fuel world for decade, says US
Study finds 345bn barrels in 42 countries

Global shale resources are vast enough to cover more than a decade of oil consumption, according to the first-ever US assessment of reserves from Russia to Argentina.

The US Department of Energy estimated “technically recoverable” shale oil resources of 345bn barrels in 42 countries it surveyed, or 10 per cent of global crude supplies. The department had previously only provided an estimate for US shale reserves, which it on Monday increased from 32bn barrels to 58bn. (…)

Monday’s assessment indicated that Russia has the largest shale oil resource, with 75bn barrels. Russia and the US were followed by China at 32bn, Argentina at 27bn and Libya at 26bn.

The report said gas from shale formations increased world natural gas resources by 47 per cent to 22,882tn cu ft. (…)

World oil demand is about 90m barrels a day, suggesting the world shale oil resource covers 10.5 years of consumption. (…)

The new US estimate of world shale gas resources at 7,299tn cu ft is 10 per cent higher than a previous estimate made in 2011.

Inside the US, shale now constitutes 30 per cent of oil and 40 per cent of natural gas production, the department said.


NEW$ & VIEW$ (20 MAY 2013)


Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.

Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

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Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

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Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

  • Auto  Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, Sputteringaccording to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.

Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.

The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.

The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

  • Mexico’s First Quarter GDP Down, But Far From Out  Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

ChartMexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.

Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.

But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.

Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.

The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011. (…)

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.

However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting. Confused smile

Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.

At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)

This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.



Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile  (Looks like devaluation is more effective than austerity)




Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.

Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.

It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)


March 2013 CCRSI National Results Highlights

  • PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period. 
  • SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively. 
  • TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013.  Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010.  Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity. 
  • DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.



U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace
Obama approves wider LNG exports as door opens to Japan and EU



NEW$ & VIEW$ (22 MARCH 2013)

U.S. LEI firm. Philly Fed Index somewhat better. Existing home sales solid, inventory down sharply. U.S. oil demand keeps falling. Europe in deep trouble: France sinking, Germany holding (!), Italy, mamma mia! Inflation watch.

Sun  U.S. Leading Economic Indicators Continue To Firm

The index of Leading Economic Indicators, published by the Conference Board, increased 0.5% (2.0% y/y) during February after a revised 0.5% January increase, initially reported as 0.2%. Eighty percent of the component series had a positive influence on the index. A steeper interest rate yield curve, the leading credit index, more building permits and a longer average workweek were the primary drivers of last month’s gain. These were offset by lower consumer expectations for business & economic conditions and fewer real orders for nondefense capital goods excluding aircraft.

Recession risk is low as these two charts fro Doug Short attest:

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Philly Fed Index Shows Manufacturing Expansion

The Philadelphia Fed said its index of general business activity within its regional factory sector increased to 2.0 after it unexpectedly fell to -12.5 in February from -5.8 in January.

The new orders index increased to 0.5 from -7.8, and the shipments index rose to 3.5 from 2.4.

Readings on labor demand, however, were mixed. The important hiring index rose to 2.7 from 0.9 in February, but the workweek index plunged to -12.9 from -1.6.


Existing-Home Sales Hit Highest Point Since 2009  Sales of previously owned properties grew last month to the highest level in more than three years and more people put their properties up for sale, a sign the improving housing market will lift the economy this year.

Existing-home sales increased 0.8% in February from a month earlier to a seasonally adjusted annual rate of 4.98 million, the highest level since November 2009, the National Association of Realtors said Thursday. Sales were 10.2% above the same month a year earlier, the 20th consecutive month of year-over-year gains.

Pointing up Inventory is down 19.2% from February 2012.


(Haver Analytics)

U.S. Oil Demand Declined in February, API Says

Total petroleum deliveries, a measure of demand, dropped 4.1 percent from a year earlier to 18 million barrels a day, the lowest February level since 1993, the industry-funded group said in a monthly report today. (…)

February gasoline deliveries were 8.36 million barrels a day, down 3.1 percent from a year earlier and the lowest demand for the month since 2001, the API said.

Pointing up  Demand for ultra-low-sulfur diesel, the type used by the trucking industry, fell 6.1 percent to 3.21 million. Jet fuel consumption decreased 8.7 percent from a year earlier to 1.23 million barrels a day.

U.S. crude-oil production jumped 14 percent from a year earlier to 7.09 million barrels a day, the highest February output in 21 years. 

Click to View(Chart from Doug Short)

Lightning  LSE’s De Grauwe: Euro area in ‘deep trouble’

Paul De Grauwe, a professor at the London School of Economics, told Tom Keene on “Bloomberg Surveillance” today that the euro area is at risk because “so many big mistakes have been made.”
De Grauwe went on to say that the “ineptitude of policy makers” allowed Cyprus to “degenerate into systemic crisis” and that European leaders should not allow Russia to take over gas in Cypriot waters as it would allow Russia to “increase its near monopoly.”

“Merkel should go out to Cyprus, together with the rest of the euro zone, and make a deal and say we are going to set up an investment fund with you and the future proceeds of that will be part of the total package.”

“(…) of course, there have been stupidities in Cyprus, but refusing to help them out would make things even worse. So we should set aside our concerns that taxpayers in Germany and the other countries are not – do not like this. We should, at some moment, if we are in a union, right, you have to help each other out. If you don’t want to do that, you shouldn’t be in the union.”

Deep Trouble? En Français, Please


The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, fell from 43.1 in February, to 42.1.

Dragging the composite figure down was a faster decline in service sector business activity during March. The latest fall was the steepest since February 2009. Manufacturing output was also down markedly, but the pace of decline eased slightly to the slowest in three months.

Incoming new business also decreased at a sharper rate in March. Mirroring the trend seen for activity, the latest reduction in new work was the fastest in four years. Service providers and manufacturers both reported steeper reductions in new orders (in the case of the former, the fastest since March 2009). (…)  Manufacturers signalled that new export orders fell at the sharpest rate in three months(…) .

Backlogs fell at the steepest rate since September 2012, with service providers and manufacturers both signalling accelerated rates of decline.

Employment in the French private sector fell further during March. The pace of job shedding remained solid, despite moderating to the slowest in three months. Job losses were broad-based across services and manufacturing, and at similar rates.

Sentiment regarding future activity in the French service sector fell into negative territory during March, and reached its lowest level since December 2008.

France is the second largest economy in Europe, the fifth largest in the world. Thank God Germany is holding up. Cross your fingers:image

Volumes of new work received by private sector companies in Germany dropped for the first time in 2013 so far. March data indicated marginal falls in new orders in both the manufacturing and service sectors, with the former partly reflecting a renewed decline in new export business. Manufacturers cited softer demand from southern Europe, while demand was reported to have improved in Asia and North America. Some manufacturers also reported that inventory reductions among their clients had negatively influenced order intakes during March.

Storm cloud  German Business Confidence Falls

German business confidence deteriorated unexpectedly in March, following February’s sharp rise, the Ifo business survey showed, as manufacturers grew less optimistic about their export prospects.

The Ifo business confidence index declined for the first time in five months, to 106.7 in March from 107.4 in February.

Overall, companies’ business expectations for the next six months worsened, as the corresponding Ifo subindex declined to 103.6 in March from 104.6 in February. The roughly 7,000 companies participating in the Ifo institute’s monthly survey were also less satisfied with their current business situation. The corresponding subindex declined to 109.9 from 110.2 the previous month.

French Economy to Stay Stalled in First Half, Insee Predicts

Gross domestic product will be unchanged in the first quarter and expand 0.1 percent in the second, Insee said yesterday in a report. GDP hasn’t registered quarterly growth of more than 0.2 percent since the first three months of 2011 and has had three quarters of declines since then.

Italy’s stalemate unnerves investors
Four weeks after polling there is no sign a new government is near

(…) On Thursday Mr Monti’s government revised down its GDP forecast for 2013 to minus 1.3 per cent from its previous projection of a 0.2 per cent fall. Its 2013 budget deficit target was revised up to 2.9 per cent from 1.8 per cent because of the recession and thanks to plans approved by Brussels to raise debt by €40bn over the next two years to pay arrears owed by the public administration to the private sector.

“The big question is how long finances can hold if recession deepens,” Ms Carletti said. (…)


Yesterday`s flash PMIs revealed a world going on 1 1/2 cylinder as only a strong U.S. and an OK China are propelling the world economy. ZeroHedge adds this:

Goldman’s ‘Swirlogram’ places the global industrial cycle squarely in the ‘Slowdown’ phase as growth momentum fades rapidly. Driven by plunges in aggregate confidence levels and New Orders (less inventories) – as well as CAD and AUD data – this reinforces last month’s preliminary view of a slowdown beginning. Goldman notes we could potentially see weaker global activity over the coming months. Is it any wonder we are seeing bellweather names missing in a big (un-unique) way.


  • [image]Plywood Becomes Hot Item in Housing Recovery Growing demand and tight supplies have pushed up plywood prices by 45% in the past year. Now, Georgia Pacific and other U.S. producers are scrambling to get back up to speed after slashing output during the housing bust.

Georgia-Pacific, the largest U.S. producer of plywood, will announce Friday it plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.

He said plants have done what they can to add shifts and make smaller fixes to improve capacity, but now significant capital investment is needed.

  • Obviously, lumber prices are also up sharply:



Natural-gas prices rose above $4 a million British thermal units during intraday trading on Thursday and are up 73% from a year ago.

A chilly start to spring brought natural-gas stockpiles nationwide closer in line with average levels for this time of year. Further stoking the rally, traders and investors said, are signs that the boom in U.S. gas output is slowing, which could trim supplies even more. (…)

Less drilling “is definitely part of the equation,” he said. The number of rigs drilling for natural gas stood at 431 last week, down 35% from a year earlier, according to oil-field-services company Baker Hughes Inc. BHI -0.62%

The Department of Energy forecasts that the nation’s gas output will rise 0.7% this year, the smallest increase since 2005. (..)

Cold weather and slowing output growth are cutting into U.S. stockpiles. The amount of gas held in underground storage totals 1.876 trillion cubic feet, down about 21% in the past year, according to the latest Department of Energy data.


  • Health Insurers Warn on Premiums 

    Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law.


NEW$ & VIEW$ (28 FEBRUARY 2013)

U.S. durable goods orders jump. Pending home sales rise. Eurozone slump to continue. Is the sell-off in materials overdone? Global IP. A new bull market for the dollar? The U.S. energy revolution.


Forget the 5.2% decline in total new orders. The important stats are:

  • New orders ex-transportation (-19.8% in January) rose 1.9% in January after rising 1.0% and 1.2% in the previous 2 months respectively. That’s almost 18% annualized for the last 3 months.
  • Orders for non-defense capital goods ex-aircrafts jumped 6.3% in January after -0.3% in December and +3.3% in November. That’s 44% annualized! This series is now +4.7% Y/Y after edging down 0.5% in 2012. (Chart from IBD, table from Haver Analytics)



U.S. Pending Home Sales Recover To Highest Since 2010

Pending sales of single-family homes jumped 4.5% (9.5% y/y) last month after a revised 1.9% December decline, according to the National Association of Realtors (NAR).


Euro-Zone Slump Set to Continue


  • The euro-zone economy appears unlikely to emerge this quarter from a contraction that has already lasted for nine months, despite a low rate of unemployment in Germany, its largest member.

The Centre for Economic Policy Research and the Bank of Italy Thursday said their Eurocoin indicator—which is intended to estimate quarter-on-quarter growth in gross domestic product—showed the euro-zone economy shrank again in February, although at a slower pace than in recent months.

  • Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!



FRED Graph

Markit’s Eurozone retail PMI® data for February signalled a record year-on-year fall in retail sales revenues in the single currency area. Sales were also down sharply compared with January, as signalled by a PMI reading of 44.5, down from 45.9.

image image

Retail PMI data by country signalled a broad-based downturn in sales revenues in February. Germany registered a fourth decline in sales in the past seven months, while French retail sales fell for a survey-record eleventh consecutive month and at the fastest pace since last August. Italy continued to show the strongest overall decline, albeit the weakest since last September.

All three countries registered stronger year-on-year falls in retail sales in February. The annual rates of decline in Germany, France and Italy were the sharpest in 34, nine and two months respectively.

Faced with declining sales, retailers made further cuts to purchases of new stock in February. The value of new purchases fell for the nineteenth
successive month, and at the fastest rate since last June. Consequently, the value of goods held in stock at retailers declined for the sixth month running, and at the strongest pace in over three years.

image image

The number of people out of work fell a seasonally adjusted 3,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said today. The adjusted jobless rate held at 6.9 percent this month after the January rate was revised up from an initially reported 6.8 percent.


Materials are down 5% in the past month. Myles Zyblock, RBC Capital’s strategist believes that

the sell-off appears to be an over-reaction given the sharp acceleration in Chinese money metrics and the ongoing upturn in global leading economic data. We believe that base metals, chemicals and agriculture are likely to offer leadership in the resource space given the profile of leading indicators.

This excellent strategist offers two charts to support his expectation.


Myles adds the following chart reflecting the tight inverse correlation between Materials and the U.S. dollar, probably hoping that the dollar’s rally will soon reverse.Fingers crossedimage

Materials are indeed highly inversely correlated to the U.S. dollar (read below) but they also need demand momentum which can be monitored through the trends in industrial production across the world. Outside the U.S., IP trends are not buoyant.










I am missing China, a big piece admittedly. China’s IP continues to grow but the rate of growth, currently in the 10% range is nowhere near the 15-20% growth rates pre-2011.

Output climbed 1 percent from December, when it rose 2.4 percent, the Trade Ministry said in Tokyo today. The ministry said that increases in production of cars and memory chips contributed to the overall gain in the month.

Pointing up Of the 138 companies on the Nikkei 225 Stock Average for which Bloomberg News has estimates, almost 64 percent beat earnings estimates for the most recent quarter, as a weaker yen pushes up profits.

Back to the weak dollar hope. I am no forex expert but there are signs out there suggesting that the dollar may in fact be about to rise. Excerpts from a good analysis by George Magnus, UBS.


(…) If history is anything to go by, and the nascent signs of economic healing in the US become more convincing, the US dollar could yet rise significantly further over the next two to three years, perhaps reaching 120- 130 against the Japanese Yen, and parity to 1.05 against the Euro. More than likely, many emerging countries will be prepared to allow their currencies to decline against the US dollar too.


(…) according to the Congressional Budget Office, the budget deficit under current laws will drop to under $500 billion in 2013, or 5.3% of GDP, the lowest since 2008. The central forecast, based on an undemanding GDP growth rate, is that it will continue to drop to 2.4% of GDP by 2015.

The CBO notes that the real fiscal and debt sustainability issues for the US are unlikely to become pressing until later in the decade and the 2020s. If the deficit should halve in the next two years, as suggested, sentiment in US capital markets is likely to be buoyed, for a while at least.

A higher US dollar, and an increase in US real interest rates would mark a significant shift in the financial and investment environment. But the most challenging implications might be for emerging markets and industrial commodity prices, both of which have prospered during the US dollar downwave since 2001. The two previous US dollar bull markets since the collapse of Bretton Woods, from 1978-1985, and from 1992-2001, had a detrimental effect on Latin America, and Asia, respectively. (…)

There are no grounds for complacency, of course, but several other parts of the US economic and financial kaleidoscope seem to be slowly falling into place. Nominal GDP growth from the trough in 2009 to the end of 2012 had moved up to 4%. The housing sector has stabilised, capital spending by companies is contributing more to GDP growth, and non farm payroll jobs have averaged a little over 150,000 per month for two years, topping 200,000 in the fourth quarter 2012.

(…)  And if the economy remains on a growth path of around 2-3%, the debate about QE exit strategies will gather relevance this year and next, not least in the expectations of US bond investors. If US bond yields rise to reflect more robust expectations of a turn away from QE because of the return of selfsustaining growth, they are likely to pull the US dollar higher. (…)

From a more structural standpoint, there has been a lot of conjecture about the path towards US energy independence, courtesy of growing domestic energy output and foreign sales of natural gas and oil. (…) But whether or not the US achieves independence any time soon, the steady decline in the energy trade deficit is already fact.

And similarly, the US technological lead in advanced manufacturing is an asset that should stand it in good stead for a long time to come, as cost structures decline, sharpening the country’s competitive edge and providing incentives to create output and jobs at home.

Even if you want to reserve judgment about the prospects for US fiscal politics, energy independence, and leadership in advanced manufacturing, the US dollar may still appreciate against other major
currencies. The US economy is, relatively speaking, in better cyclical and
structural shape, the Fed will likely be the first central bank to exit QE, and the US dollar faces weak competition in the rest of the developed world. (…)

And this from Bill Gross in today’s FT:

Sell currencies of serial QE offenders 

(…) How should an investor respond? Respect the drone, I suppose, and don’t fight the central bank in the immediate term.

In currency terms, one has only to observe the 15 per cent depreciation of the yen against the dollar and its 20 per cent depreciation versus the euro without a shot even being fired. Japan’s Prime Minister Shinzo Abe has one-upped Federal Reserve Chairman Ben Bernanke simply with a promise to print.

Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.

The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.

Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.

Unless there is a white flag or an ultimate ceasefire, money printing lowers the value of all global currencies – much like horsemeat lowers the value of any burger or shepherd’s pie.

Talking of the U.S. energy revolution:

  • Gas Boom Projected to Grow for Decades 

    U.S. natural-gas production will accelerate over the next three decades, research indicates, a further sign the energy boom remaking America will be long-lived

imageThe most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that.

The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43. (…)

The shale-gas boom has led to a reorientation of the U.S. energy economy. This has led to a steep decline in coal consumption for electric generation and prompted companies to announce or consider multibillion-dollar investments to export gas and build chemical, steel and fertilizer plants that will consume enormous quantities of gas.

oilThe Energy Information Administration released new data today for US oil production by state through the end of last year, and its report showed that “Saudi Texas” produced an average of 2.22 million barrels per day (bpd) in December, the highest average daily output in the state in any month since June 1986, more than 26 years ago. Texas oil production increased by 30% in December from a year earlier, and by 73% from two years ago.

Amazingly, oil production in the Lone Star State has doubled in only three years, from 1.1 million bpd in January 2010 to 2.22 million bpd in December 2012, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. (…)


NEW$ & VIEW$ (1 FEBRUARY 2013)

U.S. Economy. The Energy Game Changer. China House Prices. EU Unemployment. EU Inflation. Earnings Guidance Poor.


It is important to monitor high frequency data to gage the economic momentum, especially when unusual factors get into play. (Sandy, fiscal cliff fears, fiscal drag, gas prices, sequester):

The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high frequency. Its underlying (seasonally adjusted) economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data.



What you must know about the surge in personal income:

U.S. personal income surged 2.6% in December, the largest monthly increase in eight years. As today’s Hot Chart shows, this unexpected rise propelled the savings rate to a post-recession high of 6.5%. What happened in December? To avoid the higher tax grab on dividend income that takes effect in 2013, corporations opted to shower investors with special dividend payments. The windfall was an unprecedented $305 billion in Q4 2012, with $268 billion coming in December alone.

This is to say that three-quarters of the increase in personal income in
December was accounted by dividend income – well above its normal share of around 6%. As shown, the surge in December was such that dividends overtook interest rates as a source of income. This development will obviously not be sustained in Q1 2013.

So expect a double-whammy to hit households in January. Not only will dividend payouts revert to more normal levels, personal income will also be negatively impacted by a mix of higher payroll and income taxes. We expect personal disposable income to fall by more than 4% in January. This sets the stage for tepid consumption growth and a big drop in the savings rate next month. (NBF Financial)


The dividend windfall is unlikely to be spent rapidly. Keep in mind than many of these payments were merely advances on the expected 2013 payouts so dividend income will be much lower in 2013.

So beware of those HFI which rely heavily on personal income.

Clock  imageAmericans Rip Up Retirement Plans

Nearly two-thirds of Americans between the ages of 45 and 60 say they plan to delay retirement, according to a report to be released Friday by the Conference Board. That was a steep jump from just two years earlier, when the group found that 42% of respondents expected to put off retirement.


In 2004, steelmaker Nucor Corp. bought a plant next to alligator-infested Louisiana wetlands, took it apart and shipped it to Trinidad on ocean barges. This summer, after almost two years of construction, it will open the same type of plant at the same site at a cost of $750 million.

[image]Why? Natural gas, which is critical to these Nucor plants, was cheap in Trinidad. Now, it is suddenly plentiful and relatively cheap in the U.S. due to hydraulic fracturing technology, or fracking, a process that has unlocked natural gas from massive shale formations, driving prices down. (…)

Lower-priced natural gas has energized many parts of the country and the economy. Chemical and fertilizer companies, which use gas as both a feedstock and energy source, say lower prices have reduced costs and made the U.S. a more competitive manufacturing location. Dow Chemical Co. and Chevron Phillips Chemical Company LLC have announced plans to build multibillion-dollar chemical plants in Texas, Louisiana and other states. Energy-intensive industries, such as glass and aluminum makers, can cut costs, while companies that make pipes and drills are benefiting from new domestic demand.

Abundant natural gas has also made certain processes, considered uneconomical a few years ago, now doable and profitable.

Methanex will begin moving equipment from a plant in Chile to Louisiana’s Gulf Coast in late spring and has signed a 10-year agreement with Chesapeake Energy Corp. to supply natural gas to the plant.

Methanex CEO John Floren said he expects to move a second Chilean plant to Louisiana in coming years, although a final decision has not been made. (…)

PricewaterhouseCoopers has forecast that the shale gas boom could result in one million jobs added to the manufacturing sector in the United States over the next decade, with North America poised to become a “major, global, low-cost provider of energy and feedstocks to the chemical industry.” Majors like Exxon Mobil Corp. and Royal Dutch Shell PLC have announced plans to expand basic chemical production using natural gas as a feedstock.

Uptick in Chinese Home Prices Raises Concerns

China’s average home prices rose from year-ago levels for the second month in a row in January, signaling that the property market recovery is gaining momentum after last year’s slump. (…)

The average home price rose 1.2% in January from the same month a year earlier, data provider China Real Estate Index System said Friday. This comes after a 0.03% gain in December.

The average housing price in January rose 1% from December to 9,812 yuan ($1,577) a square meter, marking the eighth consecutive monthly gain on a month-on-month basis. In December, prices rose 0.23% from the month before. (…)

Compared with the preceding month, housing prices in January rose in 64 cities and fell in 35 cities, while prices in one city were unchanged.

Euro area unemployment rate at 11.7%



Euro area annual inflation down to 2.0%image

Storm cloud  EARNINGS WATCH: Negative Guidance Entering Q1

January was an active month for guidance from S&P 500 companies, as 49 companies issued quarterly EPS guidance for Q1 2013 and 94 companies issued annual EPS guidance for the current fiscal year during the month.

For Q1 2013 overall, 45 companies have issued negative EPS guidance, while 11 companies have issued positive EPS guidance. As a result, 80% (45 out of 56) of the companies that have issued EPS guidance for Q1 2013 have issued negative EPS guidance. If 80% is the final percentage, the Q1 2013 quarter will have the highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006. The Q3 2012 quarter currently has the record at 74%. (Factset)


NEW$ & VIEW$ (17 DECEMBER 2012)


A fresh proposal from House Speaker John Boehner to raise tax rates on millionaires marked a breakthrough in stalled budget negotiations with President Barack Obama, suggesting a potential framework for avoiding year-end spending cuts and tax increases known as the fiscal cliff.

The proposal, which the speaker offered privately to Mr. Obama Friday, calls for raising $1 trillion in tax revenues over 10 years, up from the $800 billion Mr. Boehner previously proposed, and cutting about $1 trillion from spending.

The Boehner proposal would extend all current tax rates, while raising rates only for income above $1 million, which would rise to 39.6% from 35%. Previewing an argument likely to be used in selling the idea to conservatives, GOP officials argued Sunday that Mr. Boehner’s proposal would not call for Republicans to vote for a tax increase: The plan will simply allow rates to rise, as scheduled, for income over $1 million.

While the White House objected to major parts of the proposal, senior Democrats described it as a tipping point that moves talks away from deadlock. (…)

Mr. Boehner’s proposal calls for a two-stage process, providing for enactment of a small-scale deficit-reduction plan by year’s end, coupled with a second phase next year, in which lawmakers would embark on a revamp of the tax code and entitlement programs, using a final agreement as a guide.

Mr. Boehner offered to include an increase in the U.S. borrowing limit as part of the deal—enough to avoid another fight over the issue for perhaps a year if it is matched by comparable spending cuts. (…)

Centrists who are seeking a big deficit-reduction deal, however, saw promise in Mr. Boehner’s willingness to take a politically risky move toward compromise. (…)

Smart move from Boehner.

The Washington Post adds:

Senior White House officials remained in contact with Boehner’s staff throughout the weekend in a sign that serious negotiations had finally begun after weeks of stalemate and partisan posturing.

Fingers crossed  No grand bargain now but an agreement on a two-step program seems possible.

Smile  Consumer Prices Fell in November

U.S. consumer prices dropped 0.3% in November as the cost of gasoline declined.

Gasoline prices dropped 7.4% in November, the largest decrease in nearly four years. Retail fuel prices have fallen in eight of the past nine weeks, according to a different government measure. Overall energy costs fell 4.1% in November.

(…) core consumer prices rose 0.1% last month. That number reflects higher prices for shelter, transportation services and medical care. Food costs rose 0.2%, the sixth consecutive monthly increase.

Year over year, consumer prices were up 1.8% and core prices were 1.9% higher.

This is good news from the Rule of 20 point of view. Inflation dropping from +2.2% to +1.8% means fair P/E rises from 17.8 to 18.2, more than offsetting the 0.5% decline in trailing earnings after Q3. If only politicians could do something smart…



Buy high, sell low charts from RBC Capital. Institutional investors, as a group, are no smarter than individual investors.


Deflation is not a big threat at this time:

Median CPI remains above 2.0%

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.



Open-mouthed smile  U.S. Retail Sales Restrained By Lower Gas Prices

Total retail sales recovered 0.3% last month following an unrevised 0.3% October decline. Retail sales were unchanged excluding autos, as expected, for the second consecutive month. The mix of sales, however, was more encouraging than these top-line numbers suggest.

Consumers spent less on gasoline last month as prices fell. A 4.0% drop (+0.8% y/y) in gas purchases accompanied a 2.5% decline in seasonally adjusted prices, as calculated by Haver. Also adding to volatility was a 1.4% recovery (5.4% y/y) in motor vehicle sales. Excluding gasoline and autos, retail sales rose a notable 0.7% (3.3% y/y) and more than recovered their 0.2% October falloff.

Also adding to volatility was a 1.6% rise (5.4% y/y) in sales of building materials. A good indication of consumers’ underlying ability to spend on discretionary items are sales without these volatile components. Excluding autos, gas and building materials, retail sales rose a respectable 0.5%. However, the 2.9% y/y increase was lower than the peak y/y gain of 7.1%, ending October of last year.



Looking at the last 3 months, total retail sales are +1.2% or +4.9% annualized. Non-Auto less Gasoline sales are +1.4% or +5.7% annualized. The U.S. consumer is not retrenching just yet. That is in spite of slow income growth:

The recent 3.2% yearly increase by employment income limits the upside for retail sales growth. After slowing from the 6.4% of 1991-2000’s recovery to the 4.5% of 2002-2007’s recovery, employment income’s average annual increase subsequently slowed to the 3.4% of the current upturn. (Moody’s)





Thinking smile  But, for how long? Americans may be willing to spend but can they? (Chart from Gary Shilling).


U.S. Industrial Output Recovers After Sandy, But The Trend Weakens

The rebound in industrial sector output from Hurricane Sandy totaled 1.1% (2.5% y/y) last month following a deepened 0.7% October decline, last month reported as -0.4%. The Fed indicated that virtually all of last month’s increase in output was due to the passage of the storm. A weakening trend is indicated by the 1.2% y/y increase in factory sector output which was down from the 4.3% rise during all of last year as well as versus 5.7% in 2010.

In the manufacturing sector, a 0.9% increase (1.2% y/y) in output just made up for October’s 1.0% drop. The pattern is the same for the 1.3% m/m gains in consumer goods and business equipment output, although the latter’s 7.5% y/y rise easily outpaced the 1.2% y/y increase for consumer goods.

The capacity utilization rate rose to 78.4% and recovered its October fall. In the factory sector, the rate also rose to 76.6% and made up for the October decline to 75.9%.



Markit’s December flash PMI offers strong hopes that the manufacturing sector is re-accelerating:



U.S. Business Inventories Continue To Accumulate

Business inventories rose a slower 0.4% (5.7% y/y) during October following a 0.6% September rise. Factory inventories ticked up just 0.1% (3.1% y/y). The slower 0.6% gain in merchant wholesalers inventories reflected a 3.1% decline (+2.4% y/y) in petroleum inventories with lower crude oil prices. Elsewhere, wholesale inventories increased a firm 0.8% (6.8% y/y) during October. Inventories at the retail level gained a firmer 0.6% (8.2% y/y). That was led by a 0.9% jump in autos (21.2% y/y) after a 0.9% September increase. Nonauto retail inventories gained 0.4% (3.2% y/y) reflecting strength in building materials (4.0% y/y) and clothing stores (3.8% y/y).

Business sales fell 0.4% (+3.1% y/y) after a 1.2% September jump. Wholesale sales dropped 1.2% (+2.3% y/y) with the decline in petroleum prices. Even without oil, however, wholesale  sales fell 0.3% (+1.6% y/y).

large image 




Auto  The U.S. auto sector, particularly GM, seems to be caught with excess inventory even with reasonably strong sales recently. Imports from Canada are already weakening which is not positive for Canada’s GDP as this chart from RBC Capital shows:image

In effect, Canada is also at the edge of the U.S. fiscal cliff!

Sun  Global outlook brightens as flash PMIs rise in the US, China & Eurozone

The strongest gain was seen in the United States, where’s Markit’s flash PMI hit an eight-month high in December. The survey had correctly signalled the downturn in official data, which showed a contraction of manufacturing output in October, and therefore bodes well for a rapid return to growth. The December PMI was broadly consistent with US manufacturing output growing at a 4% annualised rate.

The US PMI came on the heels of Markit’s PMI for China, produced for HSBC, which hit a 14-month peak in December. The PMI has now risen for four successive months in China, rising above the no change level of 50 in the final two months of 2012, providing strong evidence to suggest that industrial production growth will have continued to revive after the annual growth rate picked up to 9.6% in October.

Even the Markit Eurozone Manufacturing PMI improved in December, rising to its highest since March. However, although well up on the three-year low seen in July, the rise in the Eurozone PMI was only very marginal, and the index remains firmly in contraction territory, contrasting with the expansions seen in the US and China. The PMI data therefore add to worries that the Eurozone recession deepened in the fourth quarter after GDP data showed a surprisingly mild 0.1% contraction in the third quarter. But, the rise in the PMI nevertheless suggests that the picture is beginning to brighten for even the hard pressed Eurozone as we move in 2013.

 image image

I agree with Markit’s view on the U.S. and China, but not on the Eurozone where the picture will only begin to brighten when new orders turn positive. The Euro has not depreciated sufficiently to offset the very slow progress to date on the lack of competitiveness of the Euroblock.


Right on cue, Eurostat released October’s trade data this morning: exports fell 1.4% M/M after dropping 1.3% in September. Imports rose 0.6% in October but they had declined 3.6% in the previous 2 months.

Coincidentally, Eurostat also released Hourly Labor Costs: they are up 2.0% Y/Y in Q3, up from +1.9% in Q2 and +1.6% in Q1.

Just kidding  In case you think that the Eurocrisis has ended:

Lightning  Spanish House Prices Quicken Decline

imageIn an indication that the market isn’t yet bottoming out, Spanish housing prices are now falling at the fastest pace on record, after double-digit falls over the past year. House prices fell on average by 15.2% in the third quarter from the year-earlier period, compared with the 14.4% decline in the second quarter, the country’s statistics agency, INE, said Friday.

Unlike other markets faced with a housing slump, like the U.S. and Ireland, house prices in Spain fell at a slower pace in the first few years after the 2008 property bust. The pickup in the rate of decline comes after Spain’s government urged the banks to unload foreclosed properties more quickly.

More pain in Spain (chart below from Gary Shilling):


More from Gary Shilling, this time on Canada:





Looks like an accident waiting to happen. As I said earlier, Canada is right at the edge of the U.S. fiscal cliff.

Green with envy  Portugal Moves to Cut Corporate Tax

(…) The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said.

The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview.

That would be the lowest in the European Union along with Cyprus and Bulgaria, which have blanket 10% corporate tax rates, according to consultancy firm KPMG. The average corporate tax in the EU is above 22%. (…)

Mr. Santos Pereira, who was an economics professor at Simon Fraser University in Vancouver, Canada, before taking over the Portuguese ministry, said Portugal’s economic revamping will pay off.

Changes to make the labor law more flexible and companies easier to be set up, fiscal incentives to new investment and the use of EU funds to train the Portuguese to work in export-led industries will provide sustainable economic growth, he said.

“Fifteen years ago, Germany was the sick man of Europe, and it regained its competitiveness by reforming its laws and legislation and by investing quite a lot of resources in technical training. Their model in terms of industries, exports and technical training is the model we are getting back to in Portugal,” Mr. Santos Pereira said.

Let’s see how the EU reacts to that…

Abe Sets Economic Agenda in Japan

To revive the sickly economy, incoming Japanese Prime Minister Shinzo Abe vowed a hefty spending package and increased pressure on the central bank to pull the country out of recession and deflation

Singapore Home Sales Fall

Singapore’s clampdown on home loans is showing some signs of success, as sales of new private homes fell to their lowest level so far this year in November.

Sales of new private residential units fell to 1,087 units in November, down 44% from October, according to data from the Urban Redevelopment Authority. October’s tally was 26% lower than the previous month’s.

The Energy game Changer

US sees $90bn boost from shale gas boom  Europe fears widening divide amid America’s industrial renaissance

Manufacturers have announced more than $90bn worth of investments in the US to take advantage of its cheap natural gas, according to new calculations, underlining how the shale revolution appears to be driving the country’s industrial renaissance.

Petrochemicals, fuel, fertiliser and steel companies are among those that have committed to or are considering multibillion dollar investments based on their ability to source cheap energy and feedstocks. (…)

Industry executives say low-cost feedstocks and energy are already having an effect on the US economy.

Pointing up  Since the start of 2010, industrial production is up 12 per cent in the US, while it has fallen 2 per cent in China, 3 per cent in Britain, and 6 per cent in Japan.

Germany’s production has risen 11 per cent over the same period, but German industrial companies including Bayer and BASF have been warning that they expect to lose competitiveness against US rivals over the coming decade because their energy costs are rising.

For more on that see Facts & Trends: The U.S. Energy Game Changer.


Oil Prices Could Drop Substantially

In an exclusive interview with publisher James Stafford, energy security expert Michael Levi, the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations (CFR), discusses:

  • Why oil price stability is still all about the Middle East
  • Why the oil and gas industry is heading towards transformation
  • Why oil prices could drop substantially
  • Why the US shale boom is real
  • Why the shale oil boom won’t lead to major US foreign policy changes
  • Why Keystone XL is pretty much non-essential
  • Why we won’t see any radical change in renewables in the next five years
  • The best way to achieve meaningful results on climate change

What follows are excerpts from a longer interview:


James Stafford: The UK-based think tank Chatham House has published a new report seeking to demonstrate how the oil and gas industry is under significant pressure that will lead to a transformation. How do you see a potential transformation of the industry taking shape?

Michael Levi: I think it is important to start with a distinction, particularly one that is important in the US: the oil and gas sectors, to some extent, are becoming two genuinely separate sectors, rather than one integrated one.

In the past, most natural gas was produced as associated gas together with oil, and that made oil and gas as a single entity very clear, something that made a lot of sense. Now you have a lot of non-associated gas; gas being produced separately, often by companies that do not engage in much oil production. They really have distinct challenges and opportunities, and as a result, different sets of pressures.

For the natural gas industry, at least in the US, the big challenges are low prices in the glut of gas on the market that is not being matched by demand. A big part of this is certainly idiosyncratic; there are people who are drilling to hold leases and cash flow, and they are doing that en masse, which is a problem for the whole industry.

At the same time, they have not been able to coalesce around the efforts to boost demand.

The oil world is a completely different story and you have pressures from different directions right now. On the one hand, you have a surge in opportunities for development in countries where geopolitical risks are relatively low. In the US, Canada, and Brazil you may need to still worry about regulatory changes, but you are not worried that terrorists will come and capture your workers.

At the same time, for a lot of the companies, that is not enough and they are still looking globally, and they still face challenges from nationalism and unstable regimes. On top of that, they are entering a period in which there is probably more uncertainty in prices than there has been for a long time. You have this collision of growth and supply from
outside OPEC, together with potential Iraqi growth and substantial investment from within OPEC that really opens up the possibility of a big, if temporary, price drop in the next five or so years. That complicates the outlook for companies, on top of everything else.

James Stafford: Really? You believe that prices could drop in the future?

Michael Levi: I think prices could drop substantially. If you look at the most recent IEA report or the most recent OPEC outlook, you see that if all currently planned investment goes ahead, then at prices resembling current ones, supply would greatly outstrip demand.

Either countries will pull back with production and investment in OPEC and allow supply to match demand at relatively high prices–and I think that is the most likely outcome–or they will not be able to decide who has to pull back, and there will be an excess of supply on the market that pushes prices down quickly. That is self-correcting, because low prices cannot sustain the big gains in North American production. But you can still have temporarily low prices that really shake things up for some producers, depending on the properties of their investment.

James Stafford: Speaking of the IEA report, predictions that the US could pass Saudi Arabia to become the world’s largest oil producer by 2017 have come under a lot of criticism. What do you think of the IEA’s predictive mathematics?

Michael Levi: Predictions are always wrong in one way or another, and I am not going to second-guess those who have thought to a much greater depth in these analyses. There is a range of estimates out there, but the IEA ones are relatively modest.

The bigger issue is: what are the implications? Everyone likes to talk about how their projections show that the world is being reborn anew, and will be fundamentally different from what it was in the past. There is a temptation to oversell, and I think it is reasonable that people react negatively to efforts to oversell the consequences of the changes going on in energy.

James Stafford: What are your views on the shale boom? Do you believe it can live up to the hype?

Michael Levi: It depends on what hype we are talking about. I think the shale boom is for real. I think that a lot of the criticism that we do not know long-term production rates and so on are important to look at. But even if you assume that returns on wells are substantially lower than most people think they are right now, our projected output is still quite high, because producers’ economics are dependent primarily on what happens in first few years after they drill. We know roughly what happens in the first years after producers drill.
The hype that says that this will all replace coal without any government intervention, gas prices will be $3 forever, or that we will be the dominant exporter in the world, are out of contact with reality. We have temporarily depressed prices, they will rise a bit. Hype always has the ability and the tendency to outstrip reality, but in this case, reality is pretty radical itself.

James Stafford: Could the shale boom lead to a change in US foreign policy priorities, away from the Middle East?

Michael Levi: An economic analyst will typically tell you that the US shale boom will fundamentally change US vulnerability to energy events in the Middle East. But not every policymaker listens to their economic advisors.

I do not think that US policymakers will step back and say, ‘We need to revisit our strategy in the world, because of this oil boom.’ I do think that what is happening will weigh on ongoing discussions that already exist about future US priorities.

The most obvious one is the discussion from the US Department of Defense over how much to shift from the Middle East to Asia. Within that existing debate, I have no doubt that people who want to see more of a shift will emphasize what is happening in US energy. I think it will have some influence, but ultimately, I do not see a radical change as being likely.

James Stafford: Now that Barack Obama has won a second term, what do you see happening with the Keystone XL Pipeline? Will it go ahead? Is it essential to US energy security?

Michael Levi: I made a prediction once on the Keystone XL Pipeline, so I have lost my license to make future predictions. The Keystone XL Pipeline is non-essential to US energy security; it is also not disastrous to climate change. It has been overblown by both sides in the debate. It is one pipeline that would carry a modest, but non-trivial amount of crude, and that would help create economic incentives to increase production, again, by a modest but not earth-shattering amount.

The more fundamental question is whether the US is going to let economically-rational infrastructure go ahead. I think if you replicate a pattern like the one that some would like to see for Keystone and you start blocking pipelines all over the place, then that becomes a larger economic problem.

In the end, will it make the US more secure in any meaningful way? I doubt it. Prices for Canadian oil rose more during the Libya conflict than the prices for Brent Crude, or WTI. It is hard to say that Canada gives the US potentially more security aside from in extreme circumstances.

James Stafford: One would have thought that the natural gas boom would be good for the environment, but the cheap gas prices have also hit coal prices, and we are seeing Europe sucking up unused US coal. Is this a trend we can expect to continue?

Michael Levi: I think it is a trend we can expect to continue to some extent, particularly if Europe does not make stronger moves away from coal. The state of our knowledge about global coal markets is pathetic. All we can say right now is, directionally, more gas in the US means cheaper coal, which leads to more exports, but we are still far from being able to really put quantitative meat on those bones, and making some meaningful net assessment.


James Stafford: Can the US afford to turn its back on nuclear energy?

Michael Levi: If you mean by turning its back, you mean a phasing-out of nuclear energy, I do not think that is sensible to do. Nuclear energy provides 20% of our electricity, and the marginal cost of production is extremely low for existing power plants. The real question is can the US afford to turn its back on nuclear in the future as a source of zero-carbon energy growth? The answer is: we do not know, because we do not know what the alternatives will be, or if there will be significant alternatives. So you want to keep nuclear alive as an option; that means trying to figure out ways to bring down costs, particularly financing costs. It means looking for ways to resolve, or at least partly resolve the waste questions, and it means looking for ways to potentially innovate on small modular reactors to provide a different economic model and a different construction model for nuclear power.