NEW$ & VIEW$ (11 DECEMBER 2013)

Pointing up Pointing up Pointing up The Fed Plan to Revive High-Powered Money

By Alan Blinder
Don’t only drop the interest paid rate paid on banks’ excess reserves, charge them.

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before. (…)

Not long ago—say, until Lehman Brothers failed in September 2008—banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. (…)

At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. (…)

Deal Brings Stability to U.S. Budget

House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs.

Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term jobless benefits, sought by Democrats, wasn’t included.

The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a “grand bargain” to restructure the tax code and federal entitlement programs. But in a year and an institution characterized by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement. (…)

The Murray-Ryan deal will likely need considerable Democratic support to pass the GOP-controlled House. Many Republicans, as well as a large number of conservative activists off Capitol Hill, argue that the sequester cuts have brought fiscal austerity to the federal budget and that they should not be eased. (…)

The depth of conservative opposition will become apparent as lawmakers absorb the details, which were released to the public Tuesday night. To draw support from the GOP’s fiscal conservatives, the deal includes additional deficit-reduction measures: While the agreement calls for a $63 billion increase in spending in 2014 and 2015, it is coupled with $85 billion in deficit reductions over the next 10 years, for a net deficit reduction of $22.5 billion.

The deal achieves some of those savings by extending an element of the 2011 budget law that was due to expire in 2021. The sequester currently cuts 2% from Medicare payments to health-care providers from 2013 through 2021. The new deal extends those cuts to 2022 and 2023. (…)

A Least Bad Budget Deal

The best that can be said about the House-Senate budget deal announced late Tuesday is that it includes no tax increases, no new incentives for not working, and some modest entitlement reforms. Oh, and it will avoid another shutdown fiasco, assuming enough Republicans refuse to attempt suicide a second time.

The worst part of the two-year deal is that it breaks the 2011 Budget Control Act’s discretionary spending caps for fiscal years 2014 and 2015. The deal breaks the caps by some $63 billion over the two years and then re-establishes the caps starting in 2016 where they are in current law at $1.016 trillion. Half of the increase will go to defense and half to the domestic accounts prized by Democrats. (…)

The deal means overall federal spending will not decline in 2014 as it has the last two years. (…)

All of this doesn’t begin to match the magnitude of America’s fiscal challenges, but it is probably the best that the GOP could get considering Washington’s current array of political forces. (…)

Four Signs the Job Market Is Getting Better 

Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels.

Quits are rising: (…)  2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier. Quits are still below normal levels, but they’re finally showing a clear upward trend.

And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. (…) There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.

Hiring is finally rebounding: (…) Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.(…)

But don’t get too excited: (…)The three-to-one ratio of jobseekers to openings is nearly double its prerecession level, and would be higher if so many unemployed workers hadn’t abandoned their job searches. Companies remain reluctant to hire, and many of the jobs that are getting created are in low-wage sectors — nearly a third of October’s hiring came in the low-paying hospitality and retail sectors. The epidemic of long-term unemployment has shown little sign of easing. Despite signs of healing, in other words, a healthy job market remains a long way off.

Wells Fargo Chief Sees Healing Economy

Wells Fargo& Co. Chief Executive John Stumpf said Tuesday the economy is healing, five years after the bank purchased Wachovia Corp. in the midst of a global financial meltdown.

He said government progress on a budget deal, lower unemployment and signs businesses are looking to expand give him reason to be optimistic. “As I’m talking with our customers, especially our small business and middle-market customers, I’m starting to hear a little more about expanding businesses,” he said.

Now, go back to Alan Blinder’s op-ed above.

European carmakers: speeding up

(…) Consultants at LMC Automotive reckon that November saw a 0.7 per cent rise year on year. That follows increases of over 4 per cent and almost 5.5 per cent in October and September respectively – so, at long last, a sustained upward trend for Europe’s crisis-hit sector. 

High five In three of the big markets – Germany, France and Italy – the November sales pace was lacklustre at best and down by over 4 per cent at worst. Spain, which saw a strong advance, benefited from a very easy year-on-year comparison and scrappage incentives. Pricing, too, remains weak across the sector. Last week, Fiat detailed transaction (as opposed to listed) price trends, in segments ranging from economy to basic luxury models for both the German and Italian markets. As of September, these were barely above 2007 levels and, after allowing for inflation in the intervening period, well down in real terms.

Above all, given the small number of plant closures since 2008, Europe still has massive overcapacity on the production side. If 2013 ends with under 12m cars sold in western Europe and 4.5m in eastern Europe, the total will be down by a fifth on 2007 levels. Europe’s light vehicle production, meanwhile, will probably top 19m units – just two-thirds of estimated plant capacity. Sales rises of 2-3 per cent, say, in 2014 will make only modest inroads on that gap so pricing pressures may persist.

China New Yuan Loans Higher Than Expected

Chinese financial institutions issued 624.6 billion yuan ($103 billion) worth of new yuan loans in November, up from 506.1 billion yuan in October and above economists’ expectations.

Total social financing, a broader measurement of credit in the economy, came to 1.23 trillion yuan in November, up from 856.4 billion yuan in October.

China’s broadest measure of money supply, M2, was up 14.2% at the end of November compared with a year earlier, slightly lower than the 14.3% rise at the end of October, data from the People’s Bank of China showed Wednesday.

IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery

The IEA estimated today in its monthly oil market report that demand will increase by 1.2 million barrels a day, or 1.3 percent, to 92.4 million a day next year, raising its projection from last month by 240,000 a day. U.S. fuel use rose above 20 million barrels a day in November for the first time since 2008, according to preliminary data. While the agency boosted its forecast for the crude volume OPEC will need to supply, “making room” for the potential return of Iranian exports “could be a challenge for other producers” in the group, it said.

“The geopoliticals are now bearish, while the fundamentals are bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said before the IEA published its report. “This is quite a change from just recently. People are anticipating tighter supplies as we go into next year. Demand will be higher.”

The agency raised estimates for supplies required next year from the Organization of Petroleum Exporting Countries by about 200,000 barrels a day, to 29.3 million a day. That’s still about 400,000 a day less than the group’s 12 members pumped in November, according to the report.

OPEC’s output fell for a fourth month, by 160,000 barrels a day, to 29.7 million a day in November, as a result of disruptions in Libya and smaller declines in Nigeria, Kuwait, the United Arab Emirates and Venezuela. The group decided to maintain its production target of 30 million barrels a day when it met on Dec. 4 in Vienna.

Saudi Arabia, the organization’s biggest member and de facto leader, kept production unchanged last month at 9.75 million barrels a day, the report showed.

This chart via FT Alphaville reveals how OPEC is effectively managing supply.

SENTIMENT WATCH

Can We Finally All Agree That This Is Not a Bubble?  All the bubble chatter over the past few months is increasingly looking like just a bunch of hot air.

A look at the IPO and M&A markets also point to caution rather than exuberance. “A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses,” said Jeffrey Kleintop, chief market strategist at Boston-based brokerage firm LPL Financial. While M&A activity is trending higher, it remains far below the peak 2007 levels, and 2000 for that matter, he pointed out.

RBC Capital has the chart:

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Media bubble?

It seems to me that most media have been giving a positive spin to the not so great economic news of the past few months. This RBC Capital chart carries no emotion:

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High Yield Spreads Hit a Six Year Low

(…) At a current reading of 411 basis points (bps) over treasuries, spreads are at their lowest level in more than six years (October 2007)!

With high yield spreads at their lowest levels since October 2007, skeptics will argue that the last time spreads were at these levels marked the peak of the bull market.  There’s no denying that, but we would note that in October 2007, spreads had already been at comparably low levels for more than three and a half years before the bear market started.  Additionally, back in the late 1990s we also saw a prolonged period where spreads were at comparably low levels before the market began to falter.

Another reason why the low level of spreads is of little concern is because default rates are also at historically low levels.  According to Moody’s, the default rate for junk rated American companies dropped to 2.4% in November, which according to Barron’s, “is barely more than half its long-term historic average and down from 3.1% a year ago.”

Not really bubbly, but getting closer…

Here’s an interesting chart:

Performance of Stocks vs Bonds

(…)  With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  (…)

While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon.  In the chart below, anything above the green line indicates a performance spread of more than 30 percentage points.  As you can see, the only other periods where we saw the spread exceed 30 were in 1999, 2003, 2009, and 2011.

What makes the current period somewhat different, though, is the period of time that the spread has been at elevated levels.  With the spread first exceeding 30 percentage points back in March, we are now going on nine months that the spread has been at elevated levels.  At some point you would expect the two to revert back to their long-term historical average.

Hedge funds attract billions in new money
Investor inflows jump sharply even as performance lags stocks

Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to figures from the data provider Preqin.(…)

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.”

With the same humongous fees…

Yesterday, I posted on this:

 

Fatter Wallets May Rev Up Recovery

The net worth of U.S. households and nonprofit organizations—the values of homes, stocks and other assets minus debts and other liabilities—rose 2.6%, or about $1.9 trillion, in the third quarter of 2013 to $77.3 trillion, according to the Fed.

Which deserves two more dots to explain the feeble transmission pattern of the past several years:

The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Click to View

  • And these charts from RBC Capital:

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NEW$ & VIEW$ (6 DECEMBER 2013)

Business Stockpiling Fuels 3.6% GDP Rise

The economy grew at a faster pace in the third quarter than first thought, but underlying figures suggest slower growth in the year’s final months.

catGross domestic product, the broadest measure of goods and services produced in the economy, grew at a seasonally adjusted annual rate of 3.6% from July through September, the Commerce Department said Thursday. The measure was revised up from an earlier 2.8% estimate and marks the strongest growth pace since the first quarter of 2012.

High five The upgrade was nearly entirely the result of businesses boosting their stockpiles. The change in private inventories, as measured in dollars, was the largest in 15 years after adjusting for inflation.

As a result, inventories are likely to build more slowly or decline in the current quarter, slowing overall economic growth. The forecasting firm Macroeconomic Advisers expects the economy to advance at a 1.4% rate in the fourth quarter. Other economists say the pace could fall below 1%.

Real final sales—GDP excluding the change in inventories—rose just 1.9%, a slowdown from the second quarter. Consumer spending advanced only 1.4%, the weakest gain since the recession ended.

This huge inventory bulge may explain the bullish manufacturing PMIs of the past few months as Lance Roberts writes today:

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I posted on the apparent inventory overhang Wednesday, particularly at car manufacturers but also in retail stores as can be easily seen at any mall near you. Right on cue:

Honda Offers Dealers Incentives

Honda is offering its U.S. dealers big cash incentives to pump up their new-car sales in the final month of the year after its November U.S. sales fell slightly even as the overall market rose nearly 9%.

Honda told dealers on Wednesday it would pay bonuses of $3,000 for every vehicle they sell above their December 2012 sales total, according to dealers briefed by the company. Retailers can use the extra money to drop prices on new vehicles or finance other incentives to persuade customers to buy.

Auto makers often offer similar bonuses to their dealers, but Honda’s new program is noteworthy because the Japanese company typically offers much less in sales incentives than its competitors.

Honda’s program is being rolled out amid signs that other major auto makers in the U.S. also are sweetening rebates and other sales promotions.

Lance Roberts reminds us of the importance of final demand which is at really uncomfortably low levels:

Real final sales in the economy peaked in early 2012 and has since been on the decline despite the ongoing interventions of the Federal Reserve.  The lack of transmission into the real economy is clearly evident.

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Furthermore, as shown in the next chart, consumer spending has continued to weaken since its peak in 2010.  The last couple of quarters has shown a noticeable decline is services related spending as budgets tighten due to lack of income growth as disposable personal incomes declined in the latest report.  The slowdown in dividends, wages and salaries were partially offset by a rise in social welfare and government benefits.  Unfortunately, rising incomes derived from government benefits does not lead to stronger economic growth.

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The latest GDP data are for Q3. The last and most important quarter of the year is off to a slow pace:

Retailers Post Weak November Sales

The nine retailers tracked by Thomson Reuters recorded a 1.2% increase in November same-store sales, or sales at stores open at least a year, versus the 2.3% consensus estimate and the 5.1% increase posted a year ago.

The 1.2% result is the weakest result since September 2009’s 0.7% result.  Off-price retailers continue to outperform the sector, suggesting shoppers still want designer brand names for less. Companies that missed expectations blamed the shorter holiday season, very competitive and difficult environment.

Hopefully, this will help:

U.S. Crude-Oil Glut Spurs Price Drop

The U.S. Gulf Coast—home to the world’s largest concentration of petroleum refineries—is suddenly awash in crude oil. So much high-quality oil is flowing into the area that the price there has dropped sharply.

So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.

In fact, some experts believe a U.S. oil glut is coming. “We are moving toward a significant amount of domestic oversupply of light crude,” says Ed Morse, head of commodities research at Citigroup.

And the glut on the Gulf Coast is likely to grow. In January, the southern leg ofTransCanada Corp.’s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.

The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product.

Globally, the surge in supply and tumbling prices are attracting notice. On Monday, a delegate to the Organization of the Petroleum Exporting Countries said Saudi Arabia is selling oil to the U.S. for less than it would fetch in Asia. Nonetheless, the Saudis have continued to ship crude to refineries they own in Texas and Louisiana, according to U.S. import data, further driving down prices.

The strongest indication of a glut is the falling price of “Louisiana Light Sweet,” a blend purchased by refiners along the Gulf Coast. Typically, a barrel of Louisiana Light Sweet costs a dollar or two more than a barrel of crude in Europe.

But on Wednesday, a barrel of Louisiana crude fetched $9.46 less than a barrel of comparable-quality crude in England. (…)

Some industry officials argue that U.S. light crude will simply displace more “heavy” imported oil. But many Gulf Coast refineries are set up to turn the more viscous crude into diesel fuel, and converting their facilities to process additional light oil wouldn’t be easy. (…)

San Antonio-based Valero, the nation’s largest oil refiner, all but stopped importing lightweight crude to the Gulf Coast and Memphis a year ago because there was so much U.S. product available, says spokesman Bill Day. It is also shipping crude from Texas and Louisiana all the way up to its refinery in Quebec because the price of Gulf Coast oil is so low. (…)

How about feeding New York City where prices are 17% higher than in Houston, Tx.? (Obama focuses agenda on relieving economic inequality) Winking smileBut this can’t help housing, even with the Fed trying as hard as it can:Neither can this:

While higher mortgage rates have moderated U.S. home sales recently, the potential supply of buyers has also taken a surprising step back. Annual household formations are running well below one-half million recently, compared with a three-decade norm of 1.1 million. This is surprising given that the echo boomers are old enough to leave the familial home by now—unless they simply can’t find work and feel compelled to stay there. (BMO Capital)

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TOUGH TO BE CONSTRUCTIVE ABOUT EUROPE

However you look at it, the pattern is the same: strong and stronger Germany (20% of EU GDP, 16% of EU population), weak and weaker France (16%, 13%) and Italy (12%, 12%).

  • German construction sector growth helps drive economic expansion The construction industry looks set to provide a boost to the German economy in the fourth quarter, according to Markit’s PMI data. The construction PMI – which measures the overall level of business activity in the sector – registered expansion for the seventh successive month in November. Although the headline index dipped slightly from 52.6 in October to 52.1, the average reading in the fourth quarter so far is consistent with the sector’s output rising by some 7% compared to the third quarter.
  • France: Construction sector downturn deepens The downturn in France’s construction sector gathered pace in November. Activity and new orders both fell at sharper rates, while the pace of job shedding quickened. Confidence regarding the year-ahead outlook meanwhile plunged to the lowest in 2013 to date.
  • Italian construction sector set to post contraction in final quarter Italy’s construction sector looks set to remain a drag on GDP in the final quarter of the year, with businesses in the industry having recorded further reductions in total activity levels in both October and November. The latest contraction was the slowest in five months, but nevertheless still solid overall and broad based across the housing, commercial and civil engineering sectors.

German Factory Orders Decline in Sign of Uneven Recovery

Orders, adjusted for seasonal swings and inflation, slid 2.2 percent from September, when they rose a revised 3.1 percent, the Economy Ministry in Berlin said today. Economists forecast a decline of 1 percent, according to the median of 40 estimates in a Bloomberg survey. Orders advanced 1.9 percent from a year ago when adjusted for the number of working days.

Foreign orders fell 2.3 percent in October, while those from within the country dropped 2 percent, today’s report showed. Demand from the euro area declined 1.3 percent.

EURO BANKS NEED MORE WORKOUTS:

(Morgan Stanley)

Red heart Thank You All

I have not been able to personally and directly thank all of you who reacted to my help demand last Tuesday. While it was on a rather minor thing, I am relieved to see that if I ever lost my mind, my readers from across the world will surely help.

Your kind words were also nice to read. I am happy to see I can help some, me being first in line, remain focused, objective and disciplined.

I wish I had advised you to buy bitcoins early this year but you just paid me handsomely with your buddycoins!

Other harmless ways readers can contribute to this absolutely free blog is by clicking on the ads on the sidebar from time to time just to encourage my advertisers to stay with me and/or to use the Amazon search box on the sidebar to reach the Amazon web site before ordering. This will earn News-To-Use a small referral fee. All moneys received are reinvested into research material, less and less of which if free.

 

NEW$ & VIEW$ (5 DECEMBER 2013)

ISM Services Weaker Than Expected

These days, there’s nothing like a weaker than expected economic indicator to get the market going.  While the DJIA was down about 50 points before the release of the ISM Non Manufacturing report, the weaker than expected headline number spurred an 80+ point rally off the lows.  While economists were expecting the November ISM Services to come in at a level of 55.0, the actual reading came in at 53.9.  Putting the ISM Manufacturing and ISM Non Manufacturing reports together and accounting for each sector’s weight in the overall economy, the combined ISM for the month of November fell to 54.3 from last month’s reading of 55.5.

Smile  New orders remain strong, however.

Combining the Manufacturing with the Services ISM (chart from Ed Yardeni), the strength in new orders is pretty encouraging. Christmas sales better be good, otherwise we will all have an inventory overhang…

New-Home Sales Surge

New-home sales rose 25% in October from the prior month to an annual rate of 444,000, the Commerce Department said Wednesday. That marked the sharpest monthly increase in more than three decades, though it came off a particularly weak September pace.

The surge returned sales to the brisk pace seen in the first half of the year before a summer rise in mortgage rates scared off prospective buyers. Sales had tumbled to an average annual pace of 369,000 in July through September, according to revised figures released Wednesday, down from an average pace of 445,000 in the first six months of 2013.

October’s activity caused the supply of homes on the market to contract sharply. Inventory fell to a 4.9-month supply, a historically low level. The tight supply coupled with the pickup in sales could lead home builders to ramp up construction in coming months, a development that would boost the overall U.S. recovery. (…)

Pointing up The average rate on a 30-year fixed mortgage was 4.29% last week, up from the 3.35% average registered in early May, according to Freddie Mac. (…)

Raymond James adds:

Following last week’s modest 0.2% drop, applications for purchase mortgages were down 4.1%, and on a rolling two-week basis (to take account of Thanksgiving), purchase apps are down 8.7% y/y. We note the purchase index still remains only 3.1% above this year’s lows (week of October 11) due to the “sticker shock” of spring price increases, higher interest rates, and the overhang from economic/political uncertainty. Applications remain well below recently reported y/y growth in new home sales (+22% in October), although in line with existing home sales (-6% in October), led by a declining mix of first-time buyers within both segments.

BTW:

TurtleSnail Revisions to earlier home-sales reports in June, July, and August showed that sales in each of those months were lower than initially forecast. New-home sales in September, meanwhile, stood 7.8% below the level of a year earlier, the first time in nearly two years that sales turned negative on a year-over-year basis. (…) (Chart from Haver Analytics)

CalculatedRisk has the LT chart:

BTW (2): ISI’s Homebuilders’ Survey is at its lowest level since April 2012.

Emerging market growth strengthens further

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, continued its upward trajectory in November on the back of faster manufacturing growth. The EMI rose to 52.1, from 51.7 in October, signalling the fastest expansion in business activity across global emerging markets since March. That said, growth remained only moderate overall.

Manufacturing production rose at a faster rate in November, reflecting stronger momentum at Chinese goods producers, a resumption of growth in India and marked increases in Turkey and Eastern European
economies in particular. Indonesia, Russia, Brazil and South Korea weighed on manufacturing growth in the latest period. Meanwhile, growth of services activity across emerging markets was unchanged from October‟s seven-month high.

Moderate increases in activity across manufacturing and services combined were signalled in China, Russia and Brazil. Indian private sector output fell for the fifth month running, albeit at the weakest rate in this sequence.

New order growth was maintained at a moderate rate in November. Moreover, the volume of outstanding business increased at the strongest rate since March 2011. Firms raised headcounts on average for the
second month running, albeit at a weak rate. Inflationary pressures were unchanged from October, with input prices continuing to rise at a faster rate than prices charged for final goods and services.

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OPEC Maintains Crude-Production Target at Vienna Meeting

Maintaining the 30 million-barrel-a-day target for the 12-nation Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, will ensure price stability, Venezuelan Energy Minister Rafael Ramirez said yesterday. There will be no need to reduce the cap at the next meeting, Libyan Oil Minister Abdulbari al-Arusi said.

OPEC will hold its next meeting June 11, Al-Naimi said.

Libya is confident other OPEC members will make room for its oil, al-Arusi said yesterday. The country’s output will rise to 1.5 million barrels a day in 10 days from 250,000, as all production issues have been resolved, he said. Iraq won’t cut its output or discuss OPEC quotas anytime soon, Iraqi Oil Minister Abdul Kareem al-Luaibi said.

Thumbs down The Centre for Global Energy Studies in London and Citigroup Inc. in New York have forecast that Saudi Arabia and its allies Kuwait, Qatar and the U.A.E. would have to reduce production by 1 million to 2 million barrels a day in 2014 to prevent a glut and keep prices stable.

Thumbs up Al-Naimi said before the closed-door meeting that 30 million isn’t too much for OPEC to target. He also said there’s no need for Saudi Arabia to cut its own production. The kingdom is OPEC’s biggest oil exporter and produced 9.65 million barrels a day last month, according to a Bloomberg survey. In the past two years, Saudi Arabia has adjusted its own production without any change to OPEC’s formal output ceiling.

Thumbs up “Considerable supply-side risks in OPEC” mean the group will probably need to cut output only by 600,000 barrels a day next year, which is within Saudi Arabia’s capability to do alone, according to Harry Tchilinguirian and Gareth Lewis-Davies, analysts at BNP Paribas SA.

Storm cloud “In addition to continuing problems in Nigeria, the planned incremental supply from Iraq may not emerge due to civil unrest, a recovery in Libyan output in the near term is unlikely, Venezuelan political unrest is a concern and we believe the re-emergence of Iranian barrels remains some way off,” the BNP analysts said in an e-mailed report. (…)

FYI, from Doug Short:

Click to View

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NEW$ & VIEW$ (4 DECEMBER 2013)

Smile Companies Boost U.S. Payrolls by Most in a Year

The 215,000 increase in employment exceeded the most optimistic forecast in a Bloomberg survey and followed a revised 184,000 gain in October that was larger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.

Auto CAR SALES NOT AS STRONG AS HEADLINES SUGGEST

 

WSJ:  Brisk Demand Lifts Auto Sales

(…) Overall, demand remained strong with 1.25 million light vehicles sold last month, up 9% from a year ago, lifting the annualized sales pace to 16.4 million vehicles, from 15.3 million a year ago and the strongest pace since February 2007, according to Autodata Corp.(…)

Haver Analytics: U.S. Vehicle Sales Surge to Seven-Year High

The latest level of sales was the highest since February 2007.

But sales had been quite weak in both September and October at 15.2M, the former due to fewer selling days and the latter presumably due to the government shutdown. Taking a 3-month moving average, the annualized selling rate has been flat at 15.6M since June 2013, even though manufacturers’ incentives have kept rising briskly. (Chart from CalculatedRisk)


Doug Waikem, owner of several new-car dealerships in Ohio, said discounts aren’t “out of control” but car makers are pushing retailers to buy more vehicles, a practice that boosts auto maker’s revenue.

“I think we’re slipping back into old habits,” Mr. Waiken said. “I’m seeing dealers with inventories going up. The banks are being very aggressive.”

On Nov. 20, I warned about a possible build up in car inventories if sales don’t accelerate rapidly. Monthly inventories of the Detroit Three were at a high 76 days in October.

The Detroit Three each reported a roughly 90 days’ supply of cars and light trucks in inventory at the end of November. Auto makers generally prefer to keep between 60 days and 80 days of sales at dealers. Company executives said the inventory levels are acceptable for this time of year.

Well, not really acceptable to Ford:

Ford announced its initial Q1/14 production schedule, with volumes expected to decline 2% year over year, which is slightly worse versus the most recent forecast from Ward’s Automotive for Ford’s production to increase by 2% year over year in Q1/14 and compares to our estimate for overall Detroit Three production to increase 4% year over year in Q1/14. (BMO Capital)

The risk remains that car sales, having bounced thanks to the wealth effect and pent up demand, have reached their cyclical peak.

 

More inventory problems:

Inventories Threaten to Squeeze Clothing Stores

Chains including Abercrombie & Fitch Co., Chico’s FAS Inc., Gap Inc. and Victoria’s Secret came into the fourth quarter with heavy inventory loads. The concern now is the retail industry’s weak showing over Thanksgiving weekend will force them to take bigger markdowns that could hurt their fourth-quarter profits.

Simeon Siegel, an analyst with Nomura Equity Research, looked at the inventory carried by those and other specialty-apparel retailers at the end of the third quarter and compared it with his projections for the chains’ fourth quarter sales. He found that in most cases inventory growth far outpaced sales growth. Normally, the two should be growing about the same.

“The ratios are the worst we have seen in quite a while,” Mr. Siegel said.

The companies each acknowledged that their inventories were rising and said the levels were appropriate.

Yet with holiday sales getting off to a slow start, positions that seemed appropriate several weeks ago may turn out to be too high. A survey commissioned by the National Retail Federation concluded that sales over Thanksgiving weekend fell to $57.4 billion from $59.1 billion a year ago—the first drop in at least seven years.

Fewer shoppers said they had bought clothing or visited apparel stores, according to the NRF survey, which polled nearly 4,500 consumers.

Marshal Cohen, the chief industry analyst for the NPD Group, said he spotted signs throughout the weekend that stores were overstocked, including goods stacked high up on shelves and ample merchandise in storerooms. (…)

Thanksgiving sales were generally weak, as were back-to-school sales. If Christmas sales are also weak, the inventory overhang will carry into Q1’14.

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HOUSING IS ALSO WEAK:

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The 4-week average of the purchase index is now down about 8% from a year ago. (CalculatedRisk)


Ghost  Romain Hatchuel: The Coming Global Wealth Tax

(…) households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash. The White House and New York Mayor-elect Bill de Blasio aren’t the only ones calling for higher taxes (especially on the wealthy), as voices from the International Monetary Fund to billionaire investor Bill Gross increasingly make the case too. (…)

As for the IMF, its latest Fiscal Monitor report argues that taxing the wealthy offers “significant revenue potential at relatively low efficiency costs.” (…)

From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.

Could there now be a wealth tax anticipation effect that would incite the wealthiest to save right when they are about the only source of demand?

Trade Gap in U.S. Shrank in October on Record Exports

Exports climbed 1.8 percent to $192.7 billion on growing sales of food, petroleum products, drilling equipment and consumer goods, including jewelry.

Imports increased 0.4 percent to $233.3 billion in October, the most since March 2012. Gains in consumer goods such as toys and artwork, and fuel helped offset a slump in purchases of foreign automobiles.

Sales of goods to China, Canada and Mexico were the highest ever, pointing to improving global demand that will benefit American manufacturers. In addition, an expanding U.S. economy is helping boost growth abroad as purchases of products from the European Union also climbed to a record in October even as fiscal gridlock prompted a partial federal shutdown.

Hmmm…

Lightning  EUROZONE RETAIL TRADE TURNS WEAKER, AGAIN

Core sales volume cratered 0.8% in October after declining 0.1% in September. German sales volume dropped 1.0% on the past 2 months. 

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European Stocks Suffer a Setback

European stocks fell sharply across the board today.  In Germany and France, markets have been very quiet over the last few months, steadily moving higher in small clips on a daily basis.  That came to an end today with big moves lower in both countries.  Germany is still well above its 50-day moving average and its uptrend remains intact, but the same can no longer be said for France.  As shown in the second chart below, the French CAC-40 broke hard through its 50-day today, which also represented the bottom of its multi-month uptrend channel.

Along with France, the UK (FTSE 100) and Italy (FTSE MIB) also saw significant breaks below their 50-days today.  For Italy’s major index, the 50-day had acted as key support going back to August, but that’s no longer the case after the wash out we saw today.

The fall in Europe sent US stocks lower this morning, and it was the stocks with heavy exposure to Europe that got hit the hardest.  Keep an eye on this trend in the days ahead.  

BANKING

Wall Street Sweats Out Volcker Rule With 18% of Revenue in Play

(…) The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks’ investment revenue could be reduced by the rule’s limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies’ revenue.

Goldman Sachs and Morgan Stanley may be the most affected by any additional restrictions since they generate about 30 percent of their revenue from principal trading. JPMorgan generated about 12 percent of its total revenue from principal transactions in the 12 months ended Sept. 30. The figure was less than 10 percent for Bank of America, based in Charlotte, North Carolina, and New York-based Citigroup Inc.

OIL
 
Iran threatens to trigger oil price war
Tehran warns Opec it will increase output even if prices tumble

(…) Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.” (…)

Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.

Detroit’s bankruptcy: pensions beware

(…) The news is a ruling by federal bankruptcy judge Steven Rhodes that, contrary to the arguments of public workers’ unions, pensions can be cut in the restructuring. Detroit is the largest city ever to go bust, so its bankruptcy will be widely watched regardless, but its treatment of pensions and other matters could set important precedents. (…)

Cities and unions around the US have received a wake-up call: they need to address unfunded pension obligations now, or face the ugly possibility of deep cuts later. Muni bond investors also face a new reality. The rules of the game may change and, if they do, the prices of general obligation munis will too.

Here’s the WSJ’s take on this: Detroit’s Bankruptcy Breakthrough

(…) More significant for the future of America’s cities, Judge Rhodes also dismissed the union conceit that the language of Michigan’s constitution protects public pensions as “contractual obligations” that cannot be “diminished or impaired.” The express purpose of bankruptcy is to impair contracts, and Judge Rhodes emphasized that pension benefits are “not entitled to any heightened protection in bankruptcy.”

If pension benefits are immune from bankruptcy, then unions would have even less incentive than they do now to consider the economic condition of a city when they press politicians for more benefits. They could drive cities toward bankruptcy knowing that bondholders would have to absorb nearly all the burden of restructuring. Cities would also have no recourse other than to raise taxes or cut more current services, neither of which helps urban renewal. (…)

Judge Rhodes’s wise ruling is a warning to unions and their political bodyguards that Chapter 9 is not a pension safe harbor. American public finance will be better as a result.

 

NEW$ & VIEW$ (29 NOVEMBER 2013)

Storm cloud  EUROZONE RETAIL SALES REMAIN WEAK

 

Markit’s latest batch of retail PMI® data for the eurozone signalled an ongoing downturn in sales in the penultimate month of 2013.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, edged up to 48.0 in November,  from 47.7 in October. That was indicative of a moderate depletion in sales. The PMI was only just below its long-run average of 48.5, however, and greater than the trend shown over the first half of 2013 (45.7).

Eurozone retail sales continued to fall on an annual basis in November, extending the current sequence of contraction to two-and-a-half years. The rate of decline eased since October, but remained sharp.

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German retail sales increased for the seventh month running in November, the third-longest sequence of continuous expansion since data
collection began in January 2004. The rate of growth remained moderate, however, and slower than the trend pace registered since May.

Retailers in France registered a third successive monthly decline in sales in November. That said, the rate of reduction slowed further to a fractional pace.

The Italian retail sector remained mired in a steep downturn in November. Sales fell for the thirty-third month in succession Disappointed smile, the longest sequence of decline in the survey history. Moreover, the pace of contraction accelerated again in November, to the fastest since July.

Retailers continued to cut purchases of new stock and jobs in November. Adjusted for seasonal factors, purchasing activity fell for the twenty-eighth month running, the longest sequence of decline in the survey history. Moreover, the rate of contraction in the latest period was the fastest since April.

Stocks of goods held by retailers declined in November, having risen slightly in October. Retail employment meanwhile fell marginally for the third month running.

Average purchase prices paid by retailers for new stock rose sharply in November, at a rate broadly in line with the long-run survey average. Italian retailers continued to feel the effects of the recent VAT increase, although Germany posted the strongest overall rate of inflation. By product sector, food & drink registered the steepest inflation of purchase prices for the fifteenth month in a row.

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Euro-Area Inflation Holds at Less Than Half ECB Ceiling

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent.

The core inflation rate rose to 1 percent in November from 0.8 percent. Economists had forecast that it would increase to 0.9 percent.

Euro-Area Unemployment Unexpectedly Drops Amid Recovery

The jobless rate fell to 12.1 percent in the 17-nation economy from a record 12.2 percent in the prior month, the European Union’s statistics office in Luxembourg said today. Economists had forecast the jobless rate to remain at 12.2 percent, the highest since the euro’s debut, according to the median of 34 estimates in a Bloomberg survey.

The jobless rate in Spain rose to 26.7 percent in October, even after the economy resumed growth in the third quarter. Italy’s unemployment rate held at 12.5 percent last month, today’s report showed. In Germany, Europe’s largest economy, the jobless rate remained steady at 5.2 percent.

A Stumbling Core Presents ECB Fresh Worries

The recent news from the euro zone gives the European Central Bank plenty to chew over. The region’s most beleaguered economies are getting a bit better. But the core is getting worse.

The latest mini-bombshell to hit the euro-zone economy was the decision of credit agency Standard & Poor’s to strip Netherlands sovereign debt of its AAA-rating, notwithstanding that the Dutch government has been paring back its deficit, that the country’s gross debt is moderate and that it routinely runs current account surpluses in excess of 10% of GDP.

Instead, S&P focused on the fact that the Dutch economy is contracting and unemployment has been rising. Those weak fundamentals will cause the government’s deficit to get worse and national debt to swell over the coming years, according to IMF forecasts.

But the Netherlands isn’t the only core country to raise concerns. Recent German data have also shown some worrying trends–albeit not nearly to the same degree.

German jobless claims have ticked up during the past couple of months, surprising forecasters. At the same time, consumption has stumbled. Retail sales declined again in October, having fallen the previous month.

France is slipping from the doldrums to something worse. This is a problem as it’s widely seen as a bellwether for the wider euro zone: though its economy is only second in size to Germany, it isn’t quite core while it also can’t be lumped in with region’s hardest hit countries. Consumer spending is down, unemployment is high and there are precious few signs of where growth might come from.

So where does that leave the ECB?

Recent fears that the single currency region was slipping towards a deflationary spiral were alleviated a little by the latest set of inflation numbers: euro-zone consumer prices rose 0.9% on the year to November up two tenths of a percentage point from October. At the same time, the unemployment picture eased slightly, with the jobless rate declining to 12.1% in October from a record 12.2% the previous month.

But set alongside the news from the core, that’s hardly solace.

The ECB cut its key rate a quarter point at its October meeting. Rates can’t really go down much from here before going negative. Although the ECB assures us that it is prepared to take that step, there are good reasons to believe it would avoid doing so as long as possible for fear of signalling it has nothing left in its monetary armory.

And yet it needs to do something. The most recent data show that euro-zone money supply is barely growing while the pace at which credit to the private sector is contracting seems to be accelerating.

One possible step is to do another round of bank funding, but making it contingent on banks’ extending loans to households and firms, similar to the Bank of England’s Funding for Lending scheme.

The ECB won’t have failed to notice that the U.K. economy has picked up to the point where the Bank of England yesterday said it would stop making further FLS funds available for mortgage lending from January. That might work if the stumbling block in Europe is lenders’ unwillingness to extend credit. But if it’s a question of reluctant borrowers because they can’t see where income growth is going to come from to pay back from loans, the ECB is stuck.

Hollande boosted by fall in unemployment

(…) Figures from the ministry showed the number of people without work seeking iobs fell in October by 20,500, although the total stood at 3.27m, still close to a record high. (…)

Unemployment, on internationally comparable measures, still stands at just under 11 per cent of the workforce. Most economists predict it will not peak until next year. (…)

But critics have pointed out that much, if not all, of the improved figures on unemployment is due to state-sponsored, make-work schemes aimed chiefly at those under 25 years of age. Tens of thousands of jobs are being created this way.

Economic growth remains well below levels needed to generate significant numbers of private-sector jobs. (…)

Upgrade Lifts Spanish Shares

Spanish shares and bonds were lifted by an upgrade to the country’s credit outlook by Standard & Poor’s, while wider European stocks and the single currency took a pause from their recent rally.

European Banks Could Take Their Hits Early

European banks could face a torrid fourth quarter as they face up to next year’s asset review by the European Central Bank.

That’s not the banks’ only problem. They also need to comply with minimum capital requirements under Basel III regulations; and ensure they meet leverage ratio rules designed to make them less reliant on borrowed funds. In sum, European banks could need to plug a €280 billion ($380.21 billion) capital gap, according to a report by PwC. Technical adjustments could reduce the gap by around €100 billion. But banks could still have to raise €180 billion from new capital raising or restructuring, PwC reckons.

Rather than wait for the ECB, banks could try to get ahead. Already this year European banks have issued €60 billion of new equity, according to Thomson Reuters data, up from €30 billion in the whole of 2012. Banks like Barclays and Deutsche Bank have undergone sizable rights issues.

But the process is far from complete. One implication is that banks could use upcoming fourth-quarter results to clear the decks, so that their balance sheets anticipate as far as possible the rules they expect the ECB to apply in its asset quality review. The European Banking Authority last month issued standards for defining nonperforming loans, aimed at stemming divergent practices across the euro zone. Banks could apply them as soon as the current quarter, according to senior executive at a major European bank—with the aim of getting their balance sheets in shape before the ECB’s inspectors come to town.

That could make the coming earnings season something of a bloodbath. Already, reserves against bad loans look short in some countries. Italian banks’ reserves covered only 41% of their bad loans at the end of September, according to Morgan Stanley.  If they were to raise that ratio to 65%, say, Italian banks would need an extra €11.3 billion of capital to meet a minimum core tier one equity ratio of 8%.

Banks in other countries have made progress earlier. Spain’s central bank this year forced its banks to clean up their mortgage lending books. That’s one reason why Spanish banks on average trade at close to their tangible book value, compared with Italian banks that trade at around 0.6 times tangible book, according to Berenberg Bank: Investors simply trust Spanish banks’ accounts more right now.

Bridging the credibility gap is becoming a matter of urgency for Europe’s banks.

Mind the WTI-Brent spread!

The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.

As JBC Energy wrote on Thursday:

January crude futures moved in opposite directions with ICE Brent posting a moderate gain of 43 cents per barrel to settle at $111.31 even as Nymex WTI took a heavy hit, settling at $92.30 per barrel, down $1.38 on the day. Brent prices found further support in ongoing chaos in Libya. Plenty of excitement also came on yesterday’s release of both weekly and monthly EIA data. US crude production for the week ending 22 November surpassed the 8 million b/d level for the first time since 1989 and crude stocks appear to be zeroing in on the record levels seen in May, despite higher utilisation. This is all the more remarkable considering that this is the time of the year when stocks tend to remain flat before heading south due to less maintenance and tax considerations. It is therefore hardly surprising that the market reacted to this strong counter-seasonal trend by widening the WTI/Brent discount by another $1.80 to $19.01 per barrel.

Lacking a legal way to export crude, Saudi America was supposed to find a way to export shale surpluses by way of product markets. Turns out, however, there’s only so much the US system can export in this way. Not because it doesn’t want to, but rather because there’s a fresh bottleneck impeding such exports.

Most product exports come out of Padd III, the Gulf coast, but the area has a finite capacity. Currently, refiners and product sellers can’t load the product quickly enough onto ships to take advantage of the spread that can be captured. This means Padd III stocks are rising, turning the Gulf Coast into something like the new Cushing. This is particularly apparent during the non-US driving season, when refiners are forced to rely more on export markets.

Here’s a chart illustrating the phenomenon from Stephen Schork last week:

Product cracks are arguably the best clue we have to how quickly these bottlenecks are being overcome. So, whilst they are currently weak, if the US really was having the sort of export binge that could correct the WTI-Brent spread, they’d probably be much, much weaker.

If and when product spreads begin to collapse, one can consequently expect the WTI-Brent spread to turn begin diminishing.

For now, a chart courtesy of the EIA, in which the new ballooning Padd III post-shale product hoarding trend can be clearly observed:

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Sober Look adds:

These changing dynamics in the US energy markets are having two major effects:

1. US refineries are loving this. The government is holding down domestic crude prices by limiting exports, while allowing refiners to sell as much gasoline abroad as they want. Refined products abroad are generally priced based on Brent, allowing the refineries to capture the spread. In effect the US government is subsidizing the refining business at the expense of crude oil producers. And here is how the stock market is reacting to these recent price changes.

(TSO = Tesoro Corporation, a major refiner; XLE = diversified energy index ETF)

2. This is putting pressure on nations who traditionally sell crude to the US. While in the past they were able to sell their crude close to international prices, they now get paid much less due to Louisiana Light Sweet becoming significantly cheaper than Brent.

FT: – Imports to the Gulf Coast tend to be priced off local benchmarks including LLS and the Argus sour crude index, a basket of four heavier Gulf Coast crudes. With Gulf Coast prices falling, exporters such as Saudi Arabia and Venezuela are receiving less revenue for their sales into the US.
The discounts of US crude show no sign of ebbing with oil inventories continuing to rise as production grows, and many refineries remaining closed for maintenance.

Needless to say, these nations are not happy with the US as they now have to find alternate buyers in order to get the full price for their product. And many in the US are quite happy with this outcome.
When Louisiana crude was trading at a premium to Brent, analysts thought that by improving the transport system from Oklahoma to the Gulf will eliminate the Brent-WTI spread. Instead it simply shifted the discount further “downstream”. And with that came other unintended consequences that often result from uneven regulation.

 

NEW$ & VIEW$ (25 NOVEMBER 2013)

Iran nuclear deal pushes oil prices lower Geopolitical tensions expected to ease and supply rise

Brent crude fell $2.29 to $108.76 a barrel and US-traded WTI was down $1.44 to $93.40 in response to the agreement between Iran and six world powers reached at the weekend to curb Tehran’s nuclear programme in return for the easing of sanctions.

However, some analysts warned that Iranian exports are unlikely to jump in the short term because key limitations on sales – including a ban on exports to the EU – will remain in place until a comprehensive deal is reached.

US-led sanctions have reduced Iranian exports from almost 2.5m barrels a day to just 1mb/d over recent years, squeezing crude supplies, while the prospect of an Israeli or US strike on Iran’s nuclear facilities has added a further risk premium to the market. (…)

Within the oil market the focus is growing on a sentence in a copy of the interim agreement posted on an Iranian news website, which says western powers will suspend sanctions on insurance and transportation services.

Fereidun Fesharaki, head of the FACTS Global Energy consultancy, said a relaxation of shipping and insurance sanctions could lead to an increase of between 200,000 and 400,000 b/d in Iranian export immediately. (…)

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Continued Signs of Healing in Labor Market

The job market isn’t healing quickly. But it is healing.

(…) Employers are still hiring close to a million fewer people every month than before the recession, and the pace of hiring has edged up only slowly in recent years. Millions of Americans are still looking for jobs, and millions more have given up looking. (…)

But there are signs that both workers and companies are becoming more confident about the state of the economy. The 3.9 million jobs posted in September is the most since the recession ended nearly four and a half years ago. Perhaps even more significantly, 2.3 million people quit their jobs voluntarily in September, 18.5% more than a year ago. Janet Yellen, President Barack Obama’s nominee to lead the Federal Reserve, has highlighted the rate of voluntary exits as a key measure of confidence — one that until recently had been lagging other measures of economic health.

Things are also looking up for the nation’s 11.3 million job seekers. There were 2.9 unemployed workers for every job opening in September, the best mark of the recovery and the second month in a row where the ratio fell under three to one; in the worst of the jobs crisis, there were nearly seven job seekers for every opening.

HOUSING WATCH

 

Weak October Sales Have Home Builders Fretting About Spring

A monthly survey of builders across the U.S. by John Burns Real Estate Consulting, a housing research and advisory firm, has found that respondents’ sales of new homes declined by 8% in October from the September level and by 6% from a year earlier.

Last month’s result marked the second consecutive month in which the survey yielded a year-over-year decline in sales volumes, the first dips since early 2011.

In addition, the percentage of builders disclosing that they raised prices continued to decline, registering 28% in October in comparison to 32% in September and 64% in July. Of respondents, 12% lowered prices in October, in comparison to 12% in September and none in July. (…)

The Burns survey found that sales volumes increased by 31% in the Northwestern U.S. in October from September. Other regions that notched gains included the Southeast, up 13%; Northern California, up 11%; and the Midwest, up 1%. Decliners included Texas, down 21%; the Southwest, down 16%; Florida, down 15%; the Northeast, down 12%; and Southern California, down 8%.

Hottest Housing Markets Hit Headwinds

Some of the nation’s hottest housing markets over the past year are cooling off as buyers balk at paying higher prices while faced with rising mortgage rates, according to a Wall Street Journal survey of market conditions.

In a number of cities across California, Arizona and Nevada—where price gains have been especially strong in the past year—sales are slowing and supply is rising.

Real-estate agents and economists attribute the current slowdown to rising prices and a jump in mortgage rates, which have made homes less affordable for prospective buyers and a less compelling deal for the investors that have played significant roles buying up cheap foreclosures and other distressed homes over the past two years.

For the 12-month period ending in September, values have climbed by more than 33% in Las Vegas and Sacramento, Calif., and by more than 20% in San Francisco, Phoenix, San Diego, and Orange County, Calif., according to Zillow Inc., the real-estate website.

But lately, those gains have moderated. For the July-to-September quarter, home values in Orange County rose just 1%; in San Diego, 2%; and in San Francisco, 3%. Those were the smallest increases in those markets since prices began to rise in early 2012.

(…) In Southern California, Mr. Wheaton said, “we’re seeing more price reductions than we are price increases.” (…)

Inventories are falling in Texas, the Midwest and the Northeast. Compared with a year ago, listings were down in around half of all markets, with big declines in Denver, where inventories were 26% below year-earlier levels, and Manhattan, where inventories fell by 22%.

Listings were down by 19% in Houston; 18% in Dallas; 14% in New York’s Long Island; and 13% in the northern New Jersey suburbs.

Broadly speaking, however, of the 28 major metro areas tracked in the latest Journal survey, nearly half saw inventories rise on an annual basis in September. That represents the highest share of markets showing a rise in supply in nearly three years, with notable increases in San Francisco, Phoenix, Las Vegas, Atlanta and Sacramento. (…)

As demonstrated in my June 2013 post U.S. Housing A House Of Cards?, real estate is a local business. National stats have little meaning for the actual supply demand equation in Houston, in Sacramento or Boca Raton.

France: The people see red

The scarlet hat has become the symbol of protest against François Hollande’s tax rises

In 1675 a popular revolt exploded in Brittany, the rugged north western region of France that juts into the Atlantic Ocean. It was against taxes imposed by Louis XIV, the Sun King, to finance war against the Dutch. The red-capped protesters were known as Les Bonnets Rouges. Nearly 440 years after the uprising was bloodily suppressed, people in Brittany have donned theirbonnets rouges once more. This time they are fighting a wave of taxes imposed not by a king, but by President François Hollande and his socialist government.

“It is another guerre de Hollande,” exclaims Thierry Merret, a bluff Breton vegetable grower, farming union chief and a leader of the new bonnets rouges.

Their challenge has added to a tide of discontent engulfing Mr Hollande. An Ifop poll this month showed his approval rating slumping to 20 per cent, a low no previous president has plumbed in the poll’s 55-year history.

The bonnet rouge has become a symbol of protest not just against taxes, but also the perceived inability of Mr Hollande to deal with a stuttering economy that has seen unemployment climb to nearly 11 per cent of the workforce. (…)

“The situation is unprecedented,” says Laurent Bouvet, professor of politics at Versailles-Saint-Quentin university. “A year and a half after the election, the left is in a potentially catastrophic situation. There is no capacity for movement on the economy or other questions.”

It is not just the business community that is expressing frustration. The bonnets rouges have brought together farmers, fishermen, traders, shopkeepers and workers.

Note Red: the blood of angry men!
     Black: the dark of ages past!
    Red: a world about to dawn!
                Black: the night that ends at last! Note
 
THERE’S ALSO ITALY:

In September, the seasonally adjusted retail trade index decreased by 0.3 per cent compared with August, with food goods falling 0.2 per cent and non-food goods 0.3 per cent. Year on year, retail sales were down an unadjusted 2.8 per cent. The monthly decline was the steepest for eight months, and on an annual basis it was also the biggest in three months.

In the third quarter, retail sales fell 1.2 per cent compared with the same period last year. The data are not adjusted for consumer price inflation, which stood at 0.9 per cent in September, based on the main index, suggesting that retail sales posted a much worse annual contraction in inflation-adjusted terms.

SENTIMENT WATCH

 

S&P Climbs Past 1800

The run to records continued Friday for stocks, with the S&P 500 closing above 1800 for the first time.

S&P Closes Above 1800, Posts 7th Consecutive Weekly Increase: Longest Streak Since 2007

The S&P 500 has now managed the longest weekly winning streak (7 weeks) since May 2007 (when it managed a 9% gain). Off the recent lows, the current run is an impressive 9.6% (for the S&P) (…).

Embarrassed smile Hugh Hendry Capitulates: “Can’t Look At Himself In The Mirror” As He Throws In The Towel, Turns Bullish

First David Rosenberg, then Jeremy Grantham, and now Hugh Hendry: one after another the bears are throwing in the towel. (…)

“I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out,” Hendry said.

“I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.”

“I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.”

(…) Finally, Hendry’s “come to Bernanke” moment does not come easily:

The manager acknowledged his changing stance may be viewed by some investors as a ‘top of the market’ signal, but said he is not concerned by the prospect of a crash.

“I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell’. The S&P 500 is up 30% over the past year: I wish I had thought this last year.”

Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending.”

BUBBLE WATCH

The Four Horsemen of the Apocalypse are Pulling in the Same Direction. They are a Harbinger for More Stock Market Returns (Hubert Marleau, Palos Management)

Barring financial crises, stock market bull runs need the continuous blessing of four macro drivers. These are: Positive Economic Growth, Sustainable Price Stability, Reasonable Valuation and Accommodative Monetary Policy.

While I recognize that the US stock market is up 150% since the lows of March 2009 without any serious corrections, stock prices could go up more for investors are still selectively and mildly exuberant. A rotation towards equity has just started and it could last for several years.

Since the first quarter of 2009, investors have de-risked their portfolios by adding $1.3 trillion in bonds and selling $255 billion worth of equities. Lately, investors are now allocating somewhere around 20% of their new monies to the stock market. Before the financial crisis as much as 30% to 40% of investors’ capital found its way into stocks. Household balance sheets are much healthier, banks are profitable and settling their wrongdoings, and corporations are loaded with cash. In this context, even if the economy may not be doing as well as one would like a financial crisis is not looming.

Moreover, the four horsemen that choose the direction of the stock market are still bullish.

1) Positive Economic Growth: The level of economic output in the US has been steadily growing without any interruptions for 51 months since it bottomed during the second quarter of 2009. During the period under review, the US economy grew at the annual rate of change of 2.0%. In the past six months, the pace of the economy has accelerated to 2.7%.

2) Price Stability: A steady annual rate of increase in the general price levels between 1% and 3% is considered by the Fed and most seasoned market observers as price stability. Since the third quarter of 2009, the GDP Chain Price Index increased at the annual rate of 1.4%. For the period under review, the lowest quarterly annual rate was 0.6% in the second quarter of 2013 and the highest was 2.6% in the second quarter of 2011. During the third quarter of 2013, GDP Deflator printed a year over year increase of 1.3%. Based on recent developments in commodity prices, wages and output per hour, there is reason to believe that price inflation is going to remain stable for a prolonged period of time. Moreover, the gap between actual and potential output is sufficiently wide to prevent any upward cost pressure.

3) Accommodative Monetary Policy: The rate on Federal Funds has been near zero throughout the period under review. The Zero Rate Policy had three beneficial effects. It kept the level of real interest rate negative, the yield curve positive and the cost of capital below the return on capital. The latter is often called the “Wicksellian Differential”.

While we expect the Fed to start paring down the $85 billion-a-month bond purchase program in the coming months, the monetary authorities will continue to hold short term rates near zero until a higher participation rate and/or a lower unemployment rate firmly takes hold. The Palos Monetary policy index currently stands at 60 indicating that the interest rate stance of the Fed is not about to change. In this connection, the beneficial effect of ZIRP (zero interest rate policy) on real rates, yield curve and the Wicksellian spread is maintainable.

4) Reasonable Equity Valuation: The stock market is not necessarily cheap, but it’s not stretched by historical standards. Currently, the median 12-month forward price-to-earnings ratio of 16.0 times is consistent with other periods of earnings growth. Moreover, the spread between corporate bond yields and stock dividend yields at 250 bps are as narrow as they were in the 1950’s. One should also bear in mind that the EPS of the S&P-500 increased 125% from the first quarter of 2009 to the third quarter of 2013 closely matching stock market returns. Year over year, the same EPS is up 9.3% and forecast to increase another 5.1% in 2014.

In conclusion, what is not to like? In tandem, the major drivers are pulling the stock market up. It is not that stock prices will surge ahead over the next few years in a perpetual upward motion. However, stock market returns should continue to beat bond market returns.

Hubert is a good friend of mine, an excellent economist and a good strategist. I am not sure how investors can be “selectively and mildly exuberant” but I know Hubert can’t be only mildly exuberant.

The first chart below plots the S&P 500 Index PE on forward EPS, currently at 15.4x, 28% above its 60-year median of 12x and at the mid-point of the 1 standard deviation channel (10-20x).

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One can make a case for decent valuations here, even more so if the 60-year average of 15x is used instead of the median. Do it at your own risk, however, if you chose to ignore the statistical impact of recent bubble years. As to Hubert’s assertion that “the median 12-month forward price-to-earnings ratio of 16.0 times is consistent with other periods of earnings growth”, it does not verify in the 1991-92 period (profits troughed in mid-1992).

During the 1955-1972 period of prolonged high P/E multiples, earnings remained flat until 1962 before rising steadily through 1966. Inflation was quite volatile between 1955 and 1960, fluctuated narrowly within 1-2% up to 1966, then skyrocketed from 2% to 6.5% by 1970 before coming back to the 3% range by 1972.

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The 1961 to 1966 period most closely resembles the current environment of expected sustained low inflation. Earnings rose strongly and steadily until inflation peaked in late 1966. Equities dropped sharply in 1962 (Bay of Pigs crisis) but skyrocketed during the next 4 years. Throughout that period, forward P/Es fluctuated between 15x and 17x, partly validating Hubert’s comments.

Nevertheless, with forward P/Es, one must deal with the pitfalls associated with earnings forecasts. But even with trailing earnings, absolute valuations never looked really compelling during the 1960s except in late 1966 and in mid-1970 when trailing P/Es reverted back to their 60-year median value of 13.7. Waiting for even median valuation would have meant missing the near doubling in equities between October 1960 and December 1965.

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So Hubert has a point. But I have a better and stronger one. The Rule of 20 worked really well during the 1960’s while using actual trailing earnings and constantly taking account of inflation fluctuations.

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Using the Rule of 20, investors would have sold before the 1962 decline of 24%, bought back aggressively late in 1962, remained reasonably invested as the market rose 67% to December 1965 while flirting with “fair value” (20), suffered the 16% setback of 1966 if they were not mindful of rising inflation, bought aggressively again in the fall of 1966 to enjoy a 30% gain until getting entirely out of equities in mid-1968 just before the ending of the Nifty-fifty stocks era.

Freezing  Some Stock Bulls Tread Lightly

Stock-market strategists, typically a bullish bunch, are taking a cautious approach to the S&P 500.

(…) Forecasts center on gains in the mid-to-high single-digit percentages for the S&P 500 in 2014.

In large part this caution reflects expectations that investor enthusiasm for stocks will be restrained in an environment in which structural challenges continue to hold back the U.S. economy. The result, many strategists said, is that stocks are unlikely to see a continued rise in valuations against earnings growth as they did in 2013.

In addition, bullishness is being muted by a belief that the Fed will in coming months start to pare back the easy-money policies that many said have played a key role in driving stock prices higher this year.

But some strategists said it also reflects a conscious effort to present a tempered outlook.

 

NEW$ & VIEW$ (22 NOVEMBER 2013)

Philly Fed Weaker Than Expected

(…)  the Philly Fed Manufacturing report for November came in at a level of 6.5, which was down from last month’s reading of 19.8 and weaker than consensus expectations for a level of 11.9.  (…) every component declined in this month’s report. 

New orders remained high enough……but unfilled orders turned negative……and inventories jumped……and the workweek collapsed…

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through November. The ISM and total Fed surveys are through October. (CalculatedRisk)

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To conclude, Confused smile.

Brent Hits One-Month High; Iran in Focus

Brent crude for January delivery was up 28 cents at $110.37 a barrel on ICE Futures Europe. U.S. crude-oil futures were down 32 cents at $95.12 a barrel on the New York Mercantile Exchange.

Iran remained a major focus of attention. Negotiations continue Friday between the Islamic republic and six states that have the power to revoke sanctions on it related to its enrichment of uranium.

If Iran’s crude flows back into the market next year there could be negative price repercussions for the benchmark, Brent. But JBC Energy Markets noted that not every country stopped importing Iranian crude over the past 18 months.

China was among those who continued but it imported in much less last month.

“Chinese imports of Iranian crude were cut quite drastically in October – falling by 47% month-on-month,” they wrote in a note to clients.

The import reduction could be seen as a move to secure more favorable terms for next year’s prices, “something we have seen in previous years,” said JBC. (…)

Target Shoppers Put Less in Their Carts

The retailer said shoppers put fewer items in their shopping cart for the first time in at least six quarters.

(…) Target expects sales at stores open at least a year to be flat for the current quarter. This comes after it said it lost customers for the fourth straight quarter, ringing up 1.3% fewer transactions in its latest quarter. Shoppers spent more per transaction as they selected higher priced items like electronics, but they put fewer items in their shopping cart for the first time in four years, a sign that they are financially constrained.

Some Target customers say they are reluctant to visit for fear they will be tempted to spend too much, according to Kathee Tesija, executive vice president of merchandising, a phenomenon that Target first saw pop up during the recent recession.

Wal-Mart earlier this month cut its full-year profit forecast for a second time this year, predicting flat sales. Best Buy said this week its margins in the fourth quarter would take a hit because it will match discounts.

U.S. Wholesale Prices Fall 0.2%

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September.

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September, the Labor Department said Thursday. That was largely due to falling energy costs. Core prices, which exclude the volatile food and energy components, rose 0.2%, in line with the soft readings in recent months.

ECB’s Praet warns of deflationary pressures in euro zone

(…) Praet, who sits on the ECB’s six-strong Executive Board, said the financial crisis had saddled the euro zone with a debt burden unique in Europe’s post-war history because it has created a more deflationary environment.

“This is a very different context for the correction of expectations (about income), which is more of a debt overhang,” he told a conference at the Bank of France.

“It has more signs of a balance-sheet recession, which is a priori more of a deflationary environment than what we had in the 1960s,” added Praet, who is in charge of the ECB’s economics portfolio. (…)

 German Business Confidence Increases as Recovery on Track

German business confidence surged to the highest level in more than 1 1/2 years, signaling that the recovery in Europe’s largest economy remains on track even after growth slowed in the third quarter.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.3 in November from 107.4 in October. That’s the highest since April last year and exceeds all 43 economist forecasts in a Bloomberg News survey. The median was for an increase to 107.7.

Business hopes up for global economy
FT/Economist barometer shows increased optimism among executives

Global business leaders are increasingly optimistic that economic conditions will improve over the coming months, according to the FT/Economist Global Business Barometer.

In the latest results, 41 per cent of the executives surveyed said they thought the global economy would get “better” or “much better” over the next six months, with 45 per cent saying they expected it to remain the same.

This is a big jump from three months earlier, when only 27 per cent expected the global economy to improve, and 48 per cent expected it to say the same.

However, the results should be read with a degree of caution, as this quarterly edition of the survey gave the respondents additional positive options (“much better” and “better”) rather than simply the “better” of previous surveys.

Out of more than 1,800 business people polled, 53 per cent said their companies were looking to expand significantly in two to five countries over the next six months. (…)

TIME TO BE SENTIMENTAL?

Yesterday, I posted on Barclays’ analysis

that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

Well, the highly volatile AAII survey now shows 29.5% bearishness while bullish sentiment declined sharply. Go figure!

 

NEW$ & VIEW$ (13 NOVEMBER 2013)

Slow day on the news front. Good timing since this is moving day for us.

The Christmas gift?

Consumers Get Relief at the Gas Pump

U.S. gasoline prices have fallen to their lowest level in nearly 33 months amid a boom in domestic oil drilling, leaving consumers with extra disposable income just in time for the holiday shopping season.

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Maersk Reports Profit, Warns on Demand

(…) But the world’s biggest container shipper warned of a tough fourth quarter, saying slack global economic growth would contribute to a drop in container-freight rates even though there are some early indications of demand picking up. Maersk Line’s vessels make up about 15% of global container-shipping capacity.

Bank Indonesia Surprises on Rates to Boost Rupiah Appeal

Indonesia raised interest rates to the highest level since 2009 to sustain overseas demand for its currency even as it risks hurting growth in Southeast Asia’s biggest economy.

Bank Indonesia raised the reference rate by 25 basis points to 7.5 percent, it said in Jakarta yesterday, surprising the 24 of 25 economists surveyed by Bloomberg News who predicted no change. The rate move was aimed at easing the current-account gap and meeting the inflation (IDCPIY) target, the central bank said. Bank Indonesia said it will continue to safeguard the stability of the currency.