NEW$ & VIEW$ (30 JANUARY 2014)

BLAME THE FED GAME

Investors Seek Safer Options as Ground Shifts

Just one month into 2014, investors from Illinois to Istanbul are finding the tide going out fast for stocks and other riskier investments.


(…) After years of unprecedented monetary stimulus propping up the world’s financial markets, investors are now confronting the reality of an end to the Federal Reserve’s bond-buying program, which, as expected, the central bank reduced by another $10 billion on Wednesday. (…)

Less Room to Maneuver

Some even argue that the long-simmering troubles in emerging markets will draw global investors to U.S. stocks.

But the landscape seems to have shifted from one where unprecedented central-bank stimulus enabled markets to steamroll past issues that might have otherwise spooked investors. (…)

No Respite for Emerging Markets

The pullback from emerging-market currencies showed no signs of a pause, with the Hungarian forint and Russian ruble bearing the brunt of selling pressure.

Meanwhile: Fed Sticks to Script

The Federal Reserve—unfazed by recent selloffs in emerging markets or disappointing U.S. job gains in December—said it would scale back its bond-buying program for the second time in six weeks, pressing ahead with a strategy to wind down the purchases in small and steady steps.

The Fed said it would cut its purchases of Treasury bonds and mortgage-backed securities to $65 billion a month, from $75 billion, and officials suggested they would continue reducing the purchases in $10 billion increments in the months ahead. The first cut, from $85 billion, was announced in December and made in January. (…)

Though they have been watching developments in emerging markets closely, Fed officials made no mention of these trends in the statement released Wednesday after their two-day policy meeting.

U.S. economic growth “picked up” in recent months and was expected to continue at a “moderate pace,” the Fed said. Though job-market indicators were mixed, “on balance” the labor market “showed further improvement,” the Fed said. (…)

“MIND YOUR OWN BIZ”: Citigroup summarizing the Fed statement:

From the viewpoint of domestic US economic conditions the Statement is completely anodyne. From the point of view of EM, the Fed has just said “hasta la vista, baby

FED UP?

Confused smile Confused? Here’s a great read that puts things into their proper perspective: Emerging Markets – Emerging Crisis or Media Hysteria?

Here’s the conclusion but the whole post is well worth reading:

Currently the financial press is working investors into a hysteria surrounding building stress in emerging markets. Stress in emerging markets is nothing new and pops up in specific countries on a yearly basis; however, there is always a risk that country-specific stress can spill over into a global contagion similar to what occurred in 1997-1998. The best way to determine when the risk spills over into something more dangerous is to monitor CDS readings globally as well as the price action in gold. If CDS readings remain muted then we are dealing with country-specific flare ups, but if they spike to levels higher than what has occurred over the last few years and gold surges we need to become more defensive.

With all that said, there is a bright side to the weakness in emerging markets and commodities for developed markets: a disinflationary stimulus similar to what occurred in the late 1990s and, more recently, since 2011…with the caveat that contagion does not result.

Dr. Ed explains the disinflationary stimulus:

The Fed, the Dollar, and Deflation

The woes of emerging economies could temper the Fed’s tapering in coming months by strengthening the dollar, which could push US inflation closer to zero. The JP Morgan Trade-Weighted Dollar Index has been trending higher since mid-2011. A strong dollar tends to depress inflation.

Indeed, the US import price index excluding petroleum has been falling over the past 10 months on a y/y basis through December, when it was down 1.3%. A stronger dollar would be bad news for commodity producers, especially in the emerging economies. When the dollar is rising, commodity prices tend to fall. Weak commodity prices have depressed the currencies of commodity-producers Canada and Australia over the past year.

The latest FOMC statement noted that near-zero inflation could be a problem for the US economy: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

The emerging markets crisis, strength in the dollar, and weakness in commodity prices could frustrate the Fed’s expectations that inflation will rise back closer to 2%.

WHAT NOW?

The S&P 500 hast retreated 4% and is now right on its 100 day m.a. from which it has bounced back three times since June 2013 and which is still rising. If that fails to hold, the next major support is the 200 day m.a. at 1705, another 4% decline.

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The Rule of 20 P/E is back into undervalue territory but, at 18.2, is not screaming “buy”. At the 200 day m.a., it would be 17.6, right in the middle of the range between “deep undervalue (15) and fair value (20). This is all about shifting sentiment. Let’s wait for the earnings season to end in a couple of weeks. We also might have a better view of a possible soft patch.

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HOUSING WATCH: BEAZER HOMES FEELS THE HOUSING SLOWDOWN IN ITS LAST QUARTER

Total home closings were flat at 1,038 closings, with the average sales price from closings up 19%. New orders dropped 4%.

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The 4-week average of the purchase index is now down about 12% from a year ago. (CalculatedRisk)

Spain’s Economy Picks Up Pace

In its preliminary GDP estimate for the quarter, statistics institute INE said Thursday that Spain’s GDP rose 0.3% in the fourth quarter from the third. This is in line with a previous estimate by the country’s central bank, and statements made by Finance Minister Luis de Guindos.

GDP was down 0.1% in the fourth quarter from the same period of 2012, INE said, with a better contribution from internal demand offset by a smaller contribution from the export sector.

For the whole of 2013, the Spanish economy—the euro zone’s fourth-largest—contracted 1.2%, INE added.

The fourth-quarter reading compares with 0.1% growth in the third quarter from the second, and a 1.1% contraction in the third quarter from the same quarter of 2012.

THE (MIDDLE) CLASS OF 2001 VS THE (NOT SO MIDDLE) CLASS OF 2011

From BloombergBriefs: The latest tax data from the IRS (2011) illustrates the fairly grim reality the American middle class faces.image

And this telling, and warning, chart:

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TRY NOT TO LAUGH!

 

Winking smile  President Obama: If You Like Your Retirement Plan, You Can Keep It Fingers crossed

 
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NEW$ & VIEW$ (27 JANUARY 2014)

Emerging markets turmoil intensifies
Turkish central bank calls emergency meeting to tackle falling lira

The emerging markets sell-off intensified on Monday with stocks heading for their worst day in almost six months even before Latin American bourses opened, and currencies weakened further until the Turkish central bank prompted speculation it might raise rates by calling an emergency meeting. (…)

The FTSE Emerging Markets index was 1.4 per cent down in early afternoon London trading on Monday – and is more than 6.2 per cent weaker for the year. Hong Kong’s stock market fell 2.1 per cent, Taiwan’s tumbled 1.6 per cent and Indonesia’s dropped 2.6 per cent. (…)

U.S. Markets Tumble as Fear Spreads

U.S. stocks tumbled Friday to their biggest loss in more than seven months, extending a global selloff that investors fear signals turmoil to come as financial markets adjust to a pullback in central-bank stimulus.

The Dow Jones Industrial Average fell 318.24 points, or 2%, to 15879.11. The Stoxx Europe 600 lost 2.39%, and Germany’s DAX, down 2.48%, had its sharpest fall in months. The Nikkei also fell 1.94%.

While those drops were dramatic, much of the pain of investors’ readjustment is landing on developing economies, from Brazil and India to Thailand and South Africa. (…)

Friday’s swoon was notable for its breadth—nearly all major equity markets were in the red. In foreign-exchange markets, the selloff began with currencies such as the South African rand and Turkish lira that have been viewed as vulnerable because of sluggish domestic growth. But it soon spread to currencies of countries with relatively solid fundamentals, such as Mexico’s peso and South Korea’s won. Currencies also slid in Eastern Europe. (…)

WHAT NOW?

When equity markets foray into not-so-cheap territory, investors get nervous and edgy, ready to jump ship at the first alarm bell, justified or not. Even more so if the Fed is off the gas pedal. Argentina, South Africa and Turkey cannot wag the U.S. economic dog, but they can wag its financial dog for a while. Here’s Ben Hunt’s take on this latest EM rout:

For 20+ years there has been a coherent growth story around Emerging Markets, where the label “Emerging Market” had real meaning within a common knowledge perspective. Today .. not so much. Today the story is that it was easy money from the Fed that drove global growth, EM or otherwise. Today the story is that Emerging Markets are just the levered beneficiaries or victims of Fed monetary policy, no different than anyone else.

In my note, (It Was Barzini All Along), I’m not asking whether the growth rate in this EM country or that EM country will meet expectations, or whether the currency in this EM country or that EM country will come under more or less pressure. I’m asking if the WHY of EM growth and currency valuation has changed. The WHY is the dominant Narrative of a market, the set of tectonic plates on which investment terra firma rests. When any WHY is questioned and challenged – as it certainly is in the case of EM markets today – you get a tremor. But if the WHY changes you get an earthquake.

What are the investments that such an earthquake would challenge? You don’t want to be short the yen if this earthquake hits. You don’t want to be long growth or anything that’s geared to global growth, like energy or commodities. You don’t want to be overweight equities and underweight bonds. You don’t want to be overweight Europe. There .. did I cover one of your favorite investment themes? Bet I did. You can run from EM’s with US equities, but with S&P 500 earnings driven by non-US revenues you cannot hide. If you think that your dividend-paying large-cap US equities are immune to what happens in China and Brazil and Turkey .. well, good luck with that. My point is not to sell everything and run for the hills. My point is that your risk antennae should be quivering, too.

The U.S. “investment terra firma”, for now, is in Q4 earnings:

EARNINGS WATCH

Factset gives us a good rundown after the first quarter:

Overall, 123 companies have reported earnings to date for the third quarter. Of these 123 companies, 68% have reported actual EPS above the mean EPS estimate and 32% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (71%) average and the 4-year (73%) average.

Note that S&P’s tally shows 66% beats and 24% misses.

In aggregate, companies are reporting earnings that are 2.7% above expectations. This surprise percentage is below the 1-year (3.3%) average and the 4-year (5.8%) average. Companies in the Information Technology (+6.6%) are reporting the largest upside aggregate differences between actual earnings and estimated earnings. On the other hand, companies in the Industrials (+0.7%) sector are reporting the smallest upside aggregate differences between actual earnings and estimated earnings.

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In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the average percentage recorded over the last four quarters (54%) and above the average percentage recorded over the previous four years (59%).

In aggregate, companies are reporting sales that are 0.7% above expectations. This percentage is above the 1-year (0.4%) average and above the 4-year (0.6%) average.

The blended earnings growth rate for Q4 2013 of 6.4% is slightly above the estimate of 6.3% at the end of the quarter (December 31). Four of the  sectors have recorded an increase in earnings growth during this time frame, led by the Information Technology (to 5.9% from 3.3%) sector. Five of the ten sectors have seen a decline in earnings growth since the end of the quarter, led by the Energy (to -10.9% from -8.0%) and Consumer Discretionary (to 3.7% from 6.2%) sectors.

The Financials sector has the highest earnings growth rate (23.5%) of all ten sectors. It is also the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 3.1%.

Other than Energy and Consumer Discretionary, the earnings season is going pretty smooth so far.

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In fact, earnings estimates for Q4’13 have been rising in recent weeks from their low point of $28.14 on Jan. 9 to their current $28.77, a not insignificant 2.2% creep up. As a result, trailing 12 months EPS would reach $107.82 after Q4.

But there is this new variable:

Multinationals Start Warning on Q1 Currency Impacts

As currencies in emerging markets tumbled this week, Procter & Gamble Co. and Stanley Black & Decker Inc. warned investors Friday their earnings could take a hit. (…)

Procter & Gamble’s cautioned investors that foreign-exchange swings in the fourth quarter shaved 11 cents a share off earnings, which came in at $1.18 a share. And there’s not much, the company can do to offset the damage, said Jon Moeller, chief financial officer, according to a transcript of a conference call provided by FactSet.

(…) And though the company is still looking for ways to hedge financially, much of its currency woes stem from countries like Egypt, Venezuela, Argentina and Ukraine, “where there really isn’t a financial hedging option.” And even in countries where hedging is possible, “the cost of forward hedging gets pretty prohibitive.” (…)

Stanley Black & Decker CFO Donald Allan said currencies, including the Canadian dollar, Brazilian real and Argentine peso, dragged down earnings and would continue to do so this year. While the euro showed strength over the course of 2013, he said the Canadian dollar fell 11% against the dollar last year, the real lost 15% and the peso plunged 40%.

“We saw about $60 million of negative currency effects in 2013, primarily in the back half of the year,” Mr. Allen said on a conference call. “We would expect a very similar number to occur in the first half of the 2014, which would equate to about a 30-cent negative to in [earnings per share].”

The toolmaker reiterated its guidance for earnings of 2014 earnings of $5.18 to $5.38.

That said, Factset finds little panic among companies, so far:

Q1 Guidance: At this point in time, 25 companies in the index have issued EPS guidance for the first quarter. Of these 25 companies, 18 have issued negative EPS guidance and 7 have issued positive EPS guidance. Thus, the
percentage of companies issuing negative EPS guidance to date for the first quarter is 72% (18 out of 25). This percentage is above the 5-year average of 64%, but below the percentage at this same point in time for Q4 2013 (86%).

Nine of the 18 companies with negative guidance are in IT, 5 in Consumer Disc. and 3 in Health Care.

Analysts are paring down their expectations for Q1 however:

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Using S&P numbers, Q1’14 estimates are now $28.30, down 0.6% from their level of 2 weeks ago. Trailing 12-month EPS would thus reach $110.35, up 2.3% from their expected Q4’13 level. Full year 2014 estimates have been shaved 0.3% to $121.09, up 12.3% YoY.

For the third time since 2009, the S&P 500 Index failed to cross the “20” line on the Rule of 20 barometer. If it were to retreat to the 15-16 Rule of 20 P/E range like it did in 2010 and 2012, the S&P 500 Index would decline to between 1435 (another -20%) and 1540 (-14%), assuming inflation is 1.7%. Given the current state of the world economy (good in the U.S., better in Europe and OK in China), it seems doubtful that we would revisit such deep undervaluation territory. Central banks would no doubt intervene and keep the financial heroin plentiful.

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Given that trailing earnings remain in an uptrend and that inflation is stable, my sense is that the still rising 200-day (1700) moving average will hold the rout to another 5%. The Rule of 20 P/E would then be 17.5, right in the middle of the 15 (deep undervalue) and the 20 (fair value) range. In both the 2010 and 2012 corrections, the Rule of 20 Fair Index Value (yellow line on chart) was declining as inflation picked up temporarily, conditions not currently present.

Also consider that for most global investors, the U.S. must currently be seen as the only trustworthy terra firma from economic, financial and political points of view.

That said, volatility and caution will likely remain for a while. Furthermore, as Lance Roberts’ chart shows, investors are highly leveraged at this time, pretty dangerous if the rout continues.  image

I see no rush to step back in following my Jan. 13 post TAPERING…EQUITIES.

Moody’s Affirms France Rating

The ratings firm, which rates France Aa1, said it kept the negative outlook due to continuing reduced competitiveness in the nation’s economy, as well as the risk of further deterioration in the financial strength of the government.

“Although the French government has introduced or announced a number of measures intended to address these competitiveness and growth issues, the implementation and efficacy of these policy initiatives are complicated by the persistence of long-standing rigidities in labor, goods and services markets as well as the social and political tensions the government is facing,” Moody’s said. (…)

France’s fiscal policy flexibility is limited, which, together with the policy challenges noted above, imply a continued risk of missing fiscal targets,” the firm added. (…)

Markit adds that France official data overstate the reality:

image[A recent Markit] analysis suggests France official GDP data may have overstated growth in the French economy since 2012.

A divergence between the PMI and GDP has been evident since the third quarter of 2012. (…) Up to the third quarter of 2013 (the latest available data point), GDP has risen 0.3%. This growth has helped bring the French economy to within 0.2% of its precrisis peak reached in the first quarter of 2008.

However, the PMI has painted a far weaker picture of the French economy. The composite PMI, which is a GDP-weighted average of the PMI surveys’ manufacturing and services output measures, has been below 50 (thereby signalling falling output) in every month since March 2012 with the exceptions of September and October 2013. Furthermore, the rates of decline signalled by the PMI have been strong over much of this period – exceeding those seen in the prior survey history with the exception of the height of the financial crisis in 2008-9.

Importantly, much of this discrepancy can be accounted for by the fact that PMIs only cover private sector activity. The output of the government sector, which accounts for 25% of GDP, has grown 2.1%
since the second quarter of 2012. Excluding the government sector, GDP is in fact 0.2% lower than the second quarter of 2012 and still some 3.2% below its pre-crisis peak. Stripping out government spend brings the GDP data more into line with the PMI. (…)

The recent (weaker) trends signalled by the PMI survey are confirmed by INSEE’s own surveys of manufacturing and services. (…) Chart 4, which plots the INSEE survey results against growth of non-government GDP, adds confirmation to the PMI message that the official data may have overstated growth in recent quarters. (…)

The PMI exhibits a much higher correlation with official data than both INSEE and Banque de France surveys, whether we look at manufacturing, services or a weighted combination of the two sectors. The track record of the surveys therefore adds weight to the suggestion that the GDP data have been overstating the health of the economy since mid-2012.

imageThe possible overstatement of economic growth by the official data and Banque de France surveys is also something which is indicated by the employment data. Chart 7 shows that a clear divergence between the
official data on output and employment has become evident. Between mid-2012 and mid-2013, nongovernment GDP was flat but private sector
employment dropped by 153k (0.9%). To put this in context, the fall in employment was the steepest seen over such a period in recent history (since 1999) with the exception of the height of the 2008-9 financial crisis.

Rather than concluding that the French economy has undergone a period of rapid productivity growth, it is possible that the fall in employment over this period is another indication that GDP data have overstated output. To investigate this more closely, we look at the survey data on employment. Here we can see that the survey that has corresponded most closely with the upbeat GDP data over the past two years – namely the Banque de France survey – appears to have overstated employment growth.

Importantly, the PMI survey data on employment have not diverged from the official data. The PMI has in fact exhibited a correlation of some 89% with private sector employment excluding agriculture since the survey data were first available in 1998, outperforming the INSEE and Banque de France surveys. (…)

European banks have 84 billion euro capital shortfall, OECD estimates: report

European banks have a combined capital shortfall of about 84 billion euros ($115 billion), German weekly WirtschaftsWoche reported, citing a new study by the Organisation for Economic Cooperation and Development (OECD).

French bank Credit Agricole has the deepest capital shortfall at 31.5 billion euros, while Deutsche Bank and Commerzbank have gaps of 19 billion and 7.7 billion respectively, the magazine reported in a pre-release of its Monday publication. (…)

Confused smile STRANGE QUOTES

Marc Faber: What I recommend to clients and what I do with my own portfolio aren’t always the same. (…) About 20% of my net worth is in gold. I don’t even value it in my portfolio. What goes down, I don’t value. (…) I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don’t own it. I own physical gold because the old system will implode. Those who own paper assets are doomed. (Barron’s)

 
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NEW$ & VIEW$ (24 JANUARY 2014)

No Recession In Sight:Conference Board Leading Economic Index Edged Up in December

The index rose to 0.1 percent to 99.4 percent from the previous month’s 99.3 (2004 = 100). This month’s gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.

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Chicago Fed: Economic Growth Moderated in December

Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.

The index’s three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions.

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HOUSING WATCH

Existing Home Sales Approach a New Normal

Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million.

But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data.

A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist.

CalculatedRisk adds:

The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).

 

Pointing up All-cash sales jump as “normal” buyers go on strike. RealtyTrac reports:

All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012.

States where all-cash sales accounted for more than 50 percent of all residential sales in December included Florida (62.5 percent), Wisconsin (59.8 percent), Alabama (55.7 percent), South Carolina (51.3 percent), and Georgia (51.3 percent).

Institutional investor purchases (comprised of entities that purchased at least 10 properties in a year) accounted for 7.9 percent of all U.S. residential sales in December, up from 7.2 percent the previous month and up from 7.8 percent in December 2012.

Metro areas with the highest percentages of institutional investor purchases in December included Jacksonville, Fla., (38.7 percent), Knoxville, Tenn., (31.9 percent), Atlanta (25.2 percent), Cape Coral-Fort Myers, Fla. (24.9 percent), Cincinnati (19.3 percent), and Las Vegas (18.2 percent).

For all of 2013, institutional investor purchases accounted for 7.3 percent of all U.S. residential property purchases, up from 5.8 percent in 2012 and 5.1 percent in 2011.

 

Not a sign of a healthy market, is it? Meanwhile,

Framing Lumber Prices: Moving on Up

 

 

The faith may well be strong, the means are simply not there:image image

Also: Gundlach Counting Rotting Homes Makes Subprime Bear

 

GE’s Rice Sees Global Growth

General Electric vice chairman John G. Rice said that the global economy “was getting better, not worse,” and that beneath lower growth expectations for emerging markets “there was tremendous underlying demand for infrastructure.”

Investors Flee Developing Countries

Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. (…)

Countries with similar current-account deficits considered especially fragile by investors include Brazil, South Africa, India and Indonesia. But the emerging-markets tumult hasn’t hit the “contagion” stage of across-the-board, fear-driven selling of all emerging economies. Indonesia’s rupiah and India’s rupee, for example, advanced against the dollar Thursday, benefiting from those countries’ efforts to adjust their policies to support their currencies.

And this little nugget:

Art Cashin, who runs UBS’s operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. “China Beige Book has a sentence that translates into English as ‘credit transmission is broken,’ ” he wrote. “That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns.” (WSJ)

BOE’s Carney Suggests Falling Unemployment Doesn’t Mean Rates Will Rise Bank of England Gov. Carney said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

imageBoE signals scrapping of forward guidance Carney flags dropping of 7% jobless threshold

(…) Mr Carney made it clear in the interview that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance. Then, he said, the concern was that the UK economy was stagnating and might contract again: now the concern is that rapid growth might need action by the BoE to make it more sustainable. (…)

Punch If this is not clear guidance, what is? FYI, here’s the situation in the U.S.:

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Google chief warns of IT threat
Range of jobs in danger of being wiped out, says Schmidt

 

(…) Mr Schmidt’s comments follow warnings from some economists that the spread of information technology is starting to have a deeper impact than previous periods of technological change and may have a permanent impact on employment levels.

Google itself, which has 46,000 employees, has placed big bets on automation over some existing forms of human labour, with a series of acquisitions of robot start-ups late last year. Its high-profile work on driverless cars has also led to a race in the automobile industry to create vehicles that can operate without humans, adding to concerns that some classes of manual labour once thought to be beyond the reach of machines might eventually be automated.

Recent advances in artificial intelligence and mobile communications have also fuelled fears that whole classes of clerical and research jobs may also be replaced by machines. While such upheaval has been made up for in the past by new types of work created by advancing technology, some economists have warned that the current pace of change is too fast for employment levels to adapt. (…)

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” he said. The auto industry was an example of robots being able to produce higher quality products, he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . . [but] the problem is that the middle class jobs are being replaced by service jobs,” the Google chairman said. (…)

Shale Boom Forces Pemex’s Hand

For decades, Mexico’s state oil company, Petróleos Mexicanos, had the best customer an oil company could want: the U.S. But now the U.S. energy boom is curtailing the country’s demand for imported oil, and Pemex is being forced to look farther afield.

For the first time, the company is negotiating to sell its extra-light Olmeca crude oil in Europe, according to Pemex officials. The first shipment will go out in the second half of February to the Cressier refinery in Switzerland, the company said.

The change is one of many in the North American energy landscape affecting Pemex, which also faces competition in exploration and production as Mexico prepares to allow foreign oil companies back into the country for the first time in 75 years. (…)

 
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NEW$ & VIEW$ (13 JANUARY 2014)

DRIVING BLIND (Cont’d)

 

U.S. Hiring Slowdown Blurs Growth View

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

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

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

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

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

Where Jobs Were Added

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

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

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

Weak personal income:

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

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

BloombergBriefs explains further:

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

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

image

 

Fed Unlikely To Alter Course

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

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

(…) The report exacerbated another conundrum for officials.

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

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

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

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

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

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

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

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

  • Supply/demand #1: Oversupply

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

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

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

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

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

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

  • Supply/demand #2: Shortage

BlackRock: Jobs Report Shows Unemployment Is Structural

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

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

  • Supply/demand #3: Dunno!

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

Here’s the optimistic view…

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

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

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

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

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

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

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

Maybe there are a few millions there:

cat

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

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

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

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

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

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

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

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

Now this from yours truly:

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

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

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

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

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

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

image image

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

image

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

image 

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

image

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

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

All this so late in the bull market!

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

Meanwhile,

Subprime Auto Lenders to Ease Standards Further: Moody’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Italy’s November Industrial Output Rises

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

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

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

EARNINGS WATCH

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

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

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

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

SENTIMENT WATCH

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

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

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

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

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

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

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

And this:

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

But: Stock Bargains Not Hard to Find, JPMorgan Says

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

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

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

GOOD QUOTES

Barron’s Randall Forsyth:

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

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

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

 
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NEW$ & VIEW$ (8 JANUARY 2014)

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

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

Discounts drive U.S. holiday retail growth: ShopperTrak

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

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

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

ShopperTrak had forecast a 1.4 percent decline in shopper traffic.

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

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

Growth Picture Brightens as Exports Hit Record

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

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

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

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

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

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

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

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

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

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

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

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

Aging Boomers to Boost Demand for Apartments, Condos and Townhouses

 

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

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

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

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

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

Euro-Zone Retail Sales Surge

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

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

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

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

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

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

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

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

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

Meanwhile:

image

 

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

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

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

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

Thumbs down A Flurry of Downgrades Kick Off the New Year

 

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

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

Record-Setting Cold Hits Eastern U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emerging Markets See Selloff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
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QUIBBLES

(…) define “overvalued” as a Shiller P/E anything higher than 18 (given an actual multiple of 25.7 here, any objections to the Shiller metric are quibbles)

This quote from John Hussman’s Jan. 6, 2014 comment Confidence Abounds made me screech. In December 2012, Cliff Asness wrote something similar,

Those who say the Shiller P/E is currently “broken” have been knocked out.

in his well publicised piece An Old Friend: The Shiller P/E which triggered my own The Shiller P/E: Alas, A Useless Friend.

Pardon my quibbling with such trivial issues:

  • During Q4 2008, 140 S&P 500 companies, nearly 1 in 3, reported losses, 97 of which also recorded “operating” losses per S&P.
  • As a result of the carnage, trailing 12-month earnings for the S&P 500 Index collapsed to a trough of $6.86 in March 2009, down 92% from their June 2007 peak of $84.02.
  • A very large part of the losses were in financial companies due to the collapsing housing market and the Lehman failure. Many companies recorded humongous losses while their stock price sank as bankruptcy loomed. This extraordinarily unique combination of sky-high losses and stock prices diving towards zero created a very unique situation for stock indices: companies with then almost negligible market weights were recording humongous losses.
  • Incidentally, the S&P Financial sub-index recorded “operating” losses in each and every quarter of 2008 for a yearly total of $21.24 ($37.96 “as reported”).
  • Many of the companies that recorded huge losses in 2008-09 either went bankrupt or were substantially restructured or acquired. As a result, a conceptually valid valuation method such as the Shiller PE, measuring 10-year average earnings against a current index, is thus including in its denominator, during 10 years, the huge losses recorded by companies that are no longer included in its numerator, these companies having in fact been replaced by other, profitable, companies.
  • Humongous or very large losses were recorded in 2008 by companies such as AIG, GM, Merrill Lynch, Marshall & Ilsley, MBIA, Wachovia, all companies then part of the S&P 500 Index but no longer. Their losses still impact the 10 year average earnings even though they have no contribution to the actual index value. The losers are long gone but their losses remain!
  • This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

The P/E10 concept is designed to take into account the economic cyclicality of earnings, particularly with regard to profit margins. In a sense, it is a way to normalize profits and thus normalize P/Es. This is just fine until we face a highly unusual situation like the 2007-08 financial crisis which, in addition to its cyclical impact, created a statistical depression on Index earnings that rendered their reading misleading for the reasons listed above.

The statistical cratering of S&P 500 Index earnings from $84.92 in June 2007 to $6.86 in March 2009 will weigh uninterrupted and un-weighted on the Shiller P/E for another 5 years, even though the many of the companies responsible for the crater are no longer part of the Index.

Blindly reading the high P/E10 stats can be dangerous to your financial health, like it has during the last 5 years.

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That said, John’s comment is worth reading in its entirety, if only to realize that volatility remains an inherent part of equity markets. This is especially true when monetary policy changes direction and when interest rates rise. The gradual starvation of financial heroin coupled with upward trending market interest rates will create headwinds that will need pretty strong earnings reports for equities to keep roaring ahead almost unperturbed like in 2013.

As an alternative to the Shiller P/E valuation tool, the Rule of 20 remains as valid and useful as before. It will be interesting to see if what John Hussman describes as the current state of “overbullishness” results in the Rule of 20 P/E finally crossing the “20 fair value line” into overvalued territory. Continued tame inflation numbers coupled with a good Q413 earnings season could do the trick during the next several months which are statistically favourable to equities as Doug Short’s chart below shows.

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NEW$ & VIEW$ (6 JANUARY 2014)

Auto U.S. car sales from different prisms:

 

  • Auto Makers Rebound as Buyers Go Big 

    Five years after skyrocketing fuel prices and turmoil in financial markets knocked auto makers into a tailspin, the U.S. market has recovered to its former size and character.

(…) U.S. car and light truck sales rose less than 1% in December, reflecting in part a hangover from a surge the month before. But overall, the U.S. auto industry in 2013 had its best sales year since 2007, and industry executives said on Friday they expect gains to continue in 2014, though at a slower pace.

For the year, U.S. consumers bought 15.6 million vehicles, up 7.6% from 2012, according to market researcher Autodata Corp., the strongest volume since 2007. Purchases of light trucks including sport-utility vehicles exceeded cars, a reversal from the year earlier. (…)

But as gas prices drifted lower last year, U.S. consumers trading old vehicles for new favored pricey pickup trucks, SUVs and luxury cars. Ford, for example, boosted sales of its F-150 pickup by 8.4% in December over a year ago, while sales of its subcompact Fiesta and compact Focus cars plunged by 20% and 31% respectively. (…)

Consumers also are springing for more luxurious models, driving average new-car selling price to $32,077 in 2013, up 1.4% from a year earlier and up 10% from 2005, according to auto-price researcher KBB.com. (…)

High five December points to slower growth ahead as auto makers found gains harder to achieve against year-earlier results.

GM said its December sales fell 6.3% compared with the same month last year because of what executives said were aggressive pickup truck promotions by Ford and tougher competition from Asian auto makers.

December also marked the first monthly year-over-year decline in car sales at GM, Ford and Chrysler for 2013. Gains in pickups and SUVs offset weaker car sales at Ford and Chrysler. (…)

  • Here’s the monthly sales pattern (WardsAuto):

An expected post-Christmas surge in LV sales failed to materialize, as U.S. automakers reported 1.35 million monthly sales – an increase in daily sales of 4%. December devliveries equated to a 15.3 million-unit SAAR for the month.

ZeroHedge zeroes in on domestic car sales:

 

Via SMRA,

Nearly every automaker has reported lower-than-expected sales for the month of December relative to our forecast and the consensus. At this time, domestic light vehicle sales are running at a disappointing low 11.3 million annualized pace, which compares with 12.6 million for November.

If taken into context, we can say that the strong selling pace in November pulled sales away from December. In September and October, domestic light vehicle sales fell under 12.0 million due to the impact of the federal government shutdown, slipping to 11.7 million for both months, as it negatively impacted on buying confidence.

In November 2013, sales recovered strongly to 12.6 million, perhaps too strongly to the detriment of December’s sales. Therefore, if we average November and December together, we get 12.0 million, which is a respectable, though not spectacular, selling pace.

The times, they are a-changing:

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Hmmm…

Total car sales using a 3-month m.a. to smooth out monthly fluctuations.

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Girl “Daddy, is this a cyclical peak?”

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Just kidding “May well be, but let’s hope not…”

 

From my Nov. 20 post:

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.

Truth is, basic demand seems to be soft:

Americans Holding on to Their Cars Longer

Demand for cars has been helped by the aging of America’s vehicles.

(…) during the 2007-2009 downturn and after, financial problems and tight credit standards prevented many consumers from replacing their old vehicles. As a result, estimate analysts at IHS Automotive, the average age of a vehicle stands at a record 11.3 years. The average age increased faster in the five years ended in 2013, than in the five years before that. The trend is true for cars and for light trucks.

(…) IHS projects vehicle sales will total just over 16 million in 2014, and the new cars will help to slow the aging of America’s car fleet.

Truth is that cars do last longer.

And seems that people want, need or can only afford fewer cars (chart from ZeroHedge)

Cases in point:

Office-Rental Market Is Gaining Strength

(…) Businesses occupied an additional 8.5 million square feet of office space in the quarter. That was only a 0.25% increase from the third quarter, but Reis said it was the largest gain since the third quarter of 2007.

The expansion of tenants was offset by the completion of 9.1 million square feet of new office space during the quarter, the most since the fourth quarter of 2009, according to Reis, which tracks 79 major U.S. office markets. That left the market’s vacancy rate at 16.9%, unchanged from the previous quarter.

The vacancy rate had been steadily falling from the recent high of 17.6% in early 2011, but it still is well above the low of 12.5% in the third quarter of 2007, Reis said.

The amount of occupied office space now stands at slightly more than 3.4 billion square feet, which falls short of the market’s peak in late 2007 by 79 million square feet.

At the current rate that companies are leasing new offices—known as “positive absorption”—it would take more than two years to reach that peak level again.

(…)  Average asking rents increased in the fourth quarter to $29.07 per square foot a year, up 0.7% from the third quarter but still short of the recent high of $29.37 hit in 2008. (…)

Economic research firm Moody’s Analytics projects office-using jobs will increase 2.1% this year to nearly 33.9 million. That growth rate, along with a 2.1% gain in 2012, are the largest since last decade’s boom. “I would expect 2014 to be the best year since 2006 for office-using jobs,” says Mark Zandi, chief economist at Moody’s Analytics.

Reis’ preliminary forecast for 2014 calls for office-vacancy rates to decline by roughly half a percentage point by year’s end and asking rents to increase 2.8%, the largest gain since 2007. (…)

Alien ‘Polar Pig’ Threatens Coldest U.S. Weather in Two Decades

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida. Mike Musher, a meteorologist with the U.S. Weather Prediction Center in College Park,Maryland, said 90 percent of the contiguous U.S. will be at or below the freezing mark today.

Freezing temperatures spur energy demand as people turn up thermostats to heat homes and businesses. Power generation accounts for 32 percent of U.S. natural-gas use, according to the Energy Information Administration. About 49 percent of all homes use the fuel for heating.

China Shows Signs of Slowdown

Four purchasing managers’ indexes—two compiled by the government and two by HSBC Holdings PLC all dropped last month, the first time that has happened since April. The HSBC Services PMI, released Monday, fell to 50.9 for December, compared with 52.5 the month before. (…)

All four PMIs remained in narrowly positive territory for December, indicating that expansion continues, albeit at a slow pace. But that masks difficulties for individual companies in some sectors. Conditions are worsening for small and medium-size businesses, according to the official manufacturing PMI. The subindex for large companies, which has performed best in recent months, also fell in December, though it remains above the 50 mark that separates growth from contraction.

The data show manufacturers cut back stocks of both raw materials and finished goods, suggesting they are expecting weaker sales ahead. (…)

GUIDANCE ON GUIDANCE

This is what the media have been posting from Factset in recent weeks:

For Q4 2013, 94 companies in the S&P 500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.

The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).

These following info from the same Factset release have generally been omitted by the media:

Although the number of companies that have issued negative EPS guidance is high, the amount by which these have companies have lowered expectations has been below average. For the 107 companies in
the S&P 500 that have issued EPS guidance for the third quarter, the EPS guidance has been 5.7% below the mean estimate on average. This percentage decline is smaller than the trailing 5-year average of -11.1% and trailing 5-year median of -7.8% for the index. If -5.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q2 2012 (-0.4%).

That could mean that companies are more prone to reduce guidance than before. Here’s what has happened following Q3 guidance:

At this point in time, all 114 of the companies that issued EPS guidance for Q3 2013 have reported actual results for the quarter. Of these 114 companies, 84% reported actual EPS above guidance, 9% reported
actual EPS below guidance, and 7% reported actual EPS in line with guidance. This percentage (84%) is well above the trailing 5-year average for companies issuing EPS guidance, and above the overall performance of the S&P 500 for Q2 2013.

Under-promise to over-deliver!

Companies that issued quarterly EPS guidance for Q3 reported an actual EPS number that was 9.5% above the guidance, on average. Over the past five years, companies that issued quarterly EPS guidance reported an actual EPS number that was 12.8% above the EPS guidance on average.

Now this:

For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS
guidance to date for the current fiscal year stands at 56% (149 out of 265), which is below the percentage recorded at the end of September (61%).

Since the end of September, the number of companies issuing negative EPS guidance for the current fiscal year has decreased by eight, while the
number of companies issuing positive EPS guidance has increased by 15.

Pointing up There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

As a result:

Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31.

During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q4 2013 quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

So, do you really want to use forward earnings in your valuation work?

Bernanke Kicks Off Farewell Tour In Philly. Some of his comments:

  • I have done my job:

At the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.

  • Politicians have not:

Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.

  • So get to it now:

But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.

  • That’s for you bankers as well:

The Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates;

  • Get ready for higher rates:

in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the (Fed) will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve’s operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates.

Need more warning?

 

Fed’s Plosser: May Need to Employ Aggressive Tightening Campaign

(…) Mr. Plosser, who spoke as part of a panel discussion held in Philadelphia at the annual American Economic Association, will be a voting member of the monetary policy setting Federal Open Market Committee this year. (…)

Currently, the Fed expects to keep short-term rates very low until some time in 2015. The veteran central banker is uneasy with that, and warns the Fed should prepare for a faster and more aggressive campaign of rate hikes given the inflation risks presented by all the liquidity it has provided markets.

Mr. Plosser said the Fed would like to raise rates “gradually” but added “it doesn’t always work that way.”

“How fast will we have to move interest rates up…we don’t know the answer to that,” Mr. Plosser said. He warned that the Fed may have to be “aggressive,” and he added “people like to think the Fed has all this great control over interest rates, but the market does its own thing.”

JPMorgan Shows The US Is The Most Expensive Developed Market In The World

JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…

Punch By the way, this also impacts employment:

Foreign Companies Investing Less in the U.S.

Obama has made reversing the trend a priority.

Foreign direct investment in the U.S. appears to have dropped 11% last year, to about $148 billion, according to preliminary Commerce Department data, as analyzed by the Congressional Research Service.

This follows a decline in 2012 to about $166 billion from 2011′s estimated $230 billion. Foreign direct investment, or FDI, had peaked in the U.S. at $310 billion in 2008 and sank to about $150 billion in 2009, before rebounding in 2010 to $206 billion.

The steep fall in 2012-2013 has many possible causes, including the heated presidential elections and the knockdown, drag-out budget battles that culminated in last year’s government shutdown. Our politics frighten foreigners. We also saw tougher air-quality regulations from the Environmental Protection Agency and the new Dodd-Frank rules. Nevertheless, the U.S. last year emerged for the first time since 2001 as the most promising destination for FDI, thanks to our productivity gains, according to a survey of 302 companies from 28 countries by A.T. Kearney, a New York international consulting firm.

Obama seems to be in the mean-reverting biz now with many priorities aimed at reversing trends…(see below)

Stock Buybacks’ Allure Likely to Fade

(…) In the fourth quarter, S&P 500 companies may have bought back nearly $138 billion worth of stock, says Howard Silverblatt, Standard & Poor’s senior analyst. If that estimate proves correct as companies file their quarterly disclosures, it’ll be the biggest quarter for buybacks since 2007 and a 40% jump from the level a year ago.

Companies have already repurchased a staggering $445 billion worth of shares in the 12 months ended on Sept. 30. (…)

The S&P 500 Buyback Index, which covers the 100 companies that are the busiest buying back shares, rose 48.3% in 2013, trumping a 33.3% return for even the S&P Dividend Aristocrat Index brimming with companies that have hiked dividends every year for a quarter-century.

Conventional wisdom now expects 2014 to be an even bigger year for buybacks. After all, global growth is improving at only a drowsy pace, and receding crises heap pressure on management to spend their cash stash. Goldman Sachs, for one, sees repurchases increasing 35% this year.

(…) Rising interest rates will make it dearer for companies looking to borrow to finance buybacks or replenish their cash hoards. (…)

Besides, buybacks work better as an interim measure for returning cash to shareholders when the outlook is iffy. Today, a broadening recovery nudges management to rely less on financial engineering and to begin the riskier, tougher task of finding growth, investing in research and development, or inventing the next big thing—whether it’s ocean-driven hydropower or a cure for male-pattern baldness. Reflexively buying back shares was the easy, momentarily crowd-pleasing part. Figuring out where future growth lies and how to secure it is the real challenge that lies ahead.

BANKS

 

Biggest Lenders Keep On Growing

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial.

The five largest U.S. lenders control 44.2% of the industry’s assets, up from 43.5% in 2012 and 38.4% in 2007, according to a report by data provider SNL Financial. That expansion has been reshaping banking since at least 1990, when the top five institutions held 9.67% of bank assets. (…)

At the same time, the number of U.S. banks fell last year to the lowest level since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

There were 6,891 banks as of the third quarter, down from a peak of 18,000. Between 1984 and 2011, more than 10,000 banks disappeared through mergers or failures, according to FDIC data.

The banking units of J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo and U.S. Bancorp held $6.46 trillion in assets as of the third quarter, the report, released Thursday by SNL, found. The total for the rest of the banking industry, comprised of thousands of midsize, regional and smaller players, was $8.15 trillion.

Meanwhile.

Sarcastic smile Barack Obama has played 160 rounds of golf since taking office. (Time). That’s 32 per year over the past 5 years.

 
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NEW$ & VIEW$ (27 DECEMBER 2013)

U.S. Holiday Sales Rise 3.5%, SpendingPulse Says

U.S. retail sales rose 3.5 percent during the holiday season this year, helped by deep discounts at malls and purchases of children’s apparel and jewelry, MasterCard Advisors SpendingPulse said.

Sales of holiday-related categories, such as clothing, electronics and luxury goods, rose 2.3 percent from Nov. 1 through Dec. 24 compared with a year earlier, the Purchase, New York-based research firm said today. SpendingPulse tracks total U.S. sales at stores and online via all payment forms. (…)

Sales were strongest in jewelry and children’s apparel, while sales of electronics and luxury items excluding jewelry were about the same as the same period last year, SpendingPulse said. Sales of women’s and men’s apparel fell from last year, the researcher said. (…)

Bullishness Jumps to Three-Year High

Individual investors were feeling especially cheery about stocks this holiday week.

The percentage of bullish individuals rose to 55.1%, the highest level in nearly three years, in the week ended Dec. 25, according to the American Association of Individual Investors. That was a jump from the 47.5% of investors who said they were bullish the previous week.

Bespoke provides the charts…

 

…and some caution

While the current level is definitely elevated, it’s by no means without precedent.  As shown below in the chart of the AAIIreading going back to 1987, sentiment has been above the 50% mark many times in the past.

The Blog of HORAN Capital Advisors adds this:

In addition to an elevated bullishness reading, the bull/bear spread has increased 37% and this spread is the highest since AAII reported the spread at 47% for the week of December 23, 2010.

Just a reminder: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!The bearish reading is more important.

Oh! there is also that:

Twitter Rally Picks Up Steam

Twitter shares have nearly tripled since their initial public offering last month, including an almost 5% gain on Thursday, making the microblogging service’s IPO one of the best performing this year.

Twitter Now Has A Larger Market Capitalization Than 80% Of All S&P 500 Companies

(…) Why the stock has exploded the way it has, nobody knows, and frankly nobody cares: it has entered that mythical zone of raging momentum where things work, until they don’t for whatever reason. But in order to present readers with a sense of where TWTR’s $40 billion market cap, which is greater than 403, or 80%, of all S&P 500 companies, puts in in the context of several companies all of which have a market cap that is lower than Twitter’s, we have shown on the chart below Twitter’s 2014 projected Revenue compared to this same universe of immediately smaller S&P500 companies. Again, just for the sake of perspective. (…)

And that: Copper Prices at Their Highest in 8 Months

But also this:

Treasury Yield Hits 3%

Treasury bond prices fell Thursday, pushing the yield on 10-year notes to 3%, a threshold that may signal a new baseline for higher interest rates.

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Hmmm!

Japan wages halt 17-month decline
Data suggest companies starting to heed calls to pay staff more

(…) Keidanren, the largest and most influential business lobby group, seems willing to recommend that its members prepare for the first increase in base salaries since 2008, when they enter spring negotiations with labour unions. (…)

But three-quarters of total salaries in Japan are paid by small and medium-sized businesses, which are mostly not unionised and where the recovery in profits has not been as strong. (…)

Another factor dragging on wages is the shift in the composition of Japan’s labour force from full-time to part-time workers. The government makes no distinction between the two in its calculations of average earnings per worker, which have fallen almost without interruption since the late 1990s.

And as data for part-timers take longer to calculate, the “encouraging” preliminary wage figures for November could be subject to a downward revision later, said Izumi Devalier, economist at HSBC in Hong Kong.

Other data released on Friday may strengthen policy makers’ confidence that Japan is shaking off 15 years of deflation. Consumer prices excluding fresh food rose 1.2 per cent from a year earlier, reaching a five-year high. Retail sales also increased more than economists expected, marking a fourth straight rise at 4 per cent from a year earlier.

The job-to-applicant ratio touched 1.00 for the first time since October 2007, meaning that there is one job available per applicant.

Ninja  A Metals Mother Lode Sits in Shadows Banks, hedge funds, commodity merchants and others are stashing millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses.

Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.

These facilities are known to some in the industry as “shadow warehouses” because they are unregulated and don’t disclose their holdings.

They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals.

As of October, a record seven million to 10 million tons of aluminum were being housed in these facilities, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.

The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal.

A similar shift is taking place with other industrial metals, analysts say. (…)

“It’s a real concern for anyone in the industry that metal can be sucked away into a nonreporting location with no expectation or date as to when it’s going to be available again,” said Nick Madden, senior vice president and chief supply-chain officer with Atlanta-based Novelis Inc., an aluminum-products maker that is among the world’s biggest buyers of the metal.

“The risk here is that the metal gets controlled by fewer and fewer hands, whose interests and business model is probably conflicting with that of end users,” he said. (…)

The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don’t have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage, analysts and traders say. (…)

Five companies operate 75% of the LME’s 778 licensed warehouses. All own shadow facilities as well, people familiar with the companies said.

In some instances, a single firm runs licensed and unlicensed warehouses in the same building, with the metal counted by the LME separated from hidden stockpiles by a chain-link fence, said David Wilson, a commodities analyst with Citigroup.

Until 2010, most warehouses were owned by logistics firms like Netherlands-based C. Steinweg Group. But as metal-financing trades became more popular, C. Steinweg was joined by units of Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. as well as commodity traders Glencore Xstrata PLC of the U.K. and Switzerland and Trafigura Beheer BV of the Netherlands. (…)

Many metal buyers and producers say they are worried that new rules approved by the LME in November will speed up the flow of metal into shadow warehouses. (…)

 
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