NEW$ & VIEW$ (1 AUGUST 2013)

Jobless Claims in U.S. Fall to Lowest Level in Five Years

Applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department reported today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 345,000. A government analyst said no states were estimated, and the data were still being influenced by the auto plant shutdowns that play havoc with the figures at this time of year.

The less-volatile four-week moving average declined to 341,250 last week, a two-month low, from 345,750.

Tepid Growth Restrains Fed The U.S. economy is faring a little better than previously thought, but the overall picture is still one of lackluster growth.

The Commerce Department reported Wednesday that the economy grew at a 1.7% annual rate in the second quarter, enough to ease fears of a full-on summertime economic stall but still a sluggish pace by historic standards. (…)

Still, the April-June performance was only a small acceleration after the first quarter’s revised paltry 1.1% growth rate and represents little comeback from the end of last year, when the economy barely grew.

More than 24% of the quarter’s growth came from an increase in inventories—a buildup that is unlikely to be repeated and could even be erased in subsequent data revisions.

Consumer spending, which has been the backbone of the recovery recently, grew at a slower pace in the second quarter, with Americans cutting spending on hotels and restaurants—a possible indication families are pulling back on discretionary items.

The Commerce Department also significantly reduced its estimates for the prior four quarters and said the annual pace of growth since the recovery began in mid-2009 was only 2.2%, well below the nation’s long-term trend of over 3%. (…)

Against that backdrop, the Fed on Wednesday said it would continue an $85 billion-a-month bond-buying program meant to boost growth and hiring and offered no substantive changes in its stance on how long the purchases would continue.

Fed officials nodded in their statement to a few economic developments of late that could cause them concern if they persist. They described the pace of growth in the first half as “modest” and noted risks to the economy if inflation runs “persistently below” their 2% objective, as it has been. The Commerce Department report showed inflation running near a 1% annual rate in the last three months, well below the Fed’s goal.

Draghi Signals Worst Over as ECB Reiterates Low Rate Guidance

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at 0.5 percent. Policy makers expect to keep borrowing costs “at the present or lower level for an extended period of time,” he said, repeating a formula first deployed last month.

How confident should we all be on “confidence indicators”? More on that? CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL!

I prefer economic facts such as

  • German retail sales declined 2.8% YoY in June following a 0.4% advance in May.
  • Spain’s workday-adjusted real retail sales decreased 5.0% in June after a 4.5% decline in May.

And this from Bloomberbriefs.com:

The data on lending also continues to show signs of weakness. Loans to
nonfinancial corporations, adjusted for sales and securitization, fell 2.3 percent year over year in June versus minus 2.1 percent in May. The equivalent figure for households stood at 0.3 percent year over
year, unchanged from the previous month.

The ECB’s quarterly bank lending survey provided little reason for optimism. It indicated: “looking forward to the third quarter of 2013, banks expect the net decline in demand for loans across all loan
categories to continue.”

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Japanese PMI signals near-stalling of manufacturing sector

PMI survey data hinted at a waning impact of Japan’s  economic stimulus plan, dubbed ‘Abenomics’, at the start of the third quarter. After strong survey readings pointed to a further strengthening of GDP growth in the second quarter, the third quarter may bring disappointment to policymakers.

The manufacturing PMI signalled a near-stalling of growth in the sector in July. Alongside an easing in growth of manufacturing output, new orders and exports, the survey found price pressures to have eased again, and that employment started to fall again as companies cut capacity in line with weak demand.

Having risen to its highest for over two years in June, rounding off the best quarter of growth for the manufacturing sector for three years, the Markit/JMMA PMI fell in July. Dropping from 52.3 in June to a four month low of 50.7, the PMI signalled a marked easing in the rate of growth of the goods-producing sector at the start of the third quarter.

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Output grew at the slowest rate since February, registering only a modest increase after the strong gains seen throughout the second quarter. New order growth also slowed, registering the weakest increase since March.

imageJuly’s PMI survey showed that, although new export orders rose for the fifth straight month, the latest increase was only modest and the smallest seen over this period. Any increase in competitiveness resulting from the weaker yen is being in part countered by weak economic growth in key export markets, notably China. (…)

Najib Plans Budget Measures After Fitch Cuts Malaysia’s Outlook

Fitch cut its outlook to negative from stable this week, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform. The credit rating company’s concerns are shared by the government, Najib told reporters at an Islamic finance event in Kuala Lumpur today, without giving details of fiscal measures planned for his October 25 budget address.

“We are just looking at various policy options but we do understand that there’s a need for us to strengthen the fiscal and macro position of the government,” he said. “The actual details will be unveiled shortly, particularly in the forthcoming budget.”

Najib, who is also finance minister, led his Barisan Nasional coalition to victory in Malaysia’s general election in May following a spending spree which saw him raise civil servants’ salaries and give cash handouts to the poor. He also froze planned cuts in state subsidies on essential items and stalled on introducing a goods and services tax. (…)

Indonesia Inflation Rate at 4-Year High as Economy Set to Slow

Consumer prices rose 8.61 percent in July from a year earlier, after a 5.9 percent gain in June, the Statistics Bureau said in Jakarta today. That exceeded all estimates in a Bloomberg survey of 23 economists. Gross domestic product probably grew 5.9 percent last quarter from a year earlier, the first drop below 6 percent since March 2010, a separate survey showed before a report due tomorrow.

Higher costs may hurt domestic consumption that has been the driver of growth in Indonesia, at a time of falling demand for the country’s commodity exports. Bank Indonesia has already raised its benchmark interest rate by 75 basis points in the past two meetings to fight inflation.

VALUATION WATCH

some prominent fund managers/commentators are now advocating investing in European stocks, moving some money out of “highly valued” U.S. equities into “better valued” European equities.

ISI tries to support this notion with this chart on Price/Sales.

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My own observations:

  • U.S equities P/S is above the historical mean but so is France and Germany.
  • The Stox600 P/S ratio is somewhat below its mean but within a very narrow range.
  • P/S ratios are near useless without profit margins trends. Margins in the U.S. are much, much higher that in Europe, suggesting much better comps on P/Es.
  • The real bargains on a P/S basis are obviously in Spain and Italy. These countries may be where the U.S. was in early 2009 but their economic, financial, fiscal and political complexion is far different and much less comfortable than that of the U.S. I see no reason for Spanish or Italian companies selling at P/S ranges so much above German companies. Why should Spain P/S be similar to the U.S.?
  • Why would anybody want to invest in France?
  • The U.K. market does look appealing, however.
 

Understanding The Rule Of 20 Valuation Tool

Many readers ask that I better explain the Rule of 20 and how to read the The Rule Of 20 Barometer Chart.

Briefly, the Rule of 20 states that fair P/E on trailing operating earnings equals 20 minus inflation. For more on that see S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years and THE “RULE OF 20” EQUITY VALUATION METHOD.

With total CPI of +1.4% YoY, fair P/E should thus be 18.6x on trailing EPS of $98.35 yielding 1829 as fair value for the S&P 500 Index. At its current level of 1640, the Index is thus 10.4% undervalued.

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The yellow line on the chart is that “fair value” while the blue line is the actual Index level. The trend in the yellow “fair value” line provides a visual of the trend in “fair valuation”. A rising trend generally results from rising earnings, but sometimes from falling inflation, rarely both. The recent sideways pattern in the yellow line reflects stalling earnings during the past 12 months.

The gap between the yellow and the blue lines provides a visual of the degree of under or over-valuation of the Index versus “fair value”. Lately, stocks have advanced against stalled valuations resulting in a decline in the market undervaluation, which is reflected in the rise of the thick black line towards the “20” red horizontal line which delineates under and over valuation. The background colors indicate where current valuation (the black line) stands on the risk barometer.

The thick black line is the Rule of 20 value itself (not “fair value”). It plots the sum of the actual P/E on trailing EPS plus inflation. Since “fair value” equals 20 minus inflation, it follows that current P/E plus inflation will equal 20 at fair valuation. So current P/E plus inflation, the “Rule of 20 P/E”, is undervalued when below 20 and overvalued above it. The Rule of 20 P/E historically fluctuates between 15 and 25. Readings below or above that band reflect periods of extreme investor greed or fear.

At the current 1640 on the S&P 500 Index, trailing P/E is 16.7. Add inflation of 1.4 = 18.1 which is 10% below 20, or 10% undervalued.

Understand that the Rule of 20 is not a forecasting tool. A quick glance at the chart reveals that markets rarely trade at “fair value” (the “20” line). It is rather a risk/reward measure providing a totally objective reading of where equity markets trade versus objective fair value. Investors can thus calculate the upside/downside to fair value, thereby appreciate whether this fits their own individual risk profile.

Understanding where markets trade on an objective risk/reward scale enables investors to structure their portfolios dispassionately and rationally. They can monitor economic trends and better appreciate how these can modify investors sentiment and move valuation closer or further away from fair value.

This is one of the goals of News-To-Use: objective monitoring of pertinent economic trends in order to better utilize the Rule of 20, the most useful tool to constantly gauge the risk/reward equation for U.S. equity markets.

I hope that helps. Please let me know otherwise.

 

FED UP, FED DOWN

From the March 2009 market trough to the end of 2012, the S&P 500 Index has appreciated 114%. Perhaps just a coincidence but, meanwhile, trailing earnings have grown 116%. Yes Virginia, earnings matter!

However, as the chart below reveals (the chart is borrowed from ISI with my annotations in red), the various Fed QE programs have created much volatility within a profit-led bull market:image_thumb[5]

After the termination of QE1, the S&P 500 dropped 17% until the Rule of 20 P/E (black line on chart) reached 15.4 (15.0 is historically low); after QE2, it dropped 19% (Rule of 20 P/E of 16.3) and after Operation Twist, it lost 9% (Rule of 20 P/E of 15.1) until QE3 expectations lifted stocks again. At the recent high of 1691, the Rule of 20 P/E was 17.2. If fear reaches the same low points, the downside for U.S equities is 5-15% (1485-1595), or 0-10% from yesterday’s close of 1594. Interestingly, the 100 day moving average is 1578 and the 200 day m.a. is 1506.

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Equities are admittedly not in the dangerously expensive zone and another shift in sentiment can occur anytime.

The problem is that unlike in 2010, 2011 and 2012, S&P 500 earnings have stopped rising. As I have warned several times this year, the earnings tail wind has disappeared, leaving equities at the mercy of currents. In the absence of any favourable political or economic currents, hugely strong monetary currents have helped steer equities up.

The Fed just warned that these will reverse as soon as the economic currents strengthen. But investors know that the economic currents can’t realistically reach the velocity of monetary currents. They have thus become wary of the announced crosscurrents and, understandably, are bringing some of their exposed fleets back in a safer harbour.

I still see no reliable sign that the U.S. economy is about to accelerate and I disagree with the Fed when it says that the risks to the economy are diminishing. Perversely, that might be read bullishly since it would extend QE3 well into 2014. Realistically however, corporate earnings may not be able to hold much longer in a 1-2% GDP growth environment, especially if inflation remains so low. This chart from Ed Yardeni supports cautiousness on this:image

With inflation at 1.4% and trailing earnings of $98.35, the Rule of 20 says fair value is 1829 on the S&P 500 Index (20 minus 1.4, times 98.75). The current 10% downside risk pales a little against the 15% upside to fair value. However, the environment remains such that it seems highly unlikely that investors will overcome the numerous uncertainties floating around and pay fair value for equities any time soon. I would rather wait to see how Q2 earnings come out. When sailing in strong crosscurrents, it is better to have a good, sustained tail wind. There is no such support now.

 

DRIVING BLIND

Aside

Note My eyes get blurry, my faucet runs

I wait for my vision, but it never comes

I can’t give you the answers if I can’t see your hands

I’m driving blind through this barren land  Note (Grace Potter)

 

If anybody was waiting for clearer skies post the May PMIs…:

  • May U.S. ISM PMI down 1.7 to 49.0. New orders down 3.5 to 48.8.
  • May Markit U.S. PMI up 0.2 to 52.3. New orders up 1.8 to 53.3 with “large manufacturing firms recording the strongest increase in new orders for over a year”.
  • May Chicago ISM up 9.7 to 58.7. New orders jumped 4.9 to 58.1. The April report had declined 3.4, a 3 year low.
  • The Richmond Fed Survey “improved somewhat” from –0.6 in April to –0.2 in May, even though new orders worsened again to –10.
  • The Philly Fed survey decreased 1.3 to –5.2 with new orders falling 1.0 to –7.9.
  • China’s official PMI edged up 0.2 to 50.6 in May. New orders flat at 51.8.
  • The HSBC China Manufacturing PMI declined 1.2 to 49.2 in May. New orders declined modestly but new export orders fell for the second month in a row. “A number of panellists suggested reduced client demand, particularly in the U.S.
  • May Eurozone PMI improved a tiny 1.7 to 48.3 as “new export order inflows showed signs of stabilising in May”.

The only way to summarize manufacturing across the world is to say that, however confusing the data is, activity is spotty and weakish, directionless around the borderline between sluggish growth and contraction. Here’s how Markit summed it up as it reported that the JPMorgan Global Manufacturing PMI rose 0.2 to 50.6 in May:

Manufacturing continued to more or less stagnate in May, according to the worldwide PMI surveys. Modest expansions in the US, Japan and the UK offset downturns in China and in particular the euro area, leaving an overall picture of almost no growth.

And, for the first time in 2013, we are seeing signs of weaker U.S. demand at the manufacturing level. In fact, even Markit’s relatively more upbeat May survey revealed “the weakest expansion reported by U.S. manufacturers of consumer goods.”

Speaking of the all important U.S. consumer:

  • U.S. Real Personal Consumption expenditures, which rose at a 4.0% annual rate between November 2012 and February 2013, gained only 0.2% in March and 0.1% in April. Nominal disposable income was up 0.2% in March and down 0.1% in April and the savings rate stabilized at a low 2.5%.
  • U.S. weekly chain store sales are spotty but remain generally sluggish. Their 4-week moving average has declined in each of the last 5 weeks. It now stands at +2.8% YoY against the weakest period of 2012.

Say what you want, see what you can, the reality is that U.S. domestic demand is weakening at its core. The U.S. consumer cannot keep supporting the economy with little, if any, income growth, and a savings rate already near all time lows. The boost to Real DPI from yearend special bonuses and dividends has rapidly faded away. There are little savings left to sustain consumption in that context.

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This explains the flattening out in new car sales since November 2012.

BUT HOUSING IS SO MUCH BETTER!

All those experts who had little faith in a housing recovery even one year ago now see the housing train as unstoppable. They could not see how very limited supply could end up driving prices up. They now cannot conceive that rising prices (house prices and mortgage rates) combined with declining income can eventually hurt demand. What will then happen to supply is hidden in the heads of all these hedge fund managers who have bought nearly 30% of the supply of the last several years…

The following charts plot actual median sales prices for NEW houses, up 23% over the last year to a new all-time high, and actual median EXISTING house prices which are up 10% YoY. While median prices can be influenced by changing mix, these nonetheless reflect actual transactions, i.e. real demand.

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The housing recovery has come only because Americans have been trading up, and paying up. But that makes the recovery even more fragile as affordability can turn down quickly on these higher purchase prices.

I doubt that housing can keep pulling the U.S. economy under conditions of limited income growth and rising prices. Never mind rising mortgage rates!

Which brings us to the Federal Reserve folks who have recently been saying just about everything and anything about what the Fed will do next. These elite leaders are driving blind and are knowingly blinding investors along the way. They have no clue where the economy will be in 3, 6 or 12 months. And nobody can blame them, cause everybody is currently driving blind.

The difference is that the Fed knows it is driving blind, so it will keep its foot on the interest rates brake pedal to prevent another swoon.

Past periods of rising interest rates have dented home sales trends, even in the context of overall economic growth. A sharp rise of the 30-year mortgage rate from 7.07% at the beginning of 1994 to 9.20% by the end of that year, reversed what had been a robust housing rebound. Single-family home sales shifted from an annual gain of 13% in the year ending June 1994 to a 7% contraction by May 1995. A less severe example occurred just a couple years later when the mortgage rate started 1996 at 7.03%, before rising to 8.32% by June of that year. (Moody’s)

Equity investors, blindsided by the monstrous 25% rally since mid-December and confused by all the Fed talk and renewed media hype, are dreaming of a better world, oblivious to all the warnings signs along the road. Peter Oppenheimer, chief global equity strategist at Goldman Sachs, got a front page exposure in the FT for pretty hollow opinions such as this one:

First, much of the recent weakness in economic activity is likely to be temporary, and the prospects for a recovery late this year look good. Even in the eurozone, economic conditions should get less bad in the second half of this year and into next year, led by a recovery in Germany, and while Europe may not contribute much to the global economic recovery, it should benefit from one. (…)

Funnily enough, he later declares that

investors pay for what they can see rather than what they hope might happen.

What investors pay for is earnings. But the GS strategist fails to see that they have actually stalled over a year ago.

Q1’13 operating earnings came in at $25.76, up 6.3% YoY but still stuck below $26 and essentially flat for almost 2 years. As a result, trailing EPS have been stuck below $100 since early 2012.

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In spite of all the rhetoric that high profile strategists can use to explain equity markets, the plain reality is that stock prices = EPS x P/E. Earnings are the easy part, assuming you use trailing earnings, i.e. pay for what you see rather than what strategists hope might happen. Earnings have made zero contribution to rising equity prices over the past year.

Contribution from a rising P/E was significant as trailing P/Es rose from 13.8 to 17.1 since October 2011. This 3.3 point increase in trailing P/E boosted the S&P 500 Index by 35% to its recent peak.

What caused this P/E swell? Investment gurus provide us with a host of answers to this existential question. I humbly propose the Rule of 20’s answer: falling inflation. The U.S. inflation rate dropped from a high of 3.9% in September 2012 to its recent low of 1.1%. This 2.8% drop in inflation adds nearly 3 points to the Rule of 20 fair P/E (fair P/E = 20 minus inflation). More Oppenheimer wisdom:

Third, lower inflationary pressures continue to provide the cover needed for ongoing supportive monetary policy; this is both easing global financial conditions and supporting real asset prices.

Inflation has been so low recently that low, if not lower, inflation has become the acceptable norm. Yet, many measures of inflation suggest that it has not declined as much as the headline numbers say. Look closely at this table from the Cleveland Fed:

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However you slice it, U.S. inflation is 2.0% so far in 2013. Core CPI, median CPI and the 16% trimmed-mean CPI have all risen at a 2.0% annualized rate since December 2012. The 0.5% jump in core CPI in Jan-Feb has not been followed by a decline. Rather, core prices have kept rising by 0.1% per month. The median CPI has gained 0.2% monthly in all of the last 6 months but one. All this to say that, in spite of strong desinflationary trends across the world, U.S. core inflation is showing no signs of slowing below 2.0%.

And be careful what you wish for. Very low inflation, let alone deflation, is not necessarily good for corporate profits. S&P 500 companies grew revenues only 1.3% in Q1’13. Ed Yardeni rightly sees the writing on the wall but, like most economists and strategists, remains willing to drive on even with his eyes wide shut (my emphasis):

May’s Manufacturing-PMI raises yet another warning flag about the flagging prospects for S&P 500 revenues. Nevertheless, I still expect that global nominal GDP will increase by 5% this year and 5% next year. Revenues should grow by at least as much. However, the latest data points aren’t supportive of this relatively upbeat outlook.

The M-PMI is highly correlated with the y/y growth rate in S&P 500 revenues. The purchasing managers’ index suggests that this growth rate might have worsened rather than improved during the second quarter, when I expected to see an improvement.

I monitor the consensus expectations for S&P 500 revenues and earnings per share based on weekly data compiled by Thomson Reuters I/B/E/S. Their revenue estimates for 2013 and 2014 have dropped sharply during the first four weeks of May to new lows. They now expect revenues to grow 2.2% this year and 4.4% next year.image

Dr. Ed goes even further:

The latest global trade data also aren’t comforting. The good news is that both the value and volume of world exports remained near their recent record highs. The bad news is that they aren’t growing.

The values of both world exports and US exports are highly correlated with S&P 500 revenues. US exports also are near their recent record high, and also not growing.

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So, for those who don’t ignore their self-designed signposts, the outlook for revenue growth is not good and is actually getting worse. One can hope for better margins to keep earnings up but this is for the wishful thinkers driving on a road they assume straight for as far as the eyes can see, and beyond!

The reality as I see it with objective eyes is that:

  • profits have flattened out a while ago and offer no back wind for equities;
  • current profits are taxed at an abnormally low effective average rate and governments across the world are seeking ways to harmonize corporate taxation, a potential negative for many global companies;
  • revenue growth has slowed and looks weaker;
  • this is supported by weaker economic trends across the world, particularly at the consumer level;
  • objectively, the outlook is for very sluggish growth with the risk biased on the downside, not the upside;
  • central banks will not risk a swoon and they will keep pumping;
  • inflation remains stuck at the 2% level, even with soft demand.

In this context, the Rule of 20 says fair P/E is 18.5 (using 1.5% inflation, the mid-point between actual CPI and core inflation of 2.0%). On trailing 12-month EPS of $98.34, fair market value is 1819, 11% above yesterday’s 1635 close. If inflation is in fact 2%, fair value drops to 1770, 8% above current levels.

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I am therefore cautious on this tortuous road. Without earnings pushing up, markets can be very fickle, especially when driven by blind liquidity looking for a relatively decent home, even if the home is actually pretty uncomfortable.

Just so you don’t take my view blindly, here’s a June 3rd WSJ story about a blind man who sees a rough ride ahead…but still refrains from acting on his vision.

The man behind the “Hindenburg Omen” said he’s prepping to bail out of the stock market after his ominous-sounding technical indicatorwas tripped last week for the second time in two months.

In a chat with MoneyBeat Sunday evening, Jim Miekka — a blind former high-school physics teacher and the newsletter writer who devised the Hindenburg Omen — confirmed all the criteria were met on Friday that triggered the indicator. He said he’s still invested in the market, for now, and is waiting for “a strong up day this week” before he gets out of stocks and potentially starts shorting the market.

“We’re on our way down from here,” Miekka said. “I’m hunkering down for a possible rough ride.”

The Hindenburg Omen – named after the 1937 disaster of a German passenger airship – uses a formula that parses data including 52-week stock levels and moving averages. Other criteria include a rising 10-week NYSE moving average and a negative technical indicator that measures market fluctuations. All these indicators must be tripped simultaneously on the same day for the Hindenburg Omen to take place. One occurred on April 15 and another took form on Friday, Miekka said.

The WSJ notes however

While the Omen foreshadowed significant drops in 1987 and prior to the 2008 financial crisis, it has proven to be a false alarm more often than not. Significant stock-market declines have followed the indicator just 25% of the time. That’s why some say the Omen sounds like little more than hocus-pocus.

But

Miekka, who devised the indicator in 1995, attracted a cult-like following in August 2010 when a cluster of Hindenburg Omens took place over several weeks. When Miekka’s indicator became the buzz of talk shows, trading floors and news articles, the market meltdown he was forecasting never came to fruition.

“Back in 2010 everybody was watching it, which I think is part of the reason why it didn’t work then,” Miekka said. “Now, everybody is ignoring it. From a contrary viewpoint, that’s why it could work.”

So Jim, why don’t you simply get the hell out and keep your mouth shut?

I suspect he is like Fed governors: the urge to say something, anything, is simply overwhelming.

Actually, why not hire him as the next Fed chairman given his credentials:

Despite being blind, he has become an avid target shooter. He said he created artificial-vision technology that uses sounds to help him identify targets better than many sighted shooters, a craft that he has been developing and perfecting for years.

If not Fed Chairman, why not chief global equity strategist at Goldman Sachs.

 

NEW$ & VIEW$ (6 MAY 2013)

Smile  Job Gains Calm Slump Worries

Nonfarm payrolls rose by 165,000 last month and the jobless rate ticked down to 7.5%, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs. (…)

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The increase in 176,000 private-sector jobs, on top of a loss of 11,000 government jobs, was concentrated in a handful of service industries. The professional and business-services sectors added 73,000 jobs, including 31,000 temporary workers. Manufacturing employment stalled and construction employment contracted after gains earlier in the year.

High five  But, as Markit notes:

So far this year, 783,000 new jobs have been created, comprised of a 813,000 rise in the private sector and a 30,000 drop in government jobs. That compares less favourably with last year, when a 899,000 increase
was seen in the four months to April, buoyed by a 916,000 increase in the private sector.

Sad smile  In reality, after 4 months, the U.S. economy, still on hyper-strong financial heroin, has created 13% fewer jobs than during the same months in 2012.

Americans actually worked less last month because of a 0.2- hour drop in the workweek, resulting in total hours worked dropping 0.4% for the month. The U-6 underemployment rate, which covers folks who are working part-time but want full-time gigs or have stopped looking for work, ticked up to 13.9% from 13.8%, the first rise since last July, Philippa Dunne and Doug Henwood of the Liscio Report note. And in the household survey, some 306,000 joined the ranks of the self-employed, more than the total 293,000 overall gain. (Barron’s)

And this from NBF:

Private employment expanded by a consensus-beating 176,000 during the month. The rise, however, was not widespread as only 53.9% of industries increased their headcounts, the lowest proportion in eight
months (the goods sector actually shed 9,000 jobs in April).

The end result is that aggregate hours worked are only up an annualized 0.14% early in Q2, the weakest showing since Q4 2009. As today’s Hot Chart shows, this development is consistent with a significant slowdown in real nonfarm business GDP.

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Storm cloud  Spring Swoon Alive and Well in Manufacturing

The manufacturing sector failed to add any jobs last month after a meager 2,000 increase in March payrolls, a black spot on the otherwise rosy jobs report. Those numbers add to other economic data showing that demand for factory goods is falling and the sector is seeing a broad slowdown this spring. And that spring swoon could turn into a summer slide.

(…) with car sales slowing and dealer inventories climbing, the auto industry growth is likely to ease. (…)

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.

If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Storm cloud  Factory Orders Fell 4% in March

Demand for U.S. factory goods in March fell 4% to a seasonally adjusted $467.29 billion, the latest evidence that manufacturing sector began to slow during the month.

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.

Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.

Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)

Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.

Outside of defense, factory orders fell 3.5%

Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

This was the lowest reading since last July.  Combining both the ISM Manufacturing and Services indices based on their weighting in the overall economy, the ISM for April came in at 52.8 versus last month’s reading of 54.0.

Lightning  EUROZONE RETAIL SALES KEEP FALLING

Total retail volume fell 0.1% MoM in March after a 0.2% decline in February. Real retail sales have dropped 0.4% since September 2012. Core sales volume slumped 0.5% in March, following a 0.7% drop in February. Core sales volume is down 1.0% since September 2012.

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This Eurostat data is for March. Markit’s retail PMI released last week said that sales continued to decline at a “sharp rate” in April:

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Spanish Jobless Claims Dwindle

The ministry said the number of people filing for jobless benefits fell 0.9% in April from the prior month, to 4.99 million. Although the figures aren’t adjusted for distortions caused by seasonal trends, they show the second-largest fall in joblessness for any April since 2007, before the global financial crisis later that year sparked a deep recession across Europe in 2008 and 2009 from which countries have struggled to recover.

Portugal Unveils Budget Cuts

The prime minister’s plan would cut the number of public employees by 5%, lengthen their workweek and raise the retirement age by a year, to 66.

The plan, which aims to save €4.8 billion ($6.1 billion) through 2015, is certain to face resistance from the Socialist-led opposition and trade unions.

The government has promised to cut its budget deficit to 3% of gross domestic product by 2015, two years later than initially planned and the year Mr. Passos Coelho’s term ends. Last year’s deficit was 6.4%.

Party smile  France Says Austerity Over on Germany Flexibility

 

French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies. (…)

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.

There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

Indonesian growth slips to two-year low  Domestic consumption helps keep growth above 6%

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.

(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

March retail sales were down 0.4% from February, the Australian Bureau of Statistics reported Monday, whereas economists had expected a 0.1% increase. First-quarter sales, meanwhile, rose by 2.2%—the biggest quarterly gain in six years—as consumers took advantage of heavy price discounts offered by retailers. (…)

Australian retail sales declined toward the end of last year as the mining-dominated economy slowed alongside China, the nation’s biggest trading partner. They rose 1.3% in January and February, though, as house prices and consumer sentiment picked up.

EARNINGS WATCH

The earnings season is near complete as 84% of the S&P 500 companies have declared Q1 results. The  beat rate computed by S&P is at 69% while the miss rate is at 22.7%.

Q1 earnings are now estimated at $25.78, up from the March 28 estimate of $25.49 but down from last week’s surprising $26.20 number. Nearly 28% of the 97 companies reporting last week missed (vs 21% up to then), including 44% of companies in Consumer staples (vs 14%), IT (21%) and Utilities (33%).

imageIn addition, Factset calculates that 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. While the 79% negative ratio is not much different than that preceding Q1, there is some concern in the fact that 63 companies have guided negatively so far this season compared to 50 at the same stage in Q1, although there have been 17 positive pre-announcements this year, up from 11 last year.

In light of the above, analysts are busy revising their estimates: while Q1 EPS remain 1.1% above their March 28 forecast, current estimates for the next 3 quarters are now 2.5%, 1.7% and 1.0% lower than their March 28 estimates.

imageIn all, EPS (per S&P) are estimated up 6.4% YoY in Q1, +5.3% in Q2, +16.4% in Q3 and +27.3% in Q4 for full years earnings up 13.6% YoY to $109.94. We will see how that evolves in coming weeks…FYI, this chart from S&P shows the incessant decline in 2013 estimates. My experience with estimates is that a good rule of thumb is that yearly estimates are generally 15% too high, meaning that it would be safer to use EPS around $101 for 2013 if you wish to use forward earnings.

For now, trailing earnings should reach $98.36 after Q1, up 1.6% from trailing EPS after Q4’12. Trailing earnings remain within their very narrow $97.40-98.70 range of the last 5 quarters, confirming that earnings have completely stalled since the end of 2011.

Unsurprisingly, this has coincided with a complete flattening of revenues since Q4’12. Q1’13 revenues are estimated up 1.5% YoY but down 0.5% from their Dec. 2011 level. It is, indeed, very difficult to grow earnings when revenues stall. Here’s what Moody’s wrote last week, to be read in the context of deteriorating conditions in the economies of most of the U.S. trading partners:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by US merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.

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U.S. exports have declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.

This is why second half earnings growth projections of more than 20% appear rather heroic at this juncture.

While trailing earnings stalled, equities have roared ahead +21.8% since May 2012. During that period, U.S. inflation has declined from 2.3% to 1.5%. Under the Rule of 20, such a  decline in inflation raises the fair PE by 4.5% (from 17.7 to 18.5). The remaining 17.2% advance in equity values is a re-rating of equity markets from a 27% undervaluation to a 12% undervaluation as of last Friday.

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On the above chart, notice how the Rule of 20 Fair Index Value (yellow line) has moved sideways during the last 12 months while the S&P 500 Index (blue) has jumped. Stable earnings and inflation caused the sideway movement in fair value. This is why the Rule of 20 Value (black) has gone up from its May 2012 15.1 reading to its current 17.6.

Fingers crossedSyria Strikes Raise Alarm

Strikes that Syria attributed to Israel hit an area around a research facility near Damascus, raising concerns of a widening conflict

 

SPRING TIME! or SPRING TIME?

We’re in the middle of the earnings season. Beware, aggregators use different databases and different adjustment criteria.

Of the 271 S&P 500 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 44% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters.(…) As a result, the revenue growth rate for the quarter has continued to decline over the past month, while the earnings growth has rebounded to the levels expected at the start of the quarter (December 31). 

For the first quarter overall, the blended earnings growth rate is 2.1% this week, above last week’s growth rate of 0.3%. Upside earnings surprises reported by companies across multiple sectors were responsible for the improvement in the growth rate during the past week. All ten sectors saw an improvement in earnings growth during the week. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date as well, led by the Telecom Services sector.

The index is now reporting earnings growth in Q1 (2.1%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. (…) The blended revenue growth rate for the index for Q1 is -0.6%, down from an estimate of 0.4% at the end of the quarter.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 48 companies have issued negative EPS guidance for Q2 2013, while 11 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth for Q2 2013 has dropped to 2.4% today from an expectation of 4.5% on March 31.

  • Bloomberg:

Analysts are turning more bullish on corporate earnings. Profit at S&P 500 companies gained 1.1 percent in the first three months of the year, according to analysts’ projections compiled by Bloomberg. That compares with a week earlier projection for a decline of 1.1 percent.

Of the 270 companies in the benchmark index that have reported so far in this earnings season, 74 percent have exceeded analysts’ predictions on profits while 54 percent trailed on sales, data compiled by Bloomberg show.

  • Standard & Poors (the official data I use) reports that of the 271 companies having reported, 69.7% beat (67% on Apr. 18) and 20% missed (22%). Importantly, S&P’s most recent estimate for Q1 earnings rose from $25.40 last week to $26.14, up 7.8% YoY. This would take the trailing 12 months EPS to $98.72, a new record, and +2.0% QoQ. Full year 2013 estimates rose to $110.59 last week from $109.52 the previous week. This is unusual volatility.
  • A broader view: Bespoke Investment on NYSE companies: Earnings and Revenue Beat Rates by Quarter

The number of companies that have reported earnings this season has doubled from the low 400s up to 855 since we last reported on the beat rate on Wednesday.  (…)  As shown, the earnings beat rate is now at 59%, which is up from the 56.9% reading we saw on Wednesday.  This is still low for the current bull market, but it’s better than it was!

Top-line numbers have gotten a little better over the last two days as well.  On Wednesday, the percentage of companies that had beaten revenue estimates this season stood at just 44.1%.  As we close out the week, the revenue beat rate currently stands at 49%.

According to S&P, revenue growth is 3.8% YoY in Q1, down from +5.6% in Q4’12, in spite of the +9.2% growth rate recorded by energy companies.

As a result of these better earnings (so far with 63% in) combined with lower inflation (+1.5% YoY in April from +2.0% in March), the Rule of 20 now gives a fair value of 1826 for the S&P 500 Index, +15% from current levels.

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The S&P 500 is currently selling at 16x trailing EPS, slightly above median on the 10-20 PE chart.. It would be selling at 18.5x trailing EPS at 1826, pretty close to full value on that same chart.

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This high earnings volatility, combined with high economic uncertainty clearly biased on the downside, keep me cautious. This week is big on earnings reports and on key economic data (final PMIs, personal income and spending,  U.S. employment, etc.)

Sell in May and go away?

May through September are the least friendly months for equities going back 56 years. image(RBC Capital Markets)

These months were particularly nasty in the last 3 years. Conditions are not much different now. True, U.S. housing has turned and employment has improved somewhat. American consumers may feel a bit better as house and stock prices rise but their take-home pay is shrinking under U.S. austerity. The fiscal drag was pretty bad in Q1 but it will get worse in Q2. Meanwhile, Europe keeps sinking even markets seem oblivious to what is happening in France and Germany.

 

(See also Companies Feel Pinch on Europe Sales in this morning’s New$ & View$)

 

SPRING PEAK? YELLOW LIGHT ON EQUITIES

What is going on in Europe is as significant as the outcome is uncertain. Think about it: the European governments have agreed to simply confiscate 7-10% of their citizens’ savings in order to avoid another unpopular bailout.

How this will play out in coming days, weeks or months is anybody’s guess. Super Mario does not have whatever it takes to prevent people from taking care of their savings. I don’t know what will happen next. All I know is that the risk/reward equation as per the Rule of 20 is about even if the downside is limited to the 200-day m.a.. However, if we return to 15 on the Rule of 20 scale, that is a 19% slide to 1260.

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Better be safe than sorry. Don’t forget, earnings have stalled which means that this market is essentially fueled by P/Es. Investor confidence is very fickle, especially when few can really comprehend what is going on. Ambrose Evans-Pritchard paints the current picture:

One’s first reflex is to gasp at the stupidity of the EU policy elites, but truth is that most EU officials handling the Cyprus crisis know perfectly well that their masters have just set the slow fuse on a powder keg – and they can only pray that it is slow.

The decision to expropriate Cypriot savers – even the poorest – was imposed by Germany, Holland, Finland, Austria, and Slovakia, whose only care at this stage is to assuage bail-out fatigue at home and avoid their own political crises. (…)

The EU creditor states have at a single stroke violated the principle that insured EU bank deposits of up $100,000 will be guaranteed come what may, and in doing so they have more or less thrown Portugal under a bus.

They appear poised to seize large sums from Russian banks – €1.3bn from state-owned VTB alone, and therefore from the Kremlin – prompting the condign riposte from Vladimir Putin that the action is “unfair, unprofessional and dangerous.”

They have demonstrated that the rhetoric of EMU solidarity is just hot air, that they will not force their own taxpayers to share a single cent of clean-up costs for the great joint venture of monetary union – in which northern banks, insurers, pension funds, and indeed governments, were complicit. (…)

What is clear is that Angela Merkel will not risk defeat in the elections in September by ceding a single vote to Social Democrats determined to hold her feet to the fire over a bail-out for “Russian oligarchs, money-launderers, and tax evaders” in Cyprus, or by ceding votes to the new anti-euro party Alternative fur Deutschland. She will look after her own political interests, and all the rest is humbug. (…)

It is far from clear that the ECB backstop for Italy still exists, given that there is no compliant government in Rome able to meet the rescue conditions.

Portugal is not safely out of the woods. Its slump has been deeper than expected. Its debt dynamics are nearing the danger zone faster than feared. Citigroup, Nomura, and many others think it almost certain that Portugal will need a second rescue, and probably debt-restructuring. What happens then? Are savers going to wait patiently for their own scalping as this becomes clearer?

As for Spain, we learn from leaks in the Spanish press that officials from the ECB and the Commission warned Eurogroup ministers that the raid on Cypriot savers posed a grave contagion risk to Spanish banks, threatening to set off deposit runs. (…)

 

NEW$ & VIEW$ (18 MARCH 2013)

Cyprus. Spring peak? Earnings watch. U.S., EMU inflation. Strong U.S. IP. China housing strong, posing risk. Canada housing weak, posing risk. Currency wars. Japanese stocks valuation. Sentiment watch. Italian clowns. Financial clowns.

CYPRUS!!  Whatever It Takes?

Cyprus concerns spook markets
Plan to tax bank deposits to fund bailout fuels risk aversion

Europe botches another rescue

Just as the eurozone had begun to set the right course in its struggle with an ever-mutating debt crisis, it relapsed into its old vice. Faced with a drowning member state, instead of throwing Cyprus a lifebuoy, leaders put a millstone around its neck.

Appearances notwithstanding, the Cyprus deal does not “bail-in” creditors in an orderly resolution of bankrupt banks. Instead it imposes a tax on all depositors down to the smallest ones. (…)

Pointing up The biggest risk is political. The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.

Europe is risking a bank run

(…) With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe.

I am using the expressions “in all but name” and “effectively” because legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut. (…)

So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.

If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus. (…)

FT Alphaville has a good piece on this wealth tax (The stupid idea, and the system) in which he quotes Barclay’s:

Recent events have highlighted the increasing willingness of governments and regulators to impose losses on bondholders and depositors. (…)

In addition to highlighting the risk of eroding protection for European bank bondholders, we believe the action taken in Cyprus will reignite concerns about the stability of deposits in weaker banking systems, especially considering that deposit insurance is still provided locally. This flaw is to be addressed as part of the banking union but progress has been minimal.

Understand that Cyprus is (was) considered a tax heaven by Russians “nouveaux riches” who deposited enormous amounts into Cyprus tiny banks. They are learning that there is no free lunch, but small savers should not be impacted by this.

SPRING PEAK?

Equity markets hit a speed bump in the spring of each of the last 3 years. Not only were valuations getting pretty close to fair value on the Rule of 20 scale (19.2 in 04’10, 18.7 in 04’11 and 17.3 in 03’12, the latter admittedly more reasonable), but economic momentum stalled, leading to a soft patch and rising investor concerns, aggravated by political chaos in Europe and the U.S.

Concerns on the U.S. economy, the only “steady” engine at this time, center on consumers facing a significant fiscal drag and on the impact of the sequester. Looking for signs of weakening momentum, ISI weekly Company Surveys provided good early warnings in each of the last 3 years. So far, so good: the surveys diffusion index rose to a nine month high last week as retailers, auto dealers, truckers and credit card companies all had solid moves higher. The fact that the consumer side of the surveys has strengthened in the last 2 weeks is both surprising and reassuring.

Equity valuation worsened a little last week as U.S. inflation rose from 1.6% in January to 2.0% in February, a level that looks like a strong anchor for inflation (see below). As a result, the Rule of 20 reading is now 18.1 (16.1 trailing P/E + 2.) inflation), 10.4% below fair value while downside to the rising 200-day moving average (1415) is 9.2%. Hmmm…

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So, the upside = technical downside. The economic momentum is positive (see below) but inflation ticked up a little. March CPI could benefit if gasoline prices decline some more. Earnings season resumes in 3 weeks but Fedex results and conf. call on Wednesday will be scrutinized for signs of impending weakness…or continued strength. American politics are nowhere near stable but having survived the fiscal drag and the sequester, so far at least, investors have become less apprehensive of the games played in DC. Same in Europe…

EARNINGS WATCH

Overall, 83 companies have issued negative EPS guidance for Q1 2013, while 25 companies have issued positive EPS guidance. Thus, 77% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 61%. (Factset)

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The most recent S&P data (March 14) shows Q1’13 estimates at $25.53, down 2.5% from Dec. 31, 2012 but essentially unchanged since mid-February ($25.57). Earnings would rise +5.3% Y/Y and reverse 2 quarters of Y/Y declines. Fingers crossed

U.S. INFLATION STEADY AT 2.0%

Higher energy prices pushed the U.S. CPI up 0.7% in February, +2.0% Y/Y. All other ways used by the Cleveland Fed to monitor inflationary pressures rose 0.2% in February, very much in line with the trends of the last six months. Inflation seems stuck at the 2.0% level, although the Fed, perhaps seeking to cap expectations, still projects inflation to stay between 1.3% and 2.0% in 2013. The fact remains that monthly core CPI has gained 0.5% in the last two months, a 3.0% annualized rate.

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Gasoline prices surged 9.1% M/M in February, accounting for nearly three-fourths of the gain. Overall energy prices climbed 5.4% after declining the previous three months.

The national average retail price of regular gas hit a four-month high of $3.78 a gallon toward the end of February, according to Energy Information Administration data, up almost 15% from the start of the year. Prices have since eased a little and were at $3.71 in the week ended Monday, the EIA said.

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BTW:

Crude-oil futures fell sharply in London trade Monday as the euro-zone bailout for Cyprus’ embattled financial sector sent shivers through the market and pushed the dollar higher.

At 1000 GMT, the front-month May Brent contract on London’s ICE futures exchange was down $1.23 at $108.58 a barrel.

The front-month April light, sweet crude contract on the New York Mercantile Exchange was trading 77 cents lower at $92.68 a barrel.

Pointing up  I sense that the time to begin to worry about inflation is about now. John Mauldin posted a piece from Dylan Grice explaining how central bankers’ printing presses eventually cause inflation.

Bernanke has monetized about a half of the federally guaranteed debt issued since 2009. The incoming Bank of England governor thinks the UK’s problem hasn’t been too much monetary experimentation but too little, and likes the idea of actively targeting nominal GDP. The PM in Tokyo thinks his country’s every ill is a lack of inflation, and his new guy at the Bank of Japan is revving up its printing presses to buy government bonds, corporate bonds and ETFs. China’s shadow banking credit bubble meanwhile continues to inflate…

U.S. PPI Led Higher By Energy Prices; Elsewhere Inflation is Moderate

The producer price index for finished goods gained 0.2% last month (1.8% y/y), the same as during January. The latest rise matched expectations.

Also, as expected, there was a 0.2% gain (1.7% y/y) in prices excluding food & energy during February. A 3.0% advance (1.1% y/y) in energy prices led the increase in wholesale prices last month. That rise was led by an 11.6% spurt (1.1% y/y) in home heating oil costs. Gasoline prices followed with a 9.3% increase (1.2% y/y). Offsetting these gains was a 0.5% drop (+2.6% y/y) in food prices. Fresh fruit prices were 3.0% lower (+4.1% y/y) while dairy prices fell 1.3% (+3.6% y/y). 

EMU Inflation Steadies

The accompanying chart shows the incredible impact of the ongoing austerity programs in Europe. In high-inflation Italy the inflation rate has plunged. In low-inflation Germany inflation rate has continued to work lower. The current EMU rate of inflation is below 2%, the long-run policy objective of the European central bank.

If we look at the statistical standard deviation of inflation among the first 12 members of the community, we find that we are back-tracking to the kind of intra-community inflation differences that were present in the early goings of the Monetary Union. In the early days of the Union the standard deviation of inflation across these members of the community started about 0.9% occasionally flaring up to 1.2 1.3% with an average of about 1.1%.

Currently the deviations are back up to about 1% and the trend is rising. (…) Some huge divergences have reemerged within the Community despite the fact that the chart above seems to show that, at least for those countries, inflation rates are moving in tandem.

Open-mouthed smile  U.S. Industrial Production Recovers With Across-the-Board Gains

Industrial production jumped 0.7% (2.5% y/y) during February following a 0.1% January uptick, earlier reported as a 0.1% dip. Firmer factory sector production led the increase with a 0.8% rebound (2.0% y/y) after a 0.4% January drop.

The increase in factory sector output was led by a 3.6% rise (9.3% y/y) in motor vehicle production. In the consumer products area, furniture & related product production surged another 1.7% (0.3% y/y) while apparel output rose 0.2% (-2.1% y/y). For business equipment, machinery output posted a strong 1.7% gain (1.7% y/y) while electrical equipment production improved by 1.2% (2.9% y/y).

Pointing up  The capacity utilization rate recovered to 79.6% in February. In the factory sector, the rate increased to 78.3%, its highest level since December 2007.

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Markit looks at the rolling three month data:

The February upturn takes industrial production 1.5% higher in the three months to February compared with the prior three months, while manufacturing output is up some 2.3% in the same period – the strongest rate of expansion since March of last year.

These data therefore point to a strengthening rate of growth of the industrial sector in the first quarter compared to the end of last year. Industrial production rose just 0.7% in the fourth quarter, while
manufacturing output was up 0.8%.

Sun  And, considering the consumer sector, rightly concludes that

The upturn in manufacturing so far this year has coincided with better-than-expected non-farm payroll and retail sales data, suggesting that the US economy is faring well in the face of weak global economic growth, an increase in payroll tax and uncertainty caused by looming fiscal headwinds.

China Housing Prices Rise

Average new home prices in China rose sharply in February from a month earlier, a development that could give Beijing added reason to clamp down on the fast-heating property market.

(…) Prices of newly built homes in 66 of 70 large and medium-size cities rose in February from January, data released Monday by the National Bureau of Statistics showed. In January, prices rose in 53 cities.

Based on The Wall Street Journal’s calculations, prices in the surveyed cities rose 1.01% on average in February from January, compared with a 0.54% increase in January. (…)

Data provided show housing prices in the surveyed cities rose 1.75% on average in February from a year earlier, accelerating from the 0.63% increase in January from a year earlier, the first increase of its kind since February last year. In terms of floor space, housing sales jumped 55.2% in the January-February period from a year earlier.

Chinese Stocks Enter Correction as JPMorgan Cuts to Underweight  China’s stocks fell, dragging the Hang Seng China Enterprises Index down 12 percent from this year’s high, as slowing growth and faster inflation spurred JPMorgan Chase & Co. to downgrade the nation’s shares.

OH! CANADA

Slip in Home Sales Clouds Canada Forecast

(…) Now, Canada’s economic outlook is cloudier. Gross domestic product grew a paltry, annualized 0.6% in the fourth quarter, following a 0.7% gain in the prior three months. That was the weakest set of consecutive quarters since the recession. The economy grew just 1.8% last year, and many expect the government to soon trim its forecast of 2% growth for 2013.

Those numbers aren’t likely to get a lift this time around from the housing market. Existing home sales across Canada fell 2.1% in February from January—and dropped a sharp 15.8% from a year ago. Real-estate activity slowed in most major cities, and prices fell by the widest margin since July, the country’s real-estate trade group said Friday.

Nearly 80% of local markets across Canada posted year-to-year sales declines, the Canada Real Estate Association said. The average, non seasonally adjusted home price in Canada fell 1% year-to-year, CREA said, to 368,895 Canadian dollars ($361,697). (…)

Meanwhile, Canadian household debt reached another record high in the fourth quarter of 2012, according to the country’s statistics agency, although the pace of growth slowed sharply. (…)  The ratio of household debt to personal disposable income edged up to 164.97%, up slightly from 164.7% in the third quarter, Statistics Canada said Friday. That is the highest reading since the agency began compiling the data in 1990. (…)

Ghost  RBC Capital Markets summarizes Canada’s housing market:

Valuation metrics such as the price-to- rent and price-to-household income ratio suggest that homes are more than 60% overvalued nation-wide. And, despite historically low interest rates, affordability measures such as the RBC Housing Affordability Index, which measures home ownership costs as a percentage of household income, remain stubbornly high. In markets such as Vancouver and Toronto, ownership costs as a percentage of income are running at close to 90% and 60%, respectively, which seems unsustainable.

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Flaherty to cut spending in response to weak growth forecast

Meanwhile, in the U.S.:

2013 Economic Report of the President (456 pages)

CURRENCY WARS

Currency Intervention Has Big Trade Impact  Is the world facing currency worries or an all-out war?

(…) But a new paper by former senior U.S. Federal Reserve economist Joseph Gagnon says currency intervention — when a government forcibly lowers the value of their exchange rate — has an impact on other economies several times larger than originally thought. The findings back arguments by some economists and lawmakers that not enough is being done to stop currency manipulation.

Mr. Gagnon says that the $1 trillion a year spent on currency intervention by countries such as China, Switzerland and South Korea will continue to fuel trade tensions without stronger action. (…)

Mr. Gagnon’s paper argues that for every dollar a country spends to lower the value of a its currency, it boosts the trade balance by between 60 cents to a dollar. For a country such as China, that impact is three to five times bigger than the IMF calculated in its last exchange rate assessment released last year.

(…) Mr. Gagnon says the study has the potential to put pressure on the IMF and the Group of 20 largest economies to act more urgently to stop exchange rate interventions.(…)

Clock  EUROPE: Shortermism Is Back

Monti’s analysis guides EU debate  Economic reform taking too long to work, says prime minister

(…) the summit’s communiqué seemed to hint at a change in thinking. The conclusions, backed by all 27 leaders including Ms Merkel, endorsed “short-term targeted measures to boost growth and support job creation” and the need to “balance productive public investment needs with fiscal discipline”. Just kidding

At a post-summit press conference, José Manuel Barroso, the European Commission president who has long been one of the most ardent advocates of fiscal consolidation, appeared almost Keynesian.

“We should have short-term measures addressing some of the most pressing social needs and indeed addressing some of possibilities to have, let’s call them, ‘quick wins’ in terms of growth,” Mr Barroso said. (…)

Mr Monti might have succeeded in shifting leaders’ thinking of what was happening politically and economically in the eurozone. But the divisions over how to respond appear little changed from the day he took office a year and a half ago.

S&P warns of socially explosive situation in euro zone

Standard and Poor’s sees a high risk that Spain, Italy, Portugal and France will not be able to carry through necessary reforms as the unemployed become less willing to put up with austerity, S&P’s Germany head Torsten Hinrichs told a newspaper.

JAPAN VALUATION

Abenomics has become a buzzword and Japanese stocks have done well lately. This chart from CLSA (thanks Gary) puts Japanese equity valuation in perspective.

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Note: you may also want to read Grant Williams’ pretty negative analysis on Japan (‘It’s Just Bluefish’) before you commit all your savings.

The election of Shinzo Abe in December of 2012 has brought Kyle’s premise closer to realization but still hasn’t been enough to scare people out of the water, as they willfully ignore the mathematical implications of a PM promising to generate 2% inflation in a country that has the largest debt relative to GDP anywhere on earth but can, for now at least, borrow money at levels that will most definitely NOT be available to them should they succeed in their aims.

SENTIMENT WATCH

 

  • Snap! There Goes Dow’s Streak 

    The Dow industrials’ winning streak ended at 10 sessions, its best run since 1996, after a disappointing reading on consumer confidence sent stocks lower.

Stocks declined just as another major benchmark, the Standard & Poor’s 500-stock index, was about to join the Dow in record territory. (…)

“The market is taking a breather,” said Patrick Kaser, a portfolio manager with Brandywine Global Investment Management, which oversees $42 billion. “This is pretty minor, to be down less than half a percent. I think it’s encouraging.” (…)

Pointing up  Although the day’s move was modest, investor interest was high. Total trading was the year’s highest, with overall volume of New York Stock Exchange stocks exceeding 4.9 billion shares. Nasdaq trading also was the highest of 2013. (…)

As they question whether indexes have more gains in them, investors will be influenced by the fact that stocks have defied skeptics since before the election last year. Repeatedly, experts warned they had come too far, too fast, and repeatedly stocks broke higher.

Other signs of frothy sentiment also have been bubbling up, notably a jump in bullishness among investment advisory services polled by Investors Intelligence. Bulls increased sharply to 50.0% last week from 44.2%, while outright bears fell to 18.8% from 21.1%, their largest weekly drop in 10 months. Advisors looking for a correction also dwindled to 31.2% from 34.7%. Moreover, the spread between bulls and bears surged to 31.2% from 23.1% in just a week and put it in “the dangerous territory around 30%,” Investors Intelligence commented. A wide spread a year ago preceded a market retreat, the service noted. (…)

And for Dow Theorists, Kass pointed to the advance in the Dow Transportation Average, which is looking rather extended. The transports were 19% above their 200-day moving average Thursday, implying that the average was well ahead of itself, which has tended to portend a pullback to its trend. The last time this happened was in early May 2010, after which the market fell 18% over the next two months. In January 2010, the transports jumped 19% above their moving average; this was followed by a 12% dip over the next month. And in May 2006, they got 21% above their moving average, after which came an 11% dip over the next two months.

(…) As a matter of fact, the fever of despair is slowly dissipating. Editorials are more positive and blogs are less preoccupied. Media is realizing that dynamism abounds, that many firms are doing well and that life is not centered around politicians. Insightful investors are seeing the difference and, in turn, the stock market is quietly booming.

Italy Did Not Just Send in The Clowns Why The Political Stalemate Is a Warning to Democracies Everywhere

(…) One reading of this extraordinary outcome is that it was a protest against the painful spending cuts, tax increases, and economic reforms that Monti’s government implemented as a precondition (albeit an unstated one) for European Central Bank support. The fact that, together, Grillo, who promised a referendum on the euro, and Berlusconi, who took a euroskeptic stance throughout 2012, won more than half of the votes was described by the economist Joseph Stiglitz as “a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.”

But the Italian election is telling us much more than that. In fact, Grillo’s party, founded only in 2009, focused less on euroskepticism than on a blanket rejection of the established Italian political elite and its way of doing politics. Rejecting traditional campaign techniques in favor of social media, the party pushed its agenda of, first, ending the generous state subsidies and salaries paid to Italy’s political parties and elected politicians and, second, replacing them with a vaguely conceived Internet-based representation system. The Grillo phenomenon is a challenge not only to austerity politics, but to the traditional party system itself. The economic crisis gave Grillo a favorable wind, but his offensive against Italy’s corrupt and self-serving politicians was brewing even before the downturn began.

It would be unwise to dismiss the election results as yet another Italian anomaly. All across Europe, membership of political parties is at its lowest level since the World War II. Voters are also less loyal than ever to traditional parties — they are more likely to switch votes to a rival party or an entirely new one. Only days after Grillo’s triumph, the UK Independence Party, which campaigns for British withdrawal from the EU, came to within 2,000 votes of winning a by-election held to replace a disgraced Liberal Democrat MP, pushing the ruling Conservatives into third place. And the success of the Pirate Party in Sweden, the anti-Islam party led by Geert Wilders in the Netherlands, and more established populist parties such as the French Front National, confirm that Italy is far from being an outlier.

The economic crisis in Europe is threatening the very survival of the mainstream political parties. European citizens have been showing signs of frustration and dissatisfaction with their elected politicians for years. Even before the crisis, voters had tired of choosing between broadly similar political parties whose policy options are constrained by European laws or the pressures of globalization. Faced with the worst economic crisis since the Great Depression, this frustration is boiling over into resentment and rejection. And the imposition of draconian measures by supranational institutions only makes things worse.

All that has created a crisis of legitimacy for Europe’s ailing political parties. If the established political class can be blown out of the water in Italy, politicians Europe-wide must be wondering how safe they are from a similar fate. Political parties not only need to address the economic crisis, they also need to reconnect with voters and revitalize their central role in democratic politics. If they do not, what happened in Italy may soon repeat.

Angry smile  SAC in record $614m insider settlements
Agreements over trading in Wyeth, Elan and Dell shares

(…) A person close to SAC said the fund had chosen settlement over two to three years of civil litigation that would follow the trial of Mr Martoma, threatening prolonged uncertainty for investors and staff of the hedge fund. (…)

Ed Butowsky, of Chapwood Investments, said he retained full confidence in SAC and Mr Cohen to manage money for him and his clients following the settlement: “Its like saying you would drop Michael Jordan from your team because of a technical foul”.

A technical foul!!!!!!!

SAC said in a statement: “We are happy to put the Elan and Dell matters with the SEC behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

Yeah, sure!

Remember Martha?

According to U.S. Securities and Exchange Commission (SEC), Stewart avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart’s broker at Merrill Lynch. The day following her sale, the stock value fell 16%.

In the months that followed, Stewart drew heavy media scrutiny, including a Newsweek cover headlined “Martha’s Mess”.

After a highly publicized five-week jury trial that was the most closely watched of a wave of corporate fraud trials, Stewart was found guilty in March 2004 of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators, and was sentenced in July 2004 to serve a five-month term in a federal correctional facility and a two-year period of supervised release (to include five months of electronic monitoring).

Bacanovic and Waksal were also convicted of federal charges and sentenced to prison terms. Stewart also paid a fine of $30,000.

In August 2006, the SEC announced that it had agreed to settle the related civil case against Stewart. Under the settlement, Stewart agreed to disgorge $58,062 (including interest from the losses she avoided), as well as a civil penalty of three times the loss avoided, or $137,019. She also agreed to a five-year ban from serving as a director, CEO, CFO, or any other officer role responsible for preparing, auditing, or disclosing financial results of any public company.