NEW$ & VIEW$ (20 AUGUST 2013)

Fear of Easy Money Retreat Roils India

The Fed’s plan to reduce monthly bond purchases is exposing the deep-seated fragility of India’s economy, underscoring the risks facing emerging markets at a time of rising global interest rates.

India’s stock market tumbled 1.6% Monday, adding to a 4% decline Friday, and the rupee hit a fresh low against the dollar. Government-bond prices slumped, sending yields sharply higher.

(…) as their export engines have sputtered, because of China’s slowing growth and uneven demand in the U.S. and Europe, these [emerging] economies have started to run large current-account deficits, which occur when imports outweigh exports. As investors begin demanding higher returns for taking on risk, nations with large economic imbalances are getting punished. (…)

The selloff in Indian assets began in May, as Fed officials started discussing plans to pull back from the $85 billion of monthly bond purchases designed to bolster uneven U.S. economic growth. Seeing interest rates rise in rich-country markets such as the U.S., investors who had sought investments in faster-growing emerging markets pulled their funds.

The selloff has since spread to other developing nations, such as Indonesia and Thailand, which like India are exposed to rising global interest rates, thanks to budget and current-account deficits that mean they must borrow to finance daily spending.

The Indonesian rupiah fell to its lowest level in four years Monday. Shares slid 5.6% in Indonesia and 3.3% in Thailand. Asian shares fell further in early trading Tuesday. Indexes in Japan and Australia were both down 0.7%, and Indonesia’s main index dropped 3%. (…)

Just kidding  Let’s not forget that financial markets are communicating vessels.

Emerging markets selling hits sentiment
Sell-off worsens in Indonesia, India and Thailand

 

Brazil’s Currency Slides to New Low

Brazil’s currency hit a new low against the dollar amid increasing concerns that the country’s policy makers are failing to reinvigorate the South American economy.

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(…) Brazil’s central bank has tried to fight the outflows by raising interest rates three times this year, raising the yields on the country’s debt. It also has stepped up market interventions, pumping $7.6 billion into the currency-futures market in the past week and $45.8 billion since May 31. The real is down more than 10% over that period.

“They’re intervening like crazy, and it’s still not working,” said Sara Zervos, portfolio manager of the $11.7 billion Oppenheimer International Bond fund . “It’s gotten to the point where investors and even domestic citizens have lost confidence in the ability of the government to navigate the country into growth.” (…)

Bond Market Bear Markets

After a 71.35% rally over 4,571 calendar days from 1/18/2000 to 7/24/2012, the US long bond future is quickly approaching bear market territory for the first time in more than 13 years. 

Ed Yardini reveals who the big sellers are (US International Capital Flows)

The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.

Ghost  This a.m.:

  • Morning MoneyBeat: Stock Selloff Starting to Get Serious (WSJ)

This selloff is proving to be more than just a blip on investors’ radars.

The Dow and S&P 500 are each riding their first four-day losing streaks of the year and have fallen in nine of the past 11 trading days. The Dow is down 4.1% from its record high hit earlier this month, a skid that has brought back memories of the spring swoon that was also driven by worries about future Fed stimulus.

A lackluster earnings season, negative technicals – the S&P 500 fell through its 50-day moving average with authority on Monday – and historically tough months ahead are making some investors nervous that this selloff could be worse than what transpired a few months back.

Stocks are Tapering Themselves (Barron’s)

The Dow Jones Industrial Average is coming off its worst week of the year and now, for the second time in 2013, it is trading below its important 50-day moving average. Even without any fancy indicators, it is not difficult to surmise that something has changed in the stock market. Now is not the time for taking big risks.

Not only has the blue chip index dipped below its 50-day average, but it is the first major index to fall below its rising trendline from the market’s 2012 low (see Chart 1). That is a big deal, but unfortunately for the bears the Dow is the only major index to accomplish this dubious feat.

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Fingers crossed  (…) A longer-term view of this index suggests that it has its sights set on the vitally important 200-day moving average, which should provide some comfort to the bulls. After all, one simple definition of a bull market is consistent trading above this metric. At its current rate of advance, this average will rise roughly 150 points to meet chart support from the Dow’s June low in two or three weeks. This is where the risk/reward equation will once again be favorable for the bulls. (…)

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BUT HOW ABOUT THE ECONOMY?

The Philly Fed ADS Business Conditions Index

The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed’s National Activity Index, the August update for which will be published tomorrow (more about the comparison below).

Named for the three economists who devised it, the index, as described on its home page, “is designed to track real business conditions at high frequency.”

The index is based on six underlying data series:

  • Weekly initial jobless claims
  • Monthly payroll employment
  • Industrial production
  • Personal income less transfer payments
  • Manufacturing and trade sales
  • Quarterly real GDP

Hmmm…

This next chart shows that business sales are growing very, very slowly, in both nominal and real terms.

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And this one from Bloomberg Briefs shows that the Fed is not helping at all and is not about to begin helping.

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Meanwhile, the U.S. consumer seems exhausted:
 
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ELSEWHERE
 
Japan exports slide amid subdued demand
Decline puts spotlight on plan to raise consumption tax

(…) Figures from the finance ministry on Monday showed that total exports fell 1.8 per cent from June, to Y5.78tn ($59bn), when adjusted for seasonal variations. That marked the first month-on-month decline in the yen value of shipments since November last year, when Shinzo Abe’s Liberal Democratic party began to push for a lower currency to support an ambitious, multifaceted growth programme.

Falls were led by the US, Japan’s top export partner, where the nominal value of shipments dropped almost 3 per cent from June to just over Y1.1tn, on an unadjusted basis. Taking into account fluctuations in exchange rates and prices, overall exports in July were 2.1 per cent weaker than the previous three-month average, according to calculations by Nomura. (…)

CHINA: SLOW AND SLOWER

Big debate whether China has hit bottom. CEBM Research’s mid-August surveys say:

  • The general condition of the steel market improved over the last month, with nearly 60% of respondents reporting sales better than expectations.
  • In August, the cement market remained stable and in-line with seasonal trends. Most respondents reflected that they had not observed any “stabilizing growth” policies from their local governments. Presently the amount and demand of projects in progress was considerable but some projects were terminated due to funding shortages. Compared with survey results in July, the proportion of producers we surveyed reporting that sales in the first half of August were below expectations declined from 37% to 23%.
  • Actual demand for construction machinery is not recovering. Historically, sales in August are generally at the year’s bottom. Most clients do not want to buy equipment before the second half of September unless it’s an urgent necessity. Most dealers did not see project starts or preparations for new construction. Progress of ongoing construction projects also remains slow. Funding constraints took the largest share of the blame.
  • During the August Heavy Truck Dealer Survey, 0% of the respondents reported sales in the first half of August exceeded expectations, while 63% believed sales were in-line with expectations and 37% reported sales below expectations. Generally speaking, respondents believe that sales in August will be increasingly weaker than seasonal trends.
  • Pointing up July Copper Imports Driven by Financing Demand Rather Than End Consumption We did not find any obvious signs of demand rebound in the August communication between copper traders and end users, and end demand is believed to be flat in September according to respondents. Although July copper import volume reached a 14-month high, based on our communication with copper importers, a large portion of copper imports were driven by tight liquidity rather than robust end consumption, as most copper import transactions are settled by letters of credit rather than cash. Some copper traders also said that the impact of these copper imports has not reached the Shanghai spot market yet, but this is ultimately inevitable. This revival in copper financing may distort the copper balance in China once again.

Work or Welfare: What Pays More?

(…) The report, by Michael Tanner and Charles Hughes, is a follow-up to Cato’s 1995 study of the subject, which found that packages of welfare benefits for a typical recipient in the 50 states and the District of Columbia not only was well above the poverty level, but also more than a recipient’s annual wages from an entry-level job.

That hasn’t changed in the years since the initial report, said Mr. Tanner, a senior fellow at Cato. Instead, the range has become more pronounced, as states that already offered substantial welfare benefits increased their packages while states with lower benefits decreasing their offerings. (…)

The authors found that in 11 states, “welfare pays more than the average pretax first-year wage for a teacher [in those states]. In 39 states, it pays more than the starting wage for a secretary. And, in the three most generous states a person on welfare can take home more money than an entry-level computer programmer.”

Fed advises US banks to lift capital targets More regulatory capital needed for periods of market stress

The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday.

The study, which examined banks’ approaches to the Fed’s recent stress tests, also said that while banks had “considerably improved” their regulatory capital planning in recent years, they had “more work to do to enhance their practices”.

Follow up on The Coming Arctic Boom:

From China to Europe, Via Arctic

China’s Yong Sheng is an unremarkable ship that is about to make history. It is the first container-transporting vessel to sail to Europe from China through the arctic rather than taking the usual southerly route through the Suez Canal, shaving two weeks off the regular travel time in the process. (…)

The travel time of about 35 days compares with the average of 48 days it would normally take to journey through the Suez Canal and Mediterranean Sea.

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Chinese state media have described the approximately 3,400-mile Northern Sea Route, or NSR, as the “most economical solution” for China-Europe shipping. Cosco has said that Asian goods could be transported through the northern passage in significant volumes.

The NSR, at roughly 8,100 nautical miles, is about 2,400 nautical miles shorter than the Suez Canal for ships traveling the benchmark Shanghai-to-Rotterdam journey, according to the NSR Information Office. (…)

The Yong Sheng’s travel comes as shipping volumes on the arctic route are rising fast amid warmer weather, which has kept the passage relatively free of ice for longer than in recent decades.

The Russian-run NSR Administration has so far issued 393 permits this summer to use the waters above Siberia, compared with 46 last year and a mere four in 2010. The travel window usually opens in July and closes in late November when the ice concentration becomes prohibitive for sailing. (…)

Mr. Balmasov said even ships without ice-breaking capabilities received permits as the weather became warmer. “This cuts the cost of operators as the seaway is free of ice and the voyage time significantly lower,” he said.

Arctic ice covered 860,000 square miles last year, off 53% from 1.8 million square miles in 1979, according to the National Snow and Ice Data Center of the U.S. (…)

“It’s warming very quickly in the arctic and I would not be surprised if we see summers with no ice at all over the next 20 years. That’s why shipping companies are so excited over the prospects of the route,” Mr. Serreze said. (…)

The benchmark Asia-to-Europe shipping route accounts for 15% of total trade. (…) Shipowners recognize the potential of the route, but say it will take years to determine whether it will become commercially viable.

“We are looking into it but there are still many unknowns,” said a Greek shipowner whose vessels are chartered by a number of Chinese companies that trade with Europe. “The travel window is short and if ice forms unexpectedly your client will be left waiting and your cost will skyrocket to find an icebreaker. But if climate change continues to raise temperatures, the route will certainly become very busy.” (…)

Lloyd’s List, a shipping-industry data provider, estimates that in 2021 about 15 million metric tons of cargo will be transported using the Arctic route. That will remain a small fraction of the volumes carried on the Suez Canal. More than 17,000 vessels carrying more than 900 million tons of cargo plied the canal route last year.

 

NEW$ & VIEW$ (15 AUGUST 2013)

Storm cloud  Wal-Mart U.S. same-store sales slip 0.3 percent

Wal-Mart Stores Inc posted disappointing quarterly U.S. sales on Thursday as shoppers pinched by higher payroll taxes and gas prices made fewer trips to its stores.

In addition to missing analyst estimates, Wal-Mart also showed a jump in inventory levels in Q2 and warned on emerging markets.

Storm cloud  Macy’s Shoppers Remain Cautious

Second-quarter transactions, which the company considers a proxy for traffic, declined 1.6%, a development that Chief Financial Officer Karen Hoguet said was a concern. Customers remain stretched and may have decided to spend their money on other goods, she said on a conference call with analysts.

Macy’s CEO Terry Lundgren blamed disappointing sales on “consumers’ continuing uncertainty about spending on discretionary items in the current economic environment.” Like other retailers, it said it had to discount to clear merchandise after a cool spring hurt summer merchandise sales. Inventory growing faster than sales also was a cause for concern.

Same-store sales slipped 0.8%.

Pointing up  Many large retailers posted tepid sales recently and complained of a generally cautious consumer. Yet, retail sales data were pretty good in the last 3 months, contrary to the trend displayed by consumer spending in the national accounts as this chart from Pictet shows. Hmmm…Driving blind indeed!

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Fingers crossed Consumers Step Up Borrowing

After years of struggling to shed debt, Americans are finally gaining enough confidence in their finances to step up borrowing for autos, homes and other goods—a shift that could boost the economic recovery.

Auto lending increased by $20 billion in the second quarter from the previous quarter, the largest gain in seven years, Federal Reserve Bank of New York figures showed Wednesday. Americans also increased their credit-card balances, reversing a first-quarter decline, and took out more mortgages.

At the same time, total consumer debt declined by $78 billion last quarter to $11.15 trillion, putting it 12% lower than its peak in the fall of 2008 during the recession and at its lowest level since 2006.

Most of the adjustment was due to a decline in the amount of debt tied to outstanding home loans, likely due to lenders’ write-offs from foreclosures and recent gains in home prices that helped owners sell.

One exception is student debt. The amount of education loans outstanding has increased every quarter since the New York Fed began tracking the figure in 2003. They now account for almost 9% of all consumer debt, up from 3% a decade ago.

Debt Load

The New York Fed data also showed that Americans are doing a better job keeping up with their bills.

Only 5.7% of all consumer debt is 90 days or more late, the lowest level since 2008. The delinquency rate fell in every category measured last quarter, including mortgages and credit cards. (…)

The 90-day delinquency rate nearly tripled from the start of the recession to the first quarter of 2010, when it peaked at 8.7%. (…)

Lenders now appear to be loosening their standards. The total number of credit-card accounts, which fell sharply in the recession’s wake, posted the strongest gain in two years last quarter. (…)

But Macy’s said yesterday

that new banking regulations implemented after the financial crisis is making it harder for Macy’s to sign up new credit-card customers, which also contributed to weaker sales.

More Car Loans Than Mortgages in U.S.

There are now more auto loans than mortgages in the U.S., but most of them are going to older Americans, according to new data from the Federal Reserve Bank of New York.

(…) Americans were holding 84 million auto loans in the second quarter of 2013, compared with 80.6 million mortgages, the New York Fed’s Household Debt and Credit Report showed. (…)

Most auto loans go to older borrowers, with the greatest share going to people aged 30 to 49. That trend predated the recession, but the recovery has come faster for older Americans. The only group originating more loans than before the recession are people over 50, likely a result of aging Baby Boomers.

But 18 to 29 year olds haven’t seen much of a recovery. (…) People aged 18 to 29 are taking out 24% fewer loans than they did prior to the recession, compared to about 10% fewer loans for 30 to 49 year olds. (…)

Auto  The reality is that many young people are trying to avoid having to buy a car while the growing number of older folks are traveling less. (Chart from The Liscio Report)

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Producer Price Index: No Change in Headline Inflation, Core Rises 0.1%

(…) the July Producer Price Index (PPI) for finished goods shows no change month-over-month, seasonally adjusted. Core PPI rose 0.1% (which the BLS rounded up from 0.05%).

Year-over-year Headline PPI is at 2.12% (rounded to 2.1% by the BLS), down from last month’s 2.5%, which was the highest since March 2012. In contrast, Core PPI at 1.20% is at its lowest YoY since June 2010.

Click to View

EMERGING SUBMERGING

(Ed Yardini)

image(Scotia Capital)

(Ed Yardini)

CHINA: SLOW AND SLOWER

With Exports At 4-Year Low, Is Japan Missing Boat to China? New figures released by Japan’s government-affiliated trade promotion body show that not only is trade with China falling, officials expect the downturn to be prolonged.

(…) But even as emotions have calmed, Jetro officials say China’s suddenly weaker economy has led to continued reductions in exports. Lackluster private consumption in China contributed to a 47.7% drop in exports of digital cameras and other audio-visual equipment, the figures showed.

(…) Jetro predicts Japanese exports to China will stay keep declining, and deficits will widen further.

China’s slowdown and the ongoing diplomatic tensions have made more and more Japanese companies wary of investing in China. According to Jetro, Japan’s direct investment in China for January-June fell 31.1% from a year earlier to $4.9 billion.

This compares with a 55.4% increase to a record $10.3 billion for the Association of Southeast Asian Nations.

Pointing up The shift is likely to continue, as Japanese companies seek a safer political environment and lower labor and business costs, said Jetro Chairman Hiroyuki Ishige.

Chinese Banks Feel Strains After Long Credit Binge

China’s banking sector is showing some cracks, as years of rapid credit growth in the country has led to serious debt problems for local governments and companies and numerous white-elephant projects.

In a bid to beef up their capital base, the country’s four largest state-owned banks by assets—Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd.—recently won board approval to issue up to a total of 270 billion yuan ($44.1 billion) in securities in the next two years. The figure is bigger than the total amount of issuance by the Big Four in the past two years.

A recent analysis by ChinaScope Financial, a research firm partly owned by Moody’s Corp., shows that China’s banks would have to raise between $50 billion and $100 billion through equity sales in the next two years to maintain their current capital-adequacy levels.

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Assets in China’s banking sector jumped 126.5% to about $21 trillion as of the end of last year from four years earlier, making it the fastest-rising banking system among emerging economies, according to Fitch Ratings Inc. But it also is the most thinly capitalized among those economies, with the amount of equity representing only 6.5% of total assets in China’s banking system. By contrast, equity represents an average of 11.2% among 48 emerging economies.

Chinese regulators are taking note. In a rare interview with state broadcaster China Central Television on Aug. 2, Shang Fulin, chairman of the China Banking Regulatory Commission, acknowledged that important risks stem from loans to local governments and those created outside banks’ balance sheets.

FT Alphaville adds this:

Gavyn Davies looked at China’s fiscal space to address another financial crisis last week, and said it appeared the country’s government could cover bad debts equivalent to 20 per cent of GDP (similar to the amount that was “bad-banked” in 1999) by taking its public debt ratio to 100 per cent – not out of the ballpark terrible, compared to other countries. However, he points out that the rapid rise in debt ratios mean that this must be addressed quickly.

SENTIMENT WATCH

From The Short Side of Long:

  • AAII survey readings came in at 40% bulls and 27% bears. Bullish readings fell by 4% while bearish readings rose by 2%. The AAII bull ratio (4 week average) currently stands at 64%, which indicates very high optimism amongst the retail investment community.  For referencing, AAII bull ratio survey chart can been seen by clicking here, while AAII Cash Allocation survey chart can be seen by clicking clicking here.

Chart 1: Bearish sentiment is almost non existent these days…

Source: Short Side of Long

  • Investor Intelligence survey levels came in at 52% bulls and 19% bears. Bullish readings increased by 3%, while bearish readings fell by 1%. Bearish readings have now fallen to the lowest level since early 2011 as equity market was in the process of a major top and a 20% sell off. Furthermore, II bull ratio remains above 73% a serious “sell signal” territory that traders and investors alike should consider. For referencing, II bull ratio survey chart can been seen by clicking here.
  • NAAIM survey levels came in at 76% net long exposure, while the intensity fell to 130%. the recovery in sentiment by fund managers, seen in this survey, now lines up with the mood of the remain survey indicators. For referencing, recent NAAIM survey chart can been seen by clicking here.
  • Other sentiment surveys continue to rise towards extreme optimism. However, the movement  has been rather mute in recent weeks. Consensus Inc survey is still rising towards extreme territory, while Market Vane survey is on a cusp of it too. All in all, nothing new to report here.

Chart 2: Retail investment community continues to pile into stocks

Source: Short Side of Long

  • Last weeks ICI fund flows report showed “equity funds had estimated inflows of $714 million for the week, compared to estimated inflows of $4.20 billion in the previous week. Domestic equity funds had estimated outflows of $926 million, while estimated inflows to world equity funds were $1.64 billion.”The chart above shows that retail investment community continues to pile into stocks this late in the rally (S&P is up over 55% from October 11 lows). Rydex fund flows are also rising too. Recent data showed that leveraged funds (usually not featured here) showed 6 times more bullish inflows relative to bearish funds. That is the highest reading for the bull market since it began in March 09. For referencing, recent Rydex fund flow chart can be seen by clicking clicking here.

High five  You may want to read this before acting on the above: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!

 

NEW$ & VIEW$ (13 JUNE 2013)

Lightning  Nikkei Enters Bear Market

Markets suffered another bruising day as investors scrambled for the exits, with Japanese stocks entering a bear market. The Nikkei ended 6.4% lower. Declines continued in the U.S. and Europe.

Core benchmark indexes in Europe were all down more than 1%. (…)

The fear that the Fed could change its monetary policy, along with signs that the U.S. economy is recovering, has encouraged investors to pull money out of emerging markets that are typically perceived as risky.

The resulting outflows have hit some of Asia’s smaller markets the hardest—such as the Philippines and Thailand, which were down 6.8% and 2.1% respectively Thursday. Along with Japan, these markets were previously some of the region’s best performers before the selloff started. (…)

In Thailand where the baht has fallen recently, the finance minister said it is at an “appropriate” level and that outflows were to blame. In Korea, the central bank said the yen’s recent swings and the possible end to aggressive monetary easing in the U.S. are key downside risks for the country’s growth.

The other dampener to sentiment came from China. Chinese stocks plunged after markets in the mainland reopened after a three-day public holiday, getting their first chance to react to signs the economy is slowing.

The Shanghai Composite Index hit a six-month low of 2126.22 in the session and finished down 2.8% at 2148.36. The Hang Seng China Enterprises Index, a measure of Chinese companies in Hong Kong, plunged 3.4%, its worst percentage fall since May 2012.

The dollar was last at ¥94.35 compared with ¥96.01 late Wednesday in New York. The dollar hit a two-month low against the dollar of ¥93.76 earlier in the session and has now lost around 9.2% of its value against the yen from the multiyear peak it reached on May 22.

EM economies in danger of overheating, World Bank says
Development bank says growth may be unsustainably fast

Some of the world’s fastest growing emerging economies are in danger of overheating and should tighten monetary or fiscal policy, the World Bank has warned.

The world’s largest development bank called out the Philippines, Thailand and Vietnam in East Asia, Colombia and Ecuador in South America and Ghana in Africa as countries where growth may be unsustainably fast.

Emerging Markets Act to Stem Capital Flight

Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity.

India’s central bank sold dollars the past two days to stem the rupee’s slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate today. Brazil said yesterday it would unwind some of the capital controls it began putting in place in 2010 — when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week.

 Indonesia Unexpectedly Raises Rate for First Time Since 2011

Bank Indonesia unexpectedly raised its key interest rate for the first time since 2011 as Governor Agus Martowardojo accelerates efforts to support the currency and cool inflation expectations. The rupiah pared losses.

The central bank increased the reference rate by a quarter of a percentage point to 6 percent, it said in Jakarta today.

Indonesia joins emerging markets such as Brazil in addressing an outflow of capital amid concern that developed nations will scale back the liquidity they have been pumping.

CHINA SUMMARY CHART: Still slowing(Ed Yardeni)

BoJ insider warns on impact of tax rises
Planned tax increases could derail Abe inflation targets

Addressing a meeting of business leaders in Hokkaido, Sayuri Shirai said that the chances of the BoJ hitting its two-year, 2 per cent inflation target were “tilted somewhat to the downside”, bearing in mind the planned rises in Japan’s rate of consumption tax from 5 per cent to 8 per cent next April, and to 10 per cent in 2015.

“If many firms perceive that the price increase triggered by the tax hikes could be sufficiently large to constrain household domestic demand, they may partially postpone raising their final sales prices”, Ms Shirai said.

If that happens, the rate of consumer price inflation “could be lower than that projected by the Bank,” she said. (…)

The comments from Ms Shirai, seen as one of the more dovish figures at the BoJ, mark the first time that a board member has spoken out on the feasibility of the inflation target in the context of Japan’s fiscal tightening.

The overhaul of the country’s consumption tax was the final act of Japan’s previous prime minister, Yoshihiko Noda, who pushed for a deal under which the tax would begin rising provided the government were convinced that the economy was strong enough to bear it.

Mr Abe is expected to make that judgment in October, with some close to the prime minister describing his decision as finely balanced. The last increase in Japan’s consumption tax, from 3 per cent in April 1997, is still blamed by some economists for tipping the country back into recession in 1998. (…)

Lightning  Spanish House Prices Slump

According to data released Thursday from Spain’s National Statistics Institute, or INE, house prices in the first quarter dropped 6.6% from the fourth quarter, the fastest pace since INE began collecting house price data in 2007. The annual pace of decline was 14.3% compared with a year earlier, accelerating from 12.8% in the fourth quarter.

The latest decline is expected to add to pressure on Spanish banks, which are still loaded with loans to developers and are already hurt by tumbling prices and property assets that keep depreciating. In recent months, many of them transferred €50 billion ($66.69 billion) worth of such assets to a “bad bank” created to relieve them of toxic assets in their balance sheets under the terms of a European Union bailout for the banks agreed on last year. But the continued slump in the housing market threatens to create more problematic assets further down the road.

Southern Europeans Flee to Germany

(…) The OECD said around 34,000 Greeks and 28,000 Spaniards moved to Germany between September 2011 and September 2012, according to preliminary data for that period. The number of Greeks and Spaniards emigrating over the four-year period to 2011 more than doubled, the OECD said.

“Altogether, this represents an increase of almost 40,000 additional immigrants from crisis countries to Germany in 2012 compared to 2011,” the report said.

The OECD said that altogether 116,000 people from “crisis countries” had moved to Germany in 2012, and while acknowledging that figure doesn’t constitute an “exodus,” it still shows a “significant contribution to workforce entries in Germany.”

EARNINGS WATCH

Pointing up  SECOND-QUARTER EARNINGS GUIDANCE AMONG THE MOST NEGATIVE ON RECORD

Second-quarter earnings guidance looks extremely weak, with 93 of the 116 preannoucements negative. The healthcare sector has the most negative N/P ratio, and the consumer discretionary sector is also very negative.

Of the 116 second-quarter earnings preannouncements given by S&P 500 companies, 93 of them have been negative, while only 14 have been positive. The resulting 6.6 negative to positive guidance ratio is the most negative since the first quarter of 2001. As seen below in Exhibit 1, the recent trend has been toward more negative preannouncements as earnings growth has slowed. While there is still more guidance to come as the second-quarter earnings season approaches, the N/P ratio as it stands is significantly more negative at 6.6 than for the first quarter, which itself was the most negative since Q3 2001, at 4.3. Exhibit 1.  S&P 500: Negative to Positive Guidance Ratio, 2008–Present

Exhibit 2.  S&P 500: Q2 Guidance — Negative to Positive Ratio by Sector

OIL

U.S. Notches Biggest Gain in Oil Output

The U.S. last year posted the biggest increase in oil production in the world and the largest increase in U.S. history, the latest sign of the shale revolution remaking world energy markets.

imageIn the latest sign of the shale revolution remaking world energy markets, crude production in the U.S. jumped 14% last year to 8.9 million barrels a day, according to the newly released Statistical Review of World Energy, an annual compilation of industry trends published by BP PLC for more than six decades.

imageBeyond the U.S., oil production increased almost 7% in Canada, raising North America’s profile as a global oil producer. (…)

While the U.S. shale boom increased production, many other oil-producing regions struggled with declining volumes. U.K. production fell 13.4% in 2012, as some of its North Sea oil fields near their fourth decade of life. Former OPEC member Indonesia experienced a 3.9% decline.

Libya grew its production from 479,000 daily to 1.5 million, mostly because it was able to restart output following disruptions related to its civil war. Powerhouse Saudi Arabia raised its world-leading output almost 4% to 11.5 million barrels per day. (…)

BP said world consumption grew 0.9%. Europe and North America used less oil, while the rest of the world, led by China, used more. (…)

Measured in 2012 dollars, the average oil price last year of $111.67 per barrel of Brent crude was just $2 lower than in 2011, which was the highest price at any time since the post-Civil War boom in Pennsylvania in the 1860s, BP said. Both prices were higher than such watershed years as 2008, when oil nearly hit $150 a barrel in the summer and the average was $103.71 a barrel in current dollars; 1979, when the Iranian revolution roiled markets; and 1973, the year of the Arab oil embargo. (…)

Pointing up  Fed Could Drain the Oil Market’s Tank

There is a shadow looming over oil prices in the shape of a big tank—and a big central bank.

At around 394 million barrels, U.S. commercial stocks of crude oil, excluding the strategic petroleum reserve, are hovering around their highest levels since the early 1980s.

image(Bespoke Investment)

In part, that reflects the shale-led surge in U.S. supply, with domestic production outpacing imports in late May for the first time since January 1997. (…)

Meanwhile, domestic demand is sluggish. The IEA expects it to average slightly less than 18.6 million barrels a day this year, down for the third year in a row. (…)

But another factor keeping inventories high has nothing to do with roughnecks or commuters. It emanates from Washington.

Refiners and oil marketing and trading firms keep stocks on hand to ensure they can supply customers. Low interest rates, facilitated by the Federal Reserve’s policy of quantitative easing, make it cheaper to finance those inventories. Indeed, those low rates can make it very profitable to buy oil, store it and lock in a margin by selling futures.

Energy economist Phil Verleger estimates that with short-term interest rates around 0.25%—roughly in line with Libor—the financing cost of holding stocks today is around two cents a barrel every month. Right now, three-month oil futures trade at about a 30 cents a barrel premium to the spot price. On that basis, assuming 90% leverage, an investor could buy oil and sell it three months forward, earning a 2.5% return after costs.

That might not sound like much. But it is five times the yield on three-month U.S. Treasurys and a no-brainer for a trader at an oil firm with access to storage capacity.

But the trade is getting squeezed over time. Back in February, the spread was around $1 a barrel, implying a return over three months of almost 10%. While spot prices have held pretty steady over the past few years, futures further forward have been slipping, likely reflecting rising expectations for U.S. supply and acceptance that the global economy’s recovery will be a gradual, drawn-out affair.

The upshot is that, with bond yields rising as the end of quantitative easing becomes a more realistic prospect, profits on the carry trade are likely to shrink further. The same trade described above at current spreads but with a 1% financing cost earns a return over three months of less than 0.7%.

As this squeeze becomes more apparent, it can become self-fulfilling as those holding inventories sell them in the expectation that futures will decline further. That liquidation adds further pressure to prices as it increases available supply.

Say 50 million barrels were liquidated over the second half of the year, which would simply bring U.S. inventories down to around their five-year average. That would amount to almost 274,000 barrels a day. To put that in perspective, it equates to about a third of the IEA’s expectation for global oil-demand growth this year.

The past few weeks have seen yields rise globally as bond investors raise their expectations of the Fed taking its foot off the gas. Oil investors won’t be immune.

Smile  U.S. Set for Smallest Deficit in 5 Years

The budget deficit for the first eight months of the fiscal year, which started Oct. 1, totaled $626.33 billion, down about 26% from the same period a year earlier, the Treasury Department said Wednesday in its monthly report.

Under current policies, the deficit is expected to fall to $642 billion for the full fiscal year and get as low as $378 billion in 2015, according to Congressional Budget Office projections. The last time the deficit was under $1 trillion was 2008, when spending outpaced revenue by $458.55 billion.

The government isn’t spending less. Outlays totaled $2.427 trillion from October through May, compared with $2.408 trillion a year earlier.

Rather, receipts so far this year have jumped about 15% to $1.801 trillion, thanks largely to higher payroll taxes, higher tax rates for households making more than $450,000 and stronger incomes.

 

NEW$ & VIEW$ (11 FEBRUARY 2013)

Short term indicators steady. Insiders selling. OECD LEIs. Bubbly yields. U.S. exports slowing. German employment. Canada slowing. U.S. productivity squeezing margins? Chinese credit risks. China IP rising. Emerging markets valuations. Currency fluctuations.

Fingers crossed SO FAR, SO GOOD

The uncertain effects of the ongoing fiscal drag combined with rising gasoline prices require close monitoring of the U.S. economy. Real disposable income surged 6.8% Q/Q annualized in Q4’12, mainly due to dividends having been shifted (i.e. prepaid) into Q4 to escape potentially higher taxes in 2013. In addition, $160B in higher taxes will hit consumers in Q1’13. Disposable income could drop more than 8% in Q1’13! Can higher house and stock prices and lower mortgage rates create enough wealth effect to offset the hit?

ISI’s weekly surveys remain solid up to Feb. 8. Industrial and housing survey data are strong but “some of the consumer surveys with smaller ticket size” have decelerated recently. Retailers surveys are weakish but auto dealers surveys remain good.

U.S. CONSUMER MONITOR STEADY IN JANUARY

The Discover U.S. Spending Monitor held steady in January dropping only one-third of a point from 91.1 to 90.8. Economic confidence among consumers remained relatively flat month-to-month, while more consumers are planning to increase their spending on household expenses like gas and groceries and home improvement purchases.

Pointing up Sucker Alert? Insider Selling Surges After Dow 14,000

(…) “In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012,” wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. “Insiders are waving the cautionary flag in an increasingly aggressive manner.”

There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company’s stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year. (…)

Looking at a longer time frame paints a bearish picture as well. The eight week sell-buy ratio from Vickers stands at 5-to-1, also the most bearish since early 2012. What’s more, the last time this ratio was at these levels was June 2011, just before another correction in the stock market took place.

Insider selling is not as significant as insider buying. But in my search for signs of a weakening economy, the January selling by people on the front line raises a yellow flag, especially coming after the year-end. If anybody needed to sell stock over the short term, the looming fiscal cliff provided ample reasons to sell in December.

OECD LEADING INDICATORS

Composite leading indicators (CLIs) show diverging growth patterns in the economic outlook of major economies. In the United States and the United Kingdom, the CLIs continue to point to economic growth firming but in the United Kingdom the signs are slightly weaker compared to last month’s assessment. In Japan and Brazil, signs of growth picking up are emerging.

In the Euro Area as a whole, and in particular in Italy and Germany, the CLIs point to a stabilisation in growth prospects; however in France growth is expected to remain weak.

In China and India, the CLIs point to growth below trend compared with more positive signals in last month’s assessment. In Canada and Russia the CLIs continue to point to growth below trend.

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High five  SEARCH FOR YIELD GETTING BUBBLY (charts from Moody’s):

See the diverging trends?

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Storm cloud  U.S. Trade Deficit Shrinks to Lowest Since January 2010 (Haver Analytics)

The U.S. foreign trade deficit during December improved to $38.5 from little-revised $48.6B in November. The improvement was due to a 2.1% increase (4.9% y/y) in exports and a 2.7% decline (-2.0% y/y) in imports. Real exports jumped 2.6% (2.7% y/y) while real imports plunged 3.1% (-1.1% y/y).

Petroleum Exports Soar To New High In Economic BoostThat looks like good news as many media reported it (e.g. the WSJ’s Data Suggest Economic Growth). Yet, details reveal that U.S. exports are continuing to slow down when excluding petroleum products from the trade stats. (Chart fro IBD)

In December, the increase in real exports was led by a 9.5% jump (4.7% y/y) in industrial supplies, mostly petroleum products, and a 1.1% increase (-6.8% y/y) in foods, feeds & beverage exports. The constant dollar value of motor vehicle exports fell 2.4% (+1.4% y/y); real exports of nonauto consumer goods exports declined 1.4% (+1.1% y/y) and real capital goods exports were off 0.9% (+2.7% y/y). (…)

Same with imports.

Leading the decline in imports was an 11.0% drop (-20.9% y/y) in the value of petroleum imports. The quantity of petroleum product imports was off 7.2% m/m and it was down 17.5% y/y. The price of crude oil fell to $95.16 from $97.45. Real imports less petroleum fell 1.6% in December (+2.4% y/y), led by a 3.9% decline (+3.5% y/y) in autos. (…)

Imports of nonpetroleum goods have actually been flat (+0.3%) in Q4. This means that U.S. domestic demand is waning. It also means that the U.S. economy is no longer a strong market for other economies.

The FT’s headline was another teaser, this one global: Trade surge hints at renewed growth Data from China, Germany and the US boost global hopes

Yet, China’s January data are significantly distorted by the New Year holidays and should therefore be heavily discounted. Why the FT included Germany in its headline is a mystery.

In Germany, both exports and imports fell in December compared with their levels a year earlier, reflecting weakness in Europe’s largest economy in the fourth quarter, which is expected to improve this year.

Speaking of Germany:

Lightning  ThyssenKrupp to cut 2,000 steel jobs
Lower demand forces €500m cost-cutting plan

(…) ThyssenKrupp said in a statement on Friday that “far-reaching structural adjustments and operational improvements are urgently needed to permit the continued running of the core units in the hot end operations and the hot rolling lines”.

ThyssenKrupp will consider “the closure, relocation or sale” of several business units, including plants in Germany and Spain, it said.

More than 2,000 jobs out of a total of 27,600 jobs at Steel Europe will be cut and a further 1,800 jobs could go via disposals. (…)

And, from Canada, the U.S. largest trading partner:

Storm cloud  Jobs downturn mirrors slump in housing and trade

Friday marked a plunge in home construction starts, to the lowest since August, 2009, and a tumble in exports to the United States, Canada’s largest trading partner. It also marked the first decline in employment levels in half a year, along with cooling growth in wages.

(…) exports to the United States tumbled in December, led by a decline in car and energy shipments.

MORE ON MCDONALD’S SALES

Same-store sales in the U.S. were up 0.9%. (…) The Asia/Pacific, Middle East and Africa region posted a 9.5% drop in same-store sales. McDonald’s pointed to weakness in Japan and in China, where the company said a controversy over chicken supplies has damped consumer appetite. (…)

In Europe, same-store sales declined 2.1%, as positive results in the U.K. and Russia were offset by weak performance in Germany, France and other areas, the company said. (WSJ)

Are Wages About to Start Rising?

(…) Wages rose 3.4% from 2011 to 2012 for full-time workers in computer and mathematical occupations, 5.1% for accountants and auditors, 7.5% for electrical engineers, and 4.4% for mechanical engineers.

Storm cloud  U.S. Worker Productivity Declines and Drives Up Costs

Nonfarm business sector productivity for Q4’12 declined 2.0% (SAAR, +0.6% y/y) and reversed virtually all of the 3.2% increase during Q3, revised from 2.9%. That left the 1.0% gain for all of last year down sharply from the roughly 3.0% annual increases during the two years immediately following the last recession. Lower productivity growth last quarter was accompanied by a quickened 2.4% rise (2.6% y/y) in compensation per hour. Nevertheless, for all of last year compensation growth slowed to 1.7%, its weakest since 2009.

This combination of lower productivity and high compensation caused unit labor costs to jump at a 4.5% annual rate (1.9% y/y). Declines during the prior two quarters, however, left the full year increase at a modest 0.7%. (…)

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Hmmm…That means margin compression.

Surprised smile  Surge in Chinese credit raises fears

Data stoke concerns over overheating in China’s economy

(…) Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis. (…)

The explosion in financing was only partly driven by banks, which made Rmb1.07tn in loans. The rest of the new credit – 60 per cent of the total – came from corporate bonds, loans by investment companies, direct lending from companies to other companies and bankers’ acceptances, a popular form of short-term financing in China.

CHINA IP ABOUT TO SURGE?

HSBC’s PMI index China’s manufacturing has improved considerably since bottoming at the 47.6 of August 2012. In fact, China’s PMI index rose in each of the five subsequent months having reached 52.3 in January 2013. Accordingly, the yearly increase of China’s industrial output should climb above December’s 10.3% advance. If China continues to improve, the recent financial market rallies may prove correct in their anticipation of faster growth for sales and profits. (Moody’s)

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EMERGING MARKETS VALUATIONS

Two charts from usfunds’ Frank Holmes (via Business Insiders):

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Investors dive into euro-yen policy gap
Spectre of currency wars as markets turn bullish on single currency

(…) Buying the euro and selling the yen has become one of the most popular trades in the foreign exchange market, with currency traders including hedge funds more bullish on the euro than at any time since July 2011. (…)

The rapid pace of the currency moves has alarmed policy makers in Europe and led to caution from government officials in Japan. The euro has risen nearly 9 per cent against the yen this year, outstripping its gains against the dollar of just over 1 per cent. (…)

Meanwhile, some analysts are urging caution on the euro after what many see as verbal intervention by Mario Draghi, ECB president, who said on Thursday that the euro’s strength could hamper the economic recovery of the eurozone. The comments sparked speculation the ECB could cut interest rates if the euro continued to gain in value.

G-7 Said to Discuss Statement to Calm Currency War Concern

The current wording, which still may be changed, contains a commitment to market-set exchange rates and an agreement that governments don’t use fiscal or monetary policy to drive currencies, the official said.

Franc Is Still Overvalued, SNB’s Zurbruegg Tells Aargauer

“The Swiss franc is overvalued even at today’s exchange rate against the euro,” Zurbruegg was cited as saying in an interview with Aargauer Zeitung published today. “The minimum exchange rate remains the appropriate instrument for the foreseeable future to ensure price stability.” The Zurich-based SNB confirmed the remarks.

 Lightning  Venezuela Slashes Currency Value

Venezuela moved to devalue its currency exchange rate with the dollar, a move aimed to address shortages of basic goods as importers struggle to get a hold of hard currency.

The bolívar—whose official name is the Strong Bolívar—was slashed by nearly a third of its value to 6.3 per dollar from a previous rate of 4.3 per dollar, Finance Minister Jorge Giordani told a news conference.

The move will help narrow the Venezuelan government’s budget shortfall, but will also spur inflation that is already among the world’s highest—highlighting the increasingly difficult trade-offs faced by Mr. Chávez after a more than a decade of populist economic policies. (…)

The move should ease the fiscal gap by giving the government more in local currency terms for every dollar it earns in oil exports through state oil giant Petroleos de Venezuela, one of the world’s biggest oil companies. The fiscal gap will close to 5.3% of gross domestic product compared with 8.5% last year, said Francisco Rodriguez, an economist at Bank of America Merrill Lynch. (…)

The move will raise the cost of imports, and Venezuela’s economy—hit by widespread nationalizations during the Chávez years—is increasingly dependent on imports. Alberto Ramos at Goldman Sachs estimated Venezuela’s inflation will rise to 30% this year as a result.

As Egypt Runs Out Of Dollars, Is It Next On The Devaluation Bandwagon?

 

NEW$ & VIEW$ (20 Feb. 2012)

Greek Rescue Close as Ministers Meet to Resolve Disputes

“I don’t think there will be a majority to go down any other avenue” than a Greek bailout, Austrian Finance Minister Maria Fekter told state broadcaster ORF yesterday. Her French counterpart, Francois Baroin, told Europe 1 radio today that “we have all the elements of an agreement.” (…)

The German Finance Ministry is “increasingly optimistic” on agreement, though some points need to be resolved, including a plan for an escrow account to ensure that Greek aid money goes to paying creditors, ministry spokeswoman Marianne Kothe said in Berlin. Euro officials have reached broad agreement with Greece on the account; “at this point it’s down to technical questions,” Kothe told reporters.

Smile   U.S. LEADING INDICATOR KEEPS RISING

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4 percent in January to 94.9 (2004 = 100), following a 0.5 percent increase in December and a 0.3 percent increase in November.

This fourth consecutive gain in the LEI reflected fairly widespread strength among its components, pointing to somewhat more positive economic conditions in early 2012. The LEI’s increase in January was led not only by improving financial and credit indicators, but also rising average workweek in manufacturing. These both offset consumers’ outlook about the economy, which remained pessimistic, though slightly less so.

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CHINA EASING

China cuts banks’ reserve ratios
Move expected to free up about $64bn for new lending

The People’s Bank of China said it would lower the reserve requirement ratio by 50 basis points from February 24. The cut will bring the ratio down to 20.5 per cent for the largest banks, and is expected to free up about Rmb400bn ($64bn) for new lending.

Storm cloud   China home-sale data show prices slumping  Local reports say no new homes sold in Beijing during holiday

Average new home prices were flat or lower across all large and medium-sized Chinese cities in January, compared to levels a month earlier, according to data released over the weekend by the National Bureau of Statistics.

Of 70 cities tracked by the bureau, prices were lower in 48 cities and little changed in 22, while none saw gains from the prior month

Punch   Foxconn lifts China workers pay again

Foxconn Technology Group, the top maker of Apple Inc’s iPhones and iPads whose factories are under scrutiny over labour practices, has raised wages of its Chinese workers by 16-25 percent from this month, the third rise since 2010.

In a statement on Friday, Taiwan-based Foxconn said the pay of a junior level worker in Shenzhen, southern China, had risen to 1,800 yuan per month and could be further raised above 2,200 yuan if the worker passed a technical examination.  It said that pay three years ago was 900 yuan a month.

OIL, THE BIG THREAT

Iran struggles to find new oil customers
Storm cloud    Crude at eight-month high as sanctions bite

Tehran is trying to sell an extra 500,000 barrels a day of oil, or nearly 23 per cent of what it exported last year, to Chinese and Indian refiners, according to two industry executives familiar with the talks. (…)

If it cannot find customers by mid-March for the oil, which is equal to the amount European refiners bought last year, Iran would be forced to put unsold barrels into floating storage in supertankers, or reduce output. Either measure could push oil prices higher.

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Confused smile   Saudi Arabia Cuts Oil Output, Export: Industry Report

The world’s top oil exporter, Saudi Arabia, appears to have cut both its oil production and export in December, according to the latest update by the Joint Organizations Data Initiative (JODI), an official source of oil production, consumption and export data.

The OPEC heavyweight saw production decline by 237,000 barrels per day (bpd) from three-decade highs of 10.047 million bpd in November, the JODI data showed on Sunday.

Pointing up  The draw-down was sharper for the actual amount exported, declining by 440,000 bpd, or 5.6 percent, to come in at 7.364 million bpd, the data also showed. The level would still be similar to exports after a steep ramp-up last June.

FISCAL TIGHTENING

The FT’s Gavyn Davies discusses the global experiment underway which combines progressively tighter fiscal policies with aggressive QEs by the central banks.

This is intended to reduce fiscal deficits while allowing aggregate demand to grow at least as fast as its trend rate. No one can be confident that the strategy will succeed – the evidence from last year is indecisive – but at least it constitutes a clear plan.

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Fingers crossed   China and Japan unite on IMF resources   Support conditional on eurozone increasing bail-out funds

EARNINGS WATCH

S&P data to Feb. 15, covering 88% of S&P 500 companies, show that 60% beat Q4 earnings estimates and 29% missed. The beat rate is unchanged from the previous week but better than the 57% beat rate as of Feb. 2nd when 70% had reported.

Sad smile   imageEstimates keep declining. Q4 estimates are now 23.76, down 0.8% from $23.94 one week ago. Q1’12 estimates edged 0.3% lower to $23.94.

ISI reports encouragingly that, so far this earnings season, reported revenue has beaten expectations 73% of the time and missed 22% of the time.

Pointing up   (Watch for an equity market update today).

Winking smile   THE AMERICAN BULL

(…) since 1978, whenever an American graced the Sports Illustrated swimsuit cover, the total return for the S&P 500 averaged an annual gain of 14.3% and was on the plus side 88.2% of the time, while during those years when no American was on the cover, the index averaged a total return of 10.8% and was positive 76.5% during that span.

THE INDIAN BULL

 

EUROZONE BANKING

High five   European banks: lost decade looms

Europe’s banks are a spurned lot: eurozone lenders now trade on just 0.4 times book value, less than half their US peers. Widen the net to Europe as a whole and it only rises to 0.6 times. That there are so many lonely hearts should not be a surprise though: few European banks are in mint condition after the last crisis and most are now preoccupied with the latest one. There are also European Banking Authority capital rules to comply with. The combination of having to boost equity and shrink assets amid a regional slowdown has slashed average returns on equity to just 2.4 per cent, according to Datastream data. If investors have been leery, global rivals have not. Banks from the US and Japan are eating European banks’ lunch – and some are cherry-picking for dessert. (FT Lex)

Lightning   But also lost deposits (chart from Henderson Asset Management). Pretty dangerous when you depend on wholesale markets for funding…

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Pointing up   COPPER

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U.S. HOUSING

FT Alphaville has a good piece on the apparent decline of U.S. housing inventory.

Depending on how you look at it, you would probably be justified in reacting to this chart from SocGen with either optimism or pessimism:

Optimism because the decline in overall inventory has recently fallen fast, pessimism because it is still higher than at any time since the late 1980s and there remains a big gap between visible and total inventory.

Credit Suisse expresses conventional wisdom:

The U.S. housing sector has been cheap by most measures for some time, but excess supply, driven by a steady stream of distressed homes, will continue to put downward pressure on home prices for the time being.

I generally try to fight conventional wisdom. A few thoughts:

  • Total visible inventory is at a 10-year low. This means that the actual supply of occupied and well maintained houses is very limited and has been falling rapidly.
  • Shadow inventory remains high but is also declining. It might increase following the recent deal with banks but the quality of those homes is most likely inferior.
  • Keep in mind that the bulk of foreclosures is situated in just a few states. Florida and California carry 35% of the foreclosed housing stock. The rest of the U.S. may be facing a shortage of available houses pretty soon.

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  • With so little offering in mots states, house prices could start rising rapidly if demand picks up. We have had many signs of increasing demand recently (HOUSING WATCH) 

Also, consider this:

Pointing up   Shadow inventory: now you see it, now you don’t

Florida is one of the worst housing markets in the U.S. and boasts the largest shadow inventory which bearish economists use to maintain their negative views. Here’s a way this inventory can change rapidly:

345 South Beach Condo Units Trade In Bulk For $124 Million

Nearly 350 South Beach residential and commercial condo units in a pair of projects – the Paradiso and Roney Palace – on the ocean side of Collins Avenue have traded for nearly $124 million, according to a new report from CondoVultures.com.

The buyers – 2377 Collins Resort LP and Roney 3 Investors LP both with Eric Franklin of Rinaldi, Finkelstein & Franklin of Greenwich, Conn. as contact – acquired the condo units in the first week of February 2012, according to an analysis of Miami-Dade County records. 

The condos are part of a series of transactions totaling nearly $230 million that includes 340 hotel rooms in the former Gansevoort Miami Beach Hotel and more than 50,000 square feet of developable land on the west side of Collins Avenue, according to government records. 

A consortium of investment funds comprised of Starwood Capital Group, the LeFrak Organization, and Invesco Limited has issued a joint statement claiming credit for the deal but declining to disclose the purchase price. 

The consortium did state it intends to invest “$100 million in an extensive renovation of the overall property” in hopes of repositioning the project into being one of Miami Beach “premier” destinations. 

“This bulk deal will have an immeasurable impact on the South Beach condo market,” said Peter Zalewski, a principal with the Bal Harbour, Fla.-based real estate consultancy Condo Vultures® LLC. “Prior to this bulk deal, there were nearly 1,000 developer units still unsold in the South Beach market from the South Florida real estate boom that began in 2003. After this bulk deal, the anxiety level – and price – to acquire unsold developer inventory in South Beach is likely to change.”

Just kidding   Americans Judge Reagan, Clinton Best of Recent Presidents

Americans believe history will judge Ronald Reagan and Bill Clinton as the best among recent U.S. presidents, with at least 6 in 10 saying each will go down in history as an above-average or outstanding president. Only about 1 in 10 say each will be remembered as below average or poor. Three years into Barack Obama’s presidency, Americans are divided in their views of how he will be regarded, with 38% guessing he will be remembered as above average or outstanding and 35% as below average or poor.

How do you think each of the following presidents will go down in history -- as an outstanding president, above average, average, below average, or poor?

Open-mouthed smile   THE CANDY MAN: (tks Terry)

<http://www.youtube.com/watch_popup?feature=player_embedded&v=5u03KAcEbEo#%21>

 

EM Equities: Revisiting Valuations

The value proposition of emerging market stocks remains unattractive.

Up to late 2010, the economic environment within developing nations was characterized as “as good as it gets”: growth was robust, inflation was contained and borrowing costs were extremely low. This flawless environment produced elevated asset valuations. Since then, news has been marginally negative on the inflation front in a number of countries, and their multiples have fallen.

However, equity valuations still remain unattractive. Our composite valuation indicator for equities is now at a neutral level, but emerging market stocks are trading at a premium to developed markets.

Our Emerging Markets Strategy service warns that investors should be careful with not-so-high valuation ratios. For example, China on the surface commands low multiples because banks, materials and property stocks have very low P/E ratios. However, the 15% trimmed mean P/E ratio for China is above its historical average. Meanwhile, some parts of emerging markets are very expensive, as is the case in Indonesia where economic growth is robust and is very unlikely to falter much. Bottom line: The value proposition of emerging market stocks is poor: some markets are expensive while others are cheap for a reason.

BCA Research

 

EMERGING MARKET SNAPSHOT: Q1 2011

Great summary of emerging markets trends by HSBC.

The HSBC Emerging Markets Index (EMI), a quarterly indicator derived from the PMI surveys, showed that emerging market growth eased slightly in the first quarter of 2011. The index dipped from a figure of 55.7 to 55.0, but was broadly in line with the long-run series average of 54.9.

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The EMI is based on 21 PMI (Purchasing Managers’ Index) surveys conducted across 16 emerging markets and provides the earliest and most reliable indication of economic trends.The slight moderation in emerging market growth reflected slower expansions in services and manufacturing, with growth in the former hitting a near two-year low. Manufacturers recorded a faster rate of expansion than service providers for the second
quarter in succession.

One thing I noticed from the charts that HSBC did not highlight is the faster deceleration in China’s economic growth. Look at these charts:

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In effect, China’s leading economic indicator (light blue line below, grey line is coincident indicator) has declined for 11 consecutive months

Interestingly, the US could be China’s savior this time around (chart from CEBM Group):

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China has clearly slowed its economy. If inflation shows definite signs of peaking in coming months, the odds of a successful soft landing will increase, which, adding the significant boost that will come from Japan’s reconstruction effort, could position Chinese equities for a strong bull market after 2 years of flat performance.

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Back to HSBC’s analysis:

Input and output inflation accelerates

Input cost inflation across the emerging world quickened to the strongest since Q2 2008, with manufacturers again recording a much faster increase in cost burdens than their service sector counterparts. Cost inflation in services quickened to a two-and-a-half year high in the first quarter, with the rise in the relevant index among the largest in the series history. Meanwhile, manufacturing firms recorded the third-fastest rise in the average cost of their purchases since the start of the series in Q2 2004.

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The passing on of higher costs to clients through increased output charges continued in Q1 2011, with the rate of inflation quickening to a near three–year high. As was the case for input prices, output charge inflation in the manufacturing industry eased slightly, but remained much stronger than that seen in the service sector, where charge inflation quicken to the sharpest in eleven quarters.

Of the big-four emerging markets, Russia recorded the strongest rise in output prices. Charge inflation accelerated to a ten-quarter high in India, led by a series record rise in manufacturing, while China saw a marked cooling of inflation. Despite quickening to the fastest for a year, the rate of output price inflation was relatively modest in Brazil.

Here’s how HSBC sums up the dilemma and challenges facing emerging markets central banks:

Little can be done about the structural changes taking place in the global economy. Unless and until there is an increase in the supply of raw materials – for energy, now more difficult following the sudden loss of enthusiasm for nuclear power following the Japanese tsunami – it’s likely that ongoing demand from the new economic superpowers will push commodity prices higher on a structural basis.

There has, however, been a conscious effort throughout the emerging world to tighten monetary policy. Although interest rates haven’t risen very far – largely reflecting a desire to avoid excessive currency appreciation – emerging nations are, nevertheless, fully aware of the need to bring inflation back under control. To do so, policymakers are pursuing the polar opposite of the quantitative easing policies in the US and Europe.
They’re pursuing what we at HSBC have termed “quantitative tightening”.

And it’s for this reason that policymakers are taking a deep breath. Quantitative tightening takes us to the outer reaches of macroeconomic experimentation. We simply do not know how to calibrate its various effects. Yet there can be no doubt that policymakers are increasingly relying upon “QT” to bring inflation under control.

While QT comes in many forms, one of the most popular is proving to be raising banks’ reserve ratios. By doing so, credit growth is restrained, even if interest rates don’t rise. Central banks all over the emerging world have pursued this approach with varying degrees of enthusiasm. China, perhaps the most aggressive, has raised its reserve ratio on nine separate occasions since the beginning of 2010. And while worries over rising Chinese inflation have yet to dissipate, the impact of higher reserve ratios can already be clearly seen through money supply growth, dropping from around 30% y-o-y to 15% y-o-y over the last 15 months.

If QT works and, as a result, the pace of emerging market growth continues to fade, commodity prices may eventually stabilise and perhaps even fall. This would provide huge benefits to emerging nations, not least by alleviating social and political pressures stemming from the inevitable rise in income inequality that stems from persistent gains in food and energy prices.

Full HSBC report

 

CHINA, EMERGING EQUITIES NOT CHEAP

Benchmark equity valuations for emerging markets appear reasonable, but dissecting these parameters across various countries and sectors reveals that equities are pricey. For example, low multiples of energy stocks in Russia make that bourse attractively valued. However, outside energy, Russian stocks are not cheap. Meanwhile, low multiples for Chinese banks and some other industry groups are lowering Chinese (MSCI) broad equity index valuations. Once the 15% of cheapest and most expensive industries are excluded, valuation parameters show that Chinese stocks are also not cheap.


On a more general note, market cap-weighted price-to-book ratio of small countries (outside central Europe) is notably above the historical mean. Also, trimmed mean relative valuation ratios confirm that emerging markets are trading at a premium over developed markets. True, such a valuation premium in favor or EMs might be justified over the long run. However, over the medium term, the risk is that the premium fades or contracts due to a multiple compression and/or negative earnings surprises triggered by monetary tightening in developing economies. At the same time, pressures on multiples from policy tightening are lower in G7 economies.

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