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.


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.


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.



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

See the diverging trends?



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.


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%. (…)

large image large image

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.


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)



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





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$ (7 JANUARY 2013)


Tepid Job Growth Fuels Worry  U.S. employers closed out 2012 by maintaining the relatively slow pace of job creation, adding 155,000 to payrolls while brushing off the threat of higher taxes and spending cuts.


Employers added 155,000 jobs in December, in line with the average gains of 2011 and 2012. The unemployment rate, which is derived from a separate survey of households, sat at 7.8%, with the labor force rebounding from a drop tied to superstorm Sandy a month earlier. (…)

The private sector added about 1.9 million jobs in 2012, while the loss of 63,000 government jobs over 12 months marked the fourth year of public-sector job cuts.

Friday’s jobs report showed gains across most sectors in December, with the private sector adding 168,00 jobs, offset by a loss of 13,000 government jobs.

Smile  NBF Financial:

More than 200,000 full-time jobs were added in December according to the household survey. This brings the total to just over 2 million full-time positions in 2012, the best showing since 2006. As today’s Hot Chart shows, full-time employment is still 4% below its pre-recession peak
but it is catching up. This is important because the current mix of employment creation provides a much greater contribution to the growth in personal income. Full-time employment is also key for a rise
in homeownership and an uptrend in home prices in 2013.


Pointing up  Employment in the more cyclical construction (up 30,000) and manufacturing (up 25,000) sectors were higher on the month while employment in the retail sector declined by 11,000. Employment growth in the non-cyclical education and health services grew  65,000.

imageThese are pretty well balanced and momentum building trends as higher paying jobs are growing faster than lesser paying ones. Over the past 3 months, construction employment gains have averaged +15k. ISI says that housing starts tend to lead residential construction employment by 1 year, suggesting at least residential construction employment should now be in a rising trend.  And, according to ISI’s Stephen East, there is a 3x multiplier with residential construction jobs. (Chart from AAR)

Importantly, gains in average hourly earnings (+0.3% M/M) and the workweek (up 0.1 to 34.5) are encouraging signs that the labor market more broadly is firmly in recovery mode. Aggregate hours were up 0.4% M/M and 2% Y/Y. They rose an annualized 1.5% Q/Q in Q4 (up from 1.0% in Q3) and the payroll proxy of income was up 3.5%, up from 2.8%.

In all, employment income is accelerating with apparent momentum at its base. This should help offset some of the impact the fiscal cliff deal will have on consumers disposable income in Q1.

Canada Job Growth Surprises

Canada added almost eight times more jobs than expected in December, driving the unemployment rate down unexpectedly to a four-year low.

A total of 39,800 net new jobs were created–all full-time and primarily in the private sector–marking the fourth outsized gain in five months, including 59,300 in November, Statistics Canada said Friday. The jobless rate dropped to 7.1% from 7.2%, the lowest since the 6.8% posted in December 2008.

How Much Will Your Taxes Jump?


The Stealth Tax Hike 

Why the new $450,000 income threshold is a political fiction.


(…) The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.

The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn’t going to be pretty.

Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000. Here’s why:

During the negotiations, the White House won a concession from Republicans to allow phase outs for personal exemptions and limitations on itemized deductions, starting at an income of $250,000 for individuals and $300,000 for joint filers.

The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point.

High-income Americans with incomes of more than $1 million may lose up to 80% of their itemized deductions for home mortgage payments, health care, state and local taxes—and charities. Cue the local symphony’s development office.

Add it together and families in the 33% tax bracket could see their effective marginal rate paid on each additional dollar earned rise to above 38%.

A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.

How did this happen? Recall that early in the fiscal-cliff negotiations House Speaker John Boehner offered to cap itemized deductions to raise $800 billion, in lieu of raising tax rates, if the President would agree to spending cuts. The White House rejected that.

Mr. Obama then insisted on reviving PEP and Pease, thereby recapturing much of the income he claimed to be “compromising” away by agreeing to a higher income threshold for the top bracket. But instead of using phase outs to offset higher rates as Mitt Romney proposed, Mr. Obama insisted on raising tax rates too.

Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.

Taxpayers in blue states claim roughly twice as much in itemized deductions as those in red states. Income tax rates are steeper in California and New York than Texas and Utah. Chuck Schumer just put a tax bull’s-eye on upper-income Manhattanites, and Barbara Boxer whacked Silicon Valley. Some $150 billion, about one-quarter of all the money raised by this tax bill, will come from this stealth tax hike.

Mr. Obama purports this is merely “a return to the Clinton-era tax rates.” But capital-gains rates will be about three to five percentage points higher than in the 1990s, the Medicare tax is higher, and his stealth tax will raise personal rates higher than advertised. Forget the golden Clinton memories. Mr. Obama is pushing the U.S. back to the Carter era.



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Demand for Office Space Still Sluggish

[image]The amount of occupied office space grew by 3.7 million square feet in the quarter, nudging down the vacancy rate 0.1 percentage point to end the year at 17.1%, according to real-estate research firm Reis Inc. Asking rents rose to an average $28.46 per square foot, up 0.8% for the quarter and 1.8% for the year, said Reis, which surveys 79 metropolitan areas. (…)

The office market has generally tracked growth in the labor force, which added 155,000 jobs in December, the Labor Department reported Friday. “Until that starts to escalate a little more, we’re probably going to see more of the same,” said Ryan Severino, an economist at Reis.

Japan Auto Sales Slip

December sales of new cars, trucks and buses in Japan were off 3.4% from a year earlier, the fourth consecutive down month, as the end of the government’s buying incentives reduced demand for fuel-efficient cars.

For 2012 as a whole, sales were up 26% to 3.39 million vehicles—marking the first increase in two years, as the government’s subsidies for purchases of fuel-efficient vehicles helped spark sales before ending in September.


“Cliff” concerns give way to earnings focus

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa, are expected to be only slightly better than the third-quarter’s lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October. (…)

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. “fiscal cliff” was cited by at least nine as reasons for their earnings warnings.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data. (…)

Eli Lilly Issues Upbeat Outlook

On Friday, the company reiterated its goal that through 2014, annual revenue will be at least $20 billion, with net income of at least $3 billion and operating cash flow of at least $4 billion. After 2014, the company expects to return to more sustainable financial growth, thanks to expected new-product launches.

Lilly reiterated its previous forecast of full-year 2012 earnings of $3.68 to $3.78 a share, or $3.30 to $3.40 a share excluding certain items, on revenue of $21.8 billion to $22.8 billion. (…)

For 2013, Lilly expects full-year earnings of $4.03 to $4.18 a share, or $3.75 to $3.90 a share excluding the impact of income associated with the termination of a diabetes-drug partnership with Amylin Pharmaceuticals(…). The 2013 forecast excludes the one-time impact associated with 2012 that will be recorded this year from the fiscal-cliff legislation.

Lilly’s 2013 profit forecast is better than Wall Street expectations, while the revenue view is generally in line. For 2012, the mean Lilly earnings estimate of analysts surveyed by Thomson Reuters was $3.36 a share, excluding one-time items, rising about 10% to $3.71 a share for 2013.

From the WSJ:

On Thursday, seven retailers provided quarterly earnings guidance below expectations, while only two offered brighter prospects, according to research firm Retail Metrics. “This suggests some of the sales may have come at the expense of some margin,” Retail Metrics President Ken Perkins said.

Target was one of the retailers that gave a disappointing outlook, saying it sees fourth-quarter earnings only meeting or somewhat exceeding the low end of its expectations.

“December sales were slightly below our expectations, as strong results late in the month did not completely offset softness in the first three weeks,” Target Chief Executive Gregg Steinhafel said. Target reported flat same-store sales when a 0.8% rise was expected.

Macy’s, meanwhile, said same-store sales rose 4.1% in December, just past expectations for 4% growth, but the retailer still lowered its fourth-quarter guidance.

Kohl’s Corp. KSS -0.28% posted a 3.4% gain in same-store sales, when a 1.2% increase was expected. But the department-store chain said it was disappointed with results for the month and slashed its guidance for the fourth quarter, which closes at the end of January. Kohl’s now expects earnings per share of $1.60 to $1.62, compared with previous guidance of $2 to $2.08 a share. Surprised smile

“December sales were lower than planned,” Kohl’s Chief Executive Kevin Mansell said. “Additionally, sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned. We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the spring season.”

Gap reported December same-store sales rose 5%, while analysts expected a 3.5% increase. (…)

High-end department store Nordstrom also had a strong December, reporting an 8.6% increase in same-store sales, when a 3.4% rise was expected. Same-store sales at full-line stores combined with online rose 8.2%, while the Nordstrom Rack outlet posted an 8.1% increase.

Costco remained a standout, posting a gain of 8% in U.S. same-store sales not counting gasoline; analysts expected a 5.3% rise. The warehouse club said its sales for the month benefited by about 2% from an extra selling day because of the timing of the New Year’s holiday. Stores also were busier, with comparable traffic frequency posting a gain of slightly more than 5%.

Limited Brands, operator of Victoria’s Secret and Bath & Body Works, reported a rare miss, posting a same-store sales increase of 3%, when a 4.5% rise was expected.

Flat results at Victoria’s Secret offset 7% growth at Bath & Body Works. While the company said merchandise margins rose from a year earlier, the increase was “below expectations.”


China Stocks Rise, as CSI 300 Index Enters Bull Market on Economy Outlook


China’s CSI 300 Index (SHSZ300) entered a bull market after rallying 20 percent from its 2012 low amid signs of an economic recovery in the world’s second-largest economy.

The gauge tracking 300 yuan-denominated A shares traded in Shanghai and Shenzhen gained 0.5 percent to 2,535.99 at the close, led by health-care and financial companies. The CSI 300 rebounded 20 percent since hitting a near four-year low on Dec. 3, while the Shanghai Composite Index climbed 17 percent.

Call me  Remember my Nov. 29 New$ & View$ comment on the Chinese market (Capitulation?)?

Money  Banks Rally on Eased Rules

Bank shares rallied in an otherwise lower European market, after global banking regulators relaxed rules on Europe’s largest lenders.

Regulators Give Ground to Banks

Global banking regulators watered down an element of their plan for creating a safer financial system, giving ground to banks that argued the plans were unworkable and financially risky.

(…) Bowing to two years of intense pressure from the banking industry, the regulators made it easier for banks to meet the rule, known as the “liquidity coverage ratio,” and delayed its full implementation until 2019. (…)

The so-called Basel III accord, known for the Swiss city in which it has historically been negotiated, required banks to greatly thicken their capital cushions and come up with trillions of dollars of liquidity. The banking industry argued that the changes were overkill and would prompt them to dramatically reduce lending. Regulators ultimately accepted some of those arguments, and agreed to delay or ease key elements of the rules.

Meanwhile, questions are mounting in some countries, including the U.S., over whether the package will be implemented at all. It is up to individual countries to decide how to apply the rules to their financial institutions.



Pointing up This is big (re: the U.S. manufacturing renaissance)


Flextronics Warms to U.S.

The CEO of Flextronics International Ltd, a Singapore-based company that helped hundreds of firms move manufacturing of electronic parts and products to Asia, says it is getting “easier to justify” production in the U.S.

The difference in labor costs is narrowing and local officials in America have been giving more financial incentives to companies setting up plants in the U.S., Mike McNamara, chief executive of Flextronics, said in an interview Friday. Mr. McNamara said he could even imagine some smartphones being made in the U.S. eventually. But he cautioned that the return of manufacturing to the U.S. is likely to be a “slow and evolving process” rather than a flood. Many obstacles remain, including relatively high U.S. taxes, health-care expenses and regulatory costs, he said. (…)

While wage costs in the U.S. have been about flat in recent years, they have been rising 20% a year in China, a trend Mr. McNamara expects to continue for at least five years. He said labor costs for Flextronics rose about 30% last year in Malaysia and 40% in Indonesia.


NEW$ & VIEW$ (24 DECEMBER 2012)

Gift with a bow  MERRY CHRISTMAS  Gift with a bow

Obama Seeks Bare-Bones Budget to Avoid Cliff

Mr. Obama told reporters he was seeking quick action on a compromise bill that would extend current tax rates for middle income taxpayers and extend an expiring program of unemployment benefits.

But he acknowledged that time likely wouldn’t allow agreement before year’s end on a broader deal to avoid the fiscal cliff that Mr. Obama and House Speaker John Boehner had been working on until those talks collapsed earlier this week. (…)

The move apparently postpones until next year the broad effort to set up a process to overhaul the tax code and to rein in spending for Medicare and other entitlement programs, in favor of focusing only on the most immediate fiscal deadlines at year’s end. That narrower focus marks a setback for the president’s ambitions, and it remains unclear if it would garner Republican support.

Greg Valliere, chief political strategist for the Potomac Research Group, wrote to his clients (via Barron’s):

“This is the most incompetent, gridlocked Congress in our lifetime—and to complicate matters we have a president who doesn’t negotiate well and is not personally popular in either party. This could be a very long slog.”

The WSJ’s Stephen Moore tells us what went wrong with Boehner’s Plan B last week (my emphasis):

What went wrong? Two things. First, enough conservatives decided that to vote for a plan that would have prevented taxes from rising for 99 percent of Americans would be a tax increase on the other one percent. Groups like Heritage Action and others said Plan B was a vote for a tax hike and they urged a “no” vote. This was a debatable proposition, but it hurt Mr. Boehner with conservatives.

There was wide disagreement among strategists on whether Plan B was technically a tax hike. Conservatives from Grover Norquist to Larry Kudlow to Arthur Laffer and others had endorsed the Boehner plan. Rep. Tom McClintock of California, a staunch conservative, argued that “if 50 people are drowning and you save 49 of them, you aren’t responsible for the one who does drown.” But there was a critical mass of Republicans who said they would never vote for a tax increase, period. Rep. Jim Jordan of Ohio, the head of the Republican Study Committee, came out against the plan, and that carried weight with undecideds.

The second problem for Mr. Boehner is that he lost the trust of many in the GOP caucus with his purge of conservatives from key committees several weeks ago.

Boehner made concessions, acceptable to many hardliners, that neither his party nor Obama cared about. Everybody is now trashing on the Speaker but nobody is offering any way out of the mess. In fact, everybody is now painted into his own corner.

Ronald Reagan could not have been more right:

Government is not the solution to our problem. Government is the

Meanwhile, in the real world…

Cliff Would Strike Low Incomes Hard

(…) in terms of percentage of tax increases, low- and moderate-income taxpayers will face the biggest burden—an often overlooked part of the budget debate that’s now getting attention as the year-end deadline nears.

Households earning $10,000 to $20,000 would see a large increase in their overall federal tax burdens, from an average of $68 to $605. The blow would be especially harsh for married couples and households with children. (…)

A household that makes between $10,000 and $20,000 in income and has a child would get a $2,761 payment from the Internal Revenue Service under current rules, thanks to various tax breaks and credits. After the cliff, that would be cut by $1,324, or about half.

Married couples earning $20,000 to $30,000 today would get an average $15 payment from the IRS under current rules. In January, they would owe an average $1,408 to the IRS, because several of those breaks would be narrowed or eliminated. (…)

But, don’t you worry:

With little more than a week to find a solution, Democrats and Republicans are focusing on the real-world impacts of the fiscal cliff and seeking to shift blame for it. Confused smile

Crying face  Number of the Week: Without Unemployment Extension, Millions to Lose Benefits The expiration of nearly all federal emergency unemployment programs, which now provide benefits to 2.1 million job seekers, appears imminent.

Unlike past deadlines, this one is a hard stop — benefits won’t roll off gradually but rather will expire all at once overnight. That has economic implications that go beyond the impact on the recipients themselves. The average EUC beneficiary receives about $284 a week, making the program the equivalent of a $2.4 billion monthly stimulus.Credit Suisse estimates that allowing the program to expire would be enough to shave two tenths of a percentage point off GDP growth next year.


Aside from the dismal political scene, last week saw many positive economic news.

While GDP was higher sharply higher in Q3 – the boost came from areas that suggest the real economy remains weak.  This was further shown by only a modest increase in real final sales.    

He shows how government spending contributed positively in Q3…


…something we all know will not last (chart from Gluskin Sheff).

Here’s an Economic Policy Institute chart revealing the negative impact governments have had on employment:

If it were not of governments (and politicians), we’d be in good shape:

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from –0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November. The index’s three-month moving average, CFNAI-MA3, increased from –0.59 in October to –0.20 in November—its ninth consecutive reading below zero.

Production-related indicators contributed +0.41 to the CFNAI in November, up from –0.54 in October. This increase largely reflects the recovery of industrial production from the effects of Hurricane Sandy.

Doug Short writes:

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

Click to View

Personal income grew 0.6% last month following an unrevised 0.1% October uptick. The gain was the strongest since February and lifted the y/y increase to an improved 4.1%. A strong 0.6% rise (3.7% y/y) in wage & salary income provided lift to income last month. Disposable income rose a similar 0.6% (4.0% y/y) and adjusted for the decline in prices, take home pay rose 0.8% (2.5% y/y).

Improved earnings were all it took to power the dollar value of personal consumption expenditures. An expected 0.4% (3.5% y/y) rise followed a revised 0.1% October slip, initially reported as -0.2%. Adjusted for lower prices, spending jumped 0.6% (2.1% y/y), the largest monthly gain since August 2009. Strength in new vehicles purchases, up 5.6% (10.7% y/y), as well as a 0.9% increase (3.9% y/y) in furniture & durable household equipment powered the overall rise.

As growth in income outpaced the rise in spending, the personal savings rate rose to 3.6% from 3.4% in October. For the last year, the rate moved roughly sideways.

Doug Short adds:

Adjusted for inflation, per-capita disposable incomes have been struggling for the past two years and are currently at about the level first achieved in November of 2007. Most of 2011 saw a slow decline in incomes, a trend that began reversing in November of last year. Modest income growth continued for eight consecutive months. However, the trend reversed in August, and incomes slumped for three months. But the November data has shown a surprisingly strong reversal to the upside.

Click to View

But there’s more than income, there’s deleveraging:

U.S. households spent 10.6% of their after-tax income on debt payments in the third quarter of the year, the lowest level since 1983, according to recently released Federal Reserve data. Add in other required payments that aren’t classified as debt—such as rent and auto leases—and the figure rises to 15.7%, also near a 30-year low.


The release of the “Philly Fed” survey came in much stronger than expectations rising from a -10.7 in November to 8.1 in December.  Most all of the internals for both current and future activity were higher as the region came back online post-hurricane Sandy as was expected.

The chart above shows the survey as reported and smoothed with a 6-month average.  While the report was stronger for the current month the trend of the overall data has been decidedly weaker.  We have similar surges in the data before, as seen in the recent report, which fade in the months ahead.  

Pointing up  Last, but not least: Durable goods orders jump

Durable goods orders excluding transportation were up 1.6% (0.4% y/y), a third consecutive steady increase that followed 1.9% in October and 1.7% in September. Several industries had good gains in November. Primary metals were up 2.4% for a second consecutive month, and fabricated metal products firmed to a 1.9% increase from 0.7% in October. Orders for nonelectrical machinery rose 3.3% following October’s 3.4% rise, and electrical equipment and appliances followed their 5.6% October rise with another 1.8% in November. Other sectors were less vigorous, as computer and electronic products barely moved, just +0.1% after 2.2% in October, and all other durable goods industries reported a second successive erosion of 0.1%. Nondefense capital goods orders fell 2.8% in November, but this represented the combination of the fall in nondefense aircraft and a nice rise of 2.7% in all other nondefense capital goods orders.

The important number is on the fifth line of this Haver Analytics table: non-def capex ex aircraft +5.9% in the last 2 months!


RBC Capital had flagged this turnaround in capex with this December 14 chart…


…which now looks like this with last week’s numbers (chart from Business Insider):


RBC Capital reminds us that we have had 15 months of synchronized easing in  the world:

image54% of the world‟s Non-manufacturing PMI data is showing improvement, 61% of the world‟s Manufacturing PMI data has risen and the OECD‟s aggregate leading economic index, which typically turns
ahead of global GDP growth by ~6 months, is up smartly over the past half year.

These positive economic inflections are most likely linked to the synchronized and powerful monetary easing program that has been in place for the past 14 months. Typically, economic growth accelerates anytime from 12-18 months after the beginning of a rate cutting campaign and we are now smack-dab in the middle of that historic window.

Goldman’s Jan Hatzius sums up everybody’s frustrations:

The key challenge for economic forecasters in 2013 is to weigh the relative importance of the positive impulse from the improvement in the private sector versus the increasing drag from the dysfunction and fiscal retrenchment in the public sector. Never has this been clearer than in the past week.

Following Speaker Boehner’s failure to corral enough Republican votes for his “Plan B” on Thursday, the risk of greater fiscal restraint and greater policy uncertainty has increased. This could involve a temporary move “over the cliff” or a stop-gap measure that extends lower- and middle-income tax cuts and potentially unemployment benefits, but fails to defuse both the automatic federal spending cuts and the debt ceiling.

Punch  The Fed can help, up to a point:

Push for Cheaper Credit Hits Wall The Fed’s intensified campaign to push mortgage rates lower has hit a wall, in part because a shift in the lending landscape has made some banks unable, or unwilling, to pass along cheaper credit.

(…) While current rates are the lowest in generations, some economists argue that they should be even lower—perhaps 2.8% based on the historical relationship between mortgage rates and yields on mortgage-backed securities. The economists posit that banks are keeping the rates artificially high, boosting profits and depriving the economy of the full benefit of the Federal Reserve’s efforts.

No bank-by-bank survey on the matter has been conducted. But some lenders say they are simply making a fair rate of return on a business that has much higher fixed costs than it used to. “We have a different cost structure now,” said Stewart Larsen, who runs the mortgage banking division of Bank of the West.

Lenders profit on the gap, or spread, between their cost of obtaining money and the rate they charge when lending it out. Before the financial crisis, this spread averaged around 0.5 percentage point and widened to about 1 percentage point in the years after 2008. In October, after the Fed embarked on a new round of mortgage bond purchases, the spread leapt to 1.6 points and currently is hovering around 1.3 points.

There are numerous, and complex, reasons for the difference. More volume, for example, is moving through an industry that has shrunk significantly. At the same time, banks today are scrutinizing property appraisals and loan files more closely—requiring reams of documentation of borrowers’ assets, to guard against the cost that they will be forced to buy back any defaulted mortgages from Fannie and Freddie. That means fewer underwriters are spending more time on every loan. (…)

Lightning  Dutch Housing Slump Continues

Prices of existing homes fell by an annual 6.8% in November, national statistics agency CBS said on Friday. (…) Since the peak of 2008, house prices in the Netherlands have tumbled more than 16%, according to CBS.

The country’s jobless rate rose to 7% in November, hitting a 10-year high, and consumer sentiment is again nearing a historic low, CBS said on Thursday.


Recent stats from China were decidedly on the upside. Most November data were positive and December’s flash indicators (HSBC and MNI) were both strong. CEBM Research’s own Industrial Expectations Index has risen for three consecutive months, supporting the positive trends in the official NBS PMI and the flash indicators.


ISI’s China survey has also hooked up during the past 3 weeks.

No political clouds there and a P/E of 11 times trailing earnings.



Taiwan Industrial-Output Growth Accelerates to a Nine-Month High

Production climbed 5.85 percent from a year earlier, compared with a revised 4.84 percent in October, the Ministry of Economic Affairs said in Taipei today.

Export orders increased at the second-highest pace in 2012 in November, and the government predicts gross domestic product growth of more than 3 percent next year.

Money  Pressure Grows on Asian Central Banks  Demands on Asian central banks to be more aggressive are heating up in the face of the global economic downturn and amid political leadership changes, raising questions about the banks’ ability to remain independent.

Malaysia and the Philippines are due to go the polls in the first half of next year, Australia by the end of 2013 and India and Indonesia in 2014.

Global Currency Tensions Rise  Japan’s Abe said the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well.

[image]Mr. Abe on Sunday called on Japan’s central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. (…)

Mr. King, in an interview this month, said, “I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns.”

Japan’s Abe issues ultimatum to BoJ  Bring in 2% inflation goal or we will, says PM-to-be



Annoyed  Americans Miss $200 Billion Abandoning Stocks

Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.

Assets in equity mutual, exchange-traded and closed-end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor’s 500 Index’s 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc.

The big financial repression:

With ten-year US Treasury notes yielding 1.6% and inflation running at 2.2%, note holders are guaranteed a loss of at least six-tenths of a percent – and that’s before taxes. Add in Uncle Sam’s take, and 10-year T-note holders are taking “real” hits of up to 35% in purchasing power for any
bond held outside tax-deferred plans. This means portfolios laden with supposedly “safe” 10-year Treasury debt risk are going bankrupt gradually.

Meanwhile, the world’s central banks are doing all they can to make sure inflation rises well above today’s 2.2% rate. Led by the Fed, they have flooded the global financial system with US$11 trillion in new money since 2007 and show no signs of slowing down. They will either get the inflation they desire or bankrupt the global financial system trying. In mid-December, Ben Bernanke and Company announced plans to buy US$45 billion in long-term US Treasury debt per month with money virtually created out of thin air, bloating the Fed’s already unwieldy balance sheet to monstrous proportions.


NEW$ & VIEW$ (18 July 2012)


Lightning  Dire Signs for Spanish Economy

Spain’s housing and banking sectors continue to deteriorate, grim new government data showed, providing the latest indication that the country’s economy remains caught in a protracted recession.

House prices declined at the fastest pace since the start of the crisis in the second quarter, the public ministry said, while bank deposits saw a record decline in May from a year earlier, and bad loans increased for a 14th month in a row, the Bank of Spain reported.

Total private-sector deposits held in the country’s banks shrank 5.75% from a year earlier in May to €1.327 trillion. Some €7.4 billion were withdrawn compared with April, the data showed. The pool of bad loans jumped to €155.84 billion, or 8.95% of total loans, up from 8.72% in April.

Credit volume in Spain—which during the boom grew at annual rates of almost 30%—has been falling every month since February 2011, and in May was down 3.82% on an annual basis.

(…) The country’s house price index dropped 8.3% from a year earlier in the second quarter, indicating that the free-falling real-estate market has yet to find a floor. (…)

Hollande scraps tax breaks on overtime
Latest measure upsets French business and opposition

The move follows a number of other actions taken by the new government that have unsettled business leaders. The budget measures include scrapping a move by Mr Sarkozy to reduce employers’ heavy labour costs by shifting some of the financing of social welfare from employment charges to value added tax.

BCA Research warns that French recession could get worse:

France is currently headed toward mild recession and according to our Global Investment Strategy service, there is a non-trivial risk that if the French recession turns out worse than ’mild’, then its debt problem will be in the spotlight, creating intense pressures in the French bond market.

Lightning  Italy’s PM warns of Sicily default

Italian Prime Minister Mario Monti expressed serious concern on Tuesday over a possible default by Sicily, an autonomous region long criticized for its wasteful public administration and bloated government payroll.

Mr. Monti said in a statement that there were “grave concerns” that the southern island could default and he said he had written to Governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.

The highly unusual intervention from the Prime Minister underscored the gravity of the situation in Sicily, which accounts for around 5.5 per cent of Italy’s gross domestic product and has an unemployment rate of 19.5 per cent, almost twice the national level.

Despite the worry over its finances, Sicily is not expected to pose a major threat to Italy’s overall public finances and credit agency Fitch said it saw no immediate risk it would fail to meet its commitments.

“As far as we know, the region of Sicily is not in the best of financial conditions. But it’s not on the verge of an imminent default on its loans and bonds,” said Raffaele Carnevale, senior director for international public finance.

Fitch rates Sicily triple-B-plus with a negative outlook, one notch below Italy’s sovereign debt rating. The debt of Sicily and other local authorities amount to around €115-billion, contributing to Italy’s huge €2-trillion public debt.



Storm cloud  Intel warns on outlook for new orders
PC makers demand on hold amid uncertainty and Windows 8 launch

Paul Otellini, chief executive, told an analyst conference call that a recovery expected in the US and western European markets, where there had been “softness” for several quarters, had failed to materialise.

In the emerging economies of Brazil, Russia, India and China, PC prices had been rising with the value of the dollar, while China’s economic growth had been slowing.

“While we still see growth [in China], we don’t see quite as much as we first thought,” he said.

Smile  Homebuilder Sentiment Beats by Wide Margin



China’s Communist Party seems to have successfully restarted the FAI machine that it over-cooled in 2011. Spending on infrastructure slowed to only 2% YoY in December 2011. The pace of infrastructure spending has accelerated to 6% in the first half of 2012 but notice the monthly trend since April: +9% YoY in April, +9.7% in May and a huge +17.5% in June.

Not convinced that Beijing is behind the recovery? State-Owned-Enterprises infrastructure spending growth dropped spectacularly from a 20-25% pace in early 2010 to +15% in early 2012 and to 5-10% in the last 12 months. SOE’s infrastructure spending growth jumped to +11.1% in May and +24.7% in June.

Obviously, Beijing is re-stimulating in a non-traditional but quick-fire way.


China total electricity consumption came in at +4.3% YoY in June, from +5.2% in May. YTD electricity consumption rose 5.5%. The Chinese economy has yet to show any substantial sign of stabilization as these charts from ISI and Standard Chartered Research show.

image image


  • According to our recent survey of steelmakers, almost all respondents told us sales in July were getting worse and actual demand was below their expectations. (…) As for the demand outlook for next month, most steelmakers revised their expectations downward, with no one expecting improvement in the coming month, while about 20% of respondents thought demand may shrink further.
  • Construction machinery dealers surveyed mentioned that they did not see any recovery signs of improved demand in the first half of July.
  • Overall cement sales growth for the first two weeks in July remained sluggish. New project starts stayed at a low level in the property and infrastructure sectors. The majority of infrastructure projects are resumptions, whereas new starts were limited. (…) most of cement makers that we surveyed were pessimistic and generally believe that it will be difficult to see a recovery in cement demand for the next two months.
  • The July heavy truck dealer survey shows heavy truck sales this month may follow seasonal patterns, with M/M growth becoming negative and Y/Y growth coming in at around -20%. (CEBM Research)

If the dragon has landed, still a big if, it has yet to show signs of a new take-off. Chinese companies have been surprised by the rapid and significant slowdown. What will they do now to bring cost more in line with revenues? Fire people? That may be why Wen said yesterday that the employment outlook “will become more complex and severe.” Pointing up

“There are insufficient signs that China’s economy has hit bottom,” said Zheng Xinli, deputy head of the China Center for International Economic Exchanges and a guest economist of China Daily.

“Whether the economy has reached a turning point or will continue to decline in the third quarter remains unclear,” he told China Daily.

“Though the labor market remains stable, businesses have already had problems. If the economy remains in a downward spiral, more social conflicts will emerge following business closedowns and a decrease of local fiscal income,” Zheng warned.

Storm cloud  Chinese companies warn profits plunging as slowdown spreads

On Wednesday, Air China Ltd., one of three main government-owned airlines, warned first-half profit will fall by at least half from a year earlier. State-owned ZTE Corp., one of the world’s biggest producers of telecommunications equipment, is projecting a decline of up to 80 per cent.(…)

ZTE’s statement Friday said some Chinese phone companies were postponing new equipment orders – a downbeat sign for Beijing, which is pinning its hopes on higher investment to drive growth.

Air China blamed its lower profits on weak travel demand at home and abroad. China’s two other major state-owned airlines, China Eastern and China Southern, issued similar warnings earlier.

The country’s shipbuilding industry association, slammed by weak trade, says May orders for new vessels were half the level of a year earlier.

TCL Corp., one of the world’s biggest producers of televisions and other consumer electronics, said Sunday its first-half profit will be “significantly lower.” A major appliance retailer, Suning Appliance Co. Ltd., warned its own profit might fall by 30 per cent.

Li Ning Co., a maker of athletic shoes and sportswear, issued a profit warning in early July and announced the departure of its CEO and the launch of an overhaul to improve efficiency and profitability.

In the auto industry, Dongfeng Motor Co. Ltd., the local partner of Nissan Motor Corp., warned last week its first-half profit will be down 60 to 70 per cent. (Chart below from China Daily)

To summarize:

As of Tuesday, 449 listed companies said they expect their first-half profits to decline from a year earlier, while 233 others expect losses, accounting for 46.74 percent of listed companies that have issued their first-half performance forecasts thus far.

Due to economic complexity in the second quarter, 103 companies trimmed their profit forecasts for the first half, accounting for 64.78 percent of those that revised their first-half forecasts.


Make or Break Time for China

Storm cloud  Dell CEO warns of slowdown in China

Dell Inc. is experiencing a business slowdown in China, its largest market outside of the United States, chief executive officer Michael Dell told a business forum on Tuesday.

China June Property Prices Flat

Average housing prices in 70 Chinese cities were flat in June from May, ending eight straight months of declines and offering yet another sign that the country’s real-estate market may have bottomed out.

[image]Encouraged by cheaper mortgages after China’s central bank cut interest rates twice since June, home buyers have returned to the market in droves, and “pent-up demand from genuine home buyers and upgraders—as well as worries [by prospective buyers] that the market will rebound–sent prices in some cities higher in June over May,” said Ma Xiaoming, a statistician from the statistics bureau.

Some property developers have also canceled discounts as transactions increased, he added.

Based on Dow Jones Newswires calculations, prices in the 70 cities increased by a marginal 0.02% on average in June from a month earlier, compared with a 0.1% fall in May and a 0.25% decrease in April.


NEW$ & VIEW$ (25 June 2012)


This summer, nobody will be content. No Greek, no Spaniard, no Italian and not even the Germans. No American taxpayer/voter. No Chinese entrepreneur, consumer. No central banker, no investor. Perhaps, the salmons caught by the lucky fisherman will be content, but only after their release by the true sportsman.

My friend I. Bernobul wrote a good piece yesterday. With his permission, here it is:

This week, another summit in Europe…This one has more than a financial plot. I sense a huge political game might be played as the poor Latin Europeans try to unite against the powerful Teutons. Hollande’s arrival at the poker table might prove significant if the Mediterranean players, with but a few chips left, unite and desperately call Merkel’s bluff and impose their will on the EU and the ECB.

Money would not be content…

Some recent headlines:

  • EU Leaders, Divided, Push Growth  Leaders of the euro zone largest economies said they endorsed a proposed plan to support growth, but failed to agree on other measures to contain the crisis.

But most of the measures they flagged already have been floated. The four also remain divided over more prickly issues, including how to shore up the ailing debt markets of Italy and Spain. Germany remained firm on its insistence for fiscal discipline.

Moreover, the measures are focused on long-term objectives, such as building infrastructure, that in most cases won’t have a real near-term economic impact.

“Merkel has emerged as a strong leader,” Soros, 81, said in an interview with Bloomberg Television’s Francine Lacqua at his London home. “Unfortunately, she has been leading Europe in the wrong direction.”

More Germans would favor leaving the euro area than those in France, Italy and Spain, according to a poll published in four European newspapers yesterday. Some 39 percent of Germans would back such a move, compared with 28 percent of Italians, 26 percent of French voters and 24 percent of Spaniards, according to the Ifop-Fiducial survey.

This week’s cover of the German magazine Der Spiegel featured a defaced 1 euro coin with the title “If the Euro Breaks Up — a Scenario.” Germany’s economy could shrink by as much as 10 percent in the year after a euro collapse, the magazine cited an unpublished study from the German Finance Ministry as saying.

The statistics suggest that the cost of rescuing the euro would be a lesser evil compared with returning to national currencies, Spiegel cited a ministry official as saying. Joblessness would soar to more than 5 million from less then 3 million today, the magazine reported.

Mrs Merkel — or La Signora No in Italy — doused hopes of a break-through on proposals by the “Latin Bloc” leaders of Italy, France, and Spain to deploy the funds (EFSF and ESM) to cap the bond yields of “virtuous” countries vulnerable to contagion, or to recapitalize banks directly to take the strain off sovereign states.

“If I give moneystriaght to Spanish banks, I can’t control what they do. That is how the treaties are written,” she said.

Christine Lagarde, the head of the IMF, warned before the summit that the eurozone is under “acute stress” and at risk of a downward spiral.

“The viability of the European monetary system is questioned. There must be a recapitalisation of the weak banks, with preferably a direct link between the EFSF/ESM and the banks, in order to break the negative feedback loop that we have between banks and sovereigns.”

But, is there money for that?

Gavyn Davies: The eurozone’s finances don’t add up

The arithmetic of eurozone government refinancing needs, relative to the size of the current firewall, looks increasingly unpleasant.

(…) Overall, the remaining €400bn firepower in the EFSF/ESM is probably inadequate to finance a bail-out programme for Spain, and would of course be dwarfed by the €1,600 bn needed for both Spain and Italy. In the near term, what this means is that there is very little spare money in the EFSF/ESM to initiate a bond buying programme in the secondary market, which was the favoured option in the G20 summit discussions this week. (…)

So we will probably see more debt mutualisation via the activities of the ECB. This could occur in several different flavours: outright bond purchases through the central bank’s Securities Markets Programme; allowing the ECB to provide leverage to the ESM; or further LTROs to encourage banks to hold more government debt.  The ECB probably does not like any of this, but may well prefer the second and third flavours to the first.

Once again, it is all up to Mario Draghi.

Just kidding  But Germans are watching:

Bundesbank Swipes at Draghi as European Fault Lines Deepen

As Draghi’s officials scramble to put together policies that will fight the latest stage of the turmoil, German policy makers are emphasizing the dangers of pursuing unorthodox policies that potentially put taxpayers on the hook for future losses.

What we can expect Draghi to do is cut interest rates at the next ECB meeting. Inflation is no longer an issue. Deflation will soon be one…(Chart from Markit)


But so what?

There is a bigger game being played. Actually, two huge games, both called The Euro! And both starring Germany.  Money  Soccer ball

In The Euro game played indoor, Angela Merkel plays both offense and defense. Der Spiegel:

imageStill, it seems unlikely that Merkel will be able to stonewall completely. With Sarkozy gone from the euro-zone stage, the German chancellor now stands largely alone in her battle for austerity. She faces significant pressure from a newly elected Hollande, a political leader in Monti whose approval ratings are plummeting at home and needs to show some form of success on the European state, and a leader in Rajoy whose management of his country’s banking crisis has been widely criticized.

Furthermore, Merkel’s crisis management has been blasted by leaders around the world, including US President Barack Obama and the leaders of Brazil, India, Argentina and Russia. The media too has gotten on her case, the most recent — if breathtakingly tasteless — salvo coming from the British magazine New Statesman, which compared Merkel to both the Terminator and Hitler in the span of a few short paragraphs and also said she represented a greater threat to the world than Iranian President Mahmoud Ahmadinejad.

Up to now, the pressures have been on the Club Med countries to deliver. It now looks like it is up to Germany to deliver.

Christine Lagarde, the head of the IMF, warned before the summit that the eurozone is under “acute stress” and at risk of a downward spiral.

“The viability of the European monetary system is questioned. There must be a recapitalisation of the weak banks, with preferably a direct link between the EFSF/ESM and the banks, in order to break the negative feedback loop that we have between banks and sovereigns.”

She called on the European Central Bank to back-stop the financial system with “creative and inventive” measures to fight the crisis.

Merkel said:

Each country wants to help but if I am going to call on taxpayers in Germany, I must have guarantees that all is under control. Responsibility and control go hand in hand. If I give money straight to Spanish banks, I can’t control what they do. That is how the treaties are written.

But Hollande is no Sarko:

French president Francois Hollande did not hide his frustration, warning that France would not accede to German demands for a step-change in EU integration until Berlin puts the neuraligic issue of shared debts on the table. “There will be no transfer of sovereignty without greater solidarity, ” he said acidly.

Pointing up  Fraü Nein is clearly isolated. This is reaching deep into Germans’ guts. Will she give in? This Der Spiegel piece illustrates the challenge: Germans Willing to Donate Organs, But Often Don’t

While Germans are in favor of donating their organs in principle, few have made the move to do so, frustrating government officials who are trying to get the organ donation figures up.

Ask an average German if he or she would donate, and some 70 percent say “yes,” organ donor experts say.

But only 25 percent actually have the required donor identification papers that would allow a physician to take a needed organ in the event of a documented brain death, said Marita Völker-Albert, spokesperson for the Federal Center for Health Education (BZgA), a government agency that is promoting organ donation.

Germany’s organ donor rate is less than half of what it is in Spain, the leading donor country, according to 2010 figures provided by the German Organ Transplantation Foundation (DSO).

Germans don’t like gut wrenching decisions:

Germans have a lot of reasons why they don’t want to donate organs, according to a 2010 survey published by the Federal Center for Health Education. Some 62 percent of those surveyed said they did not want to make a decision now on donating organs; one-third of respondants said they don’t want to deal with topics related to death; and another third said they are worried that if they agree to donate, and then become critically ill, doctors won’t do everything they can to save them.

This is all cultural:

“I don’t have an organ ID card,” wrote one person in an online forum about the topic. “Somehow, I’m afraid that my organs would be transplanted into a nasty person and I don’t want that.”

Messenger  Here’s a possible solution to the crisis: all German organs should be exported to the south and vice versa. In two or three generations, the eurozone would be totally unified!

Think about it: Merkel’s guts into a Berlusconi body!  Flirt female  Party smile

How “cocky” would that be?  Winking smile


The next headline is totally unrelated with the above…


Italian Consumer Confidence Plunges

Italian consumer confidence tumbled to its lowest level since 1996 in June, as residents in the euro zone’s third-largest economy fretted about their future in the wake of tax increases and austerity measures.

Italy’s consumer confidence index fell to 85.3 in June from 86.5 in May, Istat said. The June figure was the lowest since the series started in January 1996, an Istat official said.

Last week, a poll conducted by SWG showed that Italians’ confidence in Mr. Monti more than halved to 33% from 71% at the end of November.

Silvio Berlusconi, has already undermined Mr Monti by speaking openly of a possible Italian exit from the euro and by hinting that his centre-right party could try to force early elections.


Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy

Bernanke publicly acknowledged this week a policy conflict with the Treasury over its move to lock in low borrowing costs, which is working at odds with the central bank’s efforts to lower long-term interest rates. But there is little sign either institution is likely to alter its strategy as a result.

“There’s a bit of an issue here,” Mr. Bernanke said at a press conference following the Fed’s latest policy meeting.

Bernanke’s Twist Sharpens Year-End Anxiety Over Stimulus

Federal Reserve Chairman Ben S. Bernanke has repeatedly warned lawmakers that a fiscal cliff threatens the economy. Now he’s created a precipice of his own.

The timing of Bernanke’s easing raises the stakes for the Fed’s four remaining policy meetings this year as investors focus on whether the central bank will provide stimulus for 2013 to help the economy overcome the impact of the fiscal tightening due to take hold in January, said Vincent Reinhart, chief U.S. economist at Morgan Stanley.

“They create their own monetary cliff to match the fiscal cliff,” said Reinhart, former head of the Fed board’s Division of Monetary Affairs. That may mean “a world of hurt” for the central bank because there would be a perception the Fed allows fiscal politics to influence its actions.

States Face Pressure on Pension Shortfalls

New accounting rules are likely to show that public pension plans could face hundreds of billions of dollars in additional liabilities, putting new pressure on state and local governments to act.

The revamped rules expected to be approved Monday by an accounting-standards group will force governments to record pension costs sooner than they did before and disclose shortfalls more prominently. The changes also will force some public pension funds to calculate retirement benefits using more conservative assumptions.

According to researchers at Boston College, pension liabilities at 126 state and municipal pension plans would jump by roughly $600 billion, or about 18%. The estimate is based on 2010 financial data and doesn’t reflect the stock market’s recent rebound or moves by many U.S. states to rein in pension costs.

Some pension officials said they don’t plan to make drastic changes based on GASB’s decision. For example, many pension officials plan on using two sets of numbers when calculating pension obligations: one for official reporting purposes and another to determine taxpayers’ pension bills. GASB’s new rules would allow that.

“It’s an accounting change; that is all it is,” says Andrew Pratt, a spokesman for New Jersey Treasurer’s office. “New Jersey still has complete control over how the assumptions in its pension plans are set.” Confused smile


The U.S. economy has been performing below expectations lately. RBC Capital’s scorecard is back to intervention levels:




Last Friday I quizzed you with winners possibly having a chance of playing poker with Angela Merkel and Mario Draghi.



On the same vein, two charts from RBC Capital which may, or may not, help answer the quiz… Sleepy smile



Which way do you bet: Europe goes back up, or else?

Star  Here’s another good one from Chris Kimble of Kimble Charting Solutions via Doug Short:

Another Shanghai Flag?

Thirteen months ago the Power of the Pattern suggested that the Shanghai Composite was breaking below a multi-year flag/pennant pattern at (1) in the chart below. My expectation was that global softness/contraction should take place (See post here). The portfolio construction message of the breakdown a year ago was to reduce risk exposure.

Now this key index is attempting to break below another flag/pennant/support line at (2) in the chart.

How lucky do you feel?

China’s Stocks Drop to 5-Month Low as Citigroup Sees Slower Chinese Growth   China’s stocks fell, dragging the benchmark index to a five-month low, as Citigroup Inc. cut the nation’s growth forecast on concern Europe’s debt crisis will reduce demand for exports.

imageChina moves to lift property market                                     Weaker activity outside of biggest cities worries Beijing

(…) In the biggest developed cities, houses are beyond the reach of all but the wealthiest citizens. But in the rest of the country – which represents the majority – property is now more affordable than it has been for years, making developers less inclined to build more.


Rise in profit alerts weigh on US equities
String of warnings add to fears of slowing global economy

In total, 73 companies in the S&P 500 have issued lower guidance for the upcoming earnings period compared with 67 in the first quarter, according to FactSet.

Meanwhile, 29 companies have raised their guidance, down from 44 in the previous period.

Euro Crisis Hits Corporate Profits Globally

Analysts Continue to Lower Earnings Estimates for Q2 in June

With one week remaining in the second quarter, it marks a good time to measure revisions to earnings estimates for companies in the S&P 500 for the second quarter. Since the start of the quarter (March 31), the EPS estimate for the S&P 500 has dropped about 2.5% (to $25.37 from $26.02).

How significant is a decline of 2.5% in expected earnings? This drop is slightly smaller than the percentage decrease recorded in the Q1 2012 (-3.1%), and slightly smaller than the average percentage decrease recorded over the previous eight quarters (-2.8%). It is also much smaller than the peak level of percentage estimate cuts witnessed in Q4 2008 (-34.7%) and Q1 2009 (-31.0%).



Of the 105 companies that have issued EPS guidance for the current quarter, 75 have issued projections below the mean EPS estimate and 30 have issued projections above the mean EPS estimate. At this same time in Q1 2012, 66 companies had issued projections below the mean EPS estimate and 38 companies had issued projections above the mean EPS estimate.

In addition to lowering estimates for Q2 2012, analysts also have reduced earnings growth expectations for Q3 2012 (to 1.4% from 4.1%) and Q4 2012 (to 13.7% from 15.5%) since March 31.

Good luck. For my part, I’m gone fishing!  Fingers crossed  Back Friday or next Monday.

NEW$ & VIEW$ (3 May 2012)

Smile  Weekly Jobless Claims Decline

Initial jobless claims dropped by 27,000 to a seasonally adjusted 365,000 in the week ended April 28, the lowest level in a month. (Chart from Bespoke Investment)


Just kidding  ECB Stays Pat

The European Central Bank left its main interest rate unchanged, at a record low of 1%, where it has stood since December. The decision was in line with expectations. 45 min ago

Draghi Says Euro-Area Faces Downside Risks

“We saw stabilizing economic activity at low levels in the first three months” of the year, Draghi said. “The most recent survey indicators show uncertainty prevailing. We will be clearer in our assessment next month.”

High five  Stabilizing? Where is he seeing stabilization?

image image

  • The weak PMI number reflected a drop in Eurozone manufacturing production for the second consecutive month, as new order inflows declined at the fastest pace since December.
  • Further causes for concern were sharper rates of decline in output at Italian and Spanish manufacturers.
  • Job losses were reported for the third straight month in April, with therate of decline the sharpest in over two years.
  • This hurt even German manufacturers, who saw production fall for the first time in 2012-to-date as an accelerated rate of decline in new export volumes reverberated through the sector.

Draghi goes on:

“Addressing divergences among individual euro-area countries is the task of national governments,” Draghi said. “As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term.”

How can he talk about euro area policy when one country is doing very well, a few are hanging in and most are in deepening recessions? What happens to the “price stability” mandate when wages are accelerating sharply in Germany while falling just about everywhere else? Confused smile

Solid Demand in Spanish Bond Sale

“Solid demand” at a steeper price!

The Spanish Treasury, which year-to-date has raised around 50% of its gross bond issuance target, offered €1.5 billion to €2.5 billion of the 4% July 2015, 3.80% January 2017 and 5.50% July 2017 bonds. They sold €2.516 billion, just above the upper end of the range. The bold front loading of issuance in January and February—when investors were more willing to buy its bonds—has allowed the Treasury to proceed with lower offer sizes at the current and coming auctions.

Clock  (…) the average yield on the July 2015 bond rose to 4.037% from 2.617% at the previous auction March 1. The average yield on the January 2017 bond increased to 4.752% from 3.565% at the previous sale Feb. 2.

French Poll Signals Shift in Crisis Policy

Hours before the debate, a new Ifop poll showed 54% of potential voters would choose Mr. Hollande if elections were held now, while 46% would pick Mr. Sarkozy.

Mr. Hollande’s tone vis-à-vis Berlin has grown increasingly confident. “Germany must understand that growth will allow us to solve the majority of problems,” Mr. Hollande told a news conference last week, promising to “hold a firm, friendly discussion with Madame Merkel.”

Over the weekend, Ms. Merkel repeated her argument that sustainable growth in Europe has to come from supply-side reforms, such as liberalizing labor markets, not from fiscal stimulus.

Punch   “If a country becomes more productive and competitive, but there is no demand for its products domestically or around it, growth will not materialize,” Italy’s Mr. Monti said in a speech in Brussels last week.

Storm cloud   U.K. Economy Losing Momentum

The purchasing managers index for services missed analysts’ estimates, sliding to 53.3 in April, the lowest level since November last year, the survey from data provider Markit and the Chartered Institute of Purchasing and Supply showed. The figure compares to a March reading of 55.3.

(…) the composite PMI—which is a weighted average of the services, manufacturing and construction surveys—fell to 53.2 in April from 55.2 in March.

Storm cloud   Lufthansa Cuts Jobs as Costs Bite

Lufthansa said it would cut 3,500 jobs to reduce costs amid growing signs of crisis for Europe’s airline industry, with losses nearly doubling at Scandinavian rival SAS and small Danish airline Cimber Sterling declaring bankruptcy.


Nearly 69,000 Completed Foreclosures Nationally in March

There were 69,000 completed foreclosures in March 2012 compared to 85,000 in March 2011 and 66,000 in February 2012. Through the first quarter of 2012, there were 198,000 completed foreclosures compared to 232,000 through the first quarter of 2011. Since the start of the financial crisis in September 2008, there have been approximately 3.5 million completed foreclosures.

Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of March 2012 compared to 1.5 million, or 3.5 percent, in March 2011 and 1.4 million, or 3.4 percent, in February 2012. The number of loans in the foreclosure inventory decreased by nearly 100,000, or 6.0 percent, in March 2012 compared to March 2011.

Of the top 100 markets, measured by Core Based Statistical Areas (CBSAs) population, 35 are showing an increase in the year-over-year foreclosure rate in March 2012, two more than in February 2012 when 33 of the top CBSAs were showing an increase in the year-over-year foreclosure rate.

“Compared to a year ago, the number of completed foreclosures has slowed,” said Anand Nallathambi, chief executive officer of CoreLogic. “Since the foreclosure inventory is also coming down, this suggests that loan modifications, short sales, deeds-in-lieu are increasingly being used as an alternative to foreclosures to clear distressed assets in our communities. This is what was envisioned with the recent National Foreclosure Settlement, and can often be a better outcome for both borrowers and investors.”


An obviously unsustainable situation (chart from Doug Kass)



Storm cloud   Non-manufacturing sector fell in April  China’s non-manufacturing businesses expanded more slowly in April, because of a moderated increase in market demand in the construction and services industries, national statistics show.

The Purchasing Managers’ Index in the non-manufacturing sector, which indicates operational activity, declined to 56.1 last month from 58 in March. According to the survey, the sub-index of new orders dropped to 52.7 in April, compared with 53.5 in March, meaning market demand increased at a slower pace, the federation said.

Storm cloud   Housing prices decline by 0.7% in big cities in April  Average home prices in 100 Chinese cities fell 0.71 percent year-on-year in April, the first year-on-year drop since June 2011.

imageAverage home prices in 100 Chinese cities fell 0.71 percent year-on-year in April, the first year-on-year drop since June 2011, the country’s largest real estate website said on Wednesday.

The prices fell 0.34 percent month-on-month, the eighth consecutive fall, according to the China Real Estate Index System, which is affiliated with SouFun Holdings Ltd.

“As property developers’ cash flow further tightens, we believe property prices in key cities such as Beijing and Shanghai will slide 5 to 10 percent this year, while second- and third-tier cities may see a drop of more than 10 percent,” He added.

CREIS said the average home price in the 10 biggest cities was down 2.6 percent year-on-year at 15,391 yuan ($2,443) a square meter in April, the fourth consecutive fall on a yearly basis. (…)

“Inventories are still rising. Developers expect more cuts of up to 20 percent,” said Stephen Green, an economist at Standard Chartered Bank. The bank presented the results of a survey of 30 residential developers in eight second- and third-tier cities taken in February and March. (…)

Chinese banks made 242.7 billion yuan in property loans in the first quarter, down 54 percent, central bank data show. Property lending fell 38 percent in 2011.(…)

According to the China Index Academy, sites purchased by the top 10 developers fell 77 percent year-on-year in the first quarter and 25 percent quarter-on-quarter. China Vanke, for example, only bought one site.


From a CEBM Research survey:

Department store sales declined significantly in April. Sales of most respondents in 1st tier cities demonstrated negative sales growth, and some respondents even claimed April as the worst month yet of 2012.

Chinese Stocks Rise to 7-Week High on Monetary Policy Easing Speculation  China’s stocks rose, sending the benchmark index to a seven-week high, on speculation the government will take steps to avoid a deeper economic slowdown.



High five   Earnings Beat Rate Falls

Over the first ten days of earnings season, the percentage of companies beating earnings estimates remained above 70%, which would have been one of the highest readings seen over the last ten years.  Over the past two weeks, however, the beat rate has been declining steadily, and it currently stands at just 64%, which is two percentage points above the historical quarterly average of 62%.  There are still a couple weeks left to the first quarter reporting period, so it will be interesting to see if this decline continues.



Rupee Falls to Four-Month Low

The Indian rupee sank to a four-month low against the U.S. dollar amid growing concerns about the country’s gaping budget and trade deficits and worries capital inflows will remain weak due to slowing domestic economic growth.

Money   Canadians Dominate World’s 10 Strongest Banks

Singapore’s Oversea-Chinese Banking Corp. retained the title of the world’s strongest bank for the second year, followed by BOC Hong Kong Holdings Ltd. Two other Singaporean lenders — United Overseas Bank Ltd. and DBS Group Holdings Ltd. — were also among the strongest. “Singapore’s economy has performed quite stably and quite well, and for the Singaporean banks, we have real economic activities to finance,” Oversea-Chinese Banking CEO Samuel Tsien says. He credits the bank’s strength partly to its risk management practices.

No other country dominated the list as did Canada: The nation of 34.7 million people has only eight publicly traded banks, two of which are regional lenders. Only three U.S. banks –JPMorgan Chase, PNC Financial Services Group Inc. and BB&T Corp. — made the top 20. Four European banks were included: two from Sweden and one each from the U.K. and Switzerland.

Wilted rose   Buffett Trails S&P 500 for Third Straight Year


Tonight, May 3rd at 9pm ET/PT, Bloomberg Television presents the newest episode of “Bloomberg Game Changers,” featuring a behind-the-scenes look at the world of the Warren Buffett. Ahead of this weekend’s Berkshire Hathaway Annual Meeting, expected to draw crowds of over 40,000, Bloomberg offers rare access and interviews to the Oracle of Omaha and his legendary friends and business associates including Bill Gates, Charlie Munger, John Gutfreund and daughter Susie Buffett.

Special coverage can be seen on Bloomberg TV, heard on Bloomberg Radio and viewed via livestream on or on the Bloomberg TV+ app for iPad.

With over 90 minutes of rare material, including behind-the-scenes footage online and on Bloomberg TV+, tune in to hear Buffett look back on his extraordinary investing career, his run-in with the SEC and his multiple interventions to help rescue the U.S. financial system.

Watch preview here:

To find Bloomberg Television in your area, visit


NEW$ & VIEW$ (25 Oct. 2011)

Confused smile   Fingers crossed   “THE COMPREHENSIVE PACKAGE” saga is entering its final stage (that’s until the next stage) and growing more confusing as we approach D-day.


Der Spiegel explains the German stage: Merkel Gambles on Parliamentary Support for Euro Backstop

Chancellor Merkel’s conservatives have bowed to pressure for a full vote in parliament on Wednesday over controversial plans to boost the euro rescue fund. Broad backing would help Chancellor Angela Merkel in EU talks on rescuing the euro, but it’s a risky gambit, given the unknown number of rebels in her ranks.
But the notoriously cautious chancellor is running a risk with the vote because a number of parliamentarians from her center-right coalition will vote against her, just as they did in the initial vote on Sept. 29 to enlarge the EFSF’s lending capacity to €440 billion.  (…) The rebellion could be greater this time around, and she faces the same pressure to reach an absolute majority, even though only she technically only needs a simple majority — more “yes” votes than “no” votes.

The FT appears more hopeful that Merkel will also win this vote:

“The instruments are acceptable because the ECB won’t be turned into a money-printing machine, the EFSF won’t be given a bank license and the guarantees will remain capped at 211 billion euros,” Christian Lindner, FDP general secretary, said in Berlin today, according to an e-mailed transcript.

EU officials are apparently testing the EFSF package with private investors and rating agencies to assess its acceptability:
the leverage which can be achieved can only be determined after dialog with investors and rating agencies around the new instrument, and in the light of prevailing investor appetite over time for the sovereign bonds of particular member states.
Confused smile   Similar confusion on the Greek haircut. The FT says that bondholders are being asked to take a 60% haircut (Hard line adopted on Greek debt loss) but, here’s the risk:
According to officials briefed on the talks, France, the European Central Bank and the International Monetary Fund remain concerned the tough stance could trigger bondholder insurance policies known as credit default swaps, sparking investor panic because of uncertainty over which financial institutions face CDS losses.

“The CDS market is not very transparent,” said Jacques Cailloux, European economist at RBS. “You don’t know where the exposures are.”

“You don’t need to be paranoid to be terrified,” said the person familiar with the talks. “They need to find a fine line where they don’t create a credit event but where the effect is significant enough so the [Greek] debt is sustainable over the long term.”

A senior German official said: “We are trying to avoid a credit event.”

A person close to bondholders said a 60 per cent cut in face value would be equivalent to a 75-80 per cent reduction in net present value.

Pointing up   EU wants 60% haircut on Greek debt (50% minimum), banks say anything over 40% is credit event. ‘Bring it on,” says one official.

High five   Satyajit Das, author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

The circular nature of the scheme is surreal. Highly leveraged vehicles, in part backed by weakened nations like Spain and Italy, are to undertake the “rescue” of the same countries and their banks. Levering the EFSF merely highlights circularity in the entire European strategy of bailouts, drawing attention to the correlated default risks between the guarantor pool and the asset portfolio of the bailout fund. This is akin to an entity selling insurance against its own default. This only works if all commitments are fully backed by real cash and savings, which of course nobody actually has, requiring resort to familiar “confidence tricks”.

The proposal assumes that it will not need to be used, avoiding exposing its technical shortcomings. The EFSF too was never meant to be used, relying on the “shock and awe” of the proposal, especially its size and government backing, to resolve the crisis.

In effect, politicians are finding new ways to kick the can further down the road and markets seem willing to play that game, hoping that the kickers will hit the ball far enough.

Storm cloud   BUYING TIME WORKS, UNTILL TIME CATCHES YOU UP: The Eurozone is in recession NOW and France is getting weaker by the day while Germany is skirting near the danger zone.

EUECONThe picture that PMI surveys paint of Italy is grimmer still. Italy’s economy, the euro zone’s third largest, shrank four-straight months through September, according to the most recent data available for Italy.


Silvio Berlusconi is praying hard to find  a plan for increasing growth and cutting borrowing by tomorrow’s summit in Brussels.

An emergency cabinet meeting last night ended without a resolution after coalition members refused to agree to raising the pension age in Italy to 67.

Storm cloud   Yields on Italy’s government debt have crept back up to almost 6%, not far short of levels they reached in August when the European Central Bank stepped in to cap Rome’s borrowing costs by buying Italian bonds in the market.

John Micklethwait, editor of The Economist, said this am:

Investors simply do not trust this clown of a man to get Italy out of this mess.


Pointing up   China’s Stocks Rally for Biggest Two-Day Gain Since December; Vanke Jumps The Shanghai Composite Index climbed 39.34 points, or 1.7% yesterday, extending its previous day’s 2.3% gain after a report showed China’s manufacturing may expand this month. The two-day, 4% gain was the biggest since the period ended Dec. 13.

Bloomberg reports that the 277 companies that have already reported third-quarter profits out of the 963 on the Shanghai Composite posted a 19% earnings increase in the period on average, trailing analysts’ estimates by 32%, according to Bloomberg data. That compared with a 26 percent average gain in second-quarter earnings, the data showed.

Storm cloud   Yet, the jury is still out on China’s growth prospects. CEBM Research’s Machinery Survey of construction machinery dealers conducted in mid-October reveals that machinery dealers reported that downstream demand remains weak. Approximately 45% of the survey respondents indicated that sales have weakened, while about 19% of the dealers reported that sales remain unchanged. Most dealers indicated that the demand for machinery remains weak as infrastructure investments are slowing down. Some machinery dealers also mentioned that the small sales rebound in September was due to the aggressive use of equipment financing from several machinery OEMs and is not sustainable in medium-term.

Storm cloud   CHINA’S HOUSING MARKET continues to weaken (Home prices decline in suburbs)

Home prices in China’s key cities are falling more quickly as property developers, under increasingly tight cash-flow pressure.

Though data from the National Bureau of Statistics show the month-on-month price remained unchanged in Beijing, Shanghai, Shenzhen and Guangzhou from July to September, home prices fell from 30 percent to 50 percent in the suburban areas of these cities.

Home prices decline in suburbs


Storm cloud   Commercial housing sales in Beijing fell 12 percent year-on-year in the first three quarters of the year. (Beijing’s 1-9 housing sales down 12%) Commercial housing sales in Beijing fell 12% YoY in the first three quarters of the year, a sign that the red-hot property market has begun to cool down. Prices of new homes in the city have shown zero MoM growth for four straight months, while prices of pre-owned homes fell 0.4 percent MoM in September.


Smile   FARM PRODUCE PRICES in China continued to fall in the week ending Oct 23 compared to the previous week, the Ministry of Commerce said in a report released on Tuesday ((Farm produce prices continue to decline)

Vegetable prices posted the sharpest declines, with the wholesale prices of 18 staple vegetables down 2.5% on average during the week, the report said. the price of pork fell 1.8 percent, 0.6 percentage points more than the fall of the previous week. Pork prices have dropped 3.7% since mid-September as supplies increased, the report said, expecting the downward trend to continue in the short term. Egg prices shed 0.8% from the previous week, extending losses from a 0.4% decline during the week ending Oct 16. The price of chicken, beef and mutton posted slight increases during the week.

Lightning   Hong Kong’s September Exports Decline for First Time in Almost 2 Years and the government warned the outlook is “bleak,” adding to the risks the city will enter a recession. Overseas shipments fell 3% YoY, compared with a 6.8% gain in August. Exports last dropped in October 2009. Exports to China, the biggest destination for shipments through Hong Kong, fell 7.3% YoY last month, while sales to the U.S., the city’s second-largest market, slid 8.9%, the fifth straight monthly decline.


OUTLOOKFingers crossed   Economists, having seen recent less downbeat data, now expect Thursday’s GDP report from the Commerce Department to show a 2.7% gain, and some are looking for more than a 3% pace.

Smile   Fedex has announced plans to hire 20k temp workers to take care of surging holiday shipments. This is 18% more than last year.


Storm cloud   India raises rates amid growth warnings  The Reserve Bank of India on Tuesday raised the repo rate 25 bPS to 8.50%.The bank also scaled down its GDP growth projection to 7.6% from 8% for the fiscal year 2011-2012 that ends in March. That might be the last hike as the bank said:
The likelihood of a rate action in the December mid- quarter review is relatively low



Storm cloud   Turkey’s Central Bank to Unveil Plans to Boost Lira  Turkey’s central bank said it will unveil this week a package to support the lira, which has lost almost 20% of its value against the dollar since November, marking the latest step in an increasingly aggressive effort to shore up the embattled currency.Turkey’s central bank forecasts inflation will hit 7.5% at the end of the year, above its 5.5% target.


NEW$ & VIEW$ (12 Oct. 2011)

Sarcastic smile   Slovakia Set for New Vote Talks  Slovak lawmakers are regrouping to broker a deal that would remove the remaining obstacle to enhancing the euro-zone’s government bailout fund.


Fingers crossed   “THE COMPREHENSIVE PACKAGE”:  Officials in Berlin told The Telegraph it is “more likely than not” that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July. (…) Estimates near 60pc have been circulating in Berlin. (…) (Ambrose Evans-Pritchard).

Marchel Alexandrovich from Jefferies Fixed Income said Germany risks opening a “Pandora’s Box” by unpicking the Greek deal.

It would be a complete disaster, a signal that sovereign debt is not safe. Investors would pull their deposits out of Portugal, Ireland, Spain and Italy and set off bank runs across Europe. The French are against doing this and so is the European Central Bank. They know banks need more time to adjust. We don’t think Europe will pull the trigger.

But, France wants banks to be able to tap the EU bail-out fund (EFSF) directly if they cannot raise enough capital on the open market. This would avoid any further strain on the French state, already at risk of losing its AAA rating. But, Mr Schäuble ruled out any attempt to leverage the EFSF beyond €440bn by letting it act as a bank:

That would be to monetise European state debt. That is not acceptable.

Yield spreads between German Bunds and 10-year EFSF debt have widened from 66 to 112 basis points since early July. If yields creep much higher, the fund itself may become a problem.

Pointing up   THE FALLACY OF THE “BIG BAZOOKA” FT’s Walter Münchau argues that the boosting the size of the EFSF would aggravate the crisis.

A big bazooka, without a simultaneous commitment to a fiscal union in the distant future, could turn out to be extremely destabilising.

If you double or treble the size of the EFSF without changing its underlying structure,all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB (…). Or you have to change the EFSF’s legal status through the adoption of joint and several liability. (…) The two options ultimately mean the same. (…) If you want to annoy certain people, you could also call the latter a eurobond.


Storm cloud   Meanwhile: Spanish Banks Hit By Rating Cuts  Spain suffered another blow when Standard & Poor’s and Fitch Ratings downgraded the country’s leading banks, citing dimming economic growth prospects, a depressed property market and turbulence in capital markets. These so-called “problematic assets” may peak between €296 billion and €313 billion, S&P said. That’s roughly the equivalent of three-quarters of outstanding loans to construction firms and real-estate developers by Spain’s banks, and around 30% of Spain’s gross domestic product. . It reiterated an earlier calculation, contested by Spanish authorities, that as much as €30 billion to €35 billion may be needed to recapitalize the sector instead vs the €17 billion the government estimates.


Wilted rose    IN THE US, BANKIN’S CHANGIN’:  Regulators Unveil ‘Volcker Rule’   Wall Street trading appears headed for an inhibited new era after the U.S. government on Tuesday outlined its proposed ‘Volcker rule,’ which would sharply limit banks’ ability to make bets with their own capital.

Storm cloud   ECRI vs BUFFETT: The Conference Board Employment Trends Index™ (ETI) decreased again in August to 100.8, down from July’s revised figure of 101.

While the Employment Trends Index has been on a slightly declining trend in recent months, the decline in the index is still not as strong as it was in the months leading to previous recessions. We still expect the economy to moderately add jobs in the next several months, but not fast enough to lower the unemployment rate. This month’s decrease in the ETI was driven by negative contributions from six out of the eight components. image

Except that it has only retraced 40% of its decline. Employment never exited the recession.

Rainbow   The Credit Managers’ Manufacturing Index rose last month to 53.3 from 52.1 in August, as its gauge of sales jumped to the highest since April, according to the National Association of Credit Management’s monthly survey of 600 executives. The increases represent a “vast improvement,” said Chris Kuehl, economic adviser for the Columbia, Maryland-based association. “The doldrums that sank the manufacturing community in the summer appear to be lifting.”



Sarcastic smile   ENTERING THE DEBATE WITH BLIND FAITH: Moody’s Analytics: Risk of New U.S. Downturn 40%  “In our baseline outlook, the U.S. will avoid recession only because we expect policymakers to act in the next few months. (…) a failure for U.S lawmakers to find common ground on economic policy could shave 1.7 percentage points from economic growth next year.”

Storm cloud   The Index of Small Business Optimism gained 0.8 points ending a six month decline, but about the only good thing to say about it is that the Index didn’t go down.


imageSeptember was another bad job creation month. Fourteen (14) percent (seasonally adjusted) reported unfilled job openings, down 1 point. Over the next three months, 11 percent plan to increase employment (unchanged), and 12 percent plan to reduce their workforce (unchanged), yielding a net seasonally adjusted 4 percent of owners planning to create new jobs, a 1 point loss from August. In a normal expansion, this Index component would have double digit readings.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 1 point, falling to a net negative 10 percent, more firms with sales trending down than up.


Storm cloud  WHERE’S THE BIG MO?  Last Friday’s NFP report led many economists to raise their GDP forecasts for Q3 on “upward momentum”. September numbers included 45k Verizon strikers  back to work after walking out in August. Keeping them out, the actual trends in total and private employment are:

Total: Q1 avg. 166k,  Q2 avg. 96k,   July 127k,   August: 102k,  Sept. 56k (=Q3 avg.: 95k)

Private: Q1 avg. 191k,  Q2 avg. 96k,  July 173k,  August: 87k,  Sept. 92k (=Q3 avg.: 117k)

Lightning   In addition, there were 444k more “involuntary part-time workers”, a huge number of people whose take-home pay got slashed, just before Halloween, Tksgiving and Xmas. Talk of upward momentum! Meanwhile, Obama’s Jobs Bill Hits Wall in Senate, for what it’s worth!

Storm cloud  ALL THE LEAVES ARE BROWN, AND THE SKY IS GREY:  CA is the US largest state with 12% of the total population and 13% of the US GDP (GDP equivalent to Italy!). It also boasts a 12.1% unemployment rate. After 3 months through September in its fiscal year, CA’s sales tax receipts are -21.5% and corporate taxes -9.3%. In September alone, sales taxes are -33.2% (3.8% below budget) and corporate taxes 23% (17% below budget). While there is an Amazon effect in these numbers, September’s decline is huge. CA controller John Chiang:

(…), both sales and corporate taxes disappointed. Particularly troubling is the weak sales tax figures because up to September, they had been tracking above the Department of Finance’s most recent estimates.

Black Sheep   CALIFORNIA DREAMIN’:  As an aside, if you want a good account of California’s problems, read Michael Lewis’ Vanity Fair article California and Bust. Very revealing of the irresponsibility of CA legislators, unions officials and members as well as electors. Californians have no reason to criticize Greeks and other Clubmedders. Speaking of Arnold Schwarzenegger, Lewis writes

Two years into his tenure, in mid-2005, he’d tried everything he could think of to persuade individual California state legislators to vote against the short-term desires of their constituents for the greater long-term good of all.

(…) people would say to me, ‘Yes, this is the best idea! I would love to vote for it! But if I vote for it some interest group is going to be angry with me, so I won’t do it.’ I couldn’t believe people could actually say that. You have soldiers dying in Iraq and Afghanistan, and they didn’t want to risk their political lives by doing the right thing.

In November 2005 he called a special election that sought votes on four reforms: limiting state spending, putting an end to the gerrymandering of legislative districts, limiting public-employee-union spending on elections, and lengthening the time it took for public-school teachers to get tenure. All four propositions addressed, directly or indirectly, the state’s large and growing financial mess. All four were defeated; the votes weren’t even close. From then until the end of his time in office he was effectively gelded: the legislators now knew that the people who had elected them to behave exactly the way they were already behaving were not going to undermine them when appealed to directly. The people of California might be irresponsible, but at least they were consistent. (…)

“What all the polls show,” says Paul (Mark, a journalist), “is that people want services and not to pay for them. And that’s exactly what they have now got.”


Rainbow   EUROZONE IP RISES 1.2% IN AUGUST. Coming after a 1.1% gain in July.


Pointing up   Still, the September PMI was weak enough to expect that IP will weaken in coming months.

Storm cloud  MORE FISCAL DRAG:  Ireland Needs to Cut €4 Billion  Ireland’s Fiscal Advisory Council said the Irish coalition government will require four billion euros ($5.5 billion) of budget adjustments to meet a key 2012 target.

Storm cloud   Europe’s banks face 9% capital rule   Lenders could be forced to raise up to €275bn



Auto Storm cloud   Another sign that China’s domestic market is slowing down: Mercedes vehicle sales in China excluding Hong Kong grew 13% last month to 15,815 vehicles, well below the nearly 60% sales growth that Mercedes-Benz’s China unit reported during the first half of this year. (China Sales Pace Slows for MercedesThe 13%YoY sales increase in September represents a turnaround from July and August, when the brand’s sales posted “low single-digit increases” from year-earlier levels.


Pointing up   THIS IS WHY Vice-Premier Li Keqiang called for more efforts to expand domestic demand and balance urban and rural development in a bid to facilitate the country’s economic restructuring and improve the livelihoods of China’s people.

Storm cloud   CHINA INFLATION:  Farm produce prices slightly up  China’s prices for most farm produce continued to rise in the week ending Oct 9, while that of pork remained flat compared to the previous week.


Thumbs down   [ALCOA]Alcoa Profit Is Weaker Than Feared  Alcoa reported third-quarter earnings far short of analysts’ recently reduced forecasts as slower global economic growth and a drop in prices weighed down the aluminum maker. Alu demand down 16% in Europe in H2. It is also weakening in North America and Brazil. Chinese demand +17% this year, up from previous forecast of 15% growth, even though China’s economy is slowing down. (!?)


Light bulb   BUY HONK KONG?  From Gavekal Via John Mauldin


Pointing up   IEA Forecasts Less Oil Demand  No surprise there. What’s interesting in the IEA [OPEC]release is the call on OPEC not to prematurely cut back its output as Lybian oil gradually flows back. “[Oil] demand has continued to run ahead of supply by an average of 0.6 million barrels a day so far in 2011,” and oil inventories are well below their five-year average, the IEA said in its monthly oil market report. Libya appears to be returning to pre-war oil production levels faster than expected, as companies operating there have moved quickly to restart facilities, the IEA said. Libya was producing 350,000 barrels a day of crude at the start of this month, having previously only expected it to hit this level by the end of the year.The IEA raised its estimate for Libyan oil production at the end of the year to 600,000 barrels a day. 

The IEA cut its estimate for non-OPEC production by 300,000 barrels a day in the fourth quarter and by 200,000 barrels a day in 2012. However, this expected decline in output in 2012 will largely match the expected drop in demand, meaning the supply-demand balance in the market is largely unchanged.

calls by other OPEC members, including Iran, Iraq and Venezuela, for Saudi Arabia to rein in supplies now that Libyan output has restarted may be premature. The group’s output is still running 300,000 barrels a day below pre-Libyan crisis levels of 30.5 million barrels a day.

Storm cloud   And this strong statement by the IEA: Saudi Arabia cut its production by 200,000 barrels a day in September and, “sent the clearest signal yet that it intends to protect revenues, despite declining output, with its decision to raise prices to record levels for Arab Light for Asian buyers for November,” the IEA said. 

Steaming mad   Just when the world needs lower oil prices, which the resumption of Lybian production would normally provide, the Saudis maintain their “high price” strategy. See SLICKLY SAUDIS, STICKY PRICES. As a reminder, over the weekend, a senior oil executive for state-owned Saudi Arabian Oil Co. said the kingdom is unlikely to proceed with plans to raise its oil output, as expansion plans in other countries such as Iraq and Brazil should be enough to satisfy world markets.

Thinking smile   “There are no signs of a slowdown, not yet,” said Andrew Gould, chairman of Schlumberger Ltd.. (MarketWatch)


Crying face   ST GAIN FOR LT PAIN: The Economic Policy Institute:

Over the last three years, state and local government employment has dropped by 641,000, as state and local budgets have been squeezed as a result of the recession.  Almost half (-278,000) of the decline was in local public  education, which is largely jobs in public K-12 education. On the other hand, over the same period, public K-12 enrollment increased by 0.6 percent. Just to keep up with this growth in the student population, employment in local public education should have grown at roughly the same rate, which would have meant adding around 48,000 jobs. Putting these numbers together (i.e., what was lost plus what should have been added to keep up with the expanding student population) means that the total jobs gap in local public education as a result of the Great Recession and its aftermath is around 326,000 jobs.


With that in mind, read again HIGH UNEMPLOYMENT IS THE NEW NORMAL in yesterday’s NEW$ & VIEW$.


Left hugRight hug   LET’S BE FRIENDS:   Couple to give friends millions after winning £101m lottery Dave and Angela Dawes from Wisbech, Cambridgeshire, celebrate after they won the UK's third biggest lottery prize - more than £101 millionjackpot

Dave and Angela Dawes pledge to make close family and friends millionaires after being unveiled as Britain’s third-largest lottery winners despite only entering the draw three times.