NEW$ & VIEW$ (3 DECEMBER 2013)

Global Output and new orders rise at fastest rates since February 2011


At 53.2 in November, up from 52.1 in October, the J.P.Morgan Global Manufacturing PMI™  registered its highest level since May 2011. The headline PMI has signalled expansion for 11 successive months. The faster improvement in overall operating conditions was underpinned by stronger expansions of production, new orders and further job creation.

Among the largest industrial regions covered by the survey, the PMI for the US bounced back to reach a ten-month high, after slowing sharply to a one-year low in October. Growth meanwhile remained solid in Japan and the UK, with the PMI in each of these nations at their highest levels since July 2006 and February 2011 respectively. The modest and fragile
recovery in the euro area continued, while the China PMI also posted slightly above the 50.0 mark.

Global manufacturing output and new business both expanded at the quickest pace since February 2011. The trend in international trade also showed further signs of improvement, as the growth rate of new export orders hit a 32-month record.

A sign that current capacity was being tested by the combination of solid demand growth and lacklustre job creation was provided by a third successive increase in backlogs of work. Outstanding business rose at the quickest pace since March 2011.

Companies reported some success in passing on higher input costs to their clients, as average factory gate prices increased for the fourth month in a row.



Surge in Public Construction Spending Offsets Private Pullback

October’s U.S. construction data offered a surprise for era of penny-pinching governments: A surge in public spending more than offset a decline in private building.

Spending on construction increased at a seasonally adjusted annual rate of 0.8% in October from the month before, beating the 0.4% gain forecast by economists.

The strength came from an unexpected source. State and local governments, which fund the majority of public construction, boosted spending at 3.2% pace.

The federal government boosted outlays by 10.9% in October, the largest monthly gain since January 2011. The October increase, the first month of the new fiscal year, more than reversed declines the prior two months. Federal construction spending had been weak most of the year due to across-the-board cuts put in place in March.

Meanwhile, private construction slipped in October. Private home building declined 0.6%, the third decrease in the last four months. Spending on communication, power infrastructure and recreation also fell during the month. (…) (Chart from Haver Analytics)

Factory Owners Wary of Bangladesh Pay Rise

Millions of Bangladeshi garment workers—key players in a supply chain that produces inexpensive clothing for Western retailers—got a pay raise over the weekend, as a new government-mandated minimum wage of $67 a month kicked in.

That puts Bangladesh into roughly the same league as other low-cost apparel exporters such as India, Sri Lanka and Cambodia. But factory owners here said the increase risks making the industry, a mainstay of the impoverished country’s economy, less competitive. (…)

For years, extremely low wages helped Bangladeshi apparel makers win contracts by offsetting other weaknesses that plague the industry—from inefficient factories to poor shipping infrastructure and frequent political upheaval that disrupts production.

An appreciating local currency is also adding to the challenges facing Bangladeshi exporters. The Bangladeshi taka is now trading at around 77 to the dollar, considerably stronger than January’s rate of about 84 to the dollar.

That has the effect of making Bangladeshi products more expensive overseas, at the same time that some of the country’s garment-making rivals benefitted from falling currencies. The rupee in neighboring India, for instance, is down about 12% from where it started the year, giving exporters there a boost. (…)

Factory owners said the wage increase means they will need to charge more. “At an average, we’re looking at a 20-30 cents rise on every product and that’s a surprise leap for any brand or any producer,” said Mohammadi’s Ms. Huq. (…)

A recent World Bank study found that the unit cost of producing a basic polo shirt in Bangladesh is approximately $3.46 per shirt, excluding margins and the cost of transportation to port, compared with a cost of $3.93 per shirt in China. But Bangladeshi workers produce 13-27 polo shirts per person per day, lower than the 18-35 pieces per person per day in China, the study found. (…)

European banks: más capital
Periphery banks looking better, but crisis is far from over

(…) This is typical of how banks are getting to their Basel III numbers – small disposals, exits from a few capital-intensive business lines and other changes to the asset side of the balance sheet.

But capital-raising on a different scale looms, spurred on by the European Central Bank’s Asset Quality Review next year, a new regulatory focus on the leverage ratio (capital as a proportion of total assets), and the growing tide of conduct fines. PwC estimates that Europe’s banks have a shortfall of €280bn and that €180bn of that will have to come from new equity. That is well over the new equity that the sector has raised in any year since 2008. Berenberg puts the capital shortfall at €350bn-€400bn.

So the stage is set for a tricky sales pitch to investors. Return on equity at most European banks is poor, barely scraping into double digits despite promises from some that they can make it into the mid teens. Adding more equity will not help. Offsetting that is a fall in the cost of equity – PwC says that for 16 US and European banks it has fallen from 11.5 per cent in 2011 to 9.8 per cent now. Banks might beat their cost of equity after all, but not by much. So the investment case might centre on dividends. But a sector with so much uncertainty about the amount of capital it needs is in a weak position to be making generous dividend promises.

Just kidding This could rock markets in 2014.


Has the Contrarian Investors’ Day Come?

One by one, the bears have fallen.

(…) And now there are precious few leading investors who admit to taking bearish positions on U.S. equities. Indeed, various surveys show that among investment advisers and individual investors the ratio of bears to bulls has rarely, if ever been as low as it is now.

Whisper it quietly, but this is a classic signal for contrarian investors.

The latest high profile bear to capitulate is Hugh Hendry, at the hedge fund Eclectica Asset Management. Although relatively small–Eclectica had $1.3 billion under management at the start of the year–Mr. Hendry has had a high profile for much of the past decade, having been a prominent bear in the run up to the 2007 crash.

But having taken pain from being on the wrong side of a soaring market during the past couple of years, he said recently that he’d thrown in the towel. He hates the market, but is now positioned for it to go up further.

Jeremy Grantham of the giant fund GMO and another prominent bear recently figured the U.S. market could advance another 30%, despite being some 50% overvalued. John Hussman, of Hussman funds and another bear, also figures there are risks of a further market “blowoff”–i.e. a continuation of the recent upward trend. As does Bob Janjuah at Nomura.

None of the high profile bears has actually come out and said that they believe in a bull case, that markets are cheap and need to be bought at these levels. By and large they all expect a correction and for deep market underperformance. But they’ve mostly pared back their bearish positions. But after the U.S. equity market tacked on another 30% this year, having already doubled from 2009 lows by last year, there’s not a lot more pain these investors can take.

As John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can stay solvent.”

Even if bears haven’t entirely disappeared, they seem to be in deep hibernation. (…)

The visuals, courtesy of Short Side of Long:

Based on volume trends, equities are rising not really because people are buying but rather because they are not selling, frozen in their tracks. Disappointed smile



Boy Girl U.S. 15-Year-Olds Slip in Rankings Crying face

U.S. 15-year-olds made no progress on recent international achievement exams and fell further in the rankings, reviving a debate about America’s ability to compete in a global economy.

The results from the 2012 Program for International Student Assessment (PISA), which are being released on Tuesday, show that teenagers in the U.S. slipped from 25th to 31st in math since 2009; from 20th to 24th in science; and from 11th to 21st in reading, according to the National Center for Education Statistics, which gathers and analyzes the data in the U.S. (…)

U.S. scores have been basically flat since the exams were first given in the early 2000s. They hover at the average for countries in the OECD except in math, where American students are behind the curve. Meanwhile, some areas—Poland and Ireland, for example—improved and moved ahead of the U.S., while the Chinese city of Shanghai, Singapore and Japan posted significantly higher scores. (…)

And this chart, courtesy of Grant Williams (Things that Make you Go Hmmm…)



Call me  HELP!

I have accidentally totally removed my Dec. 2nd New$ & View$ post and it seems that the only way to recover it would be if anybody has it opened in a browser and copied it in Word or as pdf and email it to me.  Or if anybody printed it, it could be scanned and emailed at


Euro Equities No Great Bargains

U.S. vs European stocks is currently a big theme among strategists as many see this “large gap to be filled”:


In the November 19 New$ & View$, I commented on the risk of investing in European stocks on the basis of expectations for rising earnings in coming years. Here’s another angle from Barclays:

The key reasons for recommending an overweight position in Continental European stocks in 2014 is a combination of low valuations and the expectation of a strengthening in EPS growth. (…) we think investors in European equities continue to display a large degree of risk aversion. Given recent developments in both European credit and sovereign debt markets, the risk aversion in European equities looks misplaced to us.

As Figure 19 demonstrates, European markets are currently selling on a c.30% price to book discount relative to their US peers. Price/book has proved to be a good indicator of subsequent relative returns between the two regions.


In addition to the valuation discount, we expect European earnings growth to improve in 2014. We forecast 12% earnings growth in Europe (Figure 21). After several difficult years, we suspect that a turn up in EPS growth will be seen as a very positive development and usher in expectations of further improvements to come.


These last 2 charts are interesting. One, I like low P/Bk more than low P/Es. Book values are much more stable than earnings and P/Bk relative values near 40-year lows can be very appealing. Two, the relationship between trends in the LEI and earnings has been pretty good since 1970, providing support to current book values and raising expectations for higher ROEs in coming years.

According to Barclays, such attractive relative valuation levels stem from continued high risk aversion among European equity investors:

Risk aversion continues to permeate deeply in within Continental European markets. The high price for “safety” can be seen in some very wide “value spreads” and also in the premium paid for the safest sectors.


Unlike the fixed income market:



Relative valuation is in effect appealing. Are there catalysts visible enough to expect relative performance to reverse?

  • The “Eurozone economy” remains an average of disparate regional trends where the North is growing, the South seems to be generally healing, although Italy remains very problematic, and France looks more and more about to tilt into the precipice.
  • Even though the ECB has effectively installed a good backstop, banks remain reluctant to ease lending standards and increase loans (next charts from UBS).


  • The fiscal drag is easing but nevertheless continues through 2014. Eurozone consumers get little respite from falling oil prices due to the high tax rates on gasoline.
  • While unit labour costs have declined in Greece, Spain and Portugal, they have been rising in France and Italy as seen, buried, in this UBS chart. These two big countries are now the highest costs economies in the EU. ULC have kept climbing in spite of extraordinarily high unemployment rates and declining union membership rates.


Fixed income investors may well enjoy the luxury of the Draghi put, equity investors must deal with the strong headwinds of low relative inflation coupled with high relative costs and a pretty strong euro. How much faith should we have on 2014-2915 estimates?

Over the past three years, consensus analyst estimates have been persistently too high: they have started the year with optimistic expectations of double-digit growth – and the actual outcome has been basically zero or negative. But this is not new: bottom-up analysts have been persistently too optimistic (by 8% on average) over the past 25 years.


Top line growth will remain constrained by low nominal GDP growth, near deflation and a relatively strong euro. Meanwhile, margins may be bottoming out close to their 10-year lows but European companies have yet to show the kind of cost control that American corporations are capable of. Rising European margins remain an elusive hope, until proof to the contrary.image

While relative P/Bk values may be low, absolute P/Es are not on the cheap side of the ledger as these two charts show. Dismiss the bubble years P/Es; the long-term average is closer to 11x than to 13.5x.


In all, valuations are not as low as some contend. Nevertheless, UBS concludes:

We take our fair value forward P/E multiple of 14x and apply it to our end-2015 top-down EPS forecast. This gives a central forecast of 370 for the DJ Stoxx 600 (some 15% upside from where we are currently). Adding in a 2014 dividend yield of 3.6% then points to a total return of c.19% in 2014 and, with relatively low volatility, likely a reasonable Sharpe ratio (one of the problems for equities relative to bonds in recent years).


We would note that our central scenario is not simply a half-way house between the downside and upside scenarios. The downside scenario has a more significant variation from our central scenario, but we put a lower probability on the downside outcome as it is a break from current macro trends, rather than an acceleration.


Let’s pause for a moment:

  1. Why would one apply a “fair value forward P/E multiple of 14x” to end-2015 top-down EPS forecast given the 8-14 range of the last 25 years excluding the internet bubble years?
  2. U.S. equities have sold at a 10-40% premium to Europe ex-UK since 2001. The S&P 500 Index is currently selling at 13.6x forward EPS. Why would euro stocks sell at par with the U.S. P/E, let alone at a premium?
  3. With a central scenario at +15% within a –27% – +34% scenario range, UBS gives better odds to the upside (U.S. nominal GDP +6.5%) than to the downside (U.S. nominal GDP +3%) scenario. Nominal GDP growth has averaged 4.0% since 2010, 3.8% since 2011 and 3.7% since 2012. UBS’ upside looks rather heroic while their downside seems a lot more plausible in the current environment.
  4. The upside scenario would presumably include higher inflation rates, likely higher interest rates and probably lower earnings multiples. Can’t have your cake and…

                                                    To me, the +34% upside scenario is pie-in-the-sky stuff. The +15% central scenario assumes highly hypothetical earnings growth capabilities and top of the range P/E multiples. The –27% downside scenario suddenly becomes scarier…

                                                    You may have noticed that each time I referred to Barclays’ P/Bk analysis, I made sure to write “relative” in bold. This is because Barclays’ findings are essentially useful to very large investors fighting for relative performance.

                                                    If European P/Bk ratios are so low relative to the U.S., it is mainly because U.S. P/Bk values are at historical highs (see BLIND THRUST). In effect, European P/Bk values are actually only slightly below their 10-year average, no great bargains in absolute terms.


                                                    The “large gap to be filled” is indeed an interesting theme. Alas, “the gap” seems unlikely to be filled any more than during the last 20 years.


                                                    NEW$ & VIEW$ (22 NOVEMBER 2013)

                                                    Philly Fed Weaker Than Expected

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

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

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



                                                    To conclude, Confused smile.

                                                    Brent Hits One-Month High; Iran in Focus

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

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

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

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

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

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

                                                    Target Shoppers Put Less in Their Carts

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

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

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

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

                                                    U.S. Wholesale Prices Fall 0.2%

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

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

                                                    ECB’s Praet warns of deflationary pressures in euro zone

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

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

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

                                                     German Business Confidence Increases as Recovery on Track

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

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

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

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

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

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

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

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

                                                    TIME TO BE SENTIMENTAL?

                                                    Yesterday, I posted on Barclays’ analysis

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

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


                                                    NEW$ & VIEW$ (21 NOVEMBER 2013)

                                                    Sales Brighten Holiday Mood

                                                    The government’s main gauge of retail sales, encompassing spending on everything from cars to drinks at bars, rose a healthy 0.4% from September, despite the partial government shutdown that sent consumer confidence tumbling early in the month. Sales climbed in most categories, with gains in big-ticket items as well as daily purchases such as groceries. (…)

                                                    Wednesday’s report showed some clear pockets of strength: Sales of cars rose at the fastest pace since the early summer. Sales in electronics and appliance stores also rose robustly. Stores selling sporting goods, books, and music items saw business grow at the fastest pace in more than a year.


                                                    High five Let’s not get carried away. Car sales have been slowing sequentially lately and are near their past cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis) (next 2 charts from CalculatedRisk):



                                                    Meanwhile, core sales ex-cars remain on the weak side as this Doug Short chart shows:


                                                    Consumer Prices Ease Amid Lower Fuel Costs

                                                    The consumer-price index rose only 1% in October from the same month last year, the smallest 12-month increase since October 2009, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, rose 1.7% from a year ago, similar to the modest gains seen in recent months. The Fed targets an annual inflation rate of 2%.

                                                    Prices fell 0.1% last month from September, the first drop since April. Core prices increased 0.1%.

                                                    Last month, the overall decrease reflected gasoline prices, which were down 2.9% for the month. (Chart from Haver Analytics)

                                                    High five Let’s not get carried away. Core inflation remains surprisingly resilient given the weakness of the economy and the large output gap. On a YoY basis, core CPI is stuck within 1.6% and 1.8% and the Cleveland Fed median CPI just won’t slip below 2.0%. Looking at monthly trends, core CPI has slowed to 0.1% over the last 3 months from 0.2% in the previous 3 months. Yet, the median CPI only slowed to 0.1% MoM last month after a long string of 0.2% monthly gains. The inflation jury is still out.


                                                    Pointing up No Renaissance for U.S. Factory Workers as Pay Stagnates

                                                    (…) The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.

                                                    Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics. (…)

                                                    Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolina workers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.

                                                    Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman. (…)

                                                    In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paidas little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased. (…)

                                                    General Electric Co. says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.

                                                    The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees. (…)

                                                    Existing Home Sales Fall 3.2%

                                                    Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are cooling the housing recovery.

                                                    Existing-home sales declined 3.2% in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results marked the slowest sales pace since June.

                                                    The federal government shutdown last month pushed some transactions into November, Realtors economist Lawrence Yun said. The Realtors group reported that 13% of closings in October were delayed either because buyers couldn’t obtain a government-backed loan or the Internal Revenue Service couldn’t verify income.

                                                    The number of homes for sale declined 1.8% from a month earlier to 2.13 million at the end of October. The inventory level represents a five-month supply at the current sales pace. Economists consider a six-month supply a healthy level.

                                                    Americans Recover Home Equity at Record Pace

                                                    The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

                                                    The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. (…)

                                                    Fingers crossed“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.” (…)

                                                    About 10.8 million homeowners were underwater on their mortgages in the third quarter, down from 12.2 million in the second quarter, Zillow said. About 20 million people had negative equity or less than 20 percent equity, down from 21.5 million in the prior three months. Las Vegas, Atlanta, and Orlando, Florida, led major metropolitan areas with the highest rates of borrowers with less than 20 percent equity. (…)

                                                    DRIVING BLIND, TOWARDS THE WALL

                                                    Fed Casts About for Bond-Buy Endgame

                                                    Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs.

                                                    Minutes of the Oct. 29-30 policy meeting, released Wednesday, showed officials continued to look toward ending the bond-buying program “in coming months.” But they spent hours game-planning how to handle unexpected developments and tailoring a message to the public to soften the impact of the program’s end. (…)

                                                    Fed officials are hoping their policies will play out like this: The economy will improve enough in the months ahead to justify pulling back on the program, which has been in place since last year and has boosted the central bank’s bondholdings to more than $3.5 trillion. After the program ends, they will continue to hold short-term interest rates near zero as the unemployment rate—which was 7.3% last month—slowly declines over the next few years. (…)

                                                    One scenario getting increased attention at the Fed: What if the job market doesn’t improve according to plan and the bond program becomes ineffective for addressing the economy’s woes? The minutes showed their solution might be to replace the program with some other form of monetary stimulus. That could include a stronger commitment to keep short-term interest rates low far into the future, a communications strategy known as “forward guidance.”

                                                    Top Fed officials have been signaling in recent weeks that their emphasis is shifting away from the controversial bond-buying program and toward these verbal commitments to keep rates down. (…)

                                                    Punch The reality is that, do what you want, say what you want, market rates are market rates.

                                                    Millennials Wary of Borrowing, Struggling With Debt Management

                                                    Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.

                                                    (…) Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.

                                                    And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.

                                                    Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.

                                                    Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.

                                                    Pointing upMillennials have “the worst credit habits,” and are “struggling the most with debt management,” Experian said in a report.

                                                    (…) A study by the Federal Reserve Bank of New York recently suggested high student-loan balances may have encouraged young adults to reduce their credit-card balances between 2005 and 2012.

                                                    Other young adults may be less willing to take risksin a weak economy, whether by splurging on furniture for a new apartment, moving geographically or starting businesses — things that often require debt.

                                                    What Experian’s data suggest is that the Millennials who are in fact borrowing are struggling to do so responsibly, at least partly because of the nation’s 7.3% jobless rate, sub-3% growth and $1 trillion student-loan tab — all things that are weighing disproportionately on young people, especially those without college degrees.

                                                    As the Journal reported last week, the share of student-loan balances that were 90 or more days overdue in the third quarter rose to 11.8% from 10.9%, even as late payments on other debts dropped. While the incidence of late payments on Millennials’ overall debts isn’t alarming yet, it’s big enough to drag down their credit scores, Experian said. (…)

                                                    Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

                                                    In December 2010, I wrote INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!, warning people not to give much weight to bullish sentiment readings:

                                                    I have analyzed 30 years of data plotting the II bull-bear % difference against the DJ Total Stock Market Index of 5000 US stocks. Extreme readings are above +/-25%. However, I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme +30% level which were followed by strongly rising markets. Obviously not useful on that side of the ledger. (…)

                                                    Overall, never mind the extreme positives, they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

                                                    My analysis was based on relative bullishness, bulls minus bears like in the chart below, but Barclays here takes another angle looking at the absolute level of bears:

                                                    According to the US Investors’ Intelligence Survey there are currently 40% more bulls than bears. At the end of August, the same survey indicated just 13.4% more bulls that bears. Global equities have rallied by 9% since then. Other measures also confirm this bullish hue, but none have displayed anything close to the relationship that the Investors’ Intelligence Survey has had recently with forward returns.


                                                    Here’s the more interesting part:

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


                                                    GOOD READ: ASSESSING THE PARTY’S DECISIONS

                                                    CLSA’s Andy Rothman is one of the most astute analyst living in China:

                                                    China’s leaders have issued strong statements in support of private enterprise and the rights of migrant workers and farmers which, if implemented effectively, will facilitate continued economic growth and social stability.  By announcing relaxation of the one-child policy and the abolishment of ‘re-education through labor’, the Party acknowledged it needs to curb human rights abuses and re-establish trust.  The creation of new groups to coordinate economic and national security policy signal that Xi Jinping has quickly consolidated his power as Party chief, raising the odds that the decisions announced Friday will be implemented quickly.

                                                    The brief, initial communique issued when the Party Plenum closed last Tuesday was dense, obtuse and packed with outdated political slogans.  But the more detailed ‘decision document’ published Friday was, for a Communist Party report, unusually clear, particularly in its support for private enterprise and markets.

                                                    Strong support for entrepreneurs

                                                    The most important signal from the Party leadership was strong support for the private sector and markets. Private firms already account for 80% of urban employment and 90% of new job creation, as well as two-thirds of investment in China, so improving the operating environment for entrepreneurs is key to our relatively positive outlook for the country’s economic future.  Friday’s document did not disappoint in this respect.

                                                    Although the Party still cannot rise to the challenge of actually using the Chinese characters for ‘private’ sector’, continuing to refer to it as ‘non-public’, they did pledge to ‘unwaveringly encourage, support and guide the development of the non-public economy’, and declared that ‘property rights in the non-public economy may equally [with the state sector] not be violated.’

                                                    In Friday’s document, the Party said it would ‘reduce central government management over micro-level matters to the broadest extent’, called for an end to ‘excessive government intervention’, and said that ‘resource allocation [should be] based on market principles, market prices and market competition.’  The world’s largest Communist Party declared that ‘property rights are the core of ownership systems’, and called for ‘fair competition, free consumer choice, autonomous consumption, [and] free circulation of products and production factors.’  The document also says China will ‘accelerate pricing reform of natural resources’ to ‘completely reflect market supply and demand’, as well as the costs of environmental damage.

                                                    The Party also pledged to reduce red tape and administrative hurdles to doing business.  Zhang Mao, the head of the State Administration for Industry and Commerce, explained that ‘registering a business will become much more convenient in the near future.’  And Miao Wei, minister for industry and information technology, announced that implementation of the plenum decision would lead his agency to eliminate at least 30% of administrative approval procedures by the end of 2015.

                                                    Friday’s document called for better protection of intellectual property rights, as well as the ‘lawful rights and interests of investors, especially small and mid-sized investors.’  The Party said it would create a ‘marketized withdrawal system where the fittest survive’, and a better bankruptcy process.

                                                    Party leaders did say that public ownership would remain ‘dominant’, but they clearly didn’t mean it.  Repeating this language, especially in light of the fact that private firms are already dominant, is, in our view, just a rhetorical bone thrown to officials whose political or financial fortunes are tied to state-owned enterprises. (…)


                                                    The Party did, however, raise the share of SOE income that has to be paid into the national security fund to 30% by 2020, up from 10-20% now.

                                                    In what may be a warning that serious SOE reform is likely down the road, the Party did call for the elimination of ‘all sorts of sector monopolies, and an end to ‘preferential policies . . . local protection . . . monopolies and unfair competition.’

                                                    Hukou reform coming

                                                    If the most important message from the plenum is renewed support for the private sector, a close second is the decision to reform the hukou, or household registration system.  This is important because there are more than 230m urban residents without an urban hukou, accounting for one-third of the entire urban population.

                                                    According to the official news agency, Xinhua, ‘Friday’s document promised to gradually allow eligible rural migrants to become official city residents, accelerate reform in the hukou system to fully remove restrictions in towns and small cities, gradually ease restriction in mid-sized cities, setting reasonable conditions for settling in big cities while strictly controlling the population in megacities.’ (…)

                                                    Hukou reform will be expensive, but the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services.  In cases where local governments cannot afford these services, the central government will transfer the necessary funds.  Hukou reform will be rolled out gradually, and in our view:

                                                    Will reduce the risk of social instability from the 234m people living in cities who face de jure discrimination on a daily basis, particularly in eligibility for social services.

                                                    May increase the supply of migrant workers in cities at a time when the overall labour force is shrinking.

                                                    Should improve consumption by strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.

                                                    Should result in higher productivity in manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. (…)

                                                    The one-child policy will be relaxed by ‘implementation of a policy where it is permitted to have two children if either a husband or a wife is an only child,’ a change from the current rules which require both the husband and wife to be only-children in order to qualify to have a second child.

                                                    Wang Peian, the deputy director of the national health and family planning committee, said that the Party will allow each province to decide when to switch to the new policy, but Friday’s announcement, in our view, spells the rapid end of the one-child policy.

                                                    Wang Feng, one of China’s leading demographers, told us over the weekend that Friday’s announcement was a ‘decisive turning point.’  But he also reminded us that in a May CLSA U report, he explained why ending the one-child policy is likely to result in a temporary uptick in the number of births, but is unlikely to change the longer-term trend towards a lower fertility rate.  The current fertility rate of 1.5 could drop even lower in the future, closer to Japan and South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. (…)

                                                    Xi consolidates power

                                                    The plenum decided to create two new groups within the government, a National Security Council and the Leading Small Group for the Comprehensive Deepening of Reform.  This signals that Party chief Xi Jinping has quickly and effectively consolidated his political power, far beyond, apparently, what his predecessor Hu Jintao was able to achieve.  This bodes well for Xi’s ability to implement the reform decisions announced Friday. (…)


                                                    NEW$ & VIEW$ (19 NOVEMBER 2013)

                                                    EU Car Sales Maintain Growth

                                                    New car registrations in the European Union rose in October from a year earlier, the latest in a series of indications that Europe’s long auto-sales slump may be moderating.

                                                    The data, released Tuesday, marked the first time year-to-year demand for new cars has risen for two consecutive months since September 2011.

                                                    High five  But underscoring the still-daunting challenges faced by European auto makers, the October figures were lower than registrations a month earlier, and represented the second-lowest number of vehicles registered during October since 2003. During the first 10 months of the year, EU new car registrations fell 3.1% from the year-earlier period.

                                                    October new car registrations, a proxy for sales, rose 4.7% from a year earlier to 1.00 million vehicles, compared with 5.4% growth to 1.16 million in September.

                                                    Demand was supported by all major European markets, with registrations up 2.3% in Germany, 2.6% in France, 4.0% in the U.K. and 34% in Spain. The exception was Italy, where registrations fell 5.6% from a year earlier. (…)

                                                    Punch  The WSJ article failed to mention that Spain had its fourth cash-for-clunkers program last month.

                                                    Home Builders’ Confidence Eases a Bit

                                                    The National Association of Home Builders, an industry trade group, said Monday its monthly housing-market index stood at 54 in November, matching a downwardly revised figure for October. The figure measures builder confidence in the market for newly built, single-family homes.

                                                    Readings above 50 indicate that more builders view conditions as good than poor, and the index crossed that threshold in June for the first time since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s. (…)

                                                    The figure hit 58 in August and has been falling since. (…) In recent weeks, mortgage rates have started to rise, with the average rate for a 30-year fixed-rate mortgage at 4.35% as of Nov. 14, according to Freddie Mac. That is the highest rate in eight weeks, though rates remain near historic lows. (…) (Charts from CalculatedRisk and Bespoke Investment)



                                                    HOLIDAY SPENDING WATCH

                                                    (…) With shoppers expected to visit fewer stores this holiday, sales are projected to advance 2.4 percent, the smallest increase since the year the recession ended, according to ShopperTrak, a Chicago-based researcher. Sales from Black Friday through Cyber Monday are projected to rise 2.2 percent year-over-year, researcher IBISWorld said yesterday. (…)

                                                    “The consumer is more deal-driven than ever,” Ken Perkins, president of researcher Retail Metrics LLC, wrote in a Nov. 14 note. “Discretionary dollars for holiday spending are limited for the large pool of lower- and moderate-income consumers due to lack of wage gains this year coupled with the increased payroll tax.” (…)

                                                    The six-fewer shopping days this year also could make the chains “push the promotional ‘panic button’ earlier than needed, putting their margins at risk,” they said. (…)

                                                    The National Retail Federation, a Washington-based trade group, is more upbeat than ShopperTrak. It has forecast that U.S. retail sales may increase 3.9 percent during the holiday season. That increase would be slightly higher than last year’s 3.5 percent gain. (…)

                                                    • Best Buy warns promotions could hurt holiday quarter margins
                                                    • Amazon’s Toys Cheaper Than Wal-Mart Online
                                                    • Inc. (AMZN)’s toy prices were lower than those available online from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) last week as retailers seek to attract shoppers heading into the crucial holiday selling season.

                                                      Amazon’s prices, excluding those from its third-party sellers, were 3 percent lower on average than Wal-Mart’s on a basket of 87 toys, according to a study conducted by Bloomberg Industries on Nov. 14. Including the Marketplace vendors, which use Amazon’s platform to sell their own products, the pool of comparable goods expanded to 115, and Wal-Mart was cheaper by 1.2 percent, on average.

                                                      The pricing battle may help determine which retailers win consumers’ toy purchases during the holiday season. Sales in November and December account for 20 percent to 40 percent of U.S. retailers’ annual revenue, according to the National Retail Federation. (…)

                                                      Wal-Mart’s prices were 2.4 percent lower than at Target, 5 percent less than Sears Holdings Corp. (SHLD)’s Kmart and 7.2 percent lower than Toys “R” Us Inc., according to the study.

                                                    • Chain store sales rose 0.1% last week and the 4-week m.a. is up 2.3% YoY.


                                                    Worldwide business confidence lifts from post-crisis low

                                                    The 13th Markit global survey of business expectations for the year ahead, covering 11,000 companies, indicated that firms have become more upbeat about their business prospects since the post-crisis low seen mid-year, resulting in higher expectations about employment and investment. However, optimism remains well below the highs seen earlier in the recovery, indicating that global economic growth is likely to remain subdued in the coming year.

                                                    The number of companies expecting their business activity levels to rise in the next 12 months outnumbered those anticipating a decline by +33%, up from +30% in June but below the +39% reading seen in February.


                                                    Improving prospects for the developed world contrasted with still-low levels of confidence about the year ahead in the emerging markets.
                                                    Among the developed world, the upturn in confidence was led by the UK, where the outlook is the brightest seen since the survey began in early-2009. Optimism also improved in the eurozone, hitting its highest since mid-2011, notably improving in the ‘periphery’, with Spain and Italy reporting a higher degree of optimism than Germany and France, the latter seeing the weakest positive sentiment.

                                                    In the United States, business confidence about the year ahead was the second–lowest seen since the financial crisis, up only slightly on the low seen in June but above the global average. Optimism edged up slightly in both manufacturing and services but remained subdued. Companies again fretted about the impact of the ongoing uncertainty surrounding the government budget.

                                                    Worries about the outlook meant employment intentions were only marginally higher than the survey low seen in June, though capex plans recovered to a slightly greater extent.

                                                    In Japan, optimism remained weak, and slipped compared to mid-year, suggesting companies are unconvinced that the recent growth spurt is turning into a sustainable and robust upturn, in many cases harbouring concerns about growth prospects in other Asian countries, especially China. However, price pressures are set to improve, with input costs and output charges both rising at slightly faster rates.

                                                    Prospects among the four largest emerging markets remained unchanged on the post-crisis low seen in the mid-year survey. Both India and Russia saw optimism slide, while China’s outlook failed to improve on the low seen in the summer. Only Brazil saw business sentiment improve, reaching a new post-crisis high, buoyed by optimism about the positive impact of the soccer World Cup and Olympics.


                                                    High five  Corporate Results Expose Lack of Confidence

                                                    Investors sifting through third-quarter financial results should be a bit nervous about the future growth of the U.S. economy.

                                                    Though corporate profits were higher overall, companies slashed their spending on factories, equipment and other performance-enhancing investments by 16% from year-earlier levels, according to an analysis by REL Consultancy for The Wall Street Journal.

                                                    Instead of putting money to work in their operations, companies gave more of it back to shareholders in the form of buybacks and dividends.

                                                    Weakness in emerging markets and strong currency headwinds also were common themes in the quarterly results. (…)

                                                    Almost 90% of the companies that have given financial forecasts for the final quarter of the year have prompted Wall Street analysts to lower their numbers. Only a dozen companies have painted rosier pictures, according to data tracker FactSet.

                                                    “Companies are reluctant to raise the bar,” said John Butters, senior earnings analyst at FactSet. “We’re not really seeing a huge increase in companies turning negative, but the number of companies giving positive guidance is almost half of what we’ve seen lately.”

                                                    A broad range of companies scaled back capital spending plans during the quarter, including Honeywell Inc., Corning Inc., Yahoo Inc., Cliffs Natural Resources Inc. and McDonald’s Corp. (…)

                                                    To be sure, earnings continued to be strong in the third quarter. With more than 90% of companies in the S&P 500 index having posted results for the quarter, blended earnings were up 3.5% from a year earlier, and profit remained in record territory, according to FactSet. (…)

                                                    Profit margins, at 9.6%, were near records, thanks to cost cutting, automation and lower commodity prices. But revenue growth was a tepid 2.9% from a year earlier. (…)

                                                    The lack of confidence is part of the reason why U.S. companies were on pace to have more than $1.144 trillion in cash at the end of the quarter, making it the fourth quarterly record in a row, according to S&P Dow Jones Indices. (…)

                                                    Corporate buybacks totaled $103 billion in the quarter, an increase of 12% from the second quarter, excluding Apple’s record $16 billion buyback in the spring, according to FactSet. (…)

                                                    Companies also announced a combined 2.5% increase in dividend payments, which now total almost $75.5 billion for the quarter, according to FactSet. (…)

                                                    Another prominent trend in third-quarter results was the harm caused by the dollar’s strength against the currencies of several major U.S. trading partners, including Japan, Brazil and India.

                                                    The dollar has climbed between 11% and 20% against the currencies of those three countries, making U.S.-made goods more expensive there. (…)

                                                    OECD Warns of U.S. Threat to Global Recovery

                                                    The uncertain future of U.S. fiscal and central bank policies poses a growing risk to a global economic recovery that has already been weakened by a slowdown in growth in many developing economies, the Organization for Economic Co-operation and Development said Tuesday.

                                                    In its twice-yearly Economic Outlook report, the Paris-based research body said the U.S. debt ceiling should be abolished, and replaced by “a credible long-term budgetary consolidation plan with solid political support.”

                                                    The report marks a significant shift in the OECD’s focus of concern, which in recent years has been centered on the euro zone’s attempts to tackle its fiscal and banking crises. While the OECD remains worried about the euro zone’s frailties, the most immediate threats to the global recovery now appear to come from the U.S.

                                                    The OECD said a series of events has undermined confidence and stability in recent months, including the “surprisingly strong” reaction by investors to the possibility that the Federal Reserve will soon start to reduce its asset-purchase program. That led to related concerns about developing economies, and was followed by a “potentially catastrophic” crisis precipitated by negotiations over the U.S. debt ceiling.

                                                    “These events underline the prominence of negative scenarios and risks that the recovery could again be derailed,” OECD chief economist Pier Carlo Padoan said.

                                                    The heightened risks from the U.S. are in addition to continued ones from a fragile euro-zone banking sector and Japan’s fiscal situation, the OECD said.

                                                    The warnings came as the OECD forecast only a modest economic recovery through 2015. The combined economies of the 34 members of the OECD will grow 1.2% this year, before accelerating to 2.3% in 2014 and 2.7% in 2015, according to its forecasts.

                                                    Growth rates between developed economies will continue to differ markedly with the euro zone contracting 0.4% this year before growing 1% next year, while the U.S. will grow 1.7% and 2.9% over the same periods.

                                                    The twice-yearly economic outlook is slightly weaker than in May, mainly because of an expected slowdown in some large developing economies that partly reflects their vulnerability to capital outflows when the Federal Reserve does eventually start to reduce its stimulus program.

                                                    “The turmoil following the tapering discussions in mid-year has revealed how sensitive some emerging market economies are to U.S. monetary policy,” the OECD said.

                                                    The OECD cut its 2014 growth forecast for Brazil to 2.2% from 3.5% in May, its forecast for India to 4.7% from 6.7%, and its forecast for Indonesia to 5.6% from 6.2%. It cut its growth forecast for China more modestly to 8.2% from 8.4%, still leaving it above that of many other economies.

                                                    The research body said the weaker growth outlook for some developing economies was more deeply rooted in “long-standing structural impediments that had been hidden by abundant capital inflows.” Solutions to those problems vary from country to country, but generally developing economies need more formal and efficient labor markets and stronger, market-based financial systems, Mr. Padoan said.

                                                    Largely as a result of its more downbeat assessment of the outlook for large developing economies, the OECD cut its forecast for global gross domestic product growth by around 0.5 percentage points this year and next to 2.7% and 3.6%, respectively. (…)

                                                    But not to worry:

                                                    Mohamed El-Erian
                                                    Yellen shows Fed remains risk markets’ best friend

                                                    (…) and not by choice but by necessity.

                                                    This is music to the ears of investors conditioned to position their portfolios to gain from steadfast central bank liquidity support, especially in the US. But with Wall Street having already reflected this in asset prices, and with the benefits for Main Street continuing to disappoint, investors may well need an increasingly differentiated approach if they are to continue to benefit from the “central bank put”. (…)

                                                    Ms Yellen left no doubt that she is committed to maintaining the Fed’s current approach – one that places asset markets front and centre in the transmission mechanism linking Fed actions to policy objectives.

                                                    Positioning for the impact of Fed policy rather than fundamentals has been a winning strategy for investors – not only in the immediate aftermath of the 2008 global financial crisis, but also in the past three years during which the Fed has pivoted from normalising markets to pursuing much more ambitious macroeconomic objectives. But they now need to be increasingly mindful of the level of prices and the associated (and growing) number of disconnects that the Fed is underwriting.

                                                    This year’s impressive performance of risk assets (including the 21 per cent year-to-date increase in the MSCI world equity index as of Friday, powered in particular by US stocks) contrasts with a global economy still stuck in third gear. (…)

                                                    Fed policy fuels wealth-led growth
                                                    Still no sign of a real economic recovery

                                                    (…) Ms Yellen’s remarks, prepared for her confirmation hearings last week, contained no hint of tapering. That underscores the Fed’s obsessive fear of the negative wealth effect of any slowdown in asset purchases and a move towards higher interest rates. Five years after the meltdown, it is clear the Fed’s quantitative easing is not about a real economic recovery, it is only about generating the liquidity that gives rise to asset inflation and wealth-led growth. Or super wealthy people-led growth since wages and incomes for the rest of us are not rising at all. (…)

                                                    BUBBLE WATCH

                                                    Stocks Are Way, Way Overvalued: GMO

                                                    As U.S. stocks sit in record territory, money managers at GMO – never a bunch to shy away from bold calls – are warning that the market is significantly overvalued.

                                                    As U.S. stocks sit in record territory, money managers at GMO – never a bunch to shy away from bold calls – are warning that the market is significantly overvalued.

                                                    In a report titled ”Breaking News! U.S. Equity Market Overvalued!“, Ben Inker, head of the asset allocation group at GMO, comes out with some eye-popping numbers. He argues that the S&P 500′s fair value is 1100, about 40% below Monday’s closing level, and the expected return is -1.3% a year, after inflation, for the next seven years.

                                                    Small-cap valuations, he writes, are even more elevated. (…)

                                                    Mr. Inker’s call came after comments by billionaire investor Carl Icahn, who told a conference sponsored by Reuters that he was “very cautious” on the stock market and could see a “big drop” because earnings at many companies have been goosed by low borrowing costs rather than strong management. (…)

                                                    GMO’s calls are widely watched in part because the firm’s money managers don’t have a reputation for being perma-bulls or perma-bears. Mr. Grantham was early in predicting the financial crisis and then reversed course before markets started rebounding in 2009. He has also advocated investing in timber and high-quality dividend-paying stocks. (…)

                                                    Here’s the conclusion to Mr. Inker’s rather downbeat analysis:

                                                    “We don’t consider non-U.S. equity markets a screaming buy. But as value managers listening for any assets, anywhere, that are screaming to be bought, the world currently sounds a deathly quiet place. The hoarse whisper of “buy me” coming from European and emerging equities (as well as the polite cough for attention coming from U.S. high quality stocks) comes through loud and clear. “

                                                    Hmmm… U.S. equities 40% overvalued and still willing to buy equities. I wouldn’t.

                                                    But others are also trumpeting Euro equities:

                                                    Europe Stocks Seem Cheap

                                                    As U.S. stocks push to record highs, more U.S. money managers are looking for better opportunities across the pond.

                                                    The big rally in U.S. stocks has pushed valuations higher than those of European shares. Meanwhile, sentiment is rising that Europe has gotten past the worst of its debt crisis, and some say the European Central Bank appears to be on a path for more easing of monetary policy, both of which augur for more room to run in European stocks.

                                                    Unlike the S&P 500, which is well into record territory, the Stoxx Europe 600 stock index hasn’t recovered to its precrisis peak. The S&P 500 has risen 26% this year while the Stoxx Europe 600 is up 16%.

                                                    Aren’t you convinced by this great analysis?

                                                    What about these mundane facts?

                                                    • U.S. P/Es have exceeded Euro P/Es by an average of 10% over the last 25 years. In fact, the U.S. premium is at its low point of the past 14 years.
                                                    • US trailing EPS are some 20% above their 2007 peak, whilst in Europe they are some 25% below.
                                                    • U.S. profit margins are higher than Euro margins.
                                                    • The U.S. economy keeps growing faster than that of the Eurozone.
                                                    • U.S. inflation is higher than that of the Eurozone.
                                                    • The U.S. government is more efficient than that of the Eurozone, which speaks volume about the latter.
                                                    • The Fed is also more efficient than the ECB.


                                                    These reasons amply justify higher multiples for American companies.

                                                    This is not to deny the possibility that Eurozone profits could rise faster than U.S. profits in the next few years. In fact, this is a key argument for many strategists. The hurdles are significant, however. Slow domestic growth, a strong euro, low inflation and very liberal labour laws are big impediments to profit margins. Don’t simply extrapolate America’s margin expansion. Expectations for rising margins in Europe have remained elusive so far.

                                                    image image

                                                    A case in point: the following is especially true in Europe:

                                                    Just kidding  Business taxes fall more heavily on labor.

                                                    Companies around the world are paying more in employment taxes than in profit taxes, the FT reports. Labor taxes accounted for 32% of the average total tax rate paid by midsize businesses in 2004, but now account for almost 38% of the rate, compared with slightly more than 37% for profit taxes. Mary Monfries, tax partner of PwC, said the shift is a world-wide trend, “with governments lowering profit taxes to encourage investment and entrepreneurship. Getting the right tax mix is a hard call. Lower profit taxes can drive growth which brings employment, whilst lower employment taxes can ease the cost of hiring.”

                                                    Fed Official Says Big Banks Need Higher Capital Levels Very large banks that rely on broker-dealer operations need to hold higher levels of capital to reduce the risk to the broader financial system, Federal Reserve Bank of Boston President Eric Rosengren said.

                                                    European banks are also in a worse situation.

                                                    Now you know the essentials. All the best.  Winking smile


                                                    BUBBLE BABBLE

                                                    It seems that “crying bubble” will soon replace “crying wolf” in popular sayings. Everybody is bubbling these days, from naysayers warning of bubble dangers to bulls urging to ride the coming bubble to economists saying we actually need bubbles to grow this moribund economy.

                                                    Is This a Bubble? As stocks hit new records and small investors—finally—return to the market, some analysts and economists are getting worried. How does the current cycle compare with previous ones: cat

                                                    Sorry, not very useful, is it? The rest is more interesting:

                                                    Bubble Trouble? Social media and cloud-related stocks seem stretched to bursting, but big blue chips still look attractive.

                                                    The S&P 500 is valued at 16 times projected 2013 operating profits of $109 and at 15 times estimated 2014 earnings of $120. Those price/earnings ratios are about equal to the long-run average. Even if next year’s earnings growth is closer to this year’s projected 5% than to the aggressive current estimate of 10%, the S&P 500 forward P/E is 15.6, which doesn’t look excessive at a time of near-zero short-term rates, a 2.71% yield on the 10-year Treasury note, and sub-6% average yield on junk bonds. The S&P 500 dividend yield is 2%, but the earnings payout ratio is historically low at about 35%, meaning companies have room to further boost dividends.

                                                    “The first stage of the bull market was a revaluation to something resembling reasonable levels as it dawned on investors that the world wasn’t going to end,” says Stephen Auth, chief investment officer at Federated Investors. “The second stage began this summer with a transition to the view that the economy is accelerating and that earnings are poised to increase significantly in the coming years.”

                                                    Tom Lee, the bullish JPMorgan strategist, says “We’re in a secular bull market that will last at least another three years.” Adds Jim Paulsen of Wells Capital Management, “If inflation stays at 3% or less, the market P/E could get into the 20s.”

                                                    Barron’s says that P/Es have averaged 16x “over the long term while Bloomberg claims that they averaged 17.5 since WWII.

                                                    The full S&P 500 trades at about 17.5 times trailing 12-month earnings, in line with the average since the end of World War II, according to S&P data.

                                                    Everybody and his aunt are now comparing current P/Es to their own historical P/E. The period one chooses is pretty crucial in these comparisons. For the record, again, also using S&P data:

                                                    HISTORICAL P/E RATIOSimage_thumb[6]

                                                    The ultimate P/E idiocy, this time from Factset (Hey! what’s in a name?)

                                                    Is the S&P 500 Overvalued?

                                                    On the other hand, the current forward 12-month P/E ratio is still well below the 15-year average (16.2). During the first two to three years of this time frame (1998 – 2001), the P/E ratio was consistently above 20.0, peaking at around 25.0 at various points in time. With the forward P/E ratio still below the 15-year average and not close to the higher P/E ratios recorded in the early years of this period, one could argue that the index may still be undervalued.


                                                    Annoyed  Historical P/Es can easily become hysterical P/Es. The chart below provides a more proper perspective, plotting trailing P/Es back to 1927, the red line being the 13.7 median over that period. No bubble yet but we are definitely not into “buy-low” territory.


                                                    This next chart plots the Rule of 20 Barometer since the post war era. The Rule of 20 takes inflation into account. Yes Virginia, inflation matters! The current low inflation is keeping the Rule of 20 below fair value, currently 1870 on the S&P 500 Index. The yellow channel is higher risk area while the red part is bubbly mania. This last word will also become part of the financial press vocabulary pretty soon.


                                                    The key question is whether valuations will get over “fair value”, something not seen during this bull market. Sentiment narratives remained generally negative up to recently, preventing overshooting. Are we about to enter the third phase of the bull market as the  venerable Richard Russell thinks?

                                                    Get Ready for the Mania Phase

                                                    One of the basics of Dow Theory is the thesis of three psychological phases in both bull and bear markets. In a bull market, which we are now in, the first or initial phase is the early accumulation phase. This is the phase where wise and seasoned investors enter the market at or near the bottom, when many stocks are selling at great values after having been battered for months by the preceding bear market. Here many blue-chip stocks are selling “below known value.”

                                                    The second phase of a bull market is usually the longest and most deceptive, containing many secondary reactions. During the second phase the retail public shows interest in stocks, and enters the market carefully and sporadically.

                                                    The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed.

                                                    My experience with bull markets is that by the time investors have been tricked and fooled by second phase shenanigans, nobody is ready to think about the possibility of a third speculative phase.

                                                    This is where I think we are now in this bull market. I believe that during the next 12 months we will experience a surprising and ever-expanding rush by the “mom and pop” public to enter the market. At the same time, veteran investors and institutions will seize the opportunity to distribute stock that they may have held for years.

                                                    All primary movements are international in scope, and this bull market will be no exception. In proof I show one of my favorite items, the “International Dow” known as GDOW (consisting of all 30 Dow Industrials plus 220 international major blue-chip stocks.

                                                    Note the sharp correction that occurs in mid-2012, and out of that correction the third, speculative phase of this international bull market began. I expect GDOW to go parabolic sometime in the next two years.

                                                    gdow 13 nov 2013

                                                    In the meantime, I’m reading dozens of advisories and yes, I note the warnings and technical death traps that are offered by other services. No matter, I think the excitement and greed which has enveloped the retail public will trump the adverse technical warning indicators that are now making their appearance.

                                                    A Return to Internet Mania?

                                                    (…) Messrs. Wurgler and Baker developed five indicators that were well correlated with periods of speculative excess over the past 50 years. None of them currently is detecting the levels of exuberance that prevailed at the top of the Internet bubble. They include the following:

                                                    The number of IPOs. (…) Over the first three months of 2000, according to data from University of Florida finance professor Jay Ritter, there were 123 IPOs. By contrast, there were just 73 IPOs in the three months through Nov. 14.

                                                    IPO returns. The average first-day IPO pops are also lower now. In the first three months of 2000, the average first-day return was 96%; now, it’s 25%, per Mr. Ritter’s data. (…)

                                                    The dividend premium. An even bigger contrast in sentiment between today and early 2000 appears in what Mr. Wurgler refers to as the “dividend premium,” or how much investors are willing to pay for the relative safety of established, as opposed to speculative, stocks. That is a useful indicator, he says, because investors become relatively bored with established companies during periods of speculative excess.

                                                    To calculate this dividend premium, he categorizes dividend-paying stocks as “established” and those that don’t pay a dividend as “speculative.” To compare valuations, he focuses on the price/book ratio, which is calculated by dividing a stock’s price by its per-share book value, or net worth. Higher ratios indicate richer valuations.

                                                    Of course, not all dividend-paying companies are safe, and not all nonpayers are speculative. Nevertheless, Mr. Wurgler says that, historically, the difference in the two groups’ valuations has been a good barometer of investor sentiment.

                                                    At the top of the Internet bubble in early 2000, according to Messrs. Wurgler and Baker’s research, speculative companies had a 43% higher price/book ratio than established firms, on average. Today, it is just the reverse: Among the companies in the S&P 1500 index, according to FactSet, established stocks have a 49% higher price/book ratio than nonpayers, on average.

                                                    The researchers would have been well advised to also consider return on equity since Price/Book comparisons are senseless without ROE comparisons (see BLIND THRUST)..

                                                    Share of new corporate cash from issuing stocks. The fourth sentiment indicator focuses on the percentage of new corporate cash coming from stock issuance rather than from longer-term debt that matures in more than one year.

                                                    Mr. Wurgler says this indicator is a good measure of sentiment because companies increasingly turn to the stock market to raise money as the market becomes more speculative.

                                                    Over the first three months of 2000, at the very top of the Internet bubble, this equity percentage stood at 20%. Today, it stands at 11%—or just over half as high. The low percentage of corporate financing coming from stock issuance hardly points to a speculative market. (One might wonder if this overwhelming preference for long-term-debt financing points to a bubble in the debt market, but that possibility isn’t one that Messrs. Wurgler and Baker have studied.)

                                                    Share turnover. The last of the five sentiment indicators is based on how often the average share listed on the New York Stock Exchange is sold—the so-called turnover rate—which the professors found increases along with speculation.

                                                    Over the first three months of 2000, turnover was running at an annual rate of 89%. Today, according to New York Stock Exchange data, the comparable rate is 60%.

                                                    What’s more, Mr. Wurgler says, recent turnover is, if anything, skewed upward by factors that weren’t present in early 2000, such as high-frequency trading. And yet this indicator appears to be showing a lower appetite for speculation than at the top of the Internet bubble.

                                                    The investment implication of all five sentiment indicators: If you were thinking of reducing your stock holdings out of a concern that a bubble was forming, you can instead continue to give the bull market the benefit of the doubt. (…)

                                                    Perhaps also read BLIND THRUST.

                                                    Screens for the Melt-Up

                                                    S&P Capital IQ just raised its 12-month price target for the Standard & Poor’s 500 to 1895, about 7% above its Nov. 6 close of 1770. Among the big beneficiaries by early 2014 will be yield-bearing stocks and funds, suggests Sam Stovall, the firm’s chief equity strategist. He doesn’t expect the Federal Reserve to start tapering this year or even possibly early next, ensuring that the markets are plenty liquid.

                                                    Stovall says investors should take full electronic advantage in selecting the best stocks to play this rally. “Don’t blindly dive back into higher-yielding issues,” he warns. He recommends careful screening for quality.

                                                    His ideal candidates are equities with 3% or better yields, that are rated both high quality and good value by equity analysts. Five years into a bull run, that’s a dwindling crowd.

                                                    High five  But there is a little problem with that:

                                                    A recent check in the screener for S&P’s MarketScope Advisor ( found only 18 of the 1,150 U.S. issues and 133 of 1,560 foreign issues meet S&P Capital IQ analysts’ criteria—companies such as ConAgra Foods (ticker: CAG) and Chevron (CVX). Actually, four times that many companies earn high-quality ratings, but the yield hurdle trips up a lot of them. A 3% yield is half again higher than the S&P 500 average. Then, too, it’s tough finding quality at a fair price when so many issues are making new 52-week highs.

                                                    Warren Buffett recently said he’s having problems finding good values in this market. If you have not already done so, see BLIND THRUST to understand why.

                                                    Bloomberg adds: Buying Low Thwarted by Narrowest Stock Valuation Gap Ever

                                                    More than 440 of the S&P 500’s companies have gained in 2013, the most for any year at this point since at least 1990, data compiled by Bloomberg show.

                                                    A measure of the dispersion of price-earnings ratios in the S&P 500 compiled by Goldman Sachs Group Inc. narrowed to 41 percent in June, the lowest on record, and held around that level since. (…)

                                                    The last time the dispersion of valuations came close to being this narrow was in October 2006, a year before the last bull market ended, Goldman Sachs data show. Before that, multiples were most compressed in September 1997, 10 months before the biggest bull market on record ended.

                                                    Goldman Sachs’s price-earnings ratio dispersion is a monthly reading of standard deviation, or the variance from the average, for companies in the S&P 500. Goldman Sachs compiles data for companies whose price-estimated earnings ratios are between zero and 75.

                                                    A broad based bull leading to a narrow market. The exit door looks scarier…


                                                    NEW$ & VIEW$ (12 NOVEMBER 2013)

                                                    THE AMERICAN PROBLEM

                                                    Job Gap Widens in Uneven Recovery

                                                    America’s jobs recovery is proceeding on two separate tracks—a pattern that is persisting far longer than after past economic rebounds and lately has been growing worse.

                                                    (…) Youth unemployment, for example, nearly always improves after recessions more slowly than that of prime-age workers, those between 25 and 54. Following the 2001 recession, it took six months for the gap between the youth and prime-age unemployment rates to return to its long-run average. After the early 1990s recession, it took 30 months. This time, it has been 52 months, and the gap has hardly narrowed.

                                                    For those with decent jobs, wages are rising, albeit slowly, and job security is the strongest it has been since before the recession. Many families have paid down debts and are seeing the value of assets, from homes to stocks, rebound strongly.

                                                    But many others—the young, the less educated and particularly the unemployed—are experiencing hardly any recovery at all. Hiring remains weak, and the jobs that are available are disproportionately low-paying and often part-time. Wage growth is nearly nonexistent, in part because with so many people still looking for jobs, workers have little bargaining power.

                                                    Wage growth has moved on two tracks

                                                    The two-track nature of the recovery helps explain why the four-year-old upturn still doesn’t feel like one to many Americans. Higher earners are spending on cars, electronics and luxury items, boosting profits for the companies that make and sell such goods. But much of the rest of the economy remains stuck: Companies won’t hire or raise pay without more demand, and consumers can’t spend more without faster hiring and fatter paychecks. (…)

                                                    ‘Rural America’ slow to recover
                                                    Net job growth near zero, say data

                                                    Employment growth in the US’s sparsely populated heartland has stagnated since the economy began to recover in 2010, according to official data that underscore the weakening economic power of rural America.

                                                    The data, from this year’s US Department of Agriculture’s Rural America at a Glance report, show that while employment in both urban and rural areas fell by 5 per cent during the 2007-09 recession and recovered by a similar level in 2010, their prospects have since diverged. Since the start of 2011, net job growth in non-metropolitan areas has been near zero, while it has averaged 1.4 per cent annually in metropolitan areas.

                                                    The report notes that rural job growth stagnation has coincided with the first-ever recorded net population decline in those regions, driven by a drop in the number of new migrants moving in. This means the unemployment rate in rural regions has not risen, since fewer people are seeking work.

                                                    Population loss has meant fewer jobs as demand for goods and services falls, which in turn encourages those with higher skills to move away. (…)

                                                    In summary (chart from Doug Short):

                                                    Click to View

                                                    Fingers crossed About 1-in-4 U.S. Pumps Selling Gas Below $3

                                                    Americans are seeing the lowest pump prices for gasoline since February 2011, AAA says.

                                                    Gas prices dropped 6.6 cent per gallon the past week to $3.186, which is down 25.3 cents from a year earlier.

                                                    That’s a 7.4% drop YoY! Right before Christmas. Chain store sales rose 1.2% last week, boosting the 4-week moving average to +2.1% YoY.


                                                    Expiring US jobless benefits fuel concern
                                                    The scheme launched in 2008 is due to run out

                                                    (…) Unless Congress takes action to renew it again, about 1.3m long-term unemployed would see their benefits halted at the end of the year, and a further 850,000 would be denied access to the benefits in the first three months of next year, according to a report from the National Employment Law Project, an advocacy group. (…)

                                                    Federal assistance for the long-term unemployed was launched in 2008, during the last recession, and renewed until the end of this year. Michael Feroli, a senior economist at JPMorgan Chase, has estimated that the expiry of the federal jobless benefits would trim about 0.4 percentage points off annualised gross domestic product growth in the first quarter of next year. This is roughly equivalent to estimates of the hit to US output produced by last month’s US government shutdown. (…)

                                                    Sad smile  Small Businesses Optimism Takes a Tumble

                                                    Fall arrived literally this month, as small business optimism dropped from 93.9 to 91.6, largely due to a precipitous decline in hiring plans and expectations for future smal -business conditions. Of the ten Index components, seven turned negative, falling a total of 27 percentage points. The stalemate in early October over funding the government as well as the failed “launch” of the Obamacare website left 68% of owners feeling that the current period is a bad time to expand; 37% of those owners identified the political climate in Washington as the culprit—a record high level.

                                                    Small business optimism report data through October 2013






                                                    Fingers crossed OECD: Global Growth to Pick Up

                                                    Economic growth is set to pick up in the euro zone, China and the U.K., while remaining sluggish in India, Brazil and Russia.



                                                    Punch  LE PROBLÈME FRANÇAIS (from Reuters’ AlphaNow):


                                                    Rating the Euro Zone’s Progress

                                                    Many euro-zone indicators have taken on a more promising outlook in recent months. Credit ratings firms are beginning to reflect that.

                                                    The direction of travel can be more important than where on the journey you are. That’s particularly true of the euro zone and the credit ratings assigned to its member states. November’s actions—a downgrade for France and improvements in outlooks for Spain and Portugal—send some key signals. The euro zone is undergoing adjustment, although not all its members are yet on the right track.

                                                    France’s downgrade to double-A by Standard & Poor’s might look like the most important action, but isn’t. French bond yields hardly reacted; strategists at Royal Bank of Scotland told investors to “ignore” the cut. That is quite right; France faces no immediate threat that should cause bond yields to spike higher.

                                                    Still, the rationale is cause for long-term worry: France is falling behind. “French exporters appear to continue to be losing market share to those European competitors whose governments have more effectively loosened the structural rigidities in their economies,” S&P warned. The European Commission last week forecast that net exports would contribute just 0.1 percentage point to French growth of 0.9% in 2014 and be a slight drag on growth in 2015. France’s government still hasn’t found the right policy direction to regain competitiveness.

                                                    More significant was Fitch’s decision to raise Spain’s rating outlook to stable from negative, the first of the major ratings firms to do so. Spain won plaudits for its fiscal and structural reforms, and the move to surplus in its current account. That is an important turnaround: Spain was on the front line of the crisis just 18 months ago.

                                                    Most interesting of all was Moody‘s move to a stable outlook from negative on Portugal. Moody’s is becoming rapidly less bearish on the euro zone. At the start of September, it had just two euro-zone sovereigns with a stable outlook; now there are six. The big move for Moody’s would be to shift Spain back to a stable outlook. The decision on Portugal provided a glint of hope, with Moody’s highlighting the benefit of a recovery in Spain, its key trading partner.

                                                    Ratings are often dismissed as backward-looking, and downgrades or upgrades are frequently priced in long before they actually happen. But outlooks can provide new information to the market. That is where investors should look for signposts.

                                                    IEA warns of future oil supply crunch
                                                    Concerns rise as Gulf states delay investment due to US shale revolution

                                                    (…) Mr Birol was speaking as the Paris-based IEA unveiled its annual outlook for the energy market. Its 2012 forecast that the US would be a net oil exporter by 2030 helped bring shale oil production to global attention. But this year the organisation downplayed the significance of US production growth, with Mr Birol calling shale “a surge, rather than revolution”.

                                                    The IEA still expects US oil output to reduce the world’s dependence on Middle Eastern oil in the near term: it now forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015, two years earlier than it had estimated just 12 months ago.

                                                    But it expects US light tight oil production, which includes shale, to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from around 90m b/d today.

                                                    Outside the US, light tight oil production is only expected to contribute 1.5m b/d of supplies by 2035, as countries such as Russia and China make limited progress towards unlocking their shale reserves.

                                                    That will leave the market once more dependent on crude from the Opec oil cartel, of which Gulf producers are key members. (…)

                                                    But the IEA expects domestic demand in the Middle East to hit 10m b/d by 2035 – equal to China’s current consumption – thanks to subsidies for petrol and electricity, even as foreign demand for Gulf oil increases.

                                                    Mr Birol said the Gulf states needed to invest significantly now to meet rising demand after 2020, because projects take several years to begin producing. But he said he was concerned Gulf countries were misinterpreting the impact of rising US shale production. (…)

                                                    Gulf producers have taken a cautious approach to investment in recent years, in the face of fast growing US output. Saudi Arabia does not plan to increase its oil production capacity in the next 30 years, as new sources of supply, from US shale to Canadian oil sands, fill the demand gap.

                                                    The UAE is reported to have pushed back its target for raising production capacity to 3.5m b/d to 2020 from 2017, while Kuwait is struggling to overcome rapid decline rates from its existing fields. (…)

                                                    SENTIMENT WATCH

                                                    Charles Schwab’s Liz Ann Sonders posted this good Ned Davis chart, although her bullishness dictated her to write that sentiment was “a bit” stretched.

                                                    Sentiment does look a bit stretched in the short-term, with both the Ned Davis Crowd Sentiment Poll and SentimenTrader’s Smart Money/Dumb Money Confidence Poll showing elevated (extreme) levels of optimism. Investor sentiment shoots higher

                                                    Since 1995, being in such a “bit stretched” territory has not been profitable, on average:Screen Shot 2013-11-07 at 4.21.29 PM

                                                    This next chart, posted by ZeroHedge, is nothing to help sentiment get less stretched.

                                                    Note however that the latest tally from S&P reveals that estimates for Q3 have turned up to $27.02 ($26.77 last week) while the forecast for Q4 is now $28.23 ($28.38 last week).


                                                    NEW$ & VIEW$ (7 NOVEMBER 2013)

                                                    U.S. LEADING ECONOMIC INDEX KEEPS RISING

                                                    The Conference Board LEI for the U.S. increased for the third consecutive month in September. Improvement in the LEI was driven by positive contributions from the financial indicators, initial claims for unemployment and new orders. In the six-month period ending September 2013, the leading economic index increased 3.0 percent (about a 6.0 percent annual rate), much faster than the growth of 1.2 percent (about a 2.4 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread than the weaknesses.

                                                    These charts from Doug Short suggest that the probability of a recession remains very low:

                                                    Click to View

                                                    Click to View

                                                    Click to View

                                                    ISM Services Surprises to the Upside

                                                    Following up on the heels of Friday’s stronger than expected ISM Manufacturing report, Tuesday’s release of the non-manufacturing ISM index also came in ahead of expectations.  While economists were expecting the October headline reading to come in at a level of 54.0, the actual reading came in at 55.4.  This represents a one point increase from September’s level of 54.4.  With both the manufacturing and non-manufacturing indices having been released, we can see that the combined composite PMI (bottom chart) for October also increased from 54.6 to 55.5.

                                                    Of the ten components shown, only four increased this month, while six declined.  Compared to one year ago, ‘breadth’ in the components was more positive as seven increased and just three declined. 

                                                    Credit Jobs at 10-Month Low as Borrowing Slows

                                                    The credit-intermediation industry shed 7,700 workers — including commercial bankers, credit-card issuers and mortgage and loan brokers — in September, the biggest drop since June 2011, Labor Department figures show. The total fell to about 2.6 million, the lowest since November 2012. (…)

                                                    Mortgage refinancing is the more labor-intensive segment, so a recent rise in interest rates has resulted in sluggish credit growth and fewer people needed to make such loans (…)

                                                    German Industrial Production Falls as Recovery Slows

                                                    Output (GRIPIMOM), adjusted for seasonal swings, fell 0.9 percent from August, when it rose a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast no change, according to the median of 36 estimates in a Bloomberg News survey. Production advanced 1 percent from a year earlier when adjusted for working days.

                                                    Another highly volatile series.. Output is up 0.6% in the last 5 months but down 0.4% in the last 4 months.

                                                    CHINA ECONOMY NOT REACCELERATING

                                                    The CEBM November Survey indicates that aggregate demand has stabilized, but remains weak. From the perspective of domestic demand, overall consumer sector demand remained sluggish. From the perspective of external demand (…) overall Y/Y growth was flat. Commercial bank feedback communicated a cautious outlook for November.

                                                    SENTIMENT WATCH

                                                    Investors Rush Back Into Europe

                                                    Equities investors are returning in droves, but the region’s recovery remains fragile and deep structural problems remain.

                                                    Maligned Markets Return to Vogue

                                                    Cash is returning to emerging markets, sparking stock rallies and a surge in fundraising. Calm in the U.S., combined with low rates, has spurred global investors to try to juice returns before year’s end.


                                                    The availability of foreign cash is also sparking a flurry of sales of corporate debt. Emerging-market companies have sold $71 billion of bonds since June, taking this year’s total to $236 billion, almost a third more than was sold at this stage in 2012, according to Dealogic, a data provider.

                                                    Yields on emerging-market sovereign debt, which rose until September, have also fallen sharply, signaling the return of foreign investors to the market. Average yields on five-year emerging-market government debt have dropped by 0.57 percentage point. In Indonesia, where the decline has been among the most dramatic, yields fell to 7.2% from 8.1%.

                                                    TAPER WATCH

                                                    Gavyn Davies
                                                    What Fed economists are telling the FOMC

                                                    (…) The implication of these papers is that these Fed economists have largely accepted in their own minds that tapering will take place sometime fairly soon, but that they simultaneously believe that rates should be held at zero until (say) 2017. They will clearly have a problem in convincing markets of this. After the events of the summer, bond traders have drawn the conclusion that tapering is a robust signal that higher interest rates are on the way.

                                                    The FOMC will need to work very hard indeed to convince the markets, through its new thresholds and public pronouncements, that tapering and forward short rates really do need to be divorced this time. It could be a long struggle.

                                                    Russia slashes long-term growth forecast
                                                    GDP growth will fall behind global average in the next 12 years

                                                    (…) The economy ministry said it now expected the economy to grow at an annual rate of just 2.5 per cent through to 2030, down from its previous forecast of 4.3 per cent made in April. Data for gross domestic product growth in the third quarter are due next week, and are also expected to show a continued slowdown.

                                                    The sharp cut follows a drop in fixed investment which independent analysts have warned can only be reversed by decisive structural reforms of which the government has so far given little indication.

                                                    At the end of September, fixed investment showed a 1.5 per cent drop year on year, and consumer spending slowed to 3 per cent from 7 per cent in the same period in 2012. (…)

                                                    The economy ministry said it expected corporate earnings and salaries growth to slow and the wealth gap to widen further, with the share of the middle class falling from half to just one-third of society. (…) …

                                                    EARNINGS WATCH

                                                    Q3 earnings season is almost over with more than 90% of S&P 500 companies having reported.

                                                    RBC Capital calculates that the earnings surprise was 64% with a 5.7% YoY EPS growth rate (3.6% ex-Financials) on a 3.1% revenue growth rate (3.3% ex-Financials). Bespoke Investment below writes about all NYSE companies:

                                                    Earnings Season Ending with a Whimper

                                                    As shown below, the percentage of companies that have beaten earnings estimates this season has dropped below the 60% mark (59.8%).  

                                                    Early on this season, the earnings beat rate looked pretty good, but things have turned around over the past few weeks.  The blue bars in the chart below show the overall earnings beat rate as earnings season has progressed.  The green area chart represents the total number of companies that have reported this season.  As of today, nearly 1,800 companies have reported.  

                                                    On October 23rd, 63.9% of the companies that had reported had beaten earnings estimates, which was the highest reading seen this season.  Since then the beat rate has trickled lower.  On November 1st, the beat rate was down to 61.1%, but as of today, it has crossed below the 60% mark (59.8%).