NEW$ & VIEW$ (13 JANUARY 2014)

DRIVING BLIND (Cont’d)

 

U.S. Hiring Slowdown Blurs Growth View

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

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

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

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

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

Where Jobs Were Added

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

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

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

Weak personal income:

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

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

BloombergBriefs explains further:

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

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

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Fed Unlikely To Alter Course

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

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

(…) The report exacerbated another conundrum for officials.

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

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

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

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

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

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

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

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

  • Supply/demand #1: Oversupply

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

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

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

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

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

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

  • Supply/demand #2: Shortage

BlackRock: Jobs Report Shows Unemployment Is Structural

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

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

  • Supply/demand #3: Dunno!

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

Here’s the optimistic view…

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

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

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

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

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

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

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

Maybe there are a few millions there:

cat

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

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

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

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

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

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

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

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

Now this from yours truly:

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

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

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

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

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

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

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

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

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

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

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

All this so late in the bull market!

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

Meanwhile,

Subprime Auto Lenders to Ease Standards Further: Moody’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Italy’s November Industrial Output Rises

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

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

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

EARNINGS WATCH

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

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

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

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

SENTIMENT WATCH

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

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

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

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

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

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

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

And this:

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

But: Stock Bargains Not Hard to Find, JPMorgan Says

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

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

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

GOOD QUOTES

Barron’s Randall Forsyth:

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

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

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

 

QUIBBLES

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

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

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

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

Pardon my quibbling with such trivial issues:

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

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

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

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

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

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

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NEW$ & VIEW$ (27 DECEMBER 2013)

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

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

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

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

Bullishness Jumps to Three-Year High

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

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

Bespoke provides the charts…

 

…and some caution

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

The Blog of HORAN Capital Advisors adds this:

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

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

Oh! there is also that:

Twitter Rally Picks Up Steam

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

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

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

And that: Copper Prices at Their Highest in 8 Months

But also this:

Treasury Yield Hits 3%

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

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Hmmm!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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.

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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.

SENTIMENT WATCH

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

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Meanwhile:

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…)

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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 fidanza@gmail.com.

 

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)

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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.

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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):

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

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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.

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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.

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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.

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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. (…)

 

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.

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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.

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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.

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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 (advisor.marketscope.com) 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.

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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

 

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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.

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Punch  LE PROBLÈME FRANÇAIS (from Reuters’ AlphaNow):

COTW_1111

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).