NEW$ & VIEW$ (26 FEBRUARY 2013)

Italian elections. Chicago Fed National Activity Index. More on China’s PMI. Sentiment watch. Corporate pension gap. India taxes. Asia moving to the left. Life expectancy.




Italian Vote Brings Gridlock

In a national election meant to push Italy further down a path to economic reform, voters delivered political gridlock that could once again rattle Europe’s financial stability

imageMarkets fell in response to returns. Yields on 10-year Italian bonds jumped 0.45 percentage point in mid-morning trading to 4.81%, their highest level this year.

In early trading, stock markets in France, Germany, Spain and Italy were each down around 2%. Hardest hit was the Italian benchmark, which traded down around 4%. (…)

A majority of voters endorsed parties that had promised to tone down or even reverse the financial sacrifices Italy has promised its European partners, giving surprise lifts to both the center-right coalition of former premier Silvio Berlusconi and a party of protest led by a former comedian. (…)

The apparent stalemate reflects the groundswell of support for former comedian Beppe Grillo’s Five-Star Movement. His throw-the-rascals-out platform drew enough voters to give it nearly as many votes as Italy’s mainstream coalitions—25.6% in the lower house, according to final data from the Interior Ministry, making it the single largest party in that house.

Surprising, too, was the comeback of Mr. Berlusconi, whose party was in the doldrums as late as November. (…)

Pointing up“The cost of austerity led to an electoral rebellion,” said Enrico Letta, deputy head of the Democratic Party.

This, I am sure, has been heard loud and clear by all politicians in Europe…and in the U.S. as well…

The election surprise poses a challenge for euro-zone creditor nations such as Germany, which have demanded that financially stressed euro-zone countries overhaul their economies in exchange for supporting the European Central Bank’s pledge to save the currency union if necessary. A public rejection of austerity policies could rapidly spread to Spain and beyond, forcing European authorities to accelerate their response to the regional crisis or risk another round of the kind of contagion that effectively closed a host of euro-zone credit markets. (…)

The only way either of the mainstream parties can claim a majority in the Senate, according to the latest vote tallies, is by allying with each other or with Mr. Grillo. Those are seen as implausible scenarios.

Lightning  “The situation looks ungovernable, and that’s the worst outcome you can imagine,” said Guido Rosa, president of the Italian Foreign Bank Association.

Via FT Alphaville: Gary Jenkins from Swordfish Research sums up these eurozone-wide political fears:

From a longer term perspective the risk to the Eurozone is that the rise of Mr Grillo’s party encourages others across Europe to challenge the status quo. The financial meltdown that began in 2007 and became an economic and sovereign debt crisis was always likely to at least produce the background situation that could potentially lead to social, economic and political change on a scale not seen in Europe since the French Revolution and the surprise to some is that there has been so little real political change. Mr Grillo may be seen as the start of that change, if indeed it comes.

Chicago Fed: Economic Activity “Moderated” in January

According to the Chicago Fed’s National Activity Index, January economic activity declined from December, now at -0.32, down from December’s upwardly revised 0.25 (previously 0.2). The CFNAI headline euphemistically used the term “moderated” to summarize the change.

Pointing up Particularly astonishing in today’s report was the dramatic upward revision to the November data from 0.27 to 0.96. This index has been negative (meaning below-trend growth) for eight of the past eleven months. However, the substantial revisions to the previous two months have lifted the 3-month moving average into positive territory for the past three months. (…)

The next chart highlights the -0.7 level. The Chicago Fed explains:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

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

Click to View


The flash PMI fell in February but, because of the Chinese holidays, it is better to look at the combined Jan-Feb data to better assess the trend. Markit did just that:

imageLooking at data for January and February combined, the PMI indicates that the Chinese manufacturing sector is enjoying its strongest quarter of growth since the first quarter of 2011 despite February’s dip in the PMI. The average PMI reading for the first quarter so far of 51.4 compares with a fourth-quarter average of just 50.5, and is broadly consistent with annual GDP growth of 9.5%, up from 8.9% in the fourth quarter.

Furthermore, inventories of finished goods fell during the month, and the combination of falling warehouse stocks of finished goods and ongoing growth of new orders suggests that firms will continue to raise production in coming months, provided demand does not fall back further.

imageThe signal from the orders:inventory ratio is not as strong as in prior months, but nevertheless indicative of stronger production growth than was seen throughout 2012. The latest official data showed industrial production growing at an annual rate of 10.3% in December; the fastest for nine months. Even taking into account the recent dip, the PMI’s
orders:inventory ratio is running at a level consistent with 12% growth.

Taiwan’s Export Orders Climbed Most in Over Two Years in January

Orders, an indicator of shipments in the next one to three months, rose 18 percent from a year earlier after a previously reported 8.5 percent gain in December, the Ministry of Economic Affairs said in Taipei today. (…)

Orders from China jumped 28.7 percent in January from a year earlier, while those from the U.S. gained 15.5 percent, today’s report showed. Electronics advanced 13.1 percent and information and communication products rose 22.2 percent.


The following charts are extracted from a good FT analysis (Equities: A sentimental wager). Realize that 5 of the 6 charts cover a very short period. See also INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!)

Panic or euphoria: six ways to measure the market

AAII bull-bear ratio

Investors Intelligence

Futures market positioning

Equity put/call ratio

Combined measures

Investment bank equity weighting

Why the Corporate Pension Gap Is Soaring

Big companies have disclosed yawning pension gaps this earnings season, widening the deficit between what companies expect to owe retirees and what they have on hand to pay them to a near record.

(…) Across America’s business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners. (…)

The combination of low rates and longer life spans has made it tough for pension plans to keep pace. Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management. (…)


Glencore’s CEO Says Rival Mining Chiefs ‘Really Screwed Up’

Glencore International Plc’s billionaire Chief Executive Officer Ivan Glasenberg criticized his recently departed mining CEO peers for swamping the industry with mines and new production that’s crimped profits.

“The big guys really screwed up,” Glasenberg, 56, who runs the world’s largest publicly traded commodities supplier, told investors yesterday in a presentation.

“We’ve always been wanting to keep building and keep putting the cash which we generate into new assets,” he said. “That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply.” Confused smile (…)

“Now we have a new generation of CEOs; I hope CEOs have learnt their lesson,” Glasenberg told the BMO Capital Markets conference in Hollywood, Florida. “They built, they didn’t get the returns for their shareholders. It’s time to stop building.”

Don’t bet on that!

India to Foreign Firms: Pay More Taxes

India’s tax authorities are seeking billions of dollars from some of the world’s biggest multinational companies, saying that they haven’t properly valued transactions with their Indian subsidiaries. (…)

In the past few weeks, oil company Royal Dutch Shell PLC and U.K.-based cellular-phone operator Vodafone Group PLC have received notices saying that they owe higher taxes than they have paid because they transferred shares between their Indian subsidiaries and other overseas units at too low a price, the companies say. Multinational companies frequently buy shares of overseas units as a way to inject cash into the overseas units. (…)

The tensions reflect growing debate over how multinational companies should report their income through subsidiaries around the world. Emerging economies such as India want to grab a larger slice of such income, while the U.S. and other countries where the multinationals are based want to keep profits—and taxes—at home. (…)

Corporate tax lawyers say that India’s scrutiny of share transfers is unprecedented for the country and unusual compared with other countries.

Hong Kong May Boost Spending on Poor as Income Gap Widens

“The wealth disparity is the most pressing issue,” said Jennifer Wong, a tax partner at KPMG China who follows Hong Kong’s budget. “Resources should be spent on redistributing wealth through measures such as tackling youth unemployment and enhancing welfare coverage.”

Park pledges to reward ‘sweat’ of people
S Korean president promises fairer wealth distribution

(…) Coming five years after her predecessor Lee Myung-bak took power promising annual growth of 7 per cent, Ms Park’s speech reflected South Korea’s shifting priorities.

A slowdown driven by the global financial crisis has cast the spotlight on a creeping increase in income inequality. Despite being the candidate of the centre-right New Frontier party, Ms Park sought to cater to this trend, taking victory in December’s election after a campaign peppered with talk of “economic democratisation”. (…)

Ms Park won the presidential race on a platform that promised to boost social spending, tackle competition abuses by big corporations and give more support to small businesses. But since the election, Ms Park has been beset by speculation that she will be unable to deliver. (…)

Some critics have questioned Ms Park’s claim that this spending can be funded without significant tax or debt increases, through cutting other parts of the budget and cracking down on the informal economy. (…)

Scientists claim 72 is the new 30  Life expectancy rises faster since 1900 than previous 200 millennia

(…) The pace of increase in life expectancy has left industrialised economies unprepared for the cost of providing retirement income to so many for so long.

The study, published in the Proceedings of the National Academy of Sciences of the United States, looked at Swedish and Japanese men – two countries with the longest life expectancies today. It concluded that their counterparts in 1800 would have had lifespans that were closer to those of the earliest hunter-gatherer humans than they would to adult men in both countries today.


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NEW$ & VIEW$ (18 FEBRUARY 2013)

Industrial production. NY Fed manufacturing. Retail sales weakening. Secular trends. Sentiment watch. Earnings watch. Broker poetry. Eroding equities undervaluation. China retail sales. Spain vs France. Currency wars. Oil. Mining. Bill Miller.


Monitoring for any signs of a growth problem like in 2010 (starting in May), 2011 (January)and 2012 (April):

But Markit reassures us:

imageIndustrial production fell 0.1% in January, confounding analysts’ expectations of a 0.2% increase. The downturn was led by a 0.4% drop in manufacturing output. However, December’s industrial production numbers were revised up, from 0.3% to 0.4%, and November had seen a 1.4% increase.

The January data therefore need to be looked at in part as an
adjustment of production levels from the strong upturn seen late last year, and importantly the three-month growth rate accelerated from 0.6% in December to 1.5% in January, pointing to the strongest underlying growth trend since last February.

Manufacturing output is meanwhile still up 1.9% in the latest three-month period, despite the wobble in January, enjoying the strongest pace of expansion since last April.

  • Same thing with retail sales: 3-ms growth through January is accelerating. And the NY Fed manufacturing survey jumped 18 points to 10.0 with the new orders index climbing 20 points to 13.3


image image


Alexander Ineichen’s high frequency indicators table is stable:


  • Readings Bolster Hope on Economy  U.S. consumers are showing surprising resilience, providing some hope for the economy as a new round of Washington budget battles approaches.

Consumer confidence jumped more than expected in the first half of this month despite higher payroll taxes since the beginning of the year, according to a gauge released Friday by the University of Michigan. Its index of consumer sentiment rose to 76.3, up 2.5 points. (…)

The U.S. economy lost $16 trillion in total wealth from the end of 2007, when the U.S. recession started, until early 2009, he said. That amounted to about a quarter of total U.S. wealth. It has since regained $13.5 trillion of that wealth, mostly owing to a rebound in the stock market and recent improvement in housing prices.


Punch  I don’t post often on consumer confidence surveys. Here’s why: CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL! And here’s the better readings on consumers:

  • Consumer is O.K.

Food company J.M. Smucker Co. on Friday said sales rose 6% in the three months ended Jan. 31 from the same period a year earlier. CEO Richard Smucker said he was “cautiously optimistic” about the economy going forward, and noted that the industry as a whole has seen stronger demand in recent weeks. “We are actually seeing the consumer be a little more confident and therefore spending a little more,” Mr. Smucker told investors.

Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.” (…)

Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

“(…)  Where are all the customers? And where’s their money?” (…)

“As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions,” David Tovar, a Wal-Mart spokesman, said in an interview, adding that the company will report fourth-quarter earnings on Feb. 21. Wal- Mart’s fourth quarter ends in January. (…)

About $19.7 billion more in tax refunds had been delivered to shoppers by this time last year, according to an analysis prepared by Wal-Mart’s Global Customer Insights & Analytics division that was attached to Murray’s e-mail on Feb. 12. The retailer expected returns to be delayed by three to four weeks because of the late release of tax forms and additional, federally mandated tax-fraud scrutiny. (…)

Even with a slow January, Wal-Mart is gaining market share steadily, Simon said.

“That points to our competitive landscape, which means everyone is suffering and probably worse than we are,” Simon said, according to the minutes.

What to think? I side with Wal-Mart, the largest and most sophisticated retailer in the world. These e-mails have not been denied by WMT. Their sales problems seem to be industry-wide since they see they market share growing. And it jibes with weekly chain store sales reports:



  • On the other hand, ISI surveys, which have done a good job warning of previous slowdowns, are, so far, not declining. Their diffusion index is going sideways, however, as “some of the consumer surveys with smaller ticket size have decelerated recently”.


Yet, when I scrutinize ISI’s surveys up to Feb. 15, I find that:

  • Auto dealers surveys are slowing and, at 51.1, are flirting with the 50 level;
  • Broadline retailers surveys have clearly weakened;
  • Specialty retailers surveys are stable at a weak level;
  • Restaurant surveys have slipped below 50;
  • Credit card companies surveys have slipped below 50;

Only Consumer staples companies surveys have improved in recent weeks and not by much.


In spite of its own “short term” hurdles and of significant problems abroad, the U.S. economy keeps surprising. Its resilience comes from new positive secular trends:

  • HOUSING, now a front page phenomenon. Pointing up Note that ISI homebuilders surveys remain very, very strong!
  • THE ENERGY GAME CHANGER, also front page now, and
  • THE U.S. MANUFACTURING RENAISSANCE, no longer page 16 but not quite front page material yet:

According to just-released data from the Federal Reserve, oil & gas extraction remains a key driver of industrial output. As today’s Hot
Chart shows, volume extraction has increased by more than 30% in the past three years. The last time the U.S. produced so much oil & gas was in 1974.

This unexpected energy surge is playing an important role in helping revive the U.S. manufacturing base. The new abundance of oil & gas is altering the outlook for U.S.-based production of chemicals and plastics. As shown, both industries are now adding capacity for the first time in five years. We would expect this situation to endure for the foreseeable
future since capacity utilization is running near the pre-recession high of 80%. Increased production will have to be met with increased capacity. (NBF Financial)


Reliable and sustainable energy sources are vital to a growing economy, boding well for the future, but perhaps more importantly, this again illustrates what creative minds in America can achieve when market forces are left to work. (Schwab Market Perspective: Seeing the Forest)

The changing, and encouraging, energy equation


That also helps:

Number of the Week: Aging Fleet Could Boost Car Sales

11.1 years: The average age of light vehicles in the U.S. last year, according to automotive-research firm Polk.



  • S&P 500 Gains for 7th Straight Week 

    The index has risen 8.37% over that period. The Russell 2000 also made it seven straight weeks of gains. It is up 10.94% in the past seven weeks.

  • S&P 500 Getting Close to Consensus Price Target At the start of the year, the consensus Wall Street year-end price target for the S&P 500 was 1,531, which translates into a gain of 8.76%.  With the index up 6.65% year to date, the market is already close to the consensus price target after just a month and a half.

That may be what is keeping the S&P 500 Index stuck at 1520. You can bet that, unless the economy turns bad in coming weeks, these “targets” will get a lift up accompanied with silly rhetoric such as this one from Citigroup’s European strategy group (my emphasis):

(…) However, policy makers and the healing process of time are reducing the fear. The risks of falling are still there but confidence in the safety net is increasing. This is being played out in risk assets rallying. We believe
there is more to go as investors time horizons lengthen. While we do not expect plain sailing from here we see equity markets at least 10% higher by the year end.

First the bad news that we all already know. The weak economic conditions especially in Europe in 2013 as more austerity bites will make the bottom up forecasts of 10% earnings growth very difficult to achieve. We view 5% as a more likely outcome.

But this is not a secret and the market should have discounted this already. What is more important is the outlook for 2014 earnings. As we have detailed above we expect economic growth to inflect in 2013 and be accelerating into 2014. This in itself makes double digit earnings growth more likely in our view.

While the EBITDA margin is at relatively high levels because leverage is low (Confused smile) the RoE is less stretched. We believe that margins should be sustainable around current levels given stable economic conditions, steady commodity prices and little delta in corporate capex.

Taking the 12m forward PE the market is trading at around a 10% discount to its 25 year average. Normalisation points to upside. Price to book is trading at a similar discount while ex Financials the markets are back to average. Of course by their very nature markets have to spend time above and below average to make up that average. Using the trailing PE, as it is a longer source of data, the market trades at above average multiples 48% of the time. It is not unusual to be re-rated.

So, 2013 is already well understood and discounted so we have to buy on 2014 prospects which call for 10% EPS growth because the economy is currently inflecting. Margins should remain high thanks to stable everything. And valuation is attractive because it is  10% below its last 25-year average (which includes 7 years of bubbly P/Es but never mind that since stocks trade above average 48% of the time).

Beautiful broker poetry!



The only worthy thing in this report is this chart which, I assume because it is not explicit, correlates the U.S. ISM with U.S. earnings momentum. Contrary to Citigroup, I fail to feel positive, just yet, on earnings based on this chart. image


  • In Europe:

Some 54 percent of companies in the Stoxx 600 reported earnings that topped analysts’ estimates this week, according to data compiled by Bloomberg. Fifty-six percent beat revenue projections, the data show. (Bloomberg)

  • In the U.S.

Q4 Earnings and Revenue Beat Rates

Below is an updated look at the earnings and revenue beat rates for the fourth quarter reporting period (which comes to an end next Thursday).  As shown below, 63.6% of US stocks that have reported this season have beaten earnings estimates, while 64% have beaten revenue estimates. 

I essentially rely on S&P data for my earnings and valuation analysis. This is important now since S&P includes “actuarial gains or losses” on pension expense in operating income, unlike some other aggregators.

S&P reports that as of Feb. 14, 79% of S&P companies had reported Q4 results. The beat rate is 64.9% while the miss rate was 24.5%. Ex-IT (beat rate of 82%), the beat rate drops to 61.7% and the miss rate rises to 27%.

Total Q4 EPS keep declining and are now seen at $23.32, down $0.21 from Feb. 6 and $0.51 from Jan. 31. As a result, trailing 12-month earnings dipped to $96.99, down 0.4% from their Q3’12 level, their first decline since 2009.

Q1’13 estimates stabilized lately: they are estimated at $25.62, up 5.6% Y/Y. If achieved Fingers crossed, trailing 12-month EPS would rise to $98.37. Keep in mind that Q4’12 results will likely come in nearly 8% below what analysts were estimating less than 2 months ago.

The creeping market and easing trailing earnings are slowly eroding the market undervaluation which is now 14%, down from 21% in December.




U.S. Corporate Earnings Whipsawed by Yen’s Drop

U.S. companies that do significant chunks of their business in Japanese yen are starting to see some serious costs associated with the currency’s recent decline.

“It’s having a significant top line and bottom line impact,” Wolfgang Koester, chief executive of foreign exchange risk-management company FiREapps told CFO Journal. While companies have spent much of the past year focused on protecting themselves from fluctuations in European currencies, the impact of the dollar-yen exchange rate over the past quarter has taken some companies by surprise, and could worsen if companies fail to put in hedges to absorb some of the impact, Mr. Koester said.

The Japanese yen has rapidly lost ground against the dollar, falling about 20% since November. (…)

Handbag maker Coach , Inc., for example, said last month that its fiscal second quarter Japanese sales fell 7% from the same period a year earlier in dollar terms due to the weaker yen. The sales were only off 2% in constant currency terms.

Automotive companies and airlines are also reporting negative impacts. (…)

“It isn’t just the dollar-yen” that has become a drag on results, Mr. Koester said. “The euro-yen is an even bigger exposure for some companies because of the European financial crisis. It is totally catching them off-guard.”


China New Year Retail Sales Growth Slows on Austerity  Shop and restaurant sales in China during the week-long Lunar New Year festival rose at the slowest pace in four years as a government campaign to discourage extravagant spending limited outlays on food and drink.


The improved competitiveness is illustrated by Spain’s recent success in attracting automotive manufacturing expansions by Ford, Renault, Nissan, and Volkswagen, despite a weak overall market in Europe.  (Schwab Market Perspective: Seeing the Forest)

Eurozone: those with lower costs more competitive



There’s a Feeling of Instability Bubbling Up  Even so, there are good reasons to believe that talk of currency wars is, for the moment, just talk.

The U.S. was the first country to be accused of waging currency war, when Brazil objected to the Federal Reserve’s second round of quantitative easing in 2011, which was widely seen as a naked attempt to drive down the dollar.

The new Japanese government may now claim that its promise of a massive monetary and fiscal stimulus is solely designed to boost the domestic economy but it has made little secret of its desire to see a weaker yen. Similarly, Bank of England Governor Mervyn King has been open in his view that a further devaluation of sterling, on top of the 20% depreciation since the start of the global financial crisis is needed to further rebalance the economy—even while warning that other countries risk triggering competitive depreciations. (…)

At the same time, the global prohibition on competitive devaluations appears asymmetric; countries that have intervened to prevent their currencies rising, such as Switzerland, have so far escaped censure. Goldman Sachs argues this de-facto global stand-off over currencies represents an unofficial Global Exchange Rate Mechanism. (…)

Pointing up  After all, central banks have so far largely welcomed rising asset prices as a sign of restored confidence and view low yields as creating an incentive for investment.

In the absence of domestic political support, it would take a brave policy maker to argue that soaring asset prices risk creating a new debt-fueled misallocation of capital and threaten to pull away the punch bowl. But perhaps they’re made of sterner stuff these days.

There we go!
  • Yen resumes slide after G20  Comments on currency devaluation fail to single out Japan

  • Investors turn their backs on sterling  Bets against pound second in volume only to yen

  • Norway Ready to Use Rate Cuts to Cool Krone, Olsen Says  “A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.”

  • Abe Pressures BOJ  Japanese Prime Minister Shinzo Abe said Monday that if the central bank is unable to achieve the 2% inflation target that it has set, that would be a condition for changing the Bank of Japan’s law.

  • Japan PM says BOJ easing a key factor driving FX Japanese Prime Minister Shinzo Abe said on Monday the central bank’s monetary policy is not directly aimed at weakening the yen, but is among key factors driving exchange-rate moves.

Currency wars: yen is now
Risk appetite is an important factor – but wars of any kind are bad for trade

(…) Certainly a strong yen is bad for Japan’s exporters. Popular thinking goes that a weaker one will thus lift profits and stocks. Since November 14, when Yoshihiko Noda called a general election, the yen has fallen 14 per cent against the dollar and the Topix has rallied by 30 per cent. Carmakers, as some of the biggest exporters, are among the biggest beneficiaries of a weaker currency. Toyota gains about Y38bn ($407m) in operating income – or 3 per cent of its full-year target – for every Y1 weakening, Nomura estimates. Add in the yen’s 15 per cent slide against the Korean won since November, which should hamper Japan’s biggest rivals, and exporters are in clover.

That does not make the stocks the biggest gainers from yen weakness – those are in fact banks and other financial groups. For every 5 per cent the yen weakens versus the dollar or won, the Topix banks index tends to gain 25 and 12 per cent respectively, according to CLSA. Transport stocks and the big electronics exporters add half that. That suggests the real driver is not the currency move and its profit effects so much as risk appetite. It was a flight to safety that drove the yen to its painful peaks. Now stock market volumes are up amid bets of even looser monetary policy.

Wars of any kind are bad for trade. Avoiding currency moves becoming a pitched battle should be good for the animal spirits that really move the yen – and the stock market.

Saxo Bank CEO Says Euro Doomed Amid Currency Woes

Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.

“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.” (…)

Ghost  “Another possible fallout is getting rid of some of the countries that are being ruined by being in the euro, notably the southern European economies,” Christensen said. “People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.”


Saudi Oil Output Falls to 19-Month Low as Exports Decline

Saudi Arabia’s crude oil output fell in December to a 19-month low as shipments from OPEC’s biggest producer dropped for a third month and domestic consumption decreased, the Joint Organisations Data Initiative said.

The kingdom exported 7.06 million barrels of crude a day in December, the least since September 2011, JODI reported, citing statistics the government submitted to the Organization of Petroleum Exporting Countries. Exports were 1.3 percent lower than the previous month. Production dropped 4.8 percent in the month to 9.03 million barrels a day.

Saudi Arabia, which burns oil to produce electricity and desalinate water, is seeking to increase use of natural gas as a substitute fuel. By doing so, the government plans to free up more crude for sale overseas, where the commodity can sell at higher prices than it does at home.

The kingdom burned 303,000 barrels a day at power plants in December, the lowest level in 10 months, according to the data. That is 29 percent less than what it burned a year ago.

Saudi Arabia, the world’s biggest oil exporter, stored 276.6 million barrels of crude within its borders in December compared with 278.9 million a month earlier, the data show. Refineries processed 1.73 million barrels a day during the month, down by 44,000 barrels a day from November.


Pointing up  Anecdotally, the economy in South Florida is clearly softening. There are vacancies all along A1A on the sea coast, right in prime season, and most business people I talk to say biz is slow.

Some things will never change:

Rash acquisitions leave miners in a hole  Companies report multibillion-dollar writedowns


Miller is a great investor, very fundamental value minded, well researched and articulated.  (if no longer freely available, try here)



NEW$ & VIEW$ (15 FEBRUARY 2013)

Jobless claims. Farm jobs. Housing inventory. Eurozone trade. Sentiment: don’t get too sentimental. M & A activity.

Open-mouthed smile  U.S. Jobless Claims Fall Sharply

The number of U.S. workers filing new applications for unemployment benefits fell by 27,000 last week to a seasonally adjusted 341,000, the latest sign of an improving labor market.

The four-week moving average of claims, which smooths out week-to-week volatility, advanced by 1,500 to 352,500. Despite the slight rise last week, the average level remained near a five-year low.

The number of new claims has fallen in four of the past five weeks. The downward trend points to slow but steady job growth. Hiring typically picks up when layoffs decline. (Chart below from Bespoke Investment)


Smile  Farm Boom Sows Jobs Bounty

With U.S. farm incomes hitting record levels in recent years as global grain prices have climbed, farmers have more money to spend on corn seed, harvesting combines, fertilizer and other products, fueling growth for the agribusiness industry.



Housing Inventory, Already Low, Dropped Further in January

The number of homes listed for sale, which stood at an 11-year low at the end of last year, fell even further in January, according to a report released Thursday.

There were just 1.48 million homes listed for sale at the end of January, down by 5.6% from December and by 16.5% from one year ago, according to data compiled by That’s the lowest level since the firm began its count in 2007. The National Association of Realtors separately reported last month that inventory ended 2012 at an 11-year low.

Pointing up  And spring is just about there! (Do Home Prices Risk Overheating Due To Low Supplies?)

Nice set of charts from ZeroHedge which also carries excerpts from a Goldman Sachs interview with Bob Shiller:

Lightning  Europe’s Woes Deepen

Losing Ground

Lightning  Euro-Zone Exports, Imports Weaken

Eurostat, the European Union’s official statistics agency, said exports of goods from the 17 nations that use the euro fell 1.8% in December from November, after growth of 0.6% the previous month.

Eurostat’s figures on Friday also showed imports of goods to the euro zone fell 3.0% in December, illustrating the fragile state of domestic demand in the currency bloc.

Spanish Core Inflation Up Even as Recession Deepens

Core inflation, which excludes energy and fresh food prices, accelerated to 2.2 percent in January, the National Statistics Institute in Madrid said today. Underlying prices fell 1.6 percent from the previous month. (…)

Spain’s headline inflation rate, based on European Union calculations, was 2.8 percent, matching an estimate published on Jan. 31. Stripping out taxes, inflation was 0.7 percent in January, according to the Spanish statistics institute, and 0.2 percent if fresh food and energy were also excluded, according to the Spanish measure.


A flurry of acquisitions announced within hours of each other Thursday suggests big-time deal-making is back after a nearly six-year absence from Wall Street.

The $40 billion-worth of deals struck Thursday brings the total value of M&A transactions announced since January to nearly $160 billion, the fastest start to a year since 2005, according to Dealogic. M&A volumes historically follow the lead of the stock market, and the 6.67% increase in the Standard & Poor’s 500 Index this year suggests more are on the way. (…)

In addition to the Heinz deal, the highlights of Thursday’s bonanza were the $11 billion merger between AMR Corp. and US Airways Group; a reworked deal for beer giant Anheuser-Busch InBev NV over the divestment of some brands to rival Constellation Brands Inc. worth $4.75 billion; and drug wholesaler Cardinal Health Inc.’s $2 billion purchase of rival AssuraMed.

M&A bankers are renowned for their optimism, no matter the conditions. But Mr. Lee and others argue that the recent spate of large deals, which also include the $16 billion merger of cable companies Liberty Global Inc. and Virgin Media Inc., and the $18.1 billion to be spent by Comcast Corp. to buy General Electric Corp. out of broadcaster NBC Universal, are more than coincidental timing.

Their argument is this: Companies have largely exhausted the benefits of cutting costs and improving productivity since the recession. They are now looking elsewhere for the level of growth that keeps shareholders happy. Deals, economic theory goes, are one way. (…)

Hmmm…That last paragraph doesn’t sound bullish, does it? This next one is interesting, however:

Pointing up One thing that has changed is an alignment of both credit and stock markets. In 2013, both are rallying at the same time, offering cheap credit to buyers and the prospect of acceptable prices to sellers. (…)

The number of deals is back to its previous peaks, but not their values.

  • An increase in M&A should not come as a great surprise. Data over the past 50 years shows that M&A activity is strongly positively correlated with inflation-adjusted stock prices and the value of M&A is linked to nominal stock prices.
  • While deal values are not showing nearly as strongly recently as deal volumes, today’s announced activity could be a game changer in this story. (RBC Capital)


Thumbs up  Funds keep flowing into equities

Research firm Lipper Inc. reported $34.2 billion in net deposits into stock mutual funds and ETFs over the four weeks ended Jan. 30, the largest four-week total since January 1996. Several other industry researchers also reported high levels of cash flowing into stocks as the market climbed to five-year highs.

January marked the first time in 11 months that deposits into domestic equity funds exceeded withdrawals. (…)

The American Association of Individual Investors, for example, notes that bullish sentiment – the expectation that stock prices will rise over the next six months – is above its historical average, as it has been for nearly three months now. (WSJ) (Chart below from Bespoke Investment)

High five  On that last sentiment indicator, you might want to read an old post of mine: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!

Feeling groovy?

The same WSJ article adds this scary view:

Doug Kass of Seabreeze Partners Management told CNBC he’s getting “the Summer of 1987 feeling,” about U.S. equities.

I was there managing money in 1987 and I am not getting that “1987 feeling”. For the record and for sake of objectivity:

  • Earnings troughed in Dec. 85, rose marginally in 1986 and accelerated throughout 1987.
  • Inflation troughed at +1.1% in Dec. 86 and rose sharply to an Oct. 1987 peak of +4.5%.
  • 10y Treasury yields troughed at 7.1% in Jan. 1987 and rose rapidly to 9.5% in Oct. 1987.
  • Trailing P/Es were 14.8x in Dec. 1986 and rose to 18.8x in Aug. 1987.
  • The Rule of 20 barometer moved rapidly from deep undervaluation (-22% in Dec. 1986) to near extreme overvaluation (+20% in Aug. 1987).



Don’t get me wrong. I am not saying this market is riskless (see WINDLESS EQUITIES, STAY CURRENT! if you have been away). Just that this is no 1987 even though currency wars were also present then.

Disappointed smile  Nasdaq Weighs Earlier Wake Up

Nasdaq said it plans soon to start processing trades at 4 a.m., a challenge to NYSE Euronext.


NEW$ & VIEW$ (14 FEBRUARY 2013)

Retail sales. Consumer sentiment. Investor sentiment. Eurozone, Japan GDPs dive. France’s deficit worsening. Euro strength harmful. U.S. oil production keeps surging. Foreclosure filings drop. Margin debt alarmingly high.

Retail Sales Post Modest Rise

A measure of retail sales excluding gasoline, cars and building materials—which economists prefer because it is closer to how government analysts view consumption when calculating the nation’s economic growth rate—weakened notably in January, rising just 0.1%, against 0.7% in both December and November. (table from Haver Analytics)


Non-auto less gas rose 0.2% in January (+3.6% Y/Y). Not bad in the circumstances, coming after two pretty strong months. Resilient consumer, but for how long?



There is the fiscal drag (see Tuesday’s New$ & Views on weekly chain store sales), and there is this:image

Q4’s accelerated bonuses and dividends paid before the feared fiscal cliff tax hikes are probably helping, both spending and the stock market.

RBC Capital Markets’ February surveys of consumer sentiment remains pretty good:

February shows strong improvement in consumer outlook. The second RBC Consumer Outlook Index of the year shows a substantial bump overall, and this carries over to some of the key sub-indices as well. This data builds on the moderate improvements found last month, and reinforce the notion that American consumers are entering 2013 with an overall improved economic outlook.


Wealth effect? Across the board cuts in paychecks would suggest a downbeat concumer but rising equities and house prices are probably predominant.


Meanwhile, across the ponds:

Euro-Zone GDP Dives

The euro-zone economy plunged last quarter at its fastest pace in nearly four years, as recessions along the bloc’s southern border gripped powerhouses such as Germany and France.

GDP in the euro zone fell 0.6% in the fourth quarter compared with the third, according to the Eurostat report.

It was the third straight GDP decline and fifth straight quarter in which the currency bloc failed to expand. For 2012 as a whole, GDP fell 0.5% from the prior year.

GDP in Germany, Europe’s largest economy, fell 0.6% from the previous quarter on declining exports and investment. France, the bloc’s second biggest, declined 0.3%. Other large economies including Italy, Spain and the Netherlands contracted.

Italy’s GDP plummeted 0.9% from the previous quarter, a much sharper rate of decline than the third quarter. Spain’s downturn also deepened. Portugal’s GDP slid 1.8% in the final three months of 2012, double the third quarter’s rate of decline.

Japan GDP Shrinks for 3rd Straight Quarter

Japan’s real gross domestic product contracted for the third straight quarter as the global economic slowdown again illustrated the nation’s reliance on exports

GDP shrank at an annualized rate of 0.4% in the October-December quarter from the prior quarter, data released by the Cabinet Office showed Thursday.

Adding to the gloomy picture, figures for the previous July-September quarter were revised to an annualized rate of decline of 3.8% from 3.5%.

Surprised smile  French Ministers Warn on Deficit Target

(…) Meager growth figures suggest that France could soon be forced to admit that despite an increase in taxes and more modest spending cuts, it won’t be able to stick to the headline figure it agreed with its European Union peers.

The French government’s current deficit plan is based on an economic-growth forecast of 0.8%. But economists now expect little to no growth this year, and the International Monetary Fund has further cut its forecast to a 0.3% expansion from the 0.4% it had previously predicted. (…)

France’s national auditor estimated on Tuesday that if GDP growth is 0.3% next year, the deficit would be 0.25 percentage point deeper than forecast, at 3.25%. Government officials told The Wall Street Journal earlier this month that the government is preparing to trim its 2013 growth forecast. (…)

imageEuro’s Rise Threatens Earnings The euro’s recent strength is dimming a bright spot for European companies: exports. And the pain has been spread unevenly, exposing the divide between companies in Germany and those in France and Italy.

with the euro up 12% against the dollar since July and up 35% to a three-year high against the yen, European companies are squirming. A stronger currency makes a country’s exports more expensive abroad—and thus less competitive—and reduces profit when it is brought back home. (…)

“A good level for the euro would be around $1.20,” said Gianni Zonin, who runs large wine producer Casa Vinicola Zonin SpA. He said he might have to raise prices next month if the euro doesn’t ease.

“We have this overly strong euro that is dictated by the Germans, who want a strong currency without considering the impact on Italy, Spain and France.”


Fracking Threatens OPEC as U.S. Output at 20-Year High

(…) The world’s largest crude consumer has cut net petroleum imports from OPEC by 37 percent from the January 2008 record of 6.371 million barrels a day, according to the Energy Information Administration. Rising domestic output combined with increasing Canadian crude will further cut imports from the 12 OPEC countries by the end of 2014, according to a report today from Citigroup Inc.

Improvements in horizontal drilling and hydraulic fracturing, or fracking, have spurred drilling in states such as Texas, North Dakota and Oklahoma. The U.S. pumped 7.06 million barrels a day in the week ended Feb. 8, up 1 percent from the previous week and extending last year’s 19 percent gain, the EIA said today. (…)

U.S. crude imports have fallen 5.9 percent this year after a 21 percent decline last year, according to data from the EIA, the statistical arm of the Energy Department. The U.S. met 84 percent of its energy needs in the first 10 months of last year, on pace to reach the highest annual rate of self-sufficiency since 1991. (…)

January OPEC production dropped to a 15-month low in a Bloomberg survey of oil companies, producers and analysts because of a 100,000 barrels a day drop in Saudi output.


Foreclosure Filings Drop to 6-Year Low on California Law

U.S. foreclosure filings fell 28 percent last month from a year earlier to the lowest level since April 2007, as a new California law slowed first-time defaults in the most-populous state, according to RealtyTrac.

Filings across the nation dropped 7 percent from December to 150,864, with one in 869 U.S. households receiving a notice, according to the data provider. New homeowner protections in California played an outsized role in the national decrease, as notices of defaults there slid 62 percent from a year earlier to an 87-month low, RealtyTrac said. (…)

A drop in foreclosures is helping to fuel a U.S. housing recovery that’s even more pronounced in California. Prices increased in 88 percent of U.S. metropolitan areas in the fourth quarter, with five cities in the state ranking among the 20 costliest, the National Association of Realtors said this week.

In Southern California, sales last month were the highest for a January in six years, while the median price of a property jumped almost 24 percent from a year earlier to $321,000, research firm DataQuick reported yesterday. The number of purchases between $300,000 and $800,000 in the six-county region soared almost 50 percent from January 2012, according to the San Diego-based company. (…)


As I explained last Monday in WINDLESS EQUITIES, STAY CURRENT!,

S&P 500 Index trailing 12-month EPS are now seen at $97.20 after Q4’12, down from $97.50 last week, and from $97.40  three months ago. (…) the reality is that quarterly earnings have been stable since Q2’11 and trailing 12-month EPS peaked in Q2’12. (…)

It is important to realize that flattish earnings provide little backstop if investor sentiment turns down. Much like a windless sailboat seeking strong currents to move along, equity markets now need higher multiples to advance, a bigger bet than when earnings are fueling the engine.

Higher P/Es mean rising investor sentiment to unleash the sidelined cash. Raymond James’ strategist Jeff Saut wrote this last week (“Don’t Just Do Something, Sit There.”):

“Don’t Just Do Something, Sit There” is the title of a book written by Sylvia Boorstein. I was reminded of the title when I received the following email from a financial advisor at another firm last week:

“Hey Jeff, not only do my clients want me to ‘do something,’ now I am starting to get the feeling I should do something. My shopping list of stocks to buy for the ‘consolidation-pullback’ is up 20%+ over the past five weeks, yet I have not bought any of them despite the fact I have plenty of cash on the sidelines. Now, the next pullback should be higher than where I started waiting for a pullback two weeks ago. For my active accounts, I’ve actually raised a little cash on every step to the upside, but have been holding back on that strategy this week. When my clients start calling ME to talk about what stocks to buy it makes me nervous and I start to get more cautious. Please remind me not to do something just to do something, to be patient. Regrettably, I’m starting to feel like an underperforming hedge fund manager.”

From RBC Capital Markets’ consumer survey:image

Surprised smile  And here’s a scary one. Data for January is not in yet! (From ISI)


Pointing up  Cash is no longer king. Discipline is!


NEW$ & VIEW$ (13 FEBRUARY 2013)

U.S. employment. Sequester. Obama. Eurozone IP rises. Currency war. Canada’s job market weak. Inflation watch. Investor sentiment. Insider selling. Corporate cash. Europe’s labor market reforms.

Jan. Retail Sales: +0.1% vs. +0.1% expected, +0.5% prior. Ex-auto +0.2% vs +0.2% expected, +0.3% prior.

U.S. Hiring Looks More Sluggish

(…) Employers hired 209,000 fewer workers in December than the month before, the Labor Department said Tuesday, and they posted 173,000 fewer job openings — a sign hiring may have slowed further to start the New Year.

The new data, from the government’s monthly Job Openings and Labor Turnover Survey, or JOLTS, echo the findings from the main monthly jobs report released earlier this month. That report showed job growth slowing in both December and January. (…)

 Sequester Looms, No Deal in Sight

Senate Minority Leader Mitch McConnell (R., Ky.) said it was “pretty clear” the cuts will happen, saying he wasn’t interested in “last-minute negotiations” to try to avoid the budgetary belt-tightening.

He repeated that Republicans wouldn’t support any effort by Democrats to increase federal revenue to avoid or defer the cuts.

When asked if he had met with House Speaker John Boehner (R., Ohio) to kick-start talks to avert the sequester, Mr. Reid said he would meet with him later this week.

Aides said the meeting would take place Wednesday and that the spending cuts may be discussed but neither side expects to begin serious negotiations to reach a compromise.

Obama Paints Wider Government Role in Middle Class Revival

President Barack Obama called for raising the federal minimum wage to $9 an hour and threatened to use executive action on climate change and economic incentives if Congress doesn’t act, laying out an activist second-term agenda that quickly provoked Republicans.

Along with a renewed appeal for votes on immigration and gun control, Obama proposed making preschool available to all 4- year-olds, negotiating a new trade agreement with the European Union and spending $50 billion on “urgent” infrastructure projects.

Obama strikes unapologetically partisan tone
President finally calls off fruitless quest for bipartisan Washington

(…) Fresh from re-election and the more recent success in pushing through tax rises for the wealthiest, Mr Obama all but declared the era of big government was back. (…)


Eurozone industrial production rose 0.7% M/M in December, only offsetting the -0.7% November production decline. For Q4, IP dropped 1.0% (-4.1% a.r.), a touch better than Q3’s -1.1% decline. (Eurostat)

  • Germany: +0.8% in December, -1.5% in Q4 (-0.7% in Q3).
  • France:          0% in December, -0.3% in Q4 (-1.0% in Q3).
  • Italy:          +0.4% in December, -1.8% in Q4 (-0.3% in Q3).
  • Spain:            0% in December, -1.2% in Q4 (-1.8% in Q3).



“Green shoots”? Not so sure yet. Keep reading:

Two of the world’s largest tire makers warned on Tuesday they are facing a tough year in Europe as continuing economic struggles in that region further dampen orders from new-car makers and push more consumers to hold off on replacing their current tires. (…)

“During the fourth quarter, it became increasingly clear that the effects of the European economic crisis will be felt for an extended period,” Goodyear Chief Executive Richard Kramer said in a conference call with analysts. (…)

“Multiple plant closures, announced by European auto makers, point toward weak forward projections which will inevitably impact the automotive supply chain,” Mr. Kramer said. “As this economic weakness continues, we see an environment where supply in many industries, including tires, will exceed demand.”

Société Générale SA said Wednesday it will roll out a restructuring plan to cut costs and boost revenue, as the French bank posted a larger-than-expected fourth-quarter loss and painted a stark picture of the outlook for retail banking in France against the backdrop of a stagnant economy. (…)

Pointing up  Mr. Sammarcelli said that loan defaults by medium-size and large companies in France had increased in the fourth quarter, and that the situation was likely to continue to deteriorate in 2013.

  • ING to Cut 2,400 More Jobs 

    Dutch bank ING said it would slash another 2,400 jobs at its retail banking operations, after reporting that asset sales helped it to post a 21% rise in fourth-quarter net profit.

  • French Hint at Lower Growth Forecasts 

    France’s president laid the groundwork Tuesday for lowering the country’s growth forecasts as the state auditor warned Paris will likely miss this year’s deficit targets.


(…) Previously, it was only Brazil, the region’s biggest economy, that complained about the competitive devaluations generated by money-printing in the west, the so-called currency wars.

Now, however, as Japan joins the rush to print money and devalue, the more orthodox and free-trading Latin economies – investor darlings such as Mexico, Chile, Colombia and Peru – also fear catching a bullet. (…)

The Mexican, Chilean, Colombian and Peruvian currencies all appreciated by about 10 per cent against the dollar last year. The average of their inflation-adjusted, trade weighted currencies is now also 8 per cent above the 10-year average.

This has prompted howls of protest from local exporters, and increased pressure on politicians to “do something” to help. (…)


Carney cites ‘considerable’ slack in jobs market

Bank of Canada Governor Mark Carney Tuesday described the slack in Canada’s labour market as “considerable,” reinforcing the widely held view that the central bank will keep interest rates low to stoke economic growth.


The U.K.’s central bank said inflation is likely to rise further in the near term and to overshoot its 2.0% target for the next two years, even as economic growth remains slow.

In its quarterly forecast, the BOE said inflation is likely to be driven higher by rising fuel bills and higher university tuition fees. The weaker pound is also driving up prices of imported goods such as energy and food, it said.

The most recent official data show inflation running at 2.7% in January.

White House officials say the move to boost the wage to $9 an hour, from $7.25, is aimed at addressing poverty and helping low-income Americans. (…)

Mr. Obama’s proposal would raise the minimum wage by 2015 in several stages. After that, there would be an annual increase in the minimum wage pegged to inflation.


Sentiment More Bullish Than 99% Of All Prior Readings

According to BofAML’s new Bull & Bear Index investor sentiment toward risk assets is at a more bullish level today than 99% of all readings since 2002. The current reading of 9.6 (out of 10) is close to max bullish and thus triggers a contrarian “sell” signal for risk assets. In their view, the relative risk-reward of owning equities is unfavorable at this juncture. Since 2002 a “sell” signal of 8.0+ was on average followed by a 12% peak-to-trough correction in global equities within three months.

Via BofAML,

We believe risk is the permanent impairment of capital and that reducing risk when sentiment is bullish is fundamental to effective risk management.

The current level is extreme by any measure…

with a very clear divergence between sentiment and economic data…

Chart 4 below shows periods (grey bars) when B&B was in EXTREME BULL territory (8.0 or above). During these periods, we believe risk should have been taken off the table.

Here’s RBC Capital’s sentiment indicator:



Corporate insiders are not sentimental; they are selling (chart from ISI):



Corporate America’s Cash Hoard Continues Growing

(…) Cash on the books currently stands 3.2% ahead of the third-quarter, and 4.1% ahead of last year’s fourth-quarter. And that doesn’t even include the vast bulk of Apple’s highly contentious cash hoard, most of which is classified as long-term marketable securities.

As of the third-quarter of 2012, nonfinancial corporate America was sitting on $1.23 trillion in cash, according to FactSet.

Companies are reinvesting some of their profits. Capital expenditures are running 15% ahead of the third-quarter’s rate and 13% ahead of last year. (…)

What else are companies doing with their cash? Buying their own stock. Buybacks are running 16% ahead of the third-quarter’s pace, and 55% of the pace in the fourth-quarter of 2011, according to Silverblatt. This has had the effect of lowering the diluted share count, by 0.8% from the fourth-quarter of 2011. (…)

Pointing up  Europe’s labour market reforms take shape Spain is leading the way with the pace of economic change

(…) Nissan of Japan said last week it planned to invest €130m at its Barcelona plant to produce up to 80,000 passenger cars a year from 2014. Critical to Nissan’s decision was an agreement struck with Spanish trade unions to limit wage increases and recast working conditions in return for hiring more employees and boosting output.

Nissan is no isolated example. Ford, Renault and Volkswagen are expanding production to take advantage of lower labour costs that make Spain an increasingly competitive location for manufacturing and exporting cars.

Across the 17-nation eurozone, governments, businesses and unions are making efforts – some more convincingly than others – to restructure labour relations, open up product markets, redesign pension systems, raise education standards and encourage technological innovation. (…)

Much of this stems from a 2012 labour market reform that gave companies the upper hand in setting wages by revising a collective bargaining system based on national, regional and sectoral agreements between managements and unions. Spanish productivity is up 11 per cent since mid-2008, exports are at record levels and a current account once redder than a vintage Rioja is heading into surplus. (…)

Similar progress is visible in Ireland and Portugal and, to a lesser extent, in Greece and Italy. In France, where business competitiveness has steadily eroded since the euro’s launch in 1999, employers and unions reached a landmark deal last month on labour market reform. Although the French jobs market will remain one of the most heavily regulated in Europe, it was the first such agreement in decades and signalled that the anti-business rhetoric of the Socialist government elected last year is giving way to a more reformist vision. (…)


NEW$ & VIEW$ (29 JANUARY 2013)

Durable goods orders. Pending home sales. Chain store sales. Currency wars. Earnings watch. Investor sentiment.

U.S. Durable Goods Orders Jump at Yearend; Shipments Reach Record High

A doubling of defense bookings raised total durable goods orders by 4.6% (0.2% y/y) during December, a 0.7% rise had been expected. Outside of the defense sector, orders rose 1.2% (-4.5% y/y) last month but the 4.1% full-year gain was slower than a 12.3% advance during all of 2011.

Orders for nondefense capital goods jumped 3.8% (-12.3% y/y) in December; excluding commercial aircraft, nondefense orders ticked up just 0.2% (-4.3% y/y) and for the full year fell 0.5%.


Pointing up The important line is in the red rectangle. Non-def capex ex-aircraft +6.2% in the last 3 months!

Sad smile  U.S. Pending Home Sales Fall Sharply
Pending sales of single-family homes slumped 4.3% (+6.9% y/y) last month..

Pending sales of single-family homes slumped 4.3% (+6.9% y/y) last month after a little-revised 1.6% November rise, according to the National Association of Realtors (NAR). For all of 2012, sales rose 11.2% y/y. The rebound in the aftermath of the removal in 2010 of the home buyers tax credit has raised sales by one-third from the low.

The slump in sales last month was led by an 8.2% decline (-5.3% y/y) in sales in the West. Sales in the Northeast also were soft and fell 5.4% (+8.4% y/y), reversing the November gain. Finally, sales in the South were off 4.5% (+10.1% y/y) to the lowest level in three months.


Weekly sales (s.a.) have been falling every week since Christmas. I question the seasonal adjustment so I prefer to use the Y/Y change. The 4-wk m.a. has held up at +3.0% but only because of very poor comps last year.



Some are blaming the weather, as usual, but I suspect the increase in the payroll taxes plays an important role here.

A survey by RBC Capital Markets showed that 57% plan to reduce spending due to higher payroll taxes, and 25% don’t plan to adjust spending. Another 13% weren’t sure what they will do, and 5% expect to spend more.



Mohamed El-Erian: The ECB will come under pressure in the currency wars

(…) Having solved its urgent problem, the eurozone needs to deal with a new dilemma: that of an appreciating currency. There is a growing number of countries seeking to weaken their own currencies. Indeed, in the last six months, the euro has appreciated by 11 per cent against the US dollar and by 8 per cent in nominal trade weighted terms. It has appreciated by a lot more against the Japanese yen.

With growth already sluggish, the eurozone can ill afford a stronger currency. Sharp appreciation undermines economic activity – not only for export powerhouses such as Germany but also for countries such as Spain where, for the past eight quarters, the contribution of net exports has been positive. (…)

European politicians need to significantly accelerate policy reforms if they wish to maintain competitiveness in a safe and orderly fashion. This involves quickly moving from the design to the implementation of key measures. (…)

But, having averted an existential financial problem, politicians seem more interested to bask in their success than deal with remaining challenges. This understandable desire to savour the moment – and with it, the illusion of stability – is inevitably strong in the run-up to several key elections this year.

With politicians failing to manage the dilemma directly, it is only a matter of time until they again look to the ECB for help.

Expect the ECB to be pressed hard to join other central banks in actively seeking to depreciate the currency – by cutting the policy rate (currently 0.75 per cent) and quantitative easing of the type pursued by the Bank of England, the Bank of Japan and the US Federal Reserve.

This is not a road that the ECB will embark on easily. And if it does, it would seek to address a regional dilemma by adding to a global one.

Being a relative price, all countries cannot simultaneously weaken their exchange rates (except against gold, real estate and other “real” assets). And should the ECB feel forced to join collective attempts to do the impossible, the risks of a global currency war and related beggar-thy-neighbor outcomes would increase meaningfully.

Polish 2012 GDP Slowed to 2% on Consumer Demand, Exports

Poland’s economy grew at the slowest pace in three years in 2012 as the euro-area slump damped consumer spending, increasing pressure on the central bank to keep cutting interest rates.

Gross domestic product advanced 2 percent from a year earlier, when it climbed 4.3 percent, the Central Statistical Office said in a preliminary report in Warsaw today. That matched the median estimate of 36 economists surveyed by Bloomberg. The annual pace was the slowest since 2009, when GDP rose 1.6 percent. (…)

Pointing up Today’s data “masks a slump in domestic demand toward the end of last year that has seen household spending drop to its slowest rate since the early 1990s,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London, said in an e-mailed note. (…)

In December, employment fell for a second month, industrial output had its biggest slump in more than three years and retail sales fell the most since 2005. The jobless rate rose to 13.4 percent, the highest in almost a year. (…)

The zloty touched a four-year low against the euro last week after the central bank cut its benchmark to 4 percent on Jan. 9. (…)

Colombia Cuts Rate to 4% And Steps Up Daily Dollar Purchases

Colombia cut interest rates to the lowest level in Latin America to boost below-potential economic growth, while increasing daily dollar purchases to curb the peso’s appreciation.

India Central Bank Cuts Lending Rate

India’s central bank cut its key lending rate by a quarter of a percentage point to 7.75%, and also lowered banks’ minimum cash deposit requirement to a near 40-year low.


Saudi Arabia to Keep Crude Exports Stable Through 2030, Prince Says

The kingdom will be able to keep exports at the present level until at least 2030 without adding capacity, Prince Abdulaziz bin Salman said yesterday by phone from Riyadh. The nation’s crude production capacity is 12.5 million barrels a day, he said.

“We will maintain our current oil exports levels for the next twenty years and beyond despite the rise in demand,” the minister said. “Those who are forecasting the kingdom to turn into an oil importer are ignorant bordering idiocy.” (…)

The kingdom produced 9.57 million barrels of crude a day in December, down from 9.7 million in November, according to Bloomberg estimates. The kingdom exported 7.15 million barrels a day of crude in November, according to data from the Joint Organizations Data Initiative, which publishes figures for oil-producing and consuming nations.

Global crude markets will remain well supplied in 2013, Abdalla El-Badri, secretary-general of the Organization of Petroleum Exporting Countries, said yesterday in London. OPEC, which produces about 40 percent of the world’s oil, cut output by 465,000 barrels a day last month to 30.4 million, led by a reduction in Saudi Arabia, the group said in a Jan. 16 report. (…)

Demand for electricity is rising at 8 percent a year, according to government figures. Saudi Arabia uses natural gas in half of its installed power turbines, and crude and fuel oil for the rest, according to the electricity generation authority. The country sells crude to the local electricity company at $4.50 a barrel, and heavy fuel oil at $3.50, Prince Abdulaziz said.

Citigroup Inc. said in a Sept. 4 research report that Saudi Arabia risks becoming a net oil importer by about 2030 if it continues to use oil and its derivatives for 50 percent of its power generation and if electricity consumption keeps rising at 8 percent a year. Greater use of renewable or nuclear energy would reduce that risk, the bank said.


Earnings and Revenue Beat Rates for Q4 2012

This week we’ll reach the mid-point of the fourth quarter reporting period, and so far, the results have been pretty good.  As shown below, 63.9% of the companies that have already reported earnings have beaten earnings estimates.  If this level sticks, it will be the highest beat rate seen since the fourth quarter of 2010.

Even better than the earnings beat rate is the revenue beat rate.  As shown in the second chart below, 60.8% of companies have beaten revenue estimates so far this season.  While 60.8% is about inline with the average reading seen over the last ten years, it’s a very big jump from the sub-50% readings seen in the prior two quarters.


According to just-released data, equity mutual funds recorded net inflows for the third consecutive week trough Jan 23 (+1.4 billion in U.S. equities). The performance of the ETF sector was not as good,
however, with net outflows of $3.1 billion from U.S. stocks-related products during the week. As a result, total net investment in U.S. domestic equities was down $1.7 billion on the week. Note that bond mutual funds have yet to lose in popularity with more than $3.5 billion of net inflows.

The ETF and mutual fund data suggest a divergence of attitude between
institutional investors (ETF data) and retail investors (mutual funds). The latest AAII investor sentiment survey revealed that individual investors were the most bullish in two years last week. As today’s Hot Chart shows, the percentage of investors reporting to be optimistic for the next six months stands at 52.3%, more than one standard deviation above the historical average of 39%. From a contrarian standpoint, this development argues for a period of consolidation given that the S&P 500 is already up more than 5.3% this month and closed above 1500 last week for the first time since the onset of the recession.



From Bank of America Merrill Lynch:


He’s back: Conrad Black to host new weekly television show

Will the show be called Candid Camera? Winking smile


NEW$ & VIEW$ (14 Oct. 2011)


Storm cloud   Asia is center stage this am. Chinese authorities seem stuck with their form of stagflation. China Inflation Slows Minimally   China’s September CPI did not show much downward trend, +6.1% ToY and +0.5% MoM (+0.3% in August). Food prices were up 13.4% YoY, unchanged from August’s increase, and +1.1% MoM. Economists, who have been calling for peaking inflation since the spring now face a trendless stat. September’s producer price index was up 6.5% YoY, slower than August’s 7.3%. Non-food inflation “eased” to 2.9% from 3.0%.

So, the government is stuck with more signs that the economy will need help soon but sticky inflation. Unless you think like many economists this am that YoY CPI declining from 6.5% to 6.2% and to 6.1% is really positive. Remember that MoM CPI was 0.5%, 0.3% and 0.5% during the last 3 months. While that’s 5.3% a.r., it remains elevated to use Fed speak. They will err on the inflation fight for a while longer.

Storm cloud   New loans in China came in weaker than expected in September at Rmb470bn, down from Rmb550bn in August (China Lending Shrinks as Wen Wrestles With Inflation Over 6%). See yesterday’s write up on shadow banks.

Storm cloud   SAME FOR INDIA:   India Sept Inflation Remains High  India’s wholesale price index rose 9.72% YoY in September from a year earlier.  Food prices in September rose 9.23% YoY, and 1.5% MoM.


Storm cloud   WHILE ASIAN ECONOMIES ARE SLOWING:  Singapore Grows Slowly, Central Bank Eases Policy  Singapore reported meager growth for the latest quarter. The economy grew at annualized pace of 1.3% in the third quarter from the second, a weak bounce from a contraction of 6.3% in the second quarter.  The MAS said the weak external environment is likely to persist, and that the domestic economy will expand more slowly in 2012 and growth could be below its potential rate of 3%-5%. The central bank also said the slowdown in domestic economic activity will reduce tightness in the labor market and alleviate price pressures.

As a result, core inflation should gradually ease from an estimated 2.3% in fourth quarter this year to 1.5% at the end of 2012.


The MAS forecasts that core inflation is expected to come in around 1.5%-2.0% in 2012 (2.5-3.5% headline), compared to about 2.1% in 2011 (5% headline).



In line with the weaker global outlook, growth in Asia is expected to be imageslightly lower in 2011‒12 than forecast in April 2011, but the expansion should remain healthy, supported by domestic demand, and inflation is expected to recede modestly after peaking in 2011. For the region, growth is forecast to average 6¼ % in 2011 and 6¾% in 2012, about ½ and
¼ percentage point less than our April 2011 forecast.

Nevertheless, risks for the Asia and Pacific region are also decidedly tilted to the downside.

image image

In economies where such overheating pressures remain high (Figure 1.25), inflation remains above target, and inflation expectations have continued to rise (Figure 1.26), such as in China, India, and Korea, the current pace of monetary tightening remains appropriate.


Here’s the IMF analysis of Asian countries’ sensitivity to a Western slowdown:


Pointing up   EMERGING MARKET INVESTORS HAVE ALSO HAD THEIR BEAR MARKETS, when considering currency moves:



Storm cloud   COPPER: Simon Hunt remains a bear:

In general, fabricators are seeing a sharp fall in order books in Europe, across Asia, excluding Japan, and in many sectors in China, especially magnet and electrical wires. Their worries are such that they will be reducing their contracted requirements from producers from around 70% to between 40-50% for 2012.

On the other hand, to take one example, copper production in the Congo is forecast to increase from 498kt in 2010 to over 1.6MT in 2015. Yet, producers reduced premiums to Europe by 9% to $90! Premiums are high in Shanghai giving the appearance of a tight market, but this is more a reflection of holders of metal being unwilling sellers at these prices than a fundamentally tight market. There are also stories of large scrap stocks sitting at the ports.


Storm cloud   SPDEFICITS&P DOWNGRADED SPAIN at midnight yesterday, just in time to ruin dessert and Pacharán:   Though the Spanish government insists it will cut its deficit to 6% of GDP as promised, a growing number of independent economists believe it will fail to meet this target, possibly by a wide margin. Spain Credit Rating Cut by S&P on Weak Outlook: The financial profile of the Spanish banking system will weaken further, with the stock of problematic assets rising further.

Money   MORE BANK STRESS: At least 66 big European banks would fail a revised stress test and need to raise ~€220B ($302.3B) of capital, Credit Suisse analysts say.

Storm cloud   UK UNEMPLOYMENT reached 2.57 million in the three months to August, its highest level imagesince October 1994, pushing the unemployment rate up to 8.1%. Youth unemployment continued to rise towards the politically sensitive one million mark, increasing by 74,000 to reach 991,000, its highest since comparable data were first available in 1992. Youth accounts for nearly 40% of UK unemployeds!

Moreover, survey evidence from the KPMG/REC Report on Jobs, compiled by Markit, suggests the situation is likely to get worse in coming months. Recruitment agencies reported that demand for staff at employers had risen at the weakest rate for two years in September, as business confidence waned in the face of the increasingly gloomy economic outlook.



Pointing up   MOODY’S ANALYTICS had a conf call yesterday on Europe. Nothing really new but a few interesting charts (click to enlarge):


Clock   And for your agenda:



Rainbow   US RETAIL SALES came out this am. Not much time to analyze but nice to have them here today as they provide the only ray of hope today:

  • Retail sales jumped 1.1% in September. The prior month was revised up from zero to +0.3%.
  • Ex auto retail sales rose 0.6% with upward revisions in the prior month too.   Discretionary sales good but somewhat mixed.

Full US Census report here. 

Confused smile   BANK EARNINGS, DVAs, CVAs, ETC,   Q3 bank results will no doubt improve everybody’s accounting savviness. FT Alphaville:

The $1.9bn pre-tax DVA (debit valuation adjustments) gain ($0.29 per share after-tax) made the difference for JPMorgan’s “beat”: revenues of $1.02 per share, over forecasts of $0.91.

As the WSJ says, the old saw is that, under these rules, a bank could make a bundle by going bankrupt. No wonder investors were feeling confused. And that feeling is likely to be even worse when Morgan Stanley, Citigroup and Bank of America report, since the value of their debt fell even more during the third quarter.

[JPMHERD]So, even someone who is three sheets to the wind can see that the bank’s earnings “beat” relied on JPMorgan being able to book gains from its own debt falling in price (i.e. under the view that the bank could therefore buy back debt more cheaply). (…)

+ Noninterest expense included $1.0 billion of additional litigation expense, predominantly for mortgage-related matters.

+ JPMorgan is chalking up $1bn of Durbin fee losses in the next two years.

None of the above is likely to be “non-recurring”!! And Dimon admitted that he needs to pay the piper, just like all bankers (see also BUT, WHO’S THE PIPER?):

:We are sorry to have spent $8 billion on stock buybacks (as the stock has since fallen). We are willing to be punished for the mistakes (in sloppy mortgage-foreclosure procedures and record-keeping.)

Bank woes are not over, just yet:


Third quarter foreclosure activity increased  marginally from the previous quarter, breaking a trend of three consecutive  quarterly decreases that started in the fourth quarter of 2010. This marginal increase in overall foreclosure activity was fueled  by a 14 percent jump in new default notices, indicating that lenders are  cautiously throwing more wood into the foreclosure fireplace after spending months  trying to clear the chimney of sloppily filed foreclosures.

While foreclosure activity in  September and the third quarter continued to register well below levels from a  year ago, there is evidence that this temporary downward trend is about to  change direction, with foreclosure activity slowly beginning to ramp back up.


Pointing up   NOW, THAT’S CORRELATION (from BMO Capital):


Thumbs down   IAN MCAVITY: A real bear!

The early August death cross where the S&P 500 50-day MA crossed below the 200-Day MA does confirm a major trend rollover now that the 200-Day MA is declining in my view. (…)

Last week, Ned Davis Research (concluded) with a strong statement: “The US market drop has now met the NDR criteria for a cyclical bear market – a drop to new lows after a decline of at least 13% over 145 days. This is the 35th cyclical bear since 1900, and it is the 23rd to take place within a secular bear.”

(…) Putting the mean & median drop & duration of 22 such bears in the context of today’s DJIA would project the Dow down to 8160 by 6-Aug-2012 (mean) or 8493 by 24-Sep-12 (median).

In love   TIME TO GET SENTIMENTAL?  Bullish minus bearish advisor sentiment is the only valid sentiment reading in my view, and it is useful only when it gets in deeply bearish territory. Not quite the case, yet. See INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!.



Star   Ian McAvity tells his readers that in a 1992 contest to name a proposed new single European currency, he suggested the “Franc & Stein” since

it would be the French and Germans who would have to pick up the pieces when it blew up.



BCA Research posts their US equity capitulation index which suggests that equities are entering deeply oversold territory. Can Europe get its act together? Today’s New$ & View$ provide clues to this question.

In the short term, a rally in risky assets is possible. However, the durability of this rally depends on a clear solution to the euro area debt crisis and the performance of the global economy.
Most of our market indicators and our timing model are calling for a rebound in risky assets. For instance, the Capitulation Index for the S&P 500 is at a one-and-half-sigma undershoot. The corresponding index for the euro area stocks has plunged to levels similar to the early 2000s. In addition, the insider sell/buy ratio, bullish sentiment and breadth have all plunged to levels consistent with a cyclical market bottom. Meanwhile, the biggest risk today is whether Europe can get its act together. A credible plan with both ample sources of funds and ECB participation would lessen risk aversion, sending stocks higher. On the other hand, continued political bickering could lead to a bank run and a nasty selloff in stocks. As a result, our Global Investment Strategy service expects that hope and fear will buffet equity prices, with the S&P 500 oscillating wildly.