NEW$ & VIEW$ (4 NOVEMBER 2013)


We had two important U.S. stats last week: the manufacturing PMIs and car sales. Draw  your own conclusions:

The PMIs:

The Institute for Supply Management’s index of industrial activity edged up from 56.2 in September to 56.4 in October, reaching its highest level since April 2011.

The components of the ISM index were somewhat mixed. New orders and new export orders grew faster, while production and employment grew at slower paces compared with the previous month. Prices also increased at a slower pace. But economists still cheered.

(Bespoke Investment)

High five  Wait, wait: Markit’s U.S. PMI report

indicated “only modest improvement in business conditions”, “output growth weakest for over four years“, and “new orders increasing at the slowest pace since April.”



Car sales:

The seasonally adjusted annual sales pace for October was 15.2 million vehicles, up from 14.4 million a year ago but down from August and September’s pace, said researcher Autodata Corp.

High five  In reality, car sales are not showing any momentum (next 2 charts from CalculatedRisk):


High five  A longer term chart suggests that car sales are at a cyclical peak if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis):


This RBC Capital chart shows that even boosted incentives fail to propel sales lately. Can incentives get much higher?


So, taper or no taper?


Oil-Market Bears Are Out in Force The oil market bears are out in force today.

(…) According to Morgan Stanley’s analysis, the structure of the Brent market “is at its weakest point for this time of year since 2010,” and they point out that of the things currently keeping oil prices high—a weaker dollar, the aforementioned Middle Eastern instability and the wide difference between the U.S. and North Sea benchmark prices—all appear more likely to improve than get worse.



Fingers crossed  Gas prices have dropped 12% since July. They are 7% lower than at this time last year and in line with prices last Christmas. Welcome additional pocket money at this crucial time…image

…because income growth is very very slow.

US public investment at lowest since 1947
Republicans stymie Obama push for more spending

(…) Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy.

US public investment is at its lowest percentage share of GDP since post-WW2 demobilisation

Construction projects have taken the early hit as budgets come under pressure, with state and local government building fewer schools and highways

Emerging economies show diverging fortunes Brazil’s industrial production misses forecasts, fiscal deficit widens

Industrial production rose 0.7 per cent seasonally adjusted in September, government statistics agency IBGE said. The figure missed expectations for a 1.2 per cent rise, underscoring one of the myriad economic issues the country is facing.

World-Wide Factory Activity, by Country


China manufacturers squeezed as costs rise
Wage rises and renminbi strength weigh on companies

(…) On top of the stronger Chinese currency, wages in the Pearl River Delta are climbing at double-digit rates each year as factories compete for workers in a tight labour market.

Sean Mahon, managing director of an Irish company called Brandwell that owns several accessory brands and has been coming to the Canton Fair for 20 years, says his suppliers charge 20 per cent more each year for the 3,000 products – everything from umbrellas to underwear – that he sources. (…)

China Industrial Activity Weakening

CEBM’s October survey results indicate that aggregate demand has stabilized, but remains weak. The CEBM Industrial Sales vs. Expectations Index decreased from -4.9% in September to -8.1% in October, suggesting that the industrial activity has again weakened.

Investment was sluggish, while real estate and automobile sectors outperformed. Steel sales dropped substantially relative to the past two months’ sales volume, implying that the investment rebound observed over the past several months is losing steam. Automobile and residential home sales growth exceeded expectations.

In general, external demand was stable in October, but consumption remained weak. Freight forwarding agents reported positive shipment growth due to fee adjustments and shipments being delayed from September. However, absolute shipment volume M/M in October, as well as Y/Y growth, was flat. In consumer sectors, home appliance sales outperformed other products, but, overall, consumer demand remained weak.

Looking forward into November, the forward-looking CEBM Industrial Expectations Index (SA) decreased to -7.7% in November from -7.4% in October, suggesting enterprises have weaker expectations toward next month’s sales demand.


S&P updated its data as of Oct. 31 with 356 company results in. The beat rate rose to 69% from 67% the previous week. Beat rates are highest in IT (85%) and Consumer Discretionary (73%) and weakest in Consumer Staples (54%) and Utilities (59%). Factset calculates that

In aggregate, companies are reporting earnings that are 1.4% above expectations. Over the last four quarters on average, actual earnings have surpassed estimates by 3.7%. Over the past four years on average, actual earnings have surpassed estimates by 6.5%. If 1.4% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q4 2008 (-62%).

Q3 earnings are now expected at $26.77, down from $26.94 the previous week and from $26.81 on Sept. 30. It is curious to see good beat rates but flat earnings vs expectations. That could mean that misses are more significant than beats.

At this stage of Q3 2013 earnings season, 79 companies in the index have issued EPS guidance for the fourth quarter. Of these 79 companies, 66 have issued negative EPS guidance and 13 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 84% (66 out of 79). This percentage is well above the 5-year average of 63%.

But the average of the last 3 quarters is 79.5% at the same stage, not terribly different considering the small sample.

Q4 estimates keep being tweaked downward. They are now $28.38 compared with $28.52 on Oct. 24 and $28.89 on Sept. 30. Nothing major, so far. In fact, according to Factset

the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

Money  US bank securities portfolios back in black  Reversal of fortunes as Treasuries rally

Big US banks have seen billions of dollars of losses on their vast portfolios of securities reversed following the recent rally in the price of Treasuries and other assets.

Data released by the Federal Reserve on Friday showed unrealised gains in these portfolios had recovered to $8bn after plummeting into negative territory from June to September, when worries that the central bank might taper its bond-buying programme caused investors to sell securities including US government debt.

Profits on big banks’ securities portfolios plummeted from almost $40bn at the beginning of the year as the yield on the benchmark 10-year Treasury spiked to 3 per cent. The yield on the Treasury note has fallen back to 2.6 per cent in recent weeks, helping to push banks’ securities portfolios back into black.

The recovery will come as a relief to bank executives who had worried that the paper losses, which reached more than $10bn in early September, would translate into lower regulatory capital ratios under new Basel III proposals. (…)

The central bank revealed last week that it would include a sharp rise in interest rates when it next “stress tests” the largest US banks, suggesting it is concerned about rate risk in the financial system.


Europe Stocks Hit Five-Year High

Investors Return to IPOs in Force

Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.

October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. The coming week is slated to bring a dozen more initial offerings, including Thursday’s expected $1.6 billion stock sale by Twitter Inc., the biggest Internet IPO since Facebook Inc. FB -0.91% ‘s $16 billion sale in May 2012.

The 190 U.S.-listed IPOs this year have raised $49.2 billion, more than the $45 billion raised by the 132 deals during the same period in 2012. (…)

Many of these companies aren’t profitable. But investors increasingly are willing to roll the dice, particularly on technology firms that they say have the potential to “disrupt” the industry. (…)

So far this year, 61% of companies selling U.S.-listed IPOs have lost money in the 12 months preceding their debuts, according to Jay Ritter, professor of finance at the University of Florida. That is the highest percentage since 2000, the year the Nasdaq Composite Index roared to its all-time high of 5048.62. The index closed Friday at 3922.04.

Investors this year are putting a higher value on debut companies’ revenue than at any time since the crisis. The median IPO this year has been priced at five times the past 12 months’ sales, according to Mr. Ritter. That is the highest mark since 2007, when the median ratio was more than six times.

Companies holding their IPOs in the U.S. this year have posted an average 30% gain in share price, according to Dealogic. That compares with a 23.5% advance in the S&P 500 index.

Many IPOs this year have raised funds to pay back debt to private-equity owners rather than to invest in corporate expansion, a use of funds that many observers say is more likely to lead to stronger performance. Thinking smile So far this year, 41% of U.S.-listed IPOs have been of private equity-backed firms, according to Dealogic. (…)

In 1999 and 2000, the median IPO company was valued at more than 25 times past-year sales, according to Mr. Ritter. Many had revenue of less than $50 million. This year, fewer than 40% of IPOs fall into that category.

And so far this year, 3% of the 190 U.S.-listed IPOs have doubled in their first trading day. That compares with 22% of the 536 U.S. debuts in 1999. (…)

Three charts from The Short Side of Long

  • Most bullish newsletter sentiment since 2011 market top

  • Managers are holding extreme net long exposure towards stocks

  • Retail investor cash levels are now at extreme lows

Italy’s economic woes pose existential threat to euro zone

(…) I have lived in Italy for six years and have never seen its citizens worry so much about their children, whether those children are kids, university students or young adults starting families. There is no work, or work so beneath their skill levels they can barely muster the enthusiasm to get out of bed in the morning.

Every young Italian I know is leaving the country, or wants to. The U.S., Canadian and British consulates in Rome are seeing a surge in work-visa applications from desperate Italians.

Statistics released on Thursday confirm that Italy suffers a hellish employment problem. The overall jobless rate ticked up in September to 12.5 per cent, the highest since the records began in 1977. The youth jobless rate also rose, to 40.4 per cent, approaching Greek levels.

Even as the rest of the euro zone emerges from the economic crypt, Italy alone continues to dig its grave, tragically unaware of Warren Buffett’s maxim: “The most important thing to do if you find yourself in a hole is to stop digging.”

Besides being a textbook case for relentless wealth destruction, Italy poses an existential threat to the euro zone. Forget Greece; its economy is the size of a corner store compared with Italy. Italy is a Group of Eight country. Its economy is bigger than Canada’s. It is the euro zone’s third-largest player and second-biggest manufacturer, after Germany. If Italy goes down, the euro zone is finished.

This may sound like newspaper columnist hyperbole. It is not. Only a few days ago, the eminently sober-minded Joerg Asmussen, the German economist who sits on the executive committee of the European Central Bank, said this in a speech in Milan: “The future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels. It will be decided in Rome.” (…)

A recent article on the London School of Economics website by Roberto Orsi, a professor at the University of Tokyo, was refreshingly brutal in its analysis of Italy. He called it “the perfect showcase of a country which has managed to sink from a condition of prosperous industrial country just two decades ago to a condition of unchallenged economic desertification, total demographic mismanagement, rampant ‘thirdworldization,’ plummeting cultural production and complete political-constitutional chaos.”

Evidence that he is not exaggerating comes from the youth diaspora. Writing this week in The New York Times, Corriere della Sera newspaper columnist Beppe Severgnini noted that 400,000 university graduates have left Italy in the last decade.About 60,000 Italians flee Italy every year, most of them with university degrees. You can’t blame them.

Italy needs an economic revolution, pronto. What’s happening now – a slow-motion suicide – is still a suicide. (…)


NEW$ & VIEW$ (21 SEPTEMBER 2012)



Thumbs up Thumbs down Greek Bailout Fight Looms

A confrontation is brewing among Greece’s international creditors over who will provide the financing needed to keep the country afloat.

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece’s bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece’s debt-service burden. (…)

Northern creditor countries, led by Germany, the Netherlands and Finland are adamant that Greece won’t get more loans from them. Such loans would require the approval of Germany’s parliament, where Chancellor Angela Merkel fears many of her center-right allies would revolt, causing a government crisis.(…)

Spain Sale Improves Funding Prospects

(…) In a sign that the effects of the ECB’s pledge are allowing Spain to continue to access debt markets, the country’s treasury sold €4.8 billion ($6.26 billion) of bonds, above its €3.5 billion to €4.5 billion target. The offer received €8.577 billion in bids.

The ECB’s pledge to buy bonds with a maturity of up to three years encouraged Spain’s treasury to launch a new three-year bond, maturing in October 2015 and carrying a coupon, or scheduled interest payment, of 3.75%. This bond accounted for the bulk of the funds raised at Thursday’s auction, with the rest coming from the sale of an existing 10-year bond. (…)

Data from before Thursday’s auction show Spain had borrowed funds at an average cost of 3.87% so far this month, down from 5.75% on average in July, according to Jean François Robin, strategist at Natixis. Mr. Robin said ECB President Mario Draghi’s June 26 pledge to do whatever is needed to safeguard the euro “has clearly brought about a complete sea change as regards Spain’s funding costs.”

Spain has completed about 82% of its annual gross fundraising target of €86 billion for 2012, but some investors believe the country could soon need financial support from the European Union as Madrid faces a worsening recession, high borrowing costs and looming debt repayments, including about €30 billion in October. Spain has requested a euro-zone rescue loan of as much as €100 billion to overhaul its ailing banks, which are still reeling from a 2008 property-market crash.

On Thursday, International Monetary Fund Managing Director Christine Lagarde said a report on Spain’s banking sector due this month will show that recapitalization needs are lower than many feared, and close to projections of around €40 billion made by the IMF in June. (…)

The rift between Catalonia and Spain is expected to escalate, and analysts say that the drop in Spain’s financing costs may be short-lived, particularly if Moody’s Investors Service were to cut Spain’s debt rating to below investment grade, making it the first of the three major ratings firms to lower Spain to junk level.

A decision by Moody’s is likely by the end of the month. Such a move would further damp demand for Spanish debt.

Pointing up  That said, it sure looks like Spain is lining itself up for the big request:
EU in talks over Spanish rescue plan
Brussels is helping Madrid draft new economic reform policy

EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme that will be unveiled next week.

According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

Exclusive: Spain eyes pension reform with aid package in sight

Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said.

(…) Sources with knowledge of the government’s thinking said Rajoy’s comments were a sign that his stance was shifting.

“He just said that he would not cut the pensions. But did you hear anything else? We both know that there are several ways of cutting. One is to simply leave them steady against inflation,” said one of the sources. (…)

Call me  EU Bailout Fund to Launch Without Leverage Options

Europe’s permanent bailout mechanism is almost certain to start its life next month without the two leverage vehicles that were agreed for its temporary predecessor because of renewed Finnish concerns about its exposure to the funds, several people familiar with the situation said.

The leverage options were designed to allow the euro zone to mobilize far more than the EUR500 billion ($649 billion) lending capacity ceiling on the new bailout fund, the European Stability Mechanism, by offering extra protection to investors. (…)

Finance ministers from the euro zone discussed transferring the leverage vehicles to the ESM at a meeting in Cyprus last Friday. According to officials, there was broad support for the idea but objections from Finland blocked agreement.

One EU official said he believes Finland’s objections could be worked out. However, with the ESM due to be launched Oct. 8, the leverage vehicles now won’t be included in the ESM guidelines that will detail the tools available to the new rescue fund and the conditions for using them, two officials said.

That means the leverage vehicles aren’t likely to be available for use if a broader Spanish request for a bailout from the ESM were to come soon. (…)

Surprised smile  Italy slashes growth forecast for 2012
Rome expects 2.4% contraction, twice as deep as it previously estimated

Rome also revised sharply upwards its predicted public deficit for this year from 1.7 per cent of gross domestic product to 2.6 per cent, and from 0.5 per cent to 1.8 per cent in 2013, underlining how tough austerity measures have made fiscal consolidation more difficult to achieve.

It predicted the economy would continue to shrink next year, by 0.2 per cent, rather than grow by a modest 0.5 per cent.



Jobless Claims Drop, Remain Elevated

Initial unemployment claims fell 3,000 to a seasonally adjusted 382,000 last week but remain high, showing the labor market is struggling to sustain improvement, while leading indicators dropped 0.1% in August.

The four-week moving average of claims-—which smooths out weekly data—increased by 2,000 to 377,750. That is the highest level since the week ended June 30.


Yesterday’s Philly Fed Survey results were quite weak. Hopefuls jumped on the 6-m forecast to which I give little attention. Doug Short’s 3-months moving average plot  smooths out the Index monthly volatility.

Click to View

And Scott Barber displays the details:


See anything to cheer about there?


KB Home Reports a Profit

KB Home posted a fiscal-third-quarter profit as the builder delivered more houses at higher prices.

Orders were up 3.4% to 1,900 homes, and backlog—an indication of future business—climbed 33%.


Storm cloud  China Slowdown Seen Longer Than in Crisis by State Economist  China’s economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said.

“The slowdown will definitely extend into the first quarter of next year,” said Yuan, 58, who advises the government without being directly involved in policy making. “That will provide a good starting point for the new generation of leadership to make a turnaround, because things can’t get worse.” Sarcastic smile

(…) “China’s medium and small-sized businesses are finding it increasingly hard to borrow money from banks — the most fundamental part of the economy is suffering,” Yuan said.

Storm cloud  China Money Rate Sees Biggest Weekly Increase Since February  China’s overnight money-market rate had the biggest weekly advance in seven months on speculation banks are hoarding cash to meet quarter-end requirements.

Fingers crossed  IEA allays oil fears with Saudi pledge
Energy watchdog’s comments come as crude hits six-week low


Oil priceMaria van der Hoeven, executive director of the Paris-based IEA, told an energy conference on Thursday that the oil market was “sufficiently supplied” with Saudi Arabia, the US and Canada delivering more crude to the market. (…)

“The Saudis remain the key factor in dictating the eventual price of crude,” said Mark Thomas, head of European energy at Marex Spectron, the commodities broker. He added that investors ultimately needed to “listen to and watch carefully Saudi price guidance”.


A Golden Cross for Gold

Fittingly, gold has experienced a “golden cross” today, which is a technical signal that occurs when the 50-day moving average crosses above the 200-day moving average as both moving averages are rising.   Market technicians use the “golden cross” as a bullish indicator, but has it historically been bullish for gold?

Also supportive at this time:image


MasterCard warns at an investor meeting that second-half revenue growth will come in lower than the pace it saw in Q2. The core of the problem could be that it sees worldwide processed transaction growth falling to 24.9%, down from its previous pace of 29.3%. The company also cites foreign exchange as a headwind, forecasting a 5-6 ppt negative effect in Q3 and 3-4 ppt in Q4. (webcast, slides)  (SA)




Steaming mad Brazil’s finance chief attacks US over QE3
Mantega says Fed could restart ‘currency wars’

Brazil GDP growth, Brazilian real against the dollarGuido Mantega, Brazil’s finance minister, has warned that the US Federal Reserve’s “protectionist” move to roll out more quantitative easing will reignite the currency wars with potentially drastic consequences for the rest of the world. (…)

He cited Japan’s decision this week to expand its own QE programme, coming on the heels of the Fed’s decision to launch further QE last week, as evidence of growing global tensions. “That’s a currency war,” he said. (…)

“I would say today the currency is at a reasonable value, still overvalued against a basket of Brazil’s trading partners, but at current levels [it is] helping make Brazilian companies more competitive.” (…)

“The US, Europe and the UK are more protectionist than Brazil,” he said.

Money  Long-term corporate bonds – dirty thirty
Companies are in a rush to lock in as much long-term debt as they can

US 30-year corporate bond salesThey have sold more than $100bn of 30-year investment-grade corporate debt in the US so far this year, on pace for an annual record. Average yields on long-term corporate bonds are at 4.5 per cent, according to a Barclays index. (…)

But even if the debt is issued by a rock-solid company, this is a risky bet on interest rates. Remember the bond maths. Novartis this week sold 30-year bonds that pay a fixed 3.7 per cent; they are trading at almost $102.

If interest rates on equivalent bonds rise just 2 percentage points in five years’ time – well within historical ranges – the bond price will fall to about $75. Want to get par back? See you in 2042. (…)

Underfunded pension managers who lock in low yields will struggle to boost returns and close the funding gap when rates rise. Paper losses will be crystallised for mutual fund investors if the funds’ shareholders get spooked and start selling, which would force the manager to sell bonds at a loss. (…)

Punk  Funds Leap Beyond Benchmarks

With bond yields shrinking, many mutual funds have found a way to look better: Invest in riskier bonds but continue to measure the funds’ performance against benchmarks composed of safer investments.

Benchmarks are the main tool investors use to measure mutual funds’ performance. But bond funds are free to choose—and change—their benchmarks.


Here’s Moody’s take on high yield spreads. I am not sure about the “positive outlook for capacity utilization” however.

During the previous recovery, capacity utilization peaked at 80.8% in April 2007 and corporate credit spreads bottomed soon thereafter. Similarly, in the 1990-2000 business cycle upturn, the capacity utilization rate peaked at the 84.9% of November 1997, which was close to September 1997’s cycle bottom for the high yield bond spread.

Given the positive outlook for capacity utilization, the recent 528 bp spread of high yield bonds seems wide. However, seemingly excessive caution is warranted by above average macro and political risks. In addition, some question the sustainability of a now record low 6.2% composite speculative grade bond yield if only because of its exceptionally low benchmark Treasury yield. Nevertheless, the expected containment of inflation and the likelihood of subpar economic growth weigh against sharply higher Treasury yields.


BTW, Markit on its recent U.S. PMI:

imageThe US remained something of a bright spot, with the PMI unchanged on its August reading of 51.5. However, the PMI remains well below levels seen earlier in the year and the ongoing sluggish pace of expansion meant the manufacturing sector saw the worst performance for three years over the third quarter as a whole. Moreover, the output sub-index of the PMI fell to its lowest since September 2009 pointing to a near-stagnation of production.


(…) The following important measures go into effect at the beginning of calendar 2013 under existing law. Because the fiscal year begins on 1 October, the changes will affect only three quarters of the 2013 fiscal year.

1. Individual income tax rates will rise for ordinary income, capital gains, and dividends. In addition, certain tax credits will shrink and the alternative minimum tax (AMT) will affect a larger number of taxpayers. The Congressional Budget Office (CBO) estimates that total revenue from individual income taxes will rise from 7.2% of GDP in fiscal 2012 (which ends 30 September) to 9.0% in 2013 and 9.4% in 2014, the first full fiscal year the new tax levels would be in effect.

2. The Social Security payroll tax paid by employees will rise from 4.2% of income to 6.2% (on income up to $110,100), resulting in total social insurance taxes (also including Medicare) going from 5.5% of GDP in 2012 to 6.0% in 2013 and 6.2% in 2014.

Primarily because of these two tax increases, but also due to a number of smaller measures, the CBO estimates that total government revenue will rise from 15.7% of GDP in 2012 to 18.4% in 2013 and 19.6% in 2014, a rise of about 4% of GDP in just two years.

3. An automatic reduction in discretionary spending in 2013 and a cap on spending growth thereafter that were included in the Budget Control Act of August 2011 will, together with other measures including a reduction in payments to physicians for Medicare and the expiry of extended unemployment benefits, result in total spending falling from 22.9% of GDP in 2012 to 22.4% in 2013 and 21.9% in 2014.

The steep increase in revenues and the spending reductions/caps, if actually implemented, would result in the budget deficit falling from 7.3% of GDP in fiscal 2012 to 4.0% in 2013 and only 2.4% in 2014. The 4.9% reduction in the deficit over two years would be unprecedented since the end of the Second World War and is what has been referred to as the “fiscal cliff.” It would result in government debt as a percentage of GDP peaking in 2014 and declining thereafter. The economic effect of this fiscal scenario would be a recession, with the CBO estimating a drop of 0.3% in real GDP during calendar 2013.

GOOD QUOTE via Raymond James’ Jeffery Saut:

“Everyone kept saying ‘a top is not in place yet.’ They persistently pointed to the ‘normally reached’ levels of this or that statistic that were not yet there to reinforce their desire to remain bullish. … Apart from statistical measures of increasing blindness, this unwillingness to acknowledge what they themselves were already feeling revealed a comfortableness, a confidence, a conviction that whatever was happening – short-term survivable dips – would continue … until ‘the top,’ like a strip tease artiste of our youth would with decorum appear on stage, bow, and then, accompanied by applause from all the bulls eager to cash in on their excitement, would begin to twirl its statistical tassels in front of everyone.

I’ve gotten so old I can’t remember the names of those ladies at the Old Howard, but I can remember that all you got was a flash of this or that, before they waltzed off. Stock market tops are like that. You know it’s there somewhere if you squint hard enough, but you never quite see it, so you keep waiting for more. And then, in the end, as the curtain comes down on the bull market you realize that the one rule about tops is not that they provide this or that signal, but that they come before anyone is ready.”

… Justin Mamis


NEW$ & VIEW$ (30 July 2012)

Storm cloud  [image]Weak Economy Heads Lower

The U.S. economy slowed sharply in the second quarter, growing just 1.5% as consumers slashed spending and businesses grew more cautious about hiring and investing.

One of the biggest obstacles to recovery is a dearth of consumer spending, which accounts for two-thirds of demand in the economy.

Spending rose 1.5% in the second quarter, lower than 2.4% in the first, reflecting weaker demand for cars and big-ticket items. A big reason is the stagnant labor market. Employers added fewer jobs in the second quarter than they have since the labor market began recovering in 2010.

Plate  Sad smile  Restaurants Blame Weak Consumer Confidence for Sales Slowdown  Several typically-resilient U.S. restaurant chains are putting a face on the nation’s slower economic growth, reporting a pullback in customer traffic growth in June as consumer confidence weakened–a trend that seems to have bled into July.

Starbucks’ Chief Executive Howard Schultz said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July.

Storm cloud  Federal Spending Cutbacks Slow Recovery

Falling military spending and the end of federal stimulus programs are further slowing the already weak U.S. economic recovery.

Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.

State and local governments are projected to receive $20.8 billion in federal stimulus funds in the 2012 fiscal year, ending in September, down from a combined $180.7 billion in fiscal 2010 and 2011, according to the Government Accountability Office. In the 2013 fiscal year, stimulus funding to states and localities will fall to a projected $14.3 billion.

At the same time, military spending has fallen for three straight quarters as wars in Iraq and Afghanistan have wound down and as the Pentagon prepares for further budget cuts.

Federal employment, meanwhile, is falling for the first time in the recovery. The biggest cuts are coming among postal workers, who count as federal employees but aren’t funded out of the federal budget. But even removing the Postal Service, federal employment is down by 34,000 in the past year—a small number in the context of the overall economy but enough to push public-sector payrolls into negative territory in June for the fourth consecutive month.


David Rosenberg:

How can it possibly be that the housing market is showing a durable recovery when it is still taking a median of eight months for the builders to find a buyer upon completion of the unit? Up until April 2008 – in the midst of the Great Recession – a number this high was unheard-of, having happened but once previously and that was the peak of the previous housing market meltdown in June 1991.


Secret telling smile  Germany, France Back Pledge to Save Euro

The public display suggests that Mr. Draghi’s comments were part of an orchestrated effort among the region’s key power centers to calm restive markets.

Mr. Draghi will meet Bundesbank President Jens Weidmann in the next few days to discuss the possibility of the ECB buying government bonds simultaneously with the euro zone’s bailout fund, the person said.

Mr. Schäuble said he welcomed the notion that “the ECB will grasp the necessary measures within its existing mandate to secure the euro.”

High five  But the FT warns about over-enthusiasm:

Still, senior eurozone officials cautioned market hopes that the ECB was preparing to restart its long-dormant bond-buying programme as soon as next week, when the ECB’s governing council meets in Frankfurt, were likely to be disappointed.

Wolfgang Schäuble, the German finance minister, hinted at that unspoken bargain on Friday, releasing a statement saying that while he welcomed Mr Draghi’s commitments, there were “preconditions” to any ECB action.

“The precondition is that politicians take the necessary measures to address the financial and confidence crisis,” Mr Schäuble said. “First and foremost are the reform efforts of the member countries themselves,” he added, mentioning recent efforts by both Spain and Italy.

Fingers crossed ECB stirs expectations ahead of summit
Draghi to meet Bundesbank chief before Thursday’s meeting

But those expecting action as early as Thursday’s governing council meeting could be disappointed. The ECB will want to see more from governments, perhaps purchases of sovereign debt by the European Financial Stability Facility, the eurozone’s temporary rescue fund, and a stronger commitment from Madrid to tackle its twin banking and economic crises, before it steps in.

The ECB president’s more aggressive stance has split the governing council of top central bank officials.

The bond buying programme, dormant for four months, was off the agenda at recent council meetings and Mr Draghi’s hints of a restart astonished some members. Germany’s Bundesbank quickly objected, though Mr Draghi has the support of Angela Merkel, the German chancellor, and Wolfgang Schäuble, finance minister.

Goat  Euro zone crisis heads for September crunch


Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting.

In September, a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.

“In nearly 20 years of dealing with EU issues, I’ve never known a state of affairs like we are in now,” one euro zone diplomat said this week. “It really is a very, very difficult fix and it’s far from certain that we’ll be able to find the right way out of it.” (…)

European officials have spent the past few days issuing a series of statements declaring they will act to halt the crisis. (…)

“For two years we’ve been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak,” the diplomat said. “But now the leak has got so big that we can’t pump air into the raft quickly enough to keep it afloat.” (…)

September 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.(…)

Lightning  Spain’s Economy Contracts More Sharply

The euro zone’s fourth-largest economy contracted 0.4% from the first quarter and 1% from the second quarter of last year. In the first quarter, Spain’s economy had contracted 0.3% on a quarterly basis and fell 0.4% on an annual basis.

imageSpain’s austerity drive also helped drive the country’s harmonized Consumer Price Index to 2.2% in July from 1.8% in June, breaking a recent trend of falling inflation, according to preliminary INE data.

Energy prices—traditionally a key driver of inflation in Spain which is highly dependent on foreign oil and gas—fell, but higher drug prices sent the index well above the 2% mark seen by the European Central Bank as consistent with price stability. This followed earlier increases in government-mandated prices for subsidized drugs, a step that seeks to lower Spain’s massive government budget deficit. (Chart from Reuters)

Lightning  Take Heed of IMF’s Worst-Case Scenario for Spain  The IMF’s warned Friday that “downside risks dominate” Spain’s economic outlook, despite encouraging efforts by both Madrid and the EU to restore the country’s prospects.

(…) the IMF estimated that if growth were to fall one percentage point lower than forecast, its debt burden could jump by 17%.

Money  Greece Seen Facing €30 Billion Shortfall

Greece’s chronic recession and the receding hope of an economic recovery have blown a hole of at least €30 billion in its financial rescue plan, officials familiar with the situation said.

The last analysis made by Greece’s creditors forecast that, in a base-line scenario, Greece’s ratio of debt to gross domestic product would still be over 116% in 2020. The IMF’s alternative, more pessimistic scenario put it at 145.7% by that time. As it is, the economy is undershooting even the pessimistic scenario, and will shrink by 7% rather than the IMF’s pessimistic forecast of 5.2%, according to Prime Minister Antonis Samaras.

Lightning  German banks cut back periphery lending

Cross-border lending by German banks to the weaker parts of the eurozone has dropped by nearly a fifth since January and now stands at the lowest level since 2005, according to new central bank data.

Between January and the end of May, German banks cut their net lending to Greece, Ireland, Italy, Portugal and Spain by €55bn to a total of €241bn, Morgan Stanley’s analysis of Bundesbank figures show.

Country by country lending statistics were not available for French banks, but Morgan Stanley found their net cross-border lending to the rest of the eurozone has fallen by half since April 2010 and stood at €489bn at the end of May.

Pointing up  OK, after all the above, two MUST READs that truly summarize the situation (clink on links for complete free articles)

Only Mario Draghi’s ECB can avert global calamity before the year is out

Mario Draghi has promised the moon. The European Central Bank’s council had better deliver on his pledge this week. If it does not, the crisis will surely escalate out of control in August or soon after.

The only issue that matters at this late stage is whether Germany is willing to let the ECB step up to its responsibility as a global central bank after two years of ideological posturing and take all risk of sovereign default in Spain and Italy off the table – which it can do easily enough once it stops playing politics and obeys the “financial stability” clause (Article 127) of the Lisbon Treaty.

That is to say, whether Latin states are willing to mobilize their majority power on the ECB’s council to force a change in policy over German protest, or lamely let themselves be picked off one by one in serial disasters like the death of the Gold Standard in 1931.

Then, read this Der Spiegle piece:

ECB Divided over Efforts to Save Euro

Now Draghi is apparently prepared to lend a hand to the hapless politicians. Under his plan, which essentially creates a new form of cooperation between governments and monetary watchdogs, both of Europe’s bailout funds — the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) — and the ECB will intervene jointly in the bond markets in the future to bring yields down.

What sounds like a great success is actually a sign of weakness. If the ECB starts buying up the government bonds of highly indebted euro countries again, it won’t just be yielding to the pressure of European politicians. It will also be resorting to a tool that, in the most recent past, has primarily produced one outcome: discord within the ranks of the ECB. As Germany’s central bank, the Bundesbank, noted last week, Draghi’s proposal is a “problematic” instrument.

Thumbs up Thumbs down After reading the whole comment, if you can’t decide whether you should buy stocks or not, here’s a graphical hint to help you assess your odds:




Storm cloud  Japan’s Industrial Output Posts Fall

The 0.1% decrease in June, adjusted for seasonal factors, was worse than a 1.6% increase predicted by economists surveyed by Dow Jones Newswires and the Nikkei Stock Average. The disappointing result in the data released by the Ministry of Economy, Trade and Industry Monday follows a revised 3.4% decline in May, and was the third consecutive monthly decline. Surprised smile

In announcing the result, METI downgraded its assessment of industrial production, saying output is “flat” compared with its previous view that it was in a recovering trend.



S&P’s most recent earnings update (July 26) shows that 66% of the 282 companies having reported beat toned down consensus while 22% missed. Q2 earnings are now estimated at $25.42, up 2.3% from last year’s $24.86.

But Factset adds:

Bank of America is the largest contributor to earnings growth in both the financial sector and the entire S&P 500. The company reported actual EPS of $0.19, compared to a year-ago EPS loss (-$0.90).

Pointing up Excluding Bank of America, the earnings growth rate for the index would fall to -1.5%.

In terms of revenues, just 43% of companies have reported actual sales above estimated sales. Over the past four quarters, 63% of companies in the S&P 500 reported actual revenue above estimated revenues on average.

[image]S&P calculates that Q2 revenues are on track to reach $270.27, +2.6% YoY, a big slowdown from +6.6% in Q1 and +7.9% in Q4’11. Note that sales were seen reaching $276.20 just one week ago, a 2.1% markdown. Energy companies’ revenue growth rate of +10.5% in Q2 helps the blended total. The other 9 sectors are showing revenue growth of +1.4% in Q2.

Operating margins are estimated at 9.4% in Q2, flat YoY.

Factset warns again:

Q3 EPS Guidance: Negative Start
Of the 60 companies that have issued EPS guidance for the third quarter, 47 have issued projections below the mean EPS estimate and just 13 have  issued projections above the mean EPS estimate. Thus, 78% of the companies issuing guidance to date for Q3 2012 have issued negative guidance. This percentage is well above the percentages recorded in Q2 2012 (70%) and Q1 2012 (60%).


Based on current estimates, the estimated earnings growth rate for the index for Q3 2012 now stands at -1.6%. There has been a steady decline in the growth rate over the past four months. On March 31, the estimated earnings growth rate was 4.8%. By June 30, the estimated growth had declined to 1.7%. Today, it stands at -1.6%.

Dollar’s Strength Eats Into Corporate Bottom Line

(…) But in the past quarter, the dollar gained much more quickly than expected. Furthermore, that newfound strength isn’t expected to fade, which is making companies and their investors take notice.

At Colgate, which reported a narrow 0.8% increase in profit in the past quarter, currency issues cut its bottom line by 9%, Chief Executive Ian Cook said in a Thursday conference call with analysts. If exchange rates remain where they are, the full-year hit to profits will be 6% to 7%, he said.

Dow Chemical said its profit fell to $734 million in the second quarter from $1.1 billion a year earlier, with currency accounting for half of the drop.

The damage is done because sales in places like Europe or Mexico aren’t worth as much when translated back into stronger dollars. Meanwhile, dollar-based costs don’t get any cheaper. (…)

“The reason why you can’t offset the kind of significant foreign-exchange swings that we had in the second quarter was the speed of the change,” Mr. Cook said. “You can’t just go to market on Monday morning and take your prices up with the retailer, never mind the competitor comparison.”

The dollar had a banner second quarter, gaining 5% against the euro, which traded around $1.24 on Friday.

Revenue Misses Bode Ill for Corporate Bonds

Companies are also cutting their forward outlooks for financial performance. Barclays built an index of how company outlooks have changed, based on the relative number of companies that see their outlooks as improving, worsening, or remaining neutral over the past three months. It says this index of financial outlooks has turned negative after spending most of 2010 and all of 2011 in positive territory. While the index has been volatile, Barclays says it’s also been reasonably predictive of credits spreads two to three months down the road. From Barclays:

As more negative earnings results are announced, we expect that more declining outlooks will roll into the measure while more of the optimistic outlooks from the prior quarter roll off. This will take the outlook index even more negative, suggesting further pressure on spreads over the next several months. The outlook index has historically shown significant momentum, with a 70% chance that it will fall again after dropping in a month.

Barclays says its model suggests high-grade corporate bond risk premiums widening to 125-130 basis points over the next two months, implying more than 15 bps of widening from Thursday’s close of 111bp. “While we don’t see the model as precisely predictive, it provides another argument, along with the Europe sovereign crisis and weak macro data, against any meaningful tightening in U.S. spreads,” Barclays says. “Until corporate outlooks begin to improve, we see more potential for downside than upside for investment grade credit.”

    S&P cuts outlook on 7 Canadian banks

    “A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative www.golfsthyacinthe.compressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”

    Left hug Right hug Social-Media Frenzy Fizzles Wilted rose

    The concerns are many. Revenue and user growth are slowing, even at Facebook, the supposed paragon for a new era of media and advertising. Aggressive spending on people and technology is denting profits. Impulsive acquisitions and unconventional accounting prompt questions about executive judgment.


    Winking smile  GERMAN AUSTERITY

    In a nod to austerity, Mrs Merkel sported the same dress – a petrol-blue full-length gown – to the Bayreuth Festival that she wore to the same event four years ago. (Daily Telegraph)


    NEW$ & VIEW$ (13 Feb. 2012)

    Thumbs up  “GREXIT”  Thumbs down

    Storm cloud   Japan’s GDP shrinks 2.3% in fourth quarter
    Economy squeezed by strong yen and low demand

    Preliminary government figures showed that real gross domestic product fell 0.6 per cent between the third and the fourth quarters, dragged down by a 3.1 per cent fall in exports and a 0.3 per cent decline in private inventories.

    That is equivalent to a 2.3 per cent fall in GDP on an annualised basis, significantly worse than consensus forecast of a 1.3 per cent decline. The data also showed sluggish public investment, which fell 9.5 per cent on an annualised basis.(…)

    Top executives at Toyota and Nissan have claimed it is impossible to export cars from Japan profitably at current exchange rates. At Toyota’s third-quarter earnings briefing last week, Takahiko Ijichi, a senior managing director, said business conditions remained “extremely tough”.


    Bloomberg had this story last Saturday morning:

    Wuhu Waives Tax, Subsidizes Buyers as First Chinese City Easing Home Curbs

      Wuhu in eastern China will waive a deed tax and subsidize some home purchases, becoming the first city in the nation to ease property curbs this year even as the central government reiterated plans to maintain restrictions. “Local governments, especially those third-tier cities, rely largely on the property sector for economic growth; they are facing a lot of pressure now,” Bai said. “More cities will follow suit this year.”

    This morning, the FT reports that Beijing forced the city to backtrack:

    But within two days of its announcement, the central government sent an inspection team to Wuhu. Late on Sunday the city posted a short notice saying that it would postpone implementation of its subsidies and tax cuts “in order to ensure the stable, healthy development of the property market”.

    Underlining that Beijing was not yet ready for a relaxation, Premier Wen Jiabao was quoted by state media on Monday as saying that the government “would not waver in encouraging housing prices to return to a reasonable level”.

    Pointing up   Yet, it looks like the beginning of the end and Beijing will try to gradually relax its grip on housing, but at its own pace. And this is one of the reasons:

    China extends loans to avoid mass default
    Provinces and cities owe a mountain of debt but will get extensions

    Critics have pointed to dangers in the loan rollover plan. Repayment delays will hinder banks’ lending abilities. Some bad loans will simply be prolonged instead of recognised. Problems will remain concealed.

    Standard & Poor’s has warned the extension would be a “backward step” for the Chinese banking sector that could “shake investors’ confidence”.

    Finally, this from the horse’s mouth (my emphasis):

    Chinese Premier Wen Jiabao said that the government is paying close attention to the economic situation in January and the first quarter of this year. “We have to make a proper judgment as early as possible when things happen and take quick action,” Wen said, adding fine-tuning of macro policies should begin in the first quarter.

    Clock  February 13 looks right in Q1.


    China registered a capital and financial account deficit in the fourth quarter, indicating a net capital outflow, according to preliminary data released by the State Administration of Foreign Exchange (SAFE) on Friday.

    SAFE reported a $47.4 billion capital and financial account deficit during the period, compared to a $66.2 billion surplus in the third quarter.

    Surprised smile   That’s a 113.6B swing in one quarter.

    Foreign exchange reserves increased by $11.7 billion in the fourth quarter, adjusted for exchange rates and asset price fluctuations, SAFE said.

    According to data released by the central bank in January, China’s foreign exchange reserves declined on a quarterly basis for the first time in more than a decade, falling to $3.18 trillion at the end of last year from $3.2 trillion at the end of September.

    Just kidding   THE “GREAT DISCONNECT”

    Many pundits are commenting on the “surprising” disconnect between equity prices and Treasury rates. Joe Weisenthal summarizes the puzzleness of many in his Feb. 7 post which displayed the chart below (the green line is the S&P 500; the orange line the yield on 10Y Treasuries).

    It’s weird because you’d think that as stocks rose — indicating increased risk appetite and expectations of growth — that yields would rise too, since demand for risk-free instruments would want. But that hasn’t happened. Stocks have had a really nice run, but yields have gone nowhere.chart

    Two things need to be understood on the relationship between equities and interest rates.

    1. Interest rates generally reflect trends in inflation: rising inflation = rising rates and vice-versa.
    2. Price/Earnings multiple vary inversely with inflation as the Rule of 20 clearly shows.

    However, rapidly rising inflation rates also impact earnings positively, pushing equity prices higher even though PE multiples are shrinking.

    So, generally, equities should move in opposite direction of interest rates except when:

    1. inflation accelerates rapidly, which also helps accelerate earnings growth which may offset much of the PE contraction resulting from rising inflation;
    2. recession causes earnings to fall faster than inflation is slowing as a result;
    3. the Fed succeeds in prying long term rates down.


    So the current disconnect is certainly not unusual. In fact it is rather the norm when inflation is contained absent a recession. What is unusual this time is that real treasury yields are negative, presumably because the Fed has been a huge buyer since October 2011, intentionally driving long-term rates down.

    Such low long term interest rates, especially negative real rates, tend to push investors toward riskier investments such as high yield bonds and equities, potentially pushing PE multiples above fair value although this is not the case now.

    Operation Twist is thus a success so far.

    Pointing up  Punch   MOODY’S ON HIGH YIELD BONDS

    (…) the US’s recent 625 bp spread for high yield bonds seems too wide given the depth of January 2012’s 0.8 of a percentage point year-to-year drop by the unemployment rate, to 8.3%. The market’s unwillingness to more fully price-in the latest decline by the US jobless rate suggests that the high yield bond market senses that the latest decline by the Labor Department’s official jobless rate overstates the actual rise in labor force utilization. In particular, the current economic recovery’s atypically large number of labor force dropouts casts doubt on the meaning of January’s 8.3% unemployment rate. (Figure 2.)


    Suppose that the number of working-age individuals not in the labor force had instead expanded at the 2.0% annualized rate of the first 31 months of 2002-2007’s business cycle upturn (vs 1.5% during the last 2 recoveries). In that case, January 2012’s count of those not in the labor force would have been 2.6 million less than the actual 87.9 million. If we further assume that the 2.6 million would have been unemployed had they remained in the labor force, then January’s unemployment rate would have been 9.8% instead of the reported 8.3%.

    One way of eliminating the distortions stemming from the tendency of prolonged unemployment to boost the number of labor-force dropouts is to focus on the ratio of employment to the working-age population, as opposed to the unemployment rate. Unlike the relative ease of exiting from the labor force, dropping out of the working-age population calls for either emigration, institutionalization, or death.

    As the employment ratio climbs higher, credit spreads tend to narrow. In January, employment approximated 58.5% of the working age population, which matches its ratio of October 2009, or when the unemployment rate peaked for the cycle at 10.0%. However, January’s 0.1 of a percentage point year-to-year rise by the ratio of employment to the working age population was constructive for the high yield bond spread. When the ratio of employment to the working age population first rose by 0.1 of a percentage point from a year earlier following the recessions of 2001 and 1990-1991, the high yield bond spread averaged 430 bp — which was well under its recent 620 bp. Nevertheless, January’s slight rise by the employment ratio was less bullish for high-yield bonds than was the accompanying deep drop by the unemployment rate. (Figure 3.)


    The latest news on initial state unemployment claims suggests that the recent decline by the unemployment rate was not illusory. As of February 4, the moving four week average of jobless claims sank to 366,000, which was its lowest such reading since May 2008. When the moving four week average of jobless claims first sank to 366,000 following the recessions of 2001 and 1990-1991, the high-yield bond spread averaged 462 bp. Expectations of a fuller utilization of the US workforce support expectations of narrower credit spreads. (Figure 4)



    Smile  Sad smile  Budget to Call for Taxes on Wealthy   Obama’s budget request to Congress on Monday will forecast a deficit of $1.33 trillion in fiscal year 2012, equivalent to 8.5% of GDP and will include hundreds of billions of dollars of proposed infrastructure spending.

    Mr. Obama repeats many of his previous budget prescriptions, resists sweeping cuts to government programs, preserves the structure of Medicare and Medicaid, and calls for close to $1.5 trillion in tax increases on higher-income Americans over 10 years.

    (…) it calls for more than $350 billion in measures such as extending the payroll tax cut, $30 billion for updating schools, the continuation of a tax subsidy for business investment, and a new tax credit aimed at boosting hiring by small businesses. It also proposes a six-year, $476 billion proposal for roads and other surface transportation projects, which would be funded partly by the gasoline tax.


    NEW$ & VIEW$ (14 Jan. 2012)

    [SnPdowngrade]Europe Hit by Downgrades

    France and eight other euro-zone countries suffered ratings downgrades on their sovereign debt Friday, sparking renewed worries over Europe’s ability to bail itself out of crisis. (Chart courtesy of WSJ)

    “In our view, the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” the ratings firm said. “We believe that a reform process based on a pillar imageof fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues,” it said.

    Pointing up   In Athens, talks broke down Friday between Greece and a group of creditors negotiating to restructure its debt. If no deal can be reached, Greece will need billions of euros in additional aid to help it make a big bond repayment in March. The alternative is a messy default.

    S&P had warned Dec. 5 that it could downgrade all sovereigns. It has rather taken a more selective approach as seven countries were left unchanged while there were one notch downgrades for five countries and two notch downgrades were given to four countries. The French downgrade will likely complicate domestic politics ahead of the general elections this spring.


    Downgrade Hurts Euro Rescue Fund

    S&P’s decision means that Europe’s rescue fund, the European Financial Stability Facility, could lose the triple-A rating it needs to borrow cheaply and lend to ailing euro-zone governments. As France is the second-biggest contributor to the fund’s guarantees, the chances are greater that the EFSF’s capacity will be crimped or its borrowing costs will rise.

    The decision to cut Italy by two levels, from single-A to triple-B-plus, caught some analysts off-guard. The move is likely to have a ripple effect on the ratings of Italian banks, driving up their borrowing costs and exacerbating their funding woes. Italy’s banks, which are major holders of Italian bonds, are struggling to meet demands by European regulators to raise more capital to cushion against the debt crisis.

    All of the above were generally expected in markets.


    High five   Here’s yesterday’s big thing:

    ECB raps revisions to draft fiscal pact
    Letter says plans water down treaty

    Jörg Asmussen, a member of the ECB’s executive board, wrote to negotiators that new provisions in the treaty that would allow highly indebted eurozone countries to breach budget deficit limits “in periods of severe economic downturn” amounted to an “escape clause” that could lead to “easy circumvention of the rule”.

    Potentially more troubling for government negotiators, Mr Asmussen went on to argue that the treaty must “move towards a deeper and more effective co-ordination of fiscal policies”, a stance that some officials believe goes beyond the mandate given to treaty negotiators at a highly charged summit last month.

    And by the way,

    May I remind you that this agreement on a fiscal compact was reached against a background of serious and ongoing threats to macroeconomic and financial stability in the euro area,” Mr Asmussen wrote.

    The ECB is the only credible actor in Europe and Draghi wants a clear and effective fiscal compact… to be delivered in two weeks!


    The next several weeks will be “interesting”. Greece, the ESFB, the fiscal compact and the French elections. Fasten your seatbelts.





    J.P. Morgan Sings Blues

    J.P. Morgan dampened the New Year rally for bank stocks, saying on Friday that its fourth-quarter profit fell 23% from a year ago amid a sharp slowdown on Wall Street.

    [JPMHEARD]Earnings were $3.73 billion, or 90 cents a share, down from $4.83 billion, or $1.12 a share, a year earlier. Results were hurt by an accounting loss tied to the market for bank debt. Revenue dropped 17% to $22.2 billion, below analyst expectations.

    The fees J.P. Morgan generated from investment banking fell 39% from the year-ago quarter to $1.1 billion, and revenue from fixed-income trading dropped 13%. Total revenue for the investment bank fell 30%, to $4.3 billion.

    “We are getting killed in mortgages if you haven’t noticed,” Mr. Dimon said on a call.

    Yet, a decline in mortgage delinquencies let J.P. Morgan slash its loan-loss reserves by $730 million.

    Rainbow   The only good news from the call:

    J.P. Morgan’s results show that companies are taking on more credit to fund inventory and capital improvements. The bank’s total loan book rose 4%, as lending to middle-market and corporate banking clients climbed 12% and loans retained by the investment bank were up 28%. The loan demand is “everywhere,” Mr. Dimon said. “Industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations.”

    The bank’s results also show U.S. consumers are defaulting less. Delinquency rates on loans fell across the board, especially in credit cards.


    SAP Beats Forecast

    German business software giant SAP said it beat its 2011 full-year forecast after it recorded strong growth in the fourth quarter, pushing its shares higher.



    by Jeffrey Saut, Chief Investment Strategist, Raymond James and Associates (via AdvisorAnalyst Views)

    (…) Admittedly, the January Barometer has a pretty good track record. To wit, according to the Stock Trader’s Almanac (as paraphrased by me):

    Devised by Yale Hirsch in 1972, our January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only seven major errors since 1950 for an 88.5% accuracy ratio. . . . Including the seven flat-year (minor) errors (less than +/- 5%) yields a 77.0% accuracy ratio.

    The Hirsch organization also notes:

    The last 38 up First Five Days (of the new year) were followed by full-year gains 33 times for an 86.8% accuracy ratio and a 13.9% average gain in all 38 years. … Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.

    Now given that historically the equity markets have a bullish tilt 67% of the time, the first week of the new year typically gives the January Barometer a bullish start for the month.(…) Yet, there is one indicator that I give more credence than the January Barometer.

    Back in the early 1970s, when I was working on Wall Street, I encountered a man who became my friend and one of my mentors. At that time Lucien Hooper, then in his 70s, was considered one of the savviest “players” in this business, as well as the second longest contributing editor to Forbes magazine. While known for many market axioms and insights, the one that stuck with me the most was Lucien’s December Low Indicator. It seems as if only yesterday we were sitting at Harry’s at the Amex having lunch when he explained it. “Jeff,” he began, “Forget all the noise you hear about the January Barometer. That being, ‘so goes the first week of the new year, so goes the month and so goes the year.’ Institutions can manipulate prices for a short period of time, especially during a holiday-shortened week with a limited audience. Consequently, pay much more attention to the December low. That would be the lowest closing price for the INDU during the month of December. If that low is violated during the first quarter of the New Year, watch out!”

    For the record, the Dow’s closing low in December was 11766.26, recorded on 12/19/11. “Circle” that low and watch it closely during the first quarter of 2012. If the Industrials travel below that low then respect Lucien’s “watch out” warning, for it has proven prescient since in all but two instances since 1952 when the December low was violated during the first quarter the Dow slid another 11% on average. Importantly, if the December low is not breached in the 1Q, heed the January Barometer since when taken in conjunction with the December Low Indicator it has been right nearly 100% of the time.


    GOOD READ: Richard Koo On Why Europe’s Austerity Will Cause Deflationary Spiral

    Good stuff from ZeroHedge:

    While not new to our thoughts, Richard Koo, Nomura’s Balance Sheet Recession guru, has penned a lengthy but complete treatise on why governments need to borrow and spend now or the world faces a deflationary spiral. The Real-World Economics Review posting makes it clear how his balance sheet recessionary perspective of the deleveraging and ZIRP trap we now live in means bigger and more Keynesian efforts are needed to pull ourselves out of the hole. While we agree wholeheartedly with his diagnosis of the problem, his belief in the solution…

    Rest is here.


    NEW$ & VIEW$ (2 Dec. 2011)

    WORLD MARKETS CONTINUE TO BE INFLUENCED BY THE EUROZONE CRISIS but, fortunately,  US economics, getting better by the day, will take center stage in US investors mind.

    [ECB]IN EUROPE, Draghi’s comments and Merkozy’s respective speeches are creating hopes that something concrete will happen in Brussels Dec. 9.

    “Our currency union needs agreement on questions of fiscal policy,” Mr. Draghi said in a speech to the European Parliament on Thursday. “Further elements could follow, but the succession is decisive.”

    The message is not lost on Ms. Merkel and Mr. Sarkozy. They seem determined to ensure that the political signal that the ECB needs is sounded loud and clear at the next European summit. Mr. Sarkozy laid out his arguments in a high-profile speech in France Thursday evening, announcing that he would meet Ms. Merkel next Monday in Paris to finalize their proposals for closer cooperation in the euro zone ahead of the EU summit. Mr. Sarkozy’s proposals on Thursday suggest that France is ready to relinquish part of its sovereignty to help fix the euro-zone construction, bringing Mr. Sarkozy in line with similar proposals made by Ms. Merkel in recent months.

    Pointing up   But don’t bet the farm on it. Europe remains Europe and while they will vow fiscal convergence and harmonization and appropriate correcting measures,

    “Resolving the sovereign debt crisis is a process and this process will take years,” Mrs. Merkel said.

    In any case, we can expect the euro-elites to find the right words to keep markets calm and hopeful, get the ECB to act more decisively to stabilize banks and gain some more time… until the next crisis. Fortunately, Burlesquoni being on the sidelines, Italy will get moving in the right direction, at least for a while.

    Rainbow   The media have already changed their tunes:

    The ECB has become more active recently as its mandate to protect the banking system is clear.  ECB overnight lending jumps to €8bn.

    Pointing up   Also, Bloomberg reports the ECB is seen lending the IMF €100B-€200B to go towards its bailout efforts of the EU periphery.

    Smile   Rainbow   EUROFLATION IS EASING, creating less headwind for the ECB:



    Storm cloud   Spanish unemployment continues to rise   The number of people claiming unemployment benefit rose by 53,536 in November from the month before, taking the total number to 4.4m, after the sharpest rise in more than two and a half years recorded in October.


    Storm cloud   The JPMorgan Global Manufacturing PMI fell from 49.9 in October to 49.6, a 29-month low and the third consecutive month that the index has been below the 50.0 no-change level. Note how the US is diverging from the ROW.

    image  image


    Storm cloud   CHINA’S official PMI sub-index for export orders fell sharply to 45.6 percent in November from October’s 48.6 percent, suggesting that the spreading Eurozone debt crisis and weakened demand from both the European Union and the United States were wearing down the growth in the world’s second-largest economy.

    Rainbow   Given the weakness in China’s domestic economy, it is no wonder that Beijing has turned the easing spigot on and has done so loudly and clearly. Expect more easing in coming months.

    The weak manufacturing data prompted J.P. Morgan economists to cut their growth outlook for China’s economy; they now see gross domestic product growing at a 7.2% annual rate in the fourth quarter, down from the 8% they expected previously.

    China’s fiscal position is very strong, with a surplus of 1.3 trillion yuan in the first ten months of the year (3.3% of 2010 GDP).

    Rainbow   Many countries are shifting to stimulus mode: Japan to Boost Spending  Mr. Noda didn’t specify an amount, but Mr. Azumi was quoted by local media as saying the new extra budget will be ¥2 trillion ($25.74 billion) or more. 

    That amount is relatively modest compared with the recently enacted third extra budget of ¥12.1 trillion. Still, it is unusual for the government to put together so many extra budgets in a single year, and the development underscores how the March 11 earthquake and tsunami, coupled with export-damaging rises in the yen and economic shocks from abroad, have pushed the heavily indebted government to bolster spending.

    Brazil cuts taxes to counter turmoil in euro zone  The measures, which include tax cuts for foreign investors and domestic manufacturers, were unveiled one day after Brazil’s central bank slashed interest rates for the third straight time to shore up credit, citing concerns about the financial turmoil emanating from Europe.

    Open-mouthed smile   THE US ECONOMY KEEPS SURPRISING. Today’s employment report, including revisions, gives hope that the recent upturn in many indicators could become self-sustaining.

    Rainbow   Unemployment Slides to 8.6%  The U.S. labor market added 120,000 jobs in November. The unemployment rate fell to 8.6%, its lowest level since March 2009. Private companies added 140,000 jobs, while the public sector lost 20,000 jobs. October’s figure for nonfarm payrolls was revised upward to show a gain of 100,000 from a previously reported 80,000, while September was revised up to a 210,000 gain from 158,000. That is 143k per month on average in the past 3 months, still nothing to write home about, but nevertheless encouraging. Upward revisions are always better than downward revisions.

    Hours worked increased +0.1%, and the average of Oct and Nov is up +1.8% q/q a.r. from 3Q.  Hourly earnings declined by two cents to $23.18. Wages are up by 1.8%YoY, still trailing overall inflation at 3.6%.

    Sun   US CAR SALES RISE:  U.S. auto sales in November hit a 13.6 million annual pace, the strongest in more than two years, as car and light-truck sales jumped 13.9% YoY to 994,721. In June, the selling rate was 11.45 million. For Q4’11 so far, sales have risen 7.7% from Q3. Automakers are on track to sell at least 12.7 million vehicles this year, about 10 percent more than last year.

    Rainbow    CONSTRUCTION SPENDING, a major impediment to growth and job creation so far, seems to be creeping back to life. Construction spending during October rose 0.8%, after a 0.2% gain in September and a 2.2% jump in August. For the last 3 months, total US construction spending has grown 3.2%, a 13.2% annualized rate. It is about to turn YoY positive after nearly 5 years in negative territory.

    Private construction spending jumped 2.3% in October and is up at a 19.3% annualized rate since July.

    Pointing up   The construction industry lost nearly 2.2 million jobs since 2006. Since its January 2011 trough, the sector has gained only 44k jobs. Yet, average weekly hours, which also troughed in January at 37.3, have come back to their 2006 peak at 38.4. Employers will soon need to hire workers back.




    Fingers crossed   imageKeep in mind the recent more positive news on housing demand. More support came yesterday from the 10% leap in pending home sales in October which suggests that resale closings could spike to the 5¼ million annualized mark in November, marking the best month since January. That would put a meaningful dent in the supply overhang.

    Thumbs up   Equity markets are already reacting to these improvements as these charts from BMO Capital Markets show:



    Confused smile   OH! CANADA.

    Canada’s jobless rate ticks higher Canadian employment fell by 18,600 last month; the jobless rate rises to 7.4%. The jobs decline comes after employers shed 54,000 jobs in October — the most since the recession — and shows job creation has clearly tapered off after a strong first half to the year. However, full-time work rose, the private sector eked out a gain and most of the declines were in self-employment and part-time positions. Part-time work tumbled by 53,000 while full-time jobs rose by 35,000. Overall employment levels are up by 212,000 from last year, led by growth in full-time positions.

    Confused smile Confused smile Confused smile TWO HEADLINES:
    Obama launches energy efficiency drive

    Americans Embrace SUVs Again




    Risks, Hedges & Opportunities: Euro Crisis Near End?

    Guest post by Hubert Marleau, Chief Investment Officer, Palos Management Inc.

    It is plainly visible that the advanced economies have acute problems like not enough external demand for their goods and services, too much unemployment, plenty of unused
    industrial capacity and copious amount of wasteful and unproductive government spending. You can rest assured that the problems will eventually pass when household and business debt is sufficiently reduced and that the plans to reduce public debt and deficit spending are sufficiently believable for the private sector to start spending again.

    Unfortunately, it will not happen until Europe straightens itself out. The gathering of the leaders of the group of 20 big industrial and developing countries was supposed to do
    just that — lay the foundation for renewed and inclusive prosperity by containing global financial panic and fixing global economic imbalances.

    Unfortunately, the Greeks pitched a tactical curve ball that strategically derailed the goal of the G-20 summit in Cannes stealing the call for a wholesale reconstruction of the international monetary system. The urgent need to promote the creation of measures to correct the many structural global imbalances needed to shift entrenched opposite positions between surplus and deficit countries was missed.

    While some recognition was given that countries with excessive debt should start fiscal
    consolidation and that countries with large external surpluses like China, Germany and Japan should support domestic demand to facilitate the redressing of global imbalances, not much was done in the form of actions. Yet, the resolve of all nations to provide additional firepower through the IMF was noted. The IMF will likely receive a large injection of new capital so that it may create a new short-term credit line to help countries facing unavoidable shocks that are beyond their control and introduce a second special allocation of IMF special drawing rights. It should be noted that China, which has the most to win, is very supportive of the idea and the USA, which has the most to lose, did not dissent.

    Other than that, the challenges of high public debt contagion, unemployment waste, commodity price volatility, stock market risks that are perhaps caused by dark liquidity pool and high frequency trading appear to have been brushed aside.

    Moreover, enthusiasm for global regulatory agreements and infrastructure finance has dissipated because of lack of leadership between G-20 meetings is pushing countries to
    go their own way. It will be interesting if the Financial Stability Board (FSB) will have better teeth under Mark Carney (Governor of the Bank of Canada). It should. We favorably view this later development.

    Judging from media headlines, much more time was spent on trying to promote the grand plan to rescue the Euro-zone from its debt crisis. The giving of a vote of confidence to a Greek government that paradoxically loses its head and prepared to support a new government with national consensus will be certainly helpful to get an approval on a European Union aid package to avert default. It will probably end up in a debate that will last for several weeks as to how the financial crisis will be contained. The deflationary hawks want to externally and privately finance a huge EFSF to buy euro sovereign debt but the inflationary doves want to the ECB to directly support the euro sovereign debt through unlimited purchases.

    At this time, it seems as if the Germans, as the hawks, may get their way. There seems to be a tacit understanding that the BRIC Group of emerging countries is ready to put up money with both the EFSF and IMF if they can get a bigger say at the international table. But, it is more of a seem than a not seem. Germany has the largest amount of firepower,
    money and the broadest interest in preventing a breakdown of the euro with exports accounting for almost 50% of GDP.

    Interestingly, the Germans, despite their hawkish attitude, have overwhelmingly supported European matters and affairs. It means that if the EFSF cannot muster the necessary arsenal to fight the euro debt crisis, do not be surprised, despite all appearances, that the ECB turns into a Fed and becomes a lender of last resort as the Fed did during the US debt crisis. Josef Joffe, editor of the German weekly Die Zeit, put it well in a recent article written in the Wall Street Journal. He wrote “the Germans will flail, but not flinch”.

    P.S. Serious readers may want to have a look at the following two IMF articles:
    1) G20 Leaders Summit – Final Communique, Nov. 4, 2011 Source:
    2) Transcript of a Press Briefing with Christine Lagarde, Nov. 4, 2011, Cannes, France