NEW$ & VIEW$ (5 AUGUST 2013)

Low Pay Clouds Job Growth

The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. (…)

Over the past year, lower-paying sectors such as retail, restaurants, hotels and temporary-help agencies accounted for more than 40% of job growth. Many of those jobs are part time; the share of Americans imageworking part time, which spiked during the recession, has shown little improvement and has been trending upward for much of this year. (…)

Of the 227,000 new jobs in the July household survey, 45% were part-time in June. In the past three months 684,000 (97%) of the 706,000 new jobs were part-time (Chart from NBF Financial).

But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June. (…)

The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth. (…)

But only 175,000 on average in the last three months. The lack of momentum is also apparent in the private sector where an average 181,000 jobs were created in the last 3 months compared with 206,000 in the previous 4 months.

The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low.

Questions of Quality

Pointing up Aggregate hours worked fell 0.1% as the workweek declined 0.2% (-0.1% in the private sector), and wages fell 0.1% in July leading the annual pace to slow to 1.9% from 2.1%. As a result, workers’ earned income fell by 0.3% in July.

Oh! by the way, ISI Company Surveys have been weaker lately with their diffusion index threatening to go negative. Most of their consumer-related surveys are weaker. We are entering the all-important back-to-school season. Eighteen states are offering sales tax holidays for a couple of days in August, 12 were last weekend.

Construction Jobs Are a Wreck The housing industry may be resurgent but construction jobs aren’t helping build payrolls.

Friday’s employment report showed that construction industry jobs fell by 6,000 in July and are down three of the past four months. At a seasonally adjusted 5.79 million, the number of jobs in the sector is up less than 3% from a year earlier.

But the real culprit appears to be a big drop in public construction.

Residential and specialty trade contractors — home builders — added 6,300 jobs in July.

Meanwhile, the nonresidential side cut 9,500 jobs. Heavy and civil engineering subtracted another 2,000 positions.

Looking only at residential construction, there was a loss of 400 jobs in the last 3 months. Actually, on a non-seasonally adjusted basis, the number of construction workers in the U.S. has increased only by 8,100 workers or 1.3% in one year. What housing recovery?


Meanwhile, Congress is back to budget brinksmanship, with the threat of a possible government shutdown in the fall and another market-rattling fight over the federal government’s borrowing limit looming ever-larger. So no one really knows — not even the Fed — what the central bank will do in September, and the July jobs numbers didn’t change that one bit. (WSJ)

Barron’s Gene Epstein adds this to blur everyone’s vision:

But if there were no signs of improvement over the job gains of last year, there was one apparent bright spot in the July report. The unemployment rate fell two-tenths of a percentage to 7.4%.

The bright spot was tarnished, however, by another trend in job-deprivation. Based on the BLS measure of labor underutilization that includes involuntary part-timers, the official unemployment rate “should” have read 7.9% rather than 7.4%. The math involved in generating that 7.9% is fairly straightforward.

The BLS keeps six measures of labor underutilization, “U-1” through “U-6,” of which U-3 is the official measure. U-3 covers only those jobless folks 16 and older who have looked for work over the past four weeks. U-6 includes those folks and adds two other categories, often referred to as the “hidden unemployed.” The first is the “marginally attached”—people who haven’t looked for a job over the past four weeks, but have done so over the past 12 months. The second consists of the involuntary part-timers (“part-time for economic reasons,” in BLS parlance)—people who work part-time, but are searching for full-time positions. (…)

For 15 months from October 1999 through December 2000, U-3 fluctuated between 3.8% and 4.1%—by all accounts, a time when jobs were quite plentiful and the labor markets unusually tight. Yet through this same 15 months, U-6 ran between 6.8% and 7.2%, averaging 177% higher. And it turns out that, over the 235 months since January 1994 when the BLS began tracking U-6, the ratio between U-6 and U-3 has also been 177%. Over that period, the ratio has fluctuated between a low of 163%, in ’02 and ’03, and a high of 189%. When the ratio gets that high, U-6 may be trying to tell us something.

That high of 189% was reached just last month. In July 2013, U-6 was at 14%, and if you assume a “normal” ratio last month of 177%, then U-3 would be 7.9%, not 7.4%. Also, if you parse U-6 you find that, the reason it’s unusually high is not because of the marginally attached, but because of the unusually high share of involuntary part-timers.

U.S. Consumer Spending Rises 0.5%

Personal spending, which measures how much Americans spend on items from gasoline to refrigerators, rose 0.5% in June from a month earlier, the Commerce Department said Friday. The spending boost was more than double the increase in May and the biggest since February.

Personal incomes, meanwhile, rose 0.3%, down slightly from May’s revised increase of 0.4%. (…)

However, in one potentially troubling sign, Americans’ disposable income, adjusted for inflation, fell for the first time in months. That could raise doubts as to how much spending will increase in coming months. (…)

Doug Short’s charts reveal the consumer squeeze:

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Savings are of little help. The 2005-08 low savings rates came from the housing bubble, unlikely to get repeated for a while.

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The price index for personal consumption expenditures, the Fed’s preferred gauge for inflation, rose just 1.3% in June from a year ago. That was higher than 1.1% year-over year increase in May but still far below the Fed’s target of 2% inflation.

So-called core prices, which exclude volatile food and energy costs, rose 1.2% in June from a year ago. That was the same year-over-year increase as in May.

Just kidding  Simple math: per capita real disposable income growth is 0%, employment growth is 1.7% and mostly part-time and savings are just about as low as they can get. Tough to expect spending growth in excess of 1.5-2.0%. That’s for 70% of the economy. Another 20% is government spending, going nowhere for a while longer. Never mind the rest.

Hence: real consumption has grown 1.5% in Q1 and 1.2% in Q2. Real GDP was +1.7% in Q2 (on a big inventory rise) and +1.1% in Q1. Clearly, the U.S. economy is not accelerating as many pundits, including many Fed officials, expected.

Comstock Partners observes:

Since consumer spending accounts for about 70% of GDP, we see little chance that other sectors can make up for the shortfall created by the lack of demand. In fact, the economy is likely to face additional headwinds as a result of the coming showdown in Washington over the fiscal 2014 Federal budget and another fight over the debt ceiling. The result could be either a White House concession on spending leading to additional fiscal restraint or the debilitating threat of a government shutdown. Although this has not yet gotten a lot of attention in the media, it will probably hit the headlines and dominate cable news after the congressional summer recess.

Ghost  And just when practically nobody uses the R word, they add:

In assessing the prospect for growth, it is also important to mention the much-discussed concept of “stall speed”, the point at which the economy can no longer maintain momentum and, therefore, falls into recession. In post-World War II recoveries whenever the 4-quarter growth rate of GDP has declined to below 2% the economy has gone into recession within a short time. In this regard, it is noteworthy that 2nd quarter GDP growth was only up 1.4% from a year earlier. This does not bode well for the widely expected pickup in the 2nd half, particularly in view of the headwinds from the coming political fight over the budget and debt limit, the possible tapering of QE, and the numerous problems facing the global economy.

But the best recession indicator has yet to turn down even though it has been flattening out lately…(charts from Doug Short)

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Stay tune!

U.S. Factory Orders Rise 1.5%

Demand for U.S. factory goods rose in June, boosted by higher demand for aircraft, as businesses stepped up investments but at a slower pace than earlier in the spring.

Excluding transportation, factory orders were down 0.4%.

Orders for nondefense capital goods excluding aircraft rose 0.9%, after rising 2.1% in May and 1.2% in April. That figure is considered a proxy for business spending on equipment and software.

The report also showed that orders for goods expected to last more than three years, such as cars or refrigerators—known as durable goods—rose 3.9%. That was revised downward from last week’s 4.2%.

In one potentially troubling sign, orders for consumer goods fell 0.7%, largely on nondurable items.


PMI readings signal the end of Eurozone recession in the third quarter

PMI surveys confirm the ongoing improvement seen recently in business surveys (EC surveys, Ifo) and hard data (Industrial production, retail sales). Beyond the uncertainties regarding Q2 outcomes, this suggests that the euro area economy as a whole may exit recession in Q3, although the recovery remains fragile due to several headwinds, in particular the ongoing deleveraging process, Chinese slowdown and political instability. (Pictet)

Euro-Zone Retail Sales Fall

Eurostat said the volume of sales in June was down 0.5% from May, and 0.9% from June 2012. The month-to-month decline was the largest since December 2012.



In fact, sales volume was up 1.1% in May. But the important stat is core sales, excluding food and fuel, which were down 0.2% in June after surging 1.1% in April and 0.7% in May. In total, core sales were +1.6% in real terms in Q2 (+6.5% a.r.), following +0.2% in Q1 0.8% a.r.).

Is Spain’s Experiment About to Succeed?

(…) Spain has become a giant laboratory for an experiment never before attempted in a modern democracy. Can a program of austerity and structural overhauls extricate an economy from a debt crisis? Is it really possible for a country to achieve a so-called internal devaluation—restoring its competitiveness by cutting wages and boosting productivity rather than lowering its external exchange rate? Are European democracies capable of confronting vested interests and coping with the resulting social upheaval? (…)

The Bank of Spain recently estimated that the Spanish economy contracted by just 0.1% in the second quarter, down from 0.5% in the previous quarter, raising hopes that a return to growth is imminent—perhaps as soon as the current quarter. At the same time, unemployment has started to fall—down by 77,000 in the past four months. House prices and car sales have also stabilized. Exports have surged, up 8% in 2012, matching Germany. The current-account deficit, once 10% of gross domestic product as the country sucked in cheap money to fund the  construction boom, has turned to surplus. (…)

Now the conditions are in place for a business-investment-led recovery: foreign direct investment is picking up while domestic firms are throwing off sufficient cash to be increasingly self-funding. After all, Spain’s impressive export performance was achieved despite the deep domestic credit crunch. (…)

What is certain is that the stakes couldn’t be higher—for Spain and the euro zone: A self-sustaining recovery would remove one of the biggest threats to the survival of the single currency.

No less importantly, it would vindicate Berlin’s approach to handling the crisis and send a powerful message to other governments tempted to look to debt mutualization as an easy alternative to the hard business of reform.

High five IMF casts shadow over Spanish jobs
Fund expects jobless rate above 25% for at least next five years

(…) echoing recent warnings from independent economists, the IMF makes clear that Spain’s growth rates in the years ahead will be too anaemic to allow job creation. The Fund expects Spain’s gross domestic product rise to be less than 1 per cent annually for the next four years, and only 1.2 per cent in 2018.

“Spain has historically never generated net employment when the economy grew less than 1.5-2 per cent,” the IMF notes. “Yet growth is not projected to reach these rates even in the medium-term. Thus reducing unemployment to its structural level (still likely very high around 18 per cent) by the end of the decade would require a significant improvement in labour market dynamics.” (…)

Hmmm…The IMF is not the ultimate in economic forecasts. FYI, Spain retail sales were down 0.8% in June but +0.6% in Q2 following +1.1% in Q1. These compare with EA17 sales up 0.6% in Q2 up 0.8% in Q1. (Eurostat)

Sales tax rise to hit Japanese growth
Government says economy would grow 1% next year

The cabinet office forecast that the economy would grow at only 1 per cent in the fiscal year starting in April if the government proceeds with the first phase of a two-stage plan to raise the consumption tax from 5 per cent to 10 per cent by 2015. (…)

The cabinet office also raised its forecast for the economy this year to 2.8 per cent from 2.5 per cent. While the estimates highlighted concerns about the controversial tax, they implied that Japan would avoid a severe sales tax-related recession, suggesting their value as ammunition for opponents of the rise may be limited.

A final decision on the plan’s first phase – a rise from 5 to 8 per cent next spring – must be made by October, and could come earlier. The long-debated measure is intended to shrink the budget deficit and tackle a gross public debt that is almost 250 per cent the size of the economy, the highest ratio in the developed world. (…)

Many Japanese policy makers remain haunted by the country’s last sales-tax rise, in 1997. Enacted in the face of a worsening Asian financial crisis, it is widely believed to have tipped the economy into a severe recession. (…)

Part of the predicted tax-related slowdown would be a result of a shift in the timing of consumption, rather than an overall suppression of demand, the government said. Some people would move up purchases of big-ticket items, such as cars and houses, to before the tax took effect. That would both lift consumption immediately before the implementation date and exacerbate the expected post-tax fall.

One solution for Mr Abe could be to cushion the blow of any tax increase with short-term government spending. Economists have suggested that a stimulus budget of Y4-5tn, about half the size of a spending package Mr Abe introduced in January, could offset the tax’s likely negative impact on consumption.

Indonesia’s consumer boom falters Second-quarter growth of 5.8% is slowest for nearly three years

(…) Indonesia’s annual GDP growth fell to 5.8 per cent in the second quarter, according to government data released on Friday, the slowest pace for nearly three years.

Agus Martowardojo, governor of the central bank, told reporters that the government needed to “promote exports to new markets . . . as growth slows in China and India”.

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Rate Cuts Fail to Lift Australian Consumers  Disappointing Australian retail sales data added to market expectations the Reserve Bank of Australia is likely to cut rates at a policy meeting Tuesday. But few observers expect such easing to help turn around weak consumer spending in the short term.

Wall St falls out of love with commodities
JPMorgan’s exit signals that the boom is over

(…) The fact that JPMorgan is considering a sale is the clearest sign yet that Wall Street’s commodities trading boom has fizzled out. Coalition, a consultancy, reports that the combined revenues of the top 10 banks in the commodities sector was $6bn last year, down 22 per cent on 2011. Revenues peaked at $14.1bn in 2008, the same year the oil price peaked. (…)


Miners return to hedging gold
Small and medium-sized companies lead industry shift

(…) The shift in philosophy towards hedging reflects mining executives’ fear that the past month’s rebound in gold prices may be shortlived, as well as the recognition that more falls in prices could push them into losses. Bankers said the hedging had accelerated as prices rallied from their June low to $1,313 last week.

The mining industry has a chequered history of hedging. The practice was most prevalent in the late 1990s, just before gold began a decade-long bull market, while by the time gold prices peaked in 2011, miners had cut their hedging to almost nothing. (…)

Nerd smile  Being a broker, or even a miner, does make you any smarter!


We are nearing the end of Q2 earnings season as 393 S&P 500 companies have reported. According to S&P, the beat rate remains at 66% while the miss rate edged up above 25%. The bulk of the companies yet to report are in the Consumer and Telecom sectors where the miss rates have been above average. See last Friday’s Earnings Watch comments for a valuation update.

For Q3 2013, 61 companies have issued negative EPS guidance and 16 companies
have issued positive EPS guidance. These numbers are in line with those at the same time during the Q1 season for Q2 results but well above the 5-year average of 62% according to Factset which adds:

Due in part to negative EPS guidance, analysts have lowered earnings expectations for the third quarter. The estimated earnings growth rate for Q3 2013 is 4.8%, down from an estimate of 6.9% at the start of the quarter (June 30). Seven of the ten sectors have recorded a decline in expected earnings during this time, led by the Materials and Information Technology sectors. (…)

Although analysts have reduced earnings growth expectations for Q3 2013 (to 4.8% from 6.9%) and Q4 2013 (to 11.1% from 12.1%) since June 30, they still expect a significant improvement in earnings growth in the second half of 2013 relative to the 1st half of 2013.

That is even though estimated revenue growth rates are only +2.8% for Q3 2013 and +0.7% for Q4 2013. Why are they seeing such margins expansion at this stage? Wishful thinking when we look at these two charts from Factset.


Q4’13 margins are estimated (!) at 10.0%, up from 9.0% in Q4’12 and 8.7% in Q4’11. This would be the first year when Q4 margins would be higher than margins of the previous 3 quarters. Why? Beats me. And then, of course, it’s up on a straight line.

Here’s a ScotiaCapital chart that speaks volumes about margins:


See 10% margins there?

Interestingly, Facset recently looked at  analysts quarterly projections for the past 10 years to discover a clear propensity to really overestimate Q4 results.


Hmmm…careful if you’re using forward earnings.


Dow Gains Sixth Week in a Row

Stocks edged higher, capping the Dow’s sixth-straight weekly advance, as investors shrugged off weaker-than-expected July jobs growth.

Morning MoneyBeat: Meh Earnings? Who Cares! Investors don’t seem to be losing much sleep over the unfolding of yet another lackluster earnings season.

(…) Corporate profits have taken a backseat to Fed policy as a primary catalyst for the market’s short-term moves. (…)

Earnings may not be great, but they’ve been good enough to keep the rally moving along.

Warning lights flash in US credit markets
There is much for financial stability hawks to worry about

(…) Fed governor Jeremy Stein’s February 7 speech on “Overheating in Credit Markets” signalled that officials were thinking seriously about the potential financial ill-effects of QE, in a theme that was taken up by chairman Ben Bernanke three months later. It looked an important speech then. It looks seminal now.

In it, Prof Stein highlighted the dangers to financial stability as investors reach to earn a little more yield in the ultra-low interest rate environment engineered by the Fed. He ran through a list of indicators where one may spot high-risk practices building up. It is worth repeating the exercise. (…)

All four of his non-traditional indicators are flashing warning lights, data from Lipper and S&P Capital IQ show. This year’s issuance of payment-in-kind notes, which allow borrowers to put off cash interest payments, is close to passing the total for the whole of 2012, having had the biggest month this year in July.

Issuance of covenant-lite loans hit an all-time record in February but even through recent turbulence it has remained elevated at monthly levels that were typical in the first half of 2007.

The use of borrowing simply to pay private equity shareholder dividends – “divi recaps” – doubled in the second quarter from the first. July was slow, but there are $8bn of deals slated for August, which will be at least the second-highest month this year.

Dividend recap volume

And finally, the leverage in large buyout deals in July was 5.9 times, the highest since 2007. There is still a wall of money chasing the higher yields from junk bonds and leveraged loans. Leveraged loan funds just recorded their 59th successive week of inflows. (…)

The evidence from credit markets, and from high-yield and leveraged loan sectors in particular, is that risk-taking may be more widespread even than it was when Prof Stein raised his early warning in February.

As Stock Market Surges, Private Equity Says It’s Time to Sell

Fortress, the first publicly traded buyout firm in the U.S., is preparing holdings for public offerings while struggling to find attractive new deals, Wesley Edens, who runs Fortress’s $14.3 billion private-equity business, said on a conference call with investors yesterday. That environment extends to credit and distressed investments, said Pete Briger, who oversees the New York-based firm’s $12.5 billion credit business.

“This is a better time for selling our existing investments than making new investments,” Briger said on the call. “There’s been more uncertainty that’s been fed into the markets.”

Their comments echoed remarks from Apollo Global Management LLC Chief Executive Officer Leon Black to Blackstone President Tony James, who said last month the environment is ripe for selling because credit markets are still hot and equities strong.

“It’s almost biblical: there is a time to reap and there’s a time to sow,” Apollo (APO)’s Black said at a conference in April. “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.”


NEW$ & VIEW$ (21 JUNE 2013)


ISI’s Ed Hyman:

Bernanke gave a surprisingly explicit but appropriate roadmap that should be applauded.  However, he probably should have waited until after the summer to give a specific timeline. 

Bloomberg’s Clive Cook:

Bernanke’s Forward Guidance Is Transparent as Mud

(…) Bernanke triggered the recent rise in long-term bond yields when he said last month that “in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability.

As the economy strengthens, you’d expect long-term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising short-term interest rates.

Bernanke tried to address this confusion this week. He emphasized for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short-term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 percent.

Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 percent. And, Bernanke added with fresh emphasis, perhaps not even then: These numbers are “thresholds” not “triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 percent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates (and presumably therefore also for QE) will be revised — more likely down than up.

Is that now clear? (…)

Bernanke’s commitment to transparency and forward guidance has made his job harder. If he wants discretion under fire and the luxury of vigorous internal dissent, he can’t expect forward guidance to work as he envisaged. That’s why we’ll be debating what he really meant until he gives his next speech — and that, if you’re wondering, is a threshold not a trigger.

Bernanke said on Wednesday that the economy was a little better. However, as the St. Louis Fed noted yesterday, the FOMC was, in fact, a little less optimistic:

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In Bernanke’s defense, the FOMC did say that the downside risks to the economy had diminished. But, as Moody’s says

to the extent that expected changes in Fed policy deflate financial asset prices, the downside risks facing a still slack economy will increase.

Go figure!

As I recently wrote, everybody is currently Driving Blind. Hot smile



Brisk Home Sales Spur a Price Warning

Sales of previously owned homes surged in May to the highest level since late 2009, pushing prices up so quickly that a major real-estate trade group warned about unsustainable gains.

Home sales rose 4.2% in May from a month earlier to a seasonally adjusted annual rate of 5.2 million, the first time the pace crossed 5 million since November 2009, the National Association of Realtors said Thursday. Existing-home sales peaked in September 2005 at an annual pace of about 7.3 million. (Chart above from Haver Analytics)

The figures, showing rising home prices and contracts closing at a brisk pace, boosted optimism for the housing market and its ability to support the broader economic recovery. Median prices rose 15.4% from a year earlier to $208,000, the highest level since July 2008.


The number of homes listed for sale rose for the fourth straight month as the spring selling season got under way. And fewer sales are being forced by banks or homeowners under pressure: The percentage of sales that were distressed properties stood at 18%, the lowest level since the group began tracking the data in October 2008.

Pointing up Note, however, the sharp drop in affordability from higher prices and mortgage rates. Affordability is still statistically high but disposable income is restrained and credit remains tight. Mortgage rates have risen another 50 bps since the last point on this chart.

(Haver Analytics)

Philly Fed Notes Rebound in Manufacturing

The Philadelphia Fed’s index of general business activity within the factory sector jumped to 12.5, from -5.2 in May.

(Bespoke Investment)

Fingers crossed  The new orders index bounced to 16.6 this month from -7.9 in May. The shipments index also returned to positive territory, up 13 points to 4.1.

Signs of weakness lingered in the labor-market readings, however, with the employment index rising just 3 points to -5.4, marking its third-straight month of negative results. The Philadelphia Fed said 20% of firms reported employment decreases, compared with 15% reporting increases. (Chart and table from Haver Analytics)


Conference Board Leading Economic Index: A Slight Rise in May

The Conference Board LEI for the U.S. rose slightly in May. Only the financial indicators contributed positively to the index, offsetting negative contributions from the ISM® new orders index, building permits and initial unemployment claims (inverted).

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FED BASHING (Continued)

Did I start a campaign against the Fed when I wrote Driving Blind on June 5? Unlikely, but I nevertheless have been followed by many high profile pundits. John Mauldin’s recent Thoughts from the Frontline is a good read. It now looks like just about every observer feels the need to warn people against Fed forecasts.

  • Dylan Matthews’ Washington Post piece was short but “unsweet”:

(…) I went back through every June forecast the Fed has released from 2009 to this year. Each of those forecasts included projected growth, unemployment and inflation rates for the year in question and the two years after. So the 2009 projection forecast 2009, 2010, and 2011, the 2010 projection forecast 2010, 2011, and 2012, and so forth. And those forecasts just kept getting less and less optimistic as the years wore on:


(…) When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2012 at 3.95%. Actual real GDP (inflation adjusted) was 2.2% or a negative 44% difference. The estimate at that time for 2013 was almost 4% versus current estimates of 2.3% currently.


Bernanke’s outlook to come under scrutiny
Fed watchers ask whether shift in sentiment has come too suddenly

“Underneath the hood the economy still has a lot of weakness,” says Paul Edelstein, director of financial economics at IHS Global Insight. “I don’t think that we’re going to get the declines in unemployment that they’re expecting,” he adds.

Fed’s Bullard says Bernanke bond announcement was poorly timed


Markit’s flash PMI for China was weak but few people seem to have noticed this troubling data:

A good deal of the weakness was apparently driven by external developments as the new export orders index plunged 4.9pt to 44.0, the lowest reading since the middle of the Great Recession. This collapse is quite difficult to fully believe, given developments in the region and the global economy, where there are no signs of such a collapse of demand.

Nobody believed the strong export numbers of a few months ago. Now, we should not believe the weak ones. Hot smile

China’s Cash Squeeze Eases

China’s cash crunch appeared to ease amid speculation the central bank stepped in, though the situation could deteriorate as banks’ quarter-end demand for funds picks up.

Traders said Friday the People’s Bank of China may have asked major state lenders to refrain from hoarding cash and release more funds to ease the liquidity squeeze. The central bank hasn’t responded to repeated requests for comment, while Bank of China, one of the country’s biggest lenders, denied reports it had defaulted on a loan Thursday. (…)

Some banks may also be confronting an inability to pay back in full and on time maturing wealth-management products, Fitch Ratings said today, estimating 1.5 trillion yuan ($245 billion) worth will come due before the end of the month. (…)

Analysts say China’s new leaders are appearing to show more interest in cutting long-term financial risks at the expense of short-term pain, as part of a broader effort to make future growth more balanced and sustainable. (…)

  A gold margin call

CME Group, which operates the New York Comex exchange on which gold futures are traded, announced yesterday it is increasing margin requirements on gold trading by 25% to $8800 per 100-ounce contract. The new initial margin requirement will come into effect after close of trading today.



I don’t pretend understanding gold and I am not trying very hard, acknowledging that so many very smart people have repeatedly failed at it. I see only two “reasonably reliable” indicators on gold: U.S. monetary policy (i.e. it is usually safer not to be long gold when the Fed is tightening) and seasonality (see below). Anyhow, a few good reads FYI:

The history of discretionary monetary policy is one catastrophe after another, and the gold market loves it. Central banks have invented several rules and targets to replace the gold standard because they are aware that an economy works better under stability protected by an anchored standard.

Since 1985, central banks have managed monetary policy with either money growth and interest rate rules or inflation and unemployment rate targets. Gold perma-bulls argue that rules and targets are not firm enough to ensure price stability. In other words, the economic system has an inherent inflationary bias because governments indirectly or otherwise have tendencies to intervene one way or another with the monetary order, manipulate the public and trick investors.

I believe in the above proposition that government does what it can, on the quiet, to influence the conduct of monetary policy especially when the going is tough. Since 1999 economic tensions have been high and monetary policy, for the most part, has been very loose. In the twelve months ended July 2011, the price of gold increased about 7.5 fold to reach $1900 per troy ounce. In essence, gold price, as the theory promised, tracked closely the growing abundance of money and the declining path of real interest rates.

However, it appears that gold prices may have run-up too fast and too far.

1) A recent technical view by Oppenheimer opines that gold, having essentially tripled in price in the past five years, is toying with the prospects of violating the uptrend line that has been in effect since the $700 low in 2008.

2) A recent research paper by Credit Suisse ascertains that the price of gold has never been as high as it is today, in real terms, for this long. The long-term real average price of gold in 2007 US dollars since 1841 is $462 per ounce. Since the end of dollar convertibility in 1971, it is $653.

3) A recent study by Duke University shows that the world stock of gold, estimated at 171,300 metric tons, is currently worth about $9.0 trillion. In 1999, the world stock of gold totalled about 145,000 metric tons for a value of $1.5 trillion. This is equivalent to a 6.0 fold increase in the value of the world stock of gold. During the same 12 years, The US money stock (MZM) expanded from $4.0 trillion to $12.0 trillion for much lesser 3.0 fold increase.

4) As a matter of fact, in relative terms to industrial metals, energy, housing and equities, the price of gold is definitely expensive and has been so for some time.

What is fair value for gold is difficult to discover and, therefore, a matter of debate. Put simply, the “reflation fix” of central banks combined with “rolling financial issues” since the collapse of Lehman Brothers have been the main drivers behind the rising price of gold and treasuries.

Credit Suisse argues that extreme fears that have characterized the world scene since 2008 are dissipating. The bank’s research desk has put forth that the peak in fear trades occurred last July. The point of inflection took place when the ECB President Mario Draghi firmly committed that the ECB would do “whatever it takes” to save the euro.

If this is true, the remaining concerns have to be with what will happen to real rates and the excess reserves at the Fed.

Firstly, the day is approaching for a change in the Fed’s monetary stance. The inflation composition of the misery index (9.6) is rising and currently stands at 18%. At 25% is when the turn will come. In a previous weekly letter, I argued this point. Real rates are still negative but they are slowly moving up.

Secondly, it is possible that bank excess reserves may never be monetized. Prudent management, regulatory restrictions and investor aversion to risk are forcing banks to keep higher liquidity and capital-to-assets ratios. In effect, excess bank reserves are unofficially frozen.

Accordingly, the Federal Reserve Banks could just decide to raise the reserve requirement to a level that would officially absorb all or part of the excess bank reserves. It should be noted that when the Fed balance sheet increased some $2.5 trillion in the two years following the sub-prime crisis, the price of gold shot up $700. In this connection, one could arguably defend the proposition that the $700 is fluff. In this connection, gold prices could trend lower to $1200.

Over the last several trading days, the bottom has fallen out of gold.  In less than three weeks the price of gold has dropped by $100 for a decline of more than 5%.  Just today, the commodity saw a ’death cross’ of its 50 and 200-day moving averages.  The relatively uncommon death cross is considered a negative technical pattern where a downward sloping 50-DMA crosses below a downward sloping 200-DMA.  Death crosses are so rare for gold, in fact,  that the last time it happened with its 50 and 200-DMA was back in 1998!

Going all the way back to 1975, there have only been eight prior death crosses for gold. 

(…) Therefore, from a technical standpoint, gold is getting to a place where a potential trading opportunity may occur.  Historically speaking, when the price of gold has gotten more than 4% below the average price (inverted to display a positive number to display better) it has been consistent with a near term bottom in gold prices.  With gold now 6.7% below is 13-week moving average – the risk/reward opportunity appears to be favorable for at least a short term trade.  However, what investors should not be doing at this point is panic selling into this slide.  With gold on a very serious “sell” signal counter-trend rallies should be used to reduce excessive weightings in gold until the overall trend becomes positive.


As we approach spring and as Fed members discuss the ending of QEs, gold bugs are shivering.


NEW$ & VIEW$ (12 NOVEMBER 2012)

Much to deal with: earnings, valuation, politics. Make sure to read the “oil” part.


Nearing the end of the earnings season. S&P says that of the 451 companies having reported, 63% beat and 24% missed. The biggest beats were in Health Care where 79% beat. Excluding these, the beat rate drops to 61%.

EPS keep sliding and are now seen reaching $24.40, down 3.5% YoY, bringing trailing 12-month EPS to $97.80, down 0.9% from their June 30 level. Revenues are up 1.7% YoY, in line with Q2’s +1.8%. Margins are 9.02% down from 9.5% in Q2 and Q311.

Q4 estimates also keep being revised downward. They are now $25.96, up 9.4% YoY. Q4 estimates have been shaved nearly $1.00 in the last 3 weeks. Factset calculates that almost 40% of last week’s earnings revisions were accounted for by the Insurance industry post Sandy.

Of the 86 companies that have issued EPS guidance for the fourth quarter, 62 have issued projections below the mean EPS estimate and 24 have issued projections above the mean EPS estimate. Thus, 72% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance. This percentage is well above the long-term average (61%), but it is below the percentage recorded in the previous quarter at this same point in time (80%).

Of the 24 companies that have issued EPS guidance since October 29, seven have mentioned the negative impact of Hurricane Sandy in their earnings release or conference call.

U.S. equities remain in deep undervalued territory per the Rule of 20. Earnings are not collapsing, however, providing some downside protection for now. The next few weeks will likely be volatile given the looming fiscal cliff debate in the U.S. and continued serious economic and financial problems in Europe.


Bespoke Investment tallies all NYSE companies:

(…) the current earnings beat rate stands at 59.7%.  After hitting a high of 61.8% on Monday, the beat rate dropped each consecutive trading day to close out the week below 60%. 





Obama, Boehner Open to Bargain  Obama and Boehner hinted compromise is possible, in a bid to defuse tensions before talks next week to avert a fiscal crisis.

[image]Mr. Obama, in his first statement on the fiscal cliff since winning re-election Tuesday, said any deal must include tax increases on “the wealthy.” He also called on the House to immediately pass a Senate bill that would extend the Bush-era tax cuts on household income under $200,000 a year for individuals and below $250,000 for couples. (…)

The following was widely quoted this weekend:

White House press secretary Jay Carney, responding to questions after the president spoke, said Mr. Obama would veto any legislation that extends the Bush-era tax cuts for the top 2% of American income earners.

But this next, important, part was often omitted:

At the same time, he didn’t rule out extending the rates if they were linked to raising revenue from wealthy people by eliminating deductions. (…)

Obama is also apparently open to changes in Medicare and Medicaid.

Mr. Obama also signaled that a deal would include changes to entitlement programs such as Medicare and Medicaid, but he didn’t mention Social Security. (…)

Mr. Boehner said Friday he is open to a deal that raises tax revenue but not rates, leaving open the possibility for a compromise that includes limiting or eliminating tax deductions or other tax breaks for those families. (…)

Hmmm…If these are more than mere words (Fingers crossed) , this might not be a repeat of the miserable 2011 debt ceiling standoff episode.

Senate minority leader Mitch McConnell, interviewed by the WSJ’s Stephen Moore::

“Let me put it very clearly,” says the five-term Republican senator from Kentucky. “I am not willing to raise taxes to turn off the sequester. Period.” (…)

“Look, he may think it would be helpful to his presidency to continue to divide and demonize us,” says Mr. McConnell. “But my answer will still be short and firm: No. We won’t agree to any tax increases that will hurt the economy.” (…)

Republicans are willing to be “flexible” on raising revenues but, he hastens to add, only “in the context of broad-based, comprehensive tax reform.” He’s open to prying more out of the rich by closing tax loopholes. But he and his caucus of 45 Republicans want lower, not higher, rates. (…)

The other unresolved mega-issue is what to do about the scheduled sequester cuts of $110 billion for 2013, half coming from defense and half from discretionary domestic programs. Much like the president, he wants to shut it off, but with a caveat: “I don’t think we should just forget about imagethe spending reductions we promised. We ought to achieve exactly the same amount of spending reductions,” with targeted cuts that the two parties have already agreed to. When pressed on whether he could live with the sequester, as some Republican budget hawks have suggested, the senator dismisses that drive-off-the-cliff option as “Thelma and Louise economics.” (…)

And what if the president insists on raising tax rates? Expect a principled stand by the minority leader and his fellow Republicans: “He’s got to understand he doesn’t fully control the Senate. He doesn’t control the House at all. In order to accomplish things for the country he will need to work with us.”

As Mr. McConnell walks me to the door, he adds: “You know, he doesn’t own the place.” (Image above from Scott Pollack for Barron’s)

Deficit Push Planned

The White House is planning an aggressive public campaign to build support for its proposal to reduce the deficit through tax increases and spending cut, a sharp contrast to its private talks with Republicans that faltered last year.

Mr. Obama’s new approach is in sharp contrast to his strategy last year, when he met privately with Mr. Boehner to try and craft a broad package of tax and spending changes to reduce the deficit. Now, Mr. Obama and his aides have promised to be much more flexible and seek outside ideas.

Mr. Buffett and his secretary will soon do politics again. Things could get nasty as this WSJ editorial shows:

The Hard Fiscal Facts

Individual tax payments are up 26% in the last two years.

(…) The feds rolled up another $1.1 trillion deficit for the year that ended September 30, 2012 which was the biggest deficit since World War II, except for each of the previous three years. President Obama can now proudly claim the four largest deficits in modern history. As a share of GDP, the deficit fell to 7% last year, which was still above any single year of the Reagan Presidency, or any other year since Truman worked in the Oval Office.

Tax revenue kept climbing, up 6.4% for the year overall, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Mr. Obama won’t want you to know this, but this revenue increase is occurring under the Bush tax rates that he so desperately wants to raise in the name of getting what he says is merely “a little more in taxes.” Individual income tax payments are now up $233 billion over the last two years, or 26%.

This healthy revenue increase comes despite measly economic growth of between 1% and 2%. Imagine the gusher of revenue the feds could get if government got out of the way and let the economy grow faster. (…)

Even if Mr. Obama were to bludgeon Republicans into giving him all of the tax-rate increases he wants, the Joint Tax Committee estimates this would yield only $82 billion a year in extra revenue. But if growth is slower as a result of the higher tax rates, then the revenue will be lower too. So after Mr. Obama has humiliated House Republicans and punished the affluent for the sheer joy of it, he would still have a deficit of $1 trillion.

Most of our readers know all this, but we thought you’d like some new evidence to rebut the kids who voted for your taxes to go up when they return from college for Thanksgiving. Maybe they’ll figure it out when they have a job, if they can find one. Punk  (Winking smile)

US plays chicken on edge of fiscal cliff
Politicians on both sides are flirting with the idea of going over the cliff

The issue is not the percentage of spending taken out of the economy; it is the blow to confidence. Going off the cliff would be an emphatic indication that an election had done nothing to make Congress more willing to compromise.

Here’s the rosy scenario:

Hence forth his goal will be to secure his legacy as the president who not only introduced universal healthcare and decapitated Al Qaeda, but also pulled the US economy out of its deepest economic crisis since the 1930s and assured the Treasury’s long-term solvency.

He knows that he can only secure this legacy and avoid lame-duck status
by breaking the gridlock in Washington. These changing political calculations mean that a new willingness to compromise is virtually
guaranteed on both sides of the US political divide. With the job market
improving, the housing crisis largely over and the financial system returning to normal, President Obama and the Republican congressional
leaders will quickly realize that they have to work together and compromise if they want to claim any credit for the US economic recovery that lies ahead. (Gavekal)

What’s at stake?

Nancy Lazar, who along with Ed Hyman heads up International Strategy & Investment, writes that a deal next month for a one-year deferral of a big chunk of the cliff would still result in a $162 billion tax hike in 2013. Moreover, since it would hit Jan. 2, the brunt of it would be felt in the first quarter, during which ISI estimates that real disposable personal income would plunge at a 3.8% annual rate.

Without a deal, ISI estimates, heading over the cliff would slash real disposable income at a 10% annual rate in the first quarter; consumer spending would plummet at a 5% rate and plunge the economy back into recession. (Barron’s)

Gavyn Davies: The anatomy of the US fiscal cliff

There are five main elements in the composition of the cliff. To simplify information that has recently been published by the Congressional Budget Office, they are the following:

The CBO has also estimated the economic impact of each of the separate components of the cliff. This is what the results look like:

The overall impact on US GDP next year, if the entire cliff were to take effect, would be to reduce real GDP by 2.9 per cent, and reduce employment by 3.4 million jobs. No wonder the markets are worried.

During all this bickering:

Partisan fight over “fiscal cliff” will harm U.S. economy: Reuters poll  Any partisan squabbling over the United States’ looming budget crisis will harm its economy, according to a strong majority of economists polled by Reuters after Tuesday’s presidential election.

Keep in mind that all this is happening during the biggest shopping season of the year and just as companies finalize their 2013 budgets. Confused smile


Third Quarter GDP Looking Better, but May Be at Expense of Fourth Quarter Initially viewed as another lackluster period, the third quarter could turn out to be among the most robust economic advances of the current recovery.

After surprisingly positive reports on wholesalers’ inventories and the trade deficit this week, some economists are now forecasting that the gross domestic product increased at better than a 3.0% rate during the third quarter. The government initially pegged it as a 2.0% gain, but will use the latest data to revise the figure later this month.

Economic growth has only twice topped a 3.0% rate since the recovery began thirteen quarters ago. The economy hasn’t grown at better than a 3.0% clip for a full year since 2005.


  • Total construction spending has been rising.

FRED Graph

  • Even though public spending keeps falling.

FRED Graph

  • Private resid. has gained for 6 consecutive months.

FRED Graph

  • Private non-resid.has flattened out. More capex stimulus needed, real or political…

FRED Graph

Pointing up  Also: ISI’s economic diffusion index, which incorporates all the economic indicators they monitor each week. The index made a new high last week. Citigroup’s economic surprise index also made a new high last week.


From the state controller’s office:

October’s numbers on California’s financial condition showed the positive impact of the state’s economic recovery, with tax receipts surpassing both expectations and last year’s numbers. Total revenues of $5.0 billion were $208 million, or 4.4%, above estimates contained in the 2012-2013 State Budget and 19% above last year’s actual figure.




China’s Trade Surplus Widens

China’s trade surplus widened in October as export growth accelerated, the latest encouraging sign for the world’s second-largest economy.

China’s October exports rose 11.6% from a year earlier, faster than September’s 9.9% rise. Imports, however, rose a lackluster 2.4% from a year earlier, unchanged from September’s rise.

Exports to Europe fell 8.0% from a year earlier in October, showing that economic weakness there continues to weigh on demand for Chinese goods. Exports to the U.S., on the other hand, were up 9.1%.

Minister warns of grim trade situation  Chinese Commerce Minister warned of lingering pressure on the country’s foreign trade from weak global demand, rising domestic costs and growing trade protectionism.

(…) “The trade situation will be relatively grim in the next few months and there will be many difficulties next year,” Chen told reporters at a group interview on the sideline of the 18th National Congress of the Communist Party of China, which opened Thursday. (…)

He cited lack of fundamental improvements in global demand, rising production costs of Chinese labor-intensive industries and stronger protectionism sentiment as the main factors dragging down exports. (…)

Is this a real upturn?

An earlier survey from Markit, produced for HSBC, had signalled a similar upturn in manufacturing output, though even more encouraging was a strong rise in the new orders to inventory ratio, which acts as a leading indicator of production trends and suggests that the rate of growth of output will continue to improve in November.


Needless to say, the sharp drop in China CPI to 1.7% in October provides ample working room for Beijing, a luxury no other major country has nowadays. The biggest risk to China now is the U.S. fiscal cliff.


Industrial Output Falls Across Europe

Industrial production fell sharply in a number of European nations during September, an indication that the continent’s economy is on the brink of a sharp downturn.

(…) In its monthly note on the economic outlook, Germany’s finance ministry Friday warned that Europe’s largest national economy will weaken “noticeably” during the winter months as companies hold back on investments because of the euro zone’s fiscal and banking crisis.

“Overall, there will be a noticeably weaker economic dynamic in the winter half-year,” the ministry wrote. (…)

Siemens, the German engineering group that is a bellwether for the European economy, Thursday said the value of orders fell 4% in the three months to Sept. 30. The company, whose products range from power equipment and high-speed trains to washing machines and medical scanners, said new orders in Germany fell 44% from a year earlier. For all of Europe including Russia and its neighbors, Africa and the Middle East, orders fell 5%. (…)

In France, figures released Friday showed industrial production fell 2.7% from a month earlier, while in Italy production fell by 1.5% in seasonally-adjusted terms. The data followed the release of figures Wednesday that showed industrial production in Germany fell by 1.8%, and figures from Ireland Tuesday that showed output fell by a staggering 13.9%. (…)

Figures also released Friday showed output in Sweden was down 4.1% in September, while in Hungary output dropped by 3.8%, despite a pickup in the manufacture of automobiles.

Germans show they mean it:

Germany agrees to cut spending  Economics ministry warns of further slowdown

It will reduce total spending by 3.1 per cent to €302bn, compared with the expected outcome in the current year, and cut the budget deficit from €18.8bn to €17.1bn, thanks largely to increased tax revenues and reduced social security costs. Mug

Japan edges towards 5th recession in 15 years
Economy contracted annualised 3.5 per cent in Q3


India’s Industrial Output Shrinks, Trade Gap Widens

Industrial output contracted 0.4% from a year earlier in September, hurt by the poor performance of the manufacturing sector, government data showed Monday. The government also downwardly revised the output reading for August to a 2.3% expansion from 2.7% reported previously. (…)

Factory output has shrunk in five of the seven months through September as high interest rates eat into demand and slow policy reforms hurt investor confidence. Economic growth in India has slowed to its weakest in nearly a decade. (…)

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said the economy could expand 5.5%-6.0% this fiscal year. It grew 6.5% last year, the weakest pace in nine years.

Singh promises second wave of reform
Indian PM vows to reverse slowdown in economy

India’s prime minister has pledged to follow up his recent burst of economic reforms with more measures to restart stalled infrastructure projects, attract foreign investment and reverse the slowdown in Asia’s third-biggest economy.

Manmohan Singh defended plans to attract capital from abroad, while admitting that India’s precarious public finances needed more international money to plug a growing gap between imports and exports.

Russian Third-Quarter GDP Grew 2.9%, Slowest Since 2010 Rebound

“The main reason for the slowdown is obviously agriculture, as the harvest has been worse this year,” Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, said before the release. “The second point is a certain deceleration in industry, and more so in mining than in manufacturing.”


Composite Leading Indicators (CLIs), OECD, November 2012

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to point to weak growth prospects in many major economies, but signs of stabilisation are emerging in Canada, China and the United States.

Compared to recent months where the CLI has pointed to a deteriorating outlook, tentative signs of stabilisation are also emerging in Italy.

The CLIS for Japan, Germany, France and the Euro Area as a whole continue to point to weak growth. In India and Russia the CLIs also continue to point to weak growth. The CLIs for the United Kingdom and Brazil continue to point to a pick-up in growth.



Airplane  Another “down-to-earth” viewpoint:

Cathay Pacific Sees Little Christmas Cheer for Air Cargo


Cathay Pacific Airways Ltd. , the largest carrier of international air cargo, said it has seen only a small increase in freight ahead of the Christmas shopping season, prolonging an 18-month downturn in industry volumes. (…)

The cargo slump “tells you just how pessimistic people are about the economic outlook overall,” said Andrew Herdman, the head of the Association of Asia-Pacific Airlines. “There’s no growth expectations.”

The group’s 15 member-airlines suffered a 3.2 percent drop in cargo volumes in the first nine months of the year, according to data on its website. The proportion of cargo capacity filled with freight dropped 0.5 percentage point in the period to 66.2 percent.

Singapore Airlines Ltd.  said Nov. 3 that it will park one of its 13 Boeing Co. 747 freighters for more than a year starting in January after losses at its cargo unit tripled in the quarter through September. Asiana Airlines Inc., South Korea’s second-biggest carrier, may consider returning its leased freighter if there’s no improvement in volumes, CEO Yoon Young Doo said at the Kuala Lumpur meeting.


US set to become biggest oil producer
IEA report highlights impact of shale revolution

The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.

Pointing up  This marks the first time the IEA, the developed world’s most respected energy forecaster, has made such a prediction. It underscores how the drilling boom that has unlocked North America’s vast reserves of hard-to-get-at oil and gas is changing the world’s oil balance.

In its yearly world energy outlook, published on Monday, the IEA said that by 2030 “the US, which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries”. (…)

The increase in US domestic production – of biofuels such as ethanol as well as unconventional “tight” oil – comes as new fuel-efficiency measures in transport imposed by the first Obama administration are set to reduce oil demand sharply. That will lead to a big fall in oil imports into the US, which the IEA says will plunge from 10m barrels a day to 4m b/d in ten years’ time. The agency says that North America will become a net oil exporter by about 2035.

“The US, which imported a substantial chunk of oil from the Middle East, will be importing almost nothing from there in a few years’ time,” Fatih Birol, the IEA’s chief economist, told the Financial Times. “That will have implications for oil markets and beyond.” (…)

The US Energy Information Administration expects production will rise from 6.3m b/d this year to 6.8m b/d in 2013 – its highest level since 1993. (…)

In its outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase. In contrast, energy demand would “barely rise” in the leading industrialised countries. Global oil demand would reach 99.7m b/d in 2035, up from 87.4m b/d in 2011. (…)

Pointing up However, those projections are based on an extrapolation of the dramatic growth in shale oil production in recent years, which some analysts see as implausible, or at least uncertain.

Related: Facts & Trends: The U.S. Energy Game Changer

BUY LOW, SELL HIGH CHART  They don’t get much better than that (chart from Moody’s).



(…) , emerging & developing economies have seen their official holdings of gold rise to 200 million troy ounces for the first time ever this year. Still, despite a 44% increase in such holdings since 2007, the share of gold in total official reserves remains at a paltry 4.3%. As shown this compares to a share of nearly 24% in the advanced economies.

Given the current environment of surging sovereign debt in the U.S. and the Eurozone (whose government bonds account for the bulk of emerging markets’ official reserves) we think that the central banks of
emerging economies are likely to increase their exposure to bullion to guard against possible currency depreciation. (NBF Financial)


Surprised smile  No hold back in this buy-back

Coca-Cola (NYSE:KO) announced a plan to buy back an eye-popping 500 million shares, or approximately $18.9 billion, of its stock.


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




Citigroup’s economic surprise index has been improving all summer, helping equity prices along with Draghi’s and Bernanke’s words of hopes. (Chart from The Short Side of Long).


Keep in mind that:

  • Economic data throughout the world, including the U.S., have deteriorated throughout the summer.
  • Generally, data is not even “less bad”, it is just getting worse.
  • Economists got over pessimistic, once again, hence a relatively better surprise index.
  • Surprises are not yet positive, they are just “less bad”. Will they get positive? Read on.

Yesterday’s U.S. ISM at 49.6 indicated contraction for the 3rd consecutive month. Same with the New Orders Index which clocked at 47.1. The backlog Index slumped to 42.5. Importantly, the number of industries reporting better trends has declined very significantly this summer ( Better hope the consumer keeps spending!

Most other PMI reports remain dismal (Eurozone, China). Scotia Capital plots what this generally means for profits:

We believe global data needs to bottom to extend improvements in risk appetite into Q4. In our view, recovering ISM/PMI indices are needed to reverse the trend in earnings revisions and support “risk-on” outperformance into Q4. Exhibit 10 highlights the relationship between the World PMI index (bar) and MSCI World AC World forward earnings.


Surprised smile  FedEx Warns of Slowdown

FedEx cut the outlook for its fiscal first-quarter earnings below already reduced expectations, citing weakness in the global economy.

The world’s largest air-cargo shipper by revenue said earnings in the August-ended quarter came in below its already reduced expectations. FedEx shares fell 3.1% to $84.85 in after-hours trading, with rival United Parcel Service Inc. down 1.9% at $72.31. (…)

The company downgraded its guidance for earnings during the quarter to August 31 to $1.37 to $1.43 per diluted share, against its previous guidance of $1.45 to $1.60. Last year’s first-quarter earnings were $1.46.

Note that guidance declined 5-10% below already reduced expectations.!

FedEx said a weak global economy constrained growth at its Express business—the company’s largest division and the one that handles international parcels—more than it had anticipated.

Things are not getting bad they are getting worse!

Storm cloud  U.S. Construction Spending Slumps

The value of construction put-in-place fell a sharp 0.9% during July after an unrevised 0.4% June gain. Private sector spending led the decline with a 1.2% drop (+15.0% y/y) after a 0.6% June uptick. Residential building fell 1.6% (+17.6% y/y), its first decline since March. Single-family construction dropped 1.5% (+19.1% y/y) but multi-family building jumped another 2.8% (44.5% y/y). The value of spending on improvements fell 5.5% (+14.9% y/y) and reversed three months of increase.

In the public sector, building activity slipped 0.4% m/m (-0.7% y/y). Spending on highways & streets, which is 29% of total public construction spending, slipped 0.3% (+5.2% y/y) after five consecutive months of increase. Transportation spending, which is 10% of total public, increased 0.7% (11.5% y/y) while office building rose another 1.1% (-2.1% y/y). Educational building activity continued lower by 0.6% (-5.0% y/y) and water supply construction fell 2.0% (-11.6% y/y).


The only ray of hope:

Rainbow Fingers crossed   Auto sales a rare bright spot in struggling U.S. economy

Each of the Detroit Three auto makers reported double-digit sales gains in the U.S. market for August, helping propel overall vehicle sales to an annual selling rate of about 14.5 million vehicles, compared with 12.4 million a year earlier.

The August SAAR represents the strongest selling rate in 2012 to date, and the highest rate over the past three years. Sales are now almost in line with the 10-year average, although they remain below the 16-17 million trend from 1999-2007. (Chart from BMO)


Let’s hope oil is really rolling over.



Even if Ben Bernanke’s speech in Jackson Hole provided little information about the timing and scope for Quantitative easing (QE), the word got
around this weekend that four Federal Reserve presidents are calling for an open-ended Fed commitment to QE. Previously, the Fed would commit a dedicated sum to such operations. This development, if it occurs would send the message about the unlimited nature of the Fed’s balance sheet. This is a powerful message. (NBF)

A strong message but effective actions? Gavekal is not so sure about that:

Distributing newly-created money to banks and bond funds was certainly
useful in the US in 2009, when the financial system was imploding. It would probably be useful in the euro-zone, where crippling sovereign
bond yields have pushed Italy and Spain into debt traps. But in the US
today, with bond yields below 2% and banks adequately capitalised,
further QE will be totally ineffective in stimulating employment or
growth. QE may have helped avert a US depression, as Bernanke argues.
But QE has failed to stimulate strong growth and employment since 2010, so why should it suddenly be start to do this in 2013?


Hopes are high!

Spain Seeks to Stem Its Banking Crisis

Nearly three months after Spain requested a bailout for its banks, the problems facing the country’s frail banking system are deepening, putting pressure on the ECB to act.

[image](…) In one sign of the mounting pressures, the Bank of Spain appears to have started providing emergency loans to some of the country’s banks, according to central-bank data and industry officials.(…)

The Spanish government offered another relief measure last week by scrapping a regulation that essentially put a ceiling on the interest rates banks can dangle in front of depositors—a rule introduced last summer to defuse an escalating and potentially destabilizing price [image]war among banks. The banks quickly responded by jacking interest rates above 4% in a bid to woo skittish customers.(…)

Spain’s banks have filled the void left by departing customers by turning to the ECB and Spain’s central bank. At the end of July, the industry had borrowed a total of €410 billion from the ECB. (…)

Now the collateral problem is rearing up again, with analysts saying some Spanish banks are running low on eligible assets.


During the last 6 months, real sales are off 0.5%. Non-food was up 0.9% in July, +0.4% in last 3 months. German real sales dropped 0.9% in July (-0.1% last 6 months). They slumped 1.0% in Spain ( -3.6% last 6 months). (Eurostat)



This environment of “super” QE is good for bullion. As today’s Hot Chart shows, speculative positions on the USD turned negative for the first time since July 2010 last week. If you believe that such a situation endures, than gold will do well. In the three previous instances where speculative
positions turned short USD, the bullion gained more than 30% in the following year (see chart). We believe that bullion is en route to retest its
cyclical highs. (NBF)


Lightning  China’s steel mills braced for slowdown  Prices falling as Beijing seeks to control downturn

There is just no demand,” says one trader in the town of Tangshan. “It’s much worse than [the last downturn] in 2008. In 2008 at least you had buyers talking to you. Not any more.” (…)

Layered on top of that structural shift, the precipitous drop in iron ore prices over the past few weeks has been triggered by tightening bank credit policies that are forcing traders to sell their stockpiles into the falling market because they can’t extend their loans. This year, China’s bank regulator warned banks of rampant illicit borrowing by steel traders, who had used steel as collateral and then borrowed money to invest in real estate or the stock market. (…)’

Another reason for the slump in China’s steel markets is the unique structure of China’s state-dominated steel sector. This year Chinese mills have maintained high levels of steel production – even when running at a loss – rather than shutting down their furnaces, because many state-owned mills are incentivised to maximise revenues instead of profit. Revenues from steel mills means more tax revenues for the local government, their ultimate owners.

iron ore china

“Central planning” in action:

China hikes rail spending target  The Ministry of Railways has raised its target for railway construction spending this year to 496 billion yuan ($78 billion) from 470 billion yuan.

“The investment on new railways will be at least 67 billion yuan a month from September till the end of this year,” China Railway Group’s President Bai Zhongren told a news conference in Hong Kong on Tuesday.

Confused smile  This is at least the third time this year that the ministry has raised its investment target since the start of July when Premier Wen Jiabao said promoting investment growth is key to stabilizing economic expansion that has fallen to the slowest pace in three years.

In its previous moves, the ministry has raised its spending target from 406 billion yuan to 470 billion yuan. The latest investment target (496 billion yuan) is 35 billion yuan more than last year’s spending of 461 billion yuan

Meanwhile, data from the ministry showed that total investment in railway fixed assets during the first seven months of 2012 was 30 percent less from a year ago, due to fewer new projects and lack of funding.


After 21 Years of Growth, Australia’s Outlook Dims

[image]Gross domestic product, or GDP, grew by 0.6% from the first quarter, the Australian Bureau of Statistics said in a report Wednesday—compared with the 0.8% expected by economists. The growth rate was less than half the 1.4% expansion Australia’s economy recorded in the first three months of the calendar year. (…)

Slumping prices for the steelmaking ingredient has prompted some leading mining companies to stall their expansion plans and shed staff. That may curb growth in the final months of the year, at a time when industries such as manufacturing and tourism continue to suffer from a historically high exchange rate.

There are more signs of trouble ahead. Retail sales slumped to a near two-year low in July, for example, while job-market indicators have shown a softening in demand for new staff as Australia’s manufacturing sector continues to contract.

Miners Retrench in Australia

Mining companies in Australia are moving quickly to protect profits as the price prospects for major industrial commodities worsen—posing a risk for the resource-rich nation’s economy. Australia recovered quickly from the financial crisis in 2008 and grabbed a place among the world’s fastest-growing developed countries largely due to mining. That status is now at risk as companies such as BHP, Rio Tinto and Fortescue aggressively rein back their investments.

The iron-ore decline “has been much sharper than anyone anticipated,” said Fortescue Chief Executive Nev Power, and now there’s concern a recovery will take a little longer than first thought. Government forecasters are warning there’s further to fall for industrial commodities such as iron ore, coal and copper. (Chart from Haver Analytics)


Wilted rose  Study Finds Many ETF Indexes Misleading 

The indexes that ETF providers advertise to help market their new funds are not giving investors a good indication of future performance, according to a recent study.

U.S. ETFs currently track at least 1000 indexes, more than half of which are less than six months old — too new for investors to get a feel for possible future returns. Makers of indexes often fill in the blanks with historic data on the components to produce hypothetical index performance. But a recent Vanguard study found that a large percentage of these hypothetical, back-filled indexes that had outperformed the U.S. stock market didn’t keep up after they went live as the index returns subsequently fell. What may be happening, says senior Vanguard ETF strategist Joel Dickson, is that indexes are being developed by “rearview mirror investing,” that is, through selection bias of what worked well in the past. The result can mean a nasty surprise for investors.(…)

“I don’t know about you,” quips Dickson, “but if I drove a car using the rearview mirror, I’d probably hit a wall. Investors need to be aware of the presence and possible shortcomings of back-filled performance information and account for it accordingly.”

Steaming mad  SEC Charges China Firm With Falsifying Earnings

The U.S. Securities and Exchange Commission charged China Sky One Medical with falsely inflating its earnings, a rare action almost two years after doubts about the accuracy of disclosures by small Chinese firms sent U.S. investors fleeing.


NEW$ & VIEW$ (17 August 2012)

Fingers crossed  Investors welcome Merkel euro support      Wall Street approaches post-crisis high

Investors seem to be welcoming comments from German chancellor Angela Merkel in which she said the pledge by the European Central Bank to do whatever it takes to support the euro project was “completely in line” with the views of the bloc’s leaders.

High five  But from Bloomberg:

Asked about ECB chief Mario Draghi’s announcement that the central bank may return to sovereign bond-buying, Merkel said recent ECB decisions “have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the euro.”

And from the UK Telegraph, particularly on the seniority issue:

Finland prepares for a full-blown currency crisis 

Finland’s foreign minister warns that the country is preparing for a full-blown currency crisis as tensions in the eurozone mount and that it will not tolerate further bail-out creep

Mr Draghi said two weeks ago that the issue of seniority would be “addressed” as part of his twin-pronged plan for the ECB and ESM to buy bonds in concert. A number of EU leaders and officials claimed there had been a deal on the ESM’s seniority status at an EU summit in late June. Finland, Holland, and Germany all deny this.

“Our law passed this summer says the ESM has the same priority as the IMF. There was a clear understanding on this. Any change would require a new law passed by the whole parliament, and this would be very difficult because the risks would be much higher.”

Confused smile  To QE3 or Not To QE3, The Timing Is The Question  Credit Suisse economists Neal Soss and Dana Saporta are on a growing list of forecasters putting 50/50 odds on new action from the Federal Reserve at the central bank’s September 12-13 policy meeting. Plenty of analysts think the Fed will still launch a third round of quantitative easing in the coming months. But as they say in a note today, “the timing is the question.”

‘Hawks’ Weigh In Against Action

The Federal Reserve’s “hawks” are speaking out against the central bank taking additional action to spur the U.S. economy.

“I’m very dubious. There are diminishing returns to these actions,” Mr. Plosser said. “The evidence is not strong that somehow more [bond purchases] are going to help the unemployment rate move faster to where we’d like it to be. I don’t see that there’s much benefit.”

Dallas Fed President Richard Fisher, in an interview Thursday, expressed similar skepticism about the efficacy of Fed action. He said businesses already have ample access to cheap credit and are reluctant to borrow, hire and invest for other reasons, including concerns about regulation and taxes. With those uncertainties holding back business, he said, “I don’t see any virtue to further quantitative easing.”

The recent numbers have encouraged me in my argument that there is no urgent need” for additional action, Mr. Fisher said.


Wal-Mart: ‘Paycheck’ Cycle Spreads  Wal-Mart’s second-quarter earnings rose 5.7% but it said many customers in the U.S. and abroad are living “paycheck-to-paycheck.” Overall revenue rose 4.5%.

Wal-Mart cautioned that it is now seeing in international markets the same “paycheck cycle” it saw in the U.S., where customers buy immediately after payday and then make smaller purchases as money runs out. The trend has become particularly pronounced in the U.K., where customers at Wal-Mart’s Asda grocery stores are “clearly stretched,” Chief Financial Officer Charles Holley said during a conference call with reporters Thursday morning.

David Rosenberg reminds us:

The spike in food and gas prices casts a cloud over the back-to-school shopping season – a big drain on cyclical spending right into the grocery bill and gas tank. The last time we had food and gas prices going up was like this was back in the first quarter of 2011 and it produced a zero percent GDP growth and a subsequent end to the post-QE2 rally.


Auto  White House studying potential oil reserve release  The White House is “dusting off old plans” for a potential release of oil reserves to dampen rising gasoline prices and prevent high energy costs from undermining sanctions against Iran, a source with knowledge of the situation said.

“The driving force in this is both impact on the economy and impact on the Iran sanctions policy,” the source said, noting that Washington did not want rising oil prices to create a windfall for Iran while international sanctions were having an effective impact on its crude exports and revenues.

The United States has not yet held talks with international partners about a coordinated move. The source noted that Britain, France, Germany and other partner nations in the Paris-based International Energy Agency (IEA) were receptive to a potential release a few months ago when conditions were similar.

May I remind you about the U.S. elections in 2 months.

Singapore’s Export Growth Slows

Singapore’s export growth slowed in July, missing expectations, but shipments to China grew, offering some hope that demand from the world’s second-largest economy can help support Asia’s export engine.

The city-state’s exports rose 5.8% in July from a year earlier, slowing from June’s 6.6% increase. Singapore’s exports to mainland China grew 8.3% in July from a year earlier and 10.2% from June, even as exports to the U.S. and Europe fell on an on-year and a sequential basis.

Shipments to the U.S. fell 15.6% on year, worsening from June’s 2.2% decline. Exports to the European Union, Singapore’s biggest export destination, fell 1.5% in July from a year earlier, erasing the previous month’s 17.0% jump. 

In fellow Asian export powerhouse Taiwan, by contrast, the export outlook worsened Friday, with the government cutting its 2012 export forecast to a decline of 1.72%, reversing a forecast of 0.07% growth.

Euro-Region Exports Increase as German Expansion Limits Slump: Economy  Euro-area exports rose for a second month in June, driven by a surge in shipments from Germany, as companies tapped into emerging markets to offset declining demand at home.

Exports from the 17-nation currency bloc advanced a seasonally adjusted 2.4 percent from May, when they gained 0.4 percent.

German exports jumped 6.6 percent in June to 40.9 billion euros, while imports in Europe’s largest economy rose 1.5 percent. Shipments from Italy increased 2 percent in the period. France and Spain reported gains of 1 percent and 1.4 percent, respectively.

Exports to the U.S. rose a non-seasonally adjusted 11 percent in the first five months from a year earlier, while shipments to the U.K. increased 7 percent, today’s report showed. Exports to China and Russia surged 8 percent and 16 percent, respectively, while Japan shipments climbed 13 percent.

China’s slowing economy sparks retail price war

China’s major appliance retailers have launched an online price war in a battle for market share as sales of household white goods and electronics products are blasted by what may be the country’s slowest year of economic growth since 1999.

Lightning  Spanish Banks’ Bad Loans Surge

Bad debts held by Spanish banks surged in June to its highest level on record and there were further outflow of deposits as the economy sank deeper into recession.

Nonperforming loans grew by €8.39 billion ($10.37 billion) in the month of June, to €164.36 billion, or 9.42% of total outstanding loans compared with 8.95% in May. The previous high for bad loans was recorded in February 1994, when they peaked at 9.2% of total loans.

The data also showed that deposits shrunk by 6.59% compared with a year earlier, the steepest annual decline on record.

imageRate Cuts on the Cards for Norway, Sweden

Sweden and Norway are riding out the economic crisis engulfing the rest of Europe, but their relatively steady economic growth and robust public finances come with a price: soaring currencies.


China’s Gold Demand Loses Glitter

China has broken its near-decade-long gold streak.

A 7% year-on-year decline in Chinese gold demand in the second quarter was the first quarterly drop since 2003. Indian consumption is down too. With the two countries accounting for around 50% of global demand, it helps explain why prices are 10% off their peak this year.

Pointing up  In the past, Chinese households had a choice between volatile equities, expensive property and gold to park their cash. Now investment options are broadening.

At the end of the second quarter, Fitch estimates around 10.4 trillion yuan ($1.6 trillion) was invested in wealth management products, equal to 11.5% of deposits in China’s banking system and up fivefold from 2008. Unlike gold, wealth management products often offer principal protection and guaranteed returns.

At the same time, the capital account is becoming more porous. Chinese households are already making investments in real estate everywhere from Hong Kong to New York.

Facebook tumble as lock-up expires  Price drops below $20 as trading ban on pre-IPO investors lifted

ISI’s Bijal Shah offers some hope to Facebook shareholders with this pretty interesting research piece:



NEW$ & VIEW$ (13 August 2012)


Ambrose Evans-Pritchard in the UK Telegraph:

“Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”

“The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”

“This was the moment when stimulus was supposed to bite. It didn’t,” said Global Insight.

Expert opinion is split on the severity of the threat. Nomura said the latest spending drive will filter through just in time for the Communist Party hand-over later this year, carrying the economy into mid-2013.

Global Insight said measures in the pipeline are not enough. “The government might not want to pile on debt and revert to grand state-led stimulus but it increasingly appears that there are few other choices,” it said.

Fitch’s December 2011 comments on Chinese banks are worth reading again:

Banks‟ cash positions are already under strain, and a rising forbearance burden will only add further claims on these resources. (…) But if current rates of erosion continue, it is conceivable that cash constraints in 2012 could become more binding. Some small banks have a dwindling capacity to extend new credit, and may require substantial relief in reserve requirements.

Conditions Today Are Different: Although prolonged forbearance has been successful on numerous occasions this time Chinese banks are entering the credit cycle with significantly weaker liquidity and a much larger stock of financing to carry. Unlike the last run-up of bad loans in the 1990s, there is no force like WTO accession on the horizon to propel the economy out of its difficulties. It is because of this cash constraint that current asset quality stress has the potential to become more destabilising than in previous episodes of loan deterioration.

Hence the need for other measures:

China Securities Journal confirmed this week that Beijing is steering the currency lower to cushion the shock. “The renminbi has entered a period of depreciation,” it said, adding that this could cause short-term capital outflows – running at $110bn in the second quarter – but the overall effect will be “beneficial, by enhancing exports.”

That would not be welcome news in Washington nor in Europe. Here’s what Markit says about China’s weak exports:

It is possible that the 1.0% rise in exports overstates the extent of the underlying weakness in Chinese trade. Both the Global PMI and the HSBC/Markit Manufacturing New Export Index, which have close correlations with China’s official export data, point to slightly stronger year-on-year growth in exports than the official data suggest, meaning some rebound in the volatile trade data may be possible in August.

However, it is nevertheless clear that weaker global demand is increasingly hurting Chinese exporters. The PMI New Export Orders Index fell to its lowest since March 2009 in June and managed only a slight rally in July. The deterioration is by no means surprising: the Global PMI showed world-wide manufacturing contracting for the second straight month in July, with output declining at the fastest rate since June 2009. The all-sector Global PMI rose slightly in July but still points to global demand rising at the weakest rate for around three years in recent months.


And this morning, a warning about August trade data:

China’s trade surplus to narrow in August  China’s trade surplus will continue to narrow in August, as export growth is likely to stay low, according to a report issued by the Financial Research Center of Bank of Communications.

“Given the grim prospects for global economic recovery, the country’s exports in August will fall from one month earlier, and year-on-year export growth will remain low,” the report said.

Pointing up  Note: many readers have enquired/commented on China electricity production as a valid benchmark on China’s economy. FT Alphaville wrote several posts on that in recent weeks:

Here are 2 charts to help you decide. The first is with IP which was up 9.2% YoY in July (not charted).


China quarterly yoy GDP and  monthly industrial production - Bloomberg Brief


When PPI declines while wages rise double-digit, profits decline!

State-owned enterprises profits drop in H1  China’s State-owned enterprises reported a more than 7 percent year-on-year drop in their first-half net profits, even though their revenues grew by more than 20 percent during the same period, according to figures from Wind Information, a financial data provider.



Storm cloud  Signs of Shaky Recovery in Japan

[image]Japan’s economy slowed more sharply than expected in the second quarter as exports and consumer spending lost steam, raising the specter of further deceleration.

Japan’s gross domestic product grew at a price-adjusted annualized pace of 1.4% in the April-June quarter after the previous quarter’s revised 5.5% expansion.

All the second-quarter growth came from domestic demand components, such as private and government spending and business investment. International trade shaved 0.3 percentage point off overall growth.


Storm cloud  Prices Surge as Drought Stunts Corn Crop  Federal forecasters expect record corn prices as a widespread drought put the nation on track to have its worst crop in nearly two decades.

Prices for ethanol, largely derived from corn and accounting for 10% of the gasoline consumed by U.S. drivers, have jumped by nearly one-third to $2.60 per gallon since May because of worries about hot, dry weather that has baked most of the country since June. Nearly all of the ethanol consumed in the U.S. comes from corn, production of which will fall to the lowest level in nearly two decades due to the drought, the U.S. Department of Agriculture said Friday.

The increase in ethanol prices helped spark a 16-cent jump in the national average gasoline price in July—the biggest increase for that month on record—to $3.45 per gallon. Four cents of that increase are attributable to ethanol, said Michael Green, spokesman for the American Automobile Association, a consumer travel group.

If corn prices remain at current levels, ethanol prices could rise another 20 cents to $2.80 a gallon, said Michael McDougall, senior director at brokerage firm Newedge.

The normal household spends about 4% of its income on gasoline and fuel, according to federal Bureau of Economic Analysis.

Output of the four North Sea crudes that underpin Brent will sink to a record low in September due to oilfield maintenance and natural decline. Output from 11 North Sea production streams is set to fall by 17 percent.

Prime Minister Benjamin Netanyahu said on Sunday that most threats to Israel’s security were “dwarfed” by the prospect of Iran obtaining nuclear weapons, which local media reports said Tehran had stepped up its efforts to achieve.




Storm cloud  Motorola to Cut 4,000 Jobs

Motorola is cutting roughly 4,000 jobs, 20% of the company’s workers, as Google works to reshape the company after closing on the acquisition in May.

Pointing up About two-thirds of the reductions will be from outside the U.S.

Pointing up  Honda Boosts North America Production

Honda is ramping up its production capacity in North America in an effort to turn its operations there into a significant exporter of cars and sport-utility vehicles, a top company executive said.

The move, driven by the strength of the Japanese yen, will also result in Honda significantly reducing the number of vehicles it imports into North America from plants in Japan, Tetsuo Iwamura, an executive vice president of the auto maker said in an interview.

Honda is expanding the production capacity of several U.S. and Canadian plants and is building a new factory in Celaya, Mexico.

When the Mexican plant reaches full capacity, Honda’s North American operations will export more vehicles than it imports from Japan, Mr. Iwamura said.


Bill McBride at CalculatedRisk provides evidence that U.S. housing has bottomed out given that

these three indicators generally reach peaks and troughs together.

If you waited for this confirmation, you’ve missed a 35% run in housing-related stocks since I wrote FACTS & TRENDS: U.S. Housing Mending on Jan. 3rd, 2012. That said, Bill’s always excellent charts also clearly show that it’s not too late. Here’s part of my Jan. post to consider:

Household formation has slowed drastically in recent years.  And though the slowdown in household formation coincided with the recession, as the economic recovery began and strengthened last year, household formation has yet to pick up.

Household Growing Pains

Macroeconomic Advisers (MA) recently examined Census Bureau population projections and “headship rates” (the share of people that head a household in various age groups) and projected that 13.7 million new households will form in the decade ending 2020.  Given vacancy rates and the size and age of the current housing stock, MA forecasts that these 13.7 million households are likely to spur the construction of 15.9 million units over that 10-year period.

Housing is quite significant at this stage since it not only can help employment, it also materially impacts consumer wealth and banks balance sheets. Housing is the only silver lining for the U.S. economy currently. Ed Hyman says that as long as housing holds solid, a U.S. recession is unlikely. He may be right. Nonetheless, ISI’s company surveys are down again this week with its global economic diffusion index making another new low last week.

For a more detailed analysis of the housing market, here’s a link to CoreLogic’s latest MarketPulse.

Light bulb  Who’s “buying” this rally?

(…) Yet after this month’s rally, it’s still hard not to wonder just why the S&P remains up more than 11 per cent this year, and roughly 25 per cent over the past twelve months, given that the macro data has been mostly disappointed in the last few months and that the earnings picture has worsened (same with earnings guidance).(…)

But we still couldn’t help thinking about it after we saw these charts from Credit Suisse Trading a few days ago:


As for who’s doing the buying, then, here’s a plausible answer from RBC analysts:

At the margin, we surmise that the buying power comes from a combination of the fast money investors who’ve been caught short, corporations with excess cash, and international equity investors running away from their home markets.

Also consider this, again via FT Alphaville:

It’s a trend of late. Beaten up investors struggle to cope with the unique brand of uncertainty that has come with a financial crisis and a sovereign debt crisis. They twitch at the thought of daring to dip into equities, and instead run into the increasingly expensive arms of a choice few safe haven government bonds. Hungry for the yield that such bonds cannot offer them, they move, cautiously, into corporate bonds too.

Or as Hans Mikkelsen at Bank of America Merrill Lynch put it (emphasis ours):

… following a long period of ultra-low interest rates, and little hope for much higher growth any time soon, many investors have capitulated and bought corporate bonds despite the low yields as alternatives – such as stocks – look comparatively less attractive. Clearly circumstances underlying big decreases in interest rates tend be consistent with wider credit spreads, but eventually if the low interest environment is expected to persist investors tend to capitulate and buy corporates.

So are the tighter spreads, seen in the above, sustainable? Back over to Mikkelsen:

… given the favorable outcome of the second Greek election, the Spanish bank recapitalizations, the June EU Summit, Mr. Draghi’s commitment “to do whatever it takes”, etc., the likelihood of the European issues becoming systemic and spreading to US financial markets has declined significantly since the dark days of early June. With valuations in the credit market already reflecting the likely impact of the fiscal cliff in our view, and given the decline in the likelihood of European contagion to US markets, we like current valuations in HG more than back in March when spreads were at the same level. Add a very favorable technical environment and we think HG spreads grind tighter for now.

Hence the ability of bonds to move tighter, even against systemic risk out of Europe. It’s not that the old world risk has gone away, but it is perceived that the probability of waves being felt across the Atlantic is lower. But in any case, that’s just “for now”.

Troubles Keep Cash Flowing to U.S.

The U.S remains a magnet for money fleeing the world’s trouble spots as markets continue to worry far more about global economic weakness than rising U.S. obligations.

The International Monetary Fund recently estimated that worries about governments’ fiscal health could remove one-sixth of the world’s supply of “safe” government debt by 2016, or about $9 trillion in assets that would need to be replaced by other investments. And it comes after a host of private-sector assets, such as pools of debt packaged by banks, fell out of favor as safe investments during the financial crisis.

The supply of safe assets, which also includes gold and higher-quality corporate debt, is shrinking at precisely the same time that demand is soaring, as banks and investors seek havens amid market turmoil and regulatory changes.


Q2 earnings season is almost over as 93% of S&P 500 companies had reported as of Aug. 9.

S&P calculates that 64% of S&P 500 companies beat estimates while 24% missed. The beat rate is highest in Industrials and Heath Care (77%), Consumer Staples (72%) and IT (69%). The miss rate is highest in Energy (42%) and Utilities and Financials (35%).

Q2 EPS are now estimated at $25.48, up 2.5% YoY. That follows +7.4% in Q1 and +8.2% in Q411.

Trailing 12 months earnings are now $98.74, up only 0.6% from $98.12 after Q1.

Q3 estimates keep declining. They are now seen at $25.09, down 1.5% QoQ and down 0.8% YoY. Trailing earnings would thus decline to $98.54.

Downward revisions are a global pastime for analysts these days. Notice how analysts are quicker at revising their sales forecasts.

All Countries World Index is projected to grow earnings by 12.4% in 2013, more than 200bps above the average of 10.3% per annum. Analysts have aggressively revised down their expectations for 2012 (from peak of 15% down to 8% today). Worryingly, 2013 estimates remain elevated. (BoA Merrill Lynch)


Declining trailing earnings are obviously not positive for equities since earnings are the fuel for equity markets. As I have been warning, the earnings tailwind for equities has now stalled. Can better multiples rescue us?

Before getting to that (which I will soon do in a separate post), some additional facts need to be considered.

S&P covers the 500 largest companies but Bespoke Investment keeps a tab on most NYSE listed companies. On a broader scale, the beat rate is even worse:

There were 490 more earnings reports this week, taking the overall total up to 2,192 since earnings season began on July 9th.  As shown below, 58.8% of the 2,192 companies that have reported this season have beaten consensus analyst estimates.  At 58.8%, the earnings beat rate this reporting period is 3.5 percentage points lower than the average quarterly reading of 62.3% seen since 1998.  If earnings season were to end today, it would be the lowest reading we’ve seen since the bull market began as well.  Earnings season ends next Thursday when Wal-Mart reports, and with just 108 companies left to report, we’re going to need to see a lot of beats to get above last quarter’s reading of 59.5%.

  • Factset provides additional color to Q2 earnings (note that Factset numbers don’t exactly match S&P’s, likely due to timing and methodology differences):

Excluding Bank of America, S&P 500 Earnings Growth Falls to 0.6% Not only is Bank of America the largest contributor to earnings growth for the Financials sector, it is also the largest contributor to earnings growth for the entire S&P 500. Excluding Bank of America, the earnings growth rate for the index would fall to 0.6% from 5.5%. Bank of America reported actual EPS of $0.19 compared to the year-ago actual EPS of -$0.90.

  • Factset adds:

Q3 EPS Guidance: High Percentage (80%) of Negative Guidance
Of the 84 companies that have issued EPS guidance for the third quarter, 67 have issued projections below the mean EPS estimate and just 17 have issued projections above the mean EPS estimate. Thus, 80% of the companies issuing EPS guidance to date for Q3 2012 have issued negative guidance. This percentage is well above the final percentages recorded in Q2 2012 (68%) and Q1 2012 (60%).

How about revenues? Q2 revenues rose 1.9% YoY, down considerably from the +6.6% recorded in Q1 and +7.9% in Q411. The biggest slowdowns are in Energy (+4.4% vs +13.0%), Materials (-5.2% vs +0.8%), Consumer Staples (+0.3% vs +7.5%) and IT (+7.0% vs +12.3%).

Operating margins rose again (9.50% vs 9.44% last year) but with revenue growth nearing zero, it will be difficult for margins to expand much further.


Because prices = earnings x multiple. While earnings are indeed economy sensitive, using trailing earnings eliminates the uncertainty that comes with forecasting GDP and the volatile profit margins (chart from GMO).


Earnings multiple are discount factors that are essentially influenced by inflation rates (see THE “RULE OF 20” EQUITY VALUATION METHOD).

Too bad for economists trying to be equity strategists on the basis of their ability (!) to forecast GDP. As Ben Inker demonstrates in GMO’s latest white paper “Reports of the Death of Equities Have Been Greatly Exaggerated: Explaining Equity Returns”:

The first point to understand about stock returns is their relationship with GDP growth. In short, there isn’t one. Stock returns do not require a particular level of GDP growth, nor does a particular level of GDP growth imply anything about stock market returns. This has been true empirically, as the Dimson-Marsh-Staunton data from 1900-2000

The trouble with picking stock markets on the basis of expectations of GDP growth is not that GDP growth is hard to predict (although it is harder than many people assume), it’s that even if you could predict it with perfect accuracy, it wouldn’t do you any good picking stock markets.

On the other hand, using the Rule of 20 provides the essential risk/reward analysis which, combined with efficient monitoring of the economic and financial environment, helps optimize investment decisions.


Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors reminds us that gold is seasonally stronger during the second half.

Based on 10 years of data, gold bullion has historically increased 2 percent in August and 4 percent in September.


Punch  If 10 years of data is not quite enough for you, here’s a link to my May 2009 post that gives you 7 more years. And if you like playing these kinds of odds, you should be mindful of the following chart which is based on more than  50 years of data: