NEW$ & VIEW$ (28 JANUARY 2014)

Calm Returns to Emerging Markets Efforts by emerging-market central banks to counter a vicious market selloff in recent days brought a measure of calm.

The Turkish lira held on to the large gains it made Monday, after the country’s central bank announced a previously unscheduled interest-rate decision for late Tuesday, with the dollar pinned just under 2.27 against the lira, well below the near-2.39 peak it hit Monday.

Bank Gov. Erdem Basci said Tuesday he will “not refrain from permanent policy tightening,” which appears to reaffirm the market’s clear expectation for aggressive rate rises to support the currency at the coming rates announcement, scheduled for midnight local time.

An unexpected 0.25-percentage-point rate rise by India’s central bank has also lent support to battered emerging-market currencies, which have been dented by drab economic news from China, concerns over the effects of the U.S. Federal Reserve’s pullback from monetary stimulus, and a long list of geopolitical stresses including those in Turkey, Argentina, South Africa and Ukraine.

Italy Grabs Record Low 2-Year Funding Costs

At Tuesday’s auction, the Italian treasury sold €2.5 billion euros ($3.42 billion) in December 2015-dated zero coupon notes, or CTZ, and a further €1.25 billion euros in September 2018-dated inflation-index bonds, or BTPei, the Bank of Italy said. The amounts sold were at the upper end of the treasury’s respective target ranges.

The yield on the CTZ was 1.031%. Italy’s previous lowest funding cost in this maturity segment was 1.113%, in May 2013.

Fears had surfaced that ongoing emerging-market turmoil could spill into to the euro zone’s relatively weak sovereign debt markets as the single currency area tentatively emerges from recession. But these auction results suggest the risks to the euro zone can remain contained.

 Italian Retail Sales Offer Very Slow Progress

Retail sales for Italy in November were flat, marking their best performance since August when sales also were flat. The last increase in Italian retail sales came in May 2013 with a 0.1% rise. Retail sales dropped by 1.2% over 12 months, they fell at a 1.5% annual rate over six months and they fell at an even faster, 1.7% rate, over three months. (…)

Real retail sales excluding autos are flat in November, but they had risen by 0.1% in October. Retail sales are down by 1.9% over 12 months and they are falling at a faster, 2.6% annual rate, over six months. However, over three months, real retail sales are declining at only a 0.9% annual rate. (…)

SOFT PATCH WATCH

 

(…) Last week, the flash January factory survey by data provider Markit said some respondents stated “extreme weather conditions in January had temporarily disrupted output levels.” So, too, the Kansas City Fed said its survey of area manufacturers showed production declined slightly this month because of weather.

Store chains are also feeling the freeze.

“It was a slow period for sales over the past week with some bouts of abnormal seasonal weather curbing the consumers’ appetite to shop,” the International Council of Shopping Centers said.

Consumer spending may also take a hit because households are paying more for natural gas to heat their homes.

“Weather was mentioned 21 times in the latest beige book, almost always in a negative context, the most in any winter month Beige Book since at least 2011,” wrote John Canally, investment strategist at LPL Financial, after looking at the book.

Besides store sales and manufacturing, other activity that could be hurt by weather include home building and car sales (who wants to drive a shiny new car off the lot during a snow storm).

As one positive for growth: higher demand for heat is probably lifting utility output this month.

The end result is that when January data roll out in February, the weak tone may cause some economists to trim their tracking of first-quarter GDP growth. (…)

  • FYI, updated to last Saturday:

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Economists polled by Bloomberg anticipate the economy grew 3.2 percent during the final three months of the year, a bit softer than the 4.1 percent gain in the third quarter, which was overwhelmingly the result of a $115.7 billion inventory build. While optimists may claim the fourth quarter was still strong, the data may not provide an accurate depiction of underlying conditions.

First, there’s little doubt the strong economic reports for November were
payback for the sharp, albeit temporary, weakness in October caused by
the shutdown of the U.S. government. Second, with December data coming in softer than Street expectations, recent issues such as the mass layoff announcements by Wal-Mart, Macy’s, JC Penney, Target and Intel, as well as deterioration in China’s industrial sector and currency
issues in the emerging markets, the accumulation of negatives could end up being too much weight for the sluggish recovery to bear.

The Chicago Fed’s National Activity Index decreased to 0.16 in December
from the 0.69 posting in November. Similarly, The Conference Board’s index of leading economic indicators (LEI) inched up 0.1 percent in December following a 0.8 percent spike in November. The LEI is known for predicting turning points in the economy. And the Conference Board’s coincident-to- lagging indicator ratio continues its downward descent.

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Meanwhile, meaningful housing data have been bleak – new home sales
tumbled 7 percent in November – essentially unchanged from mid-year 2013 levels. From an economist’s standpoint, new home sales matter more than their existing home counterpart since they require building materials, new durable goods (washers, dryers, refrigerators, etc.) and employ specialty trade contractors such as plumbers, landscapers,
electricians and other tradesmen.

Similarly, the MBA Purchases Index fell 3.6 percent during the week ended Jan. 17, and is off 15.2 percent from year ago levels. This gauge has been mired in weak territory for years now with no sign of improvement. (…)

 

Sales of newly built homes fell 7% to a seasonally adjusted annual rate of 414,000 in December from 445,000 in November, the Commerce Department said Monday. November’s figure was revised down by 19,000.

December sales came in below the 455,000 annual pace forecast by economists and were at their lowest level since the summer, when rising mortgage rates undermined demand.

It was not just weather related as Haver Analytics points out:

Poor weather crimped sales by more than one-third m/m in the Northeast to 21,000 (-27.6% y/y). Sales also fell 8.8% (+5.1% y/y) to 103,000 in the West while sales were off 7.3% (+4.1 y/y) in the South to 230,000, the second month of sharp decline.

Royal Philips NV and Siemens AG, two of Europe’s biggest industrial groups by revenue, reported Tuesday robust results for the three months to end-December but cautioned that business conditions remain tough, partly because of the euro’s strength against major currencies.

The cautious outlook from the Dutch and German companies follows similar downbeat forecasts from other blue-chip European companies to have reported in the past two weeks, some of them issuing profit warnings.

The year will start a bit slow,” Philips Chief Executive Frans van Houten said.

At Siemens, orders at its power-generation equipment division fell in Europe, the Americas, and Asia in the quarter. The Germany company’s main European competitors in the sector, Alstom SA of France and ABB Ltd. of Switzerland, warned on their earnings prospects last week. (,,,)

Fingers crossed States Weigh Plans for Revenue Windfalls Governors across the U.S. are proposing tax cuts, increases in school spending and college-tuition freezes as growing revenue and mounting surpluses have states putting the recession behind them.

(…) The strengthening in tax revenue started in late 2012 as higher-income residents in many states took increased capital gains among other steps to avoid rising federal tax rates on certain income. Those tax payments spilled over into 2013, and further fuel for collections came from a record stock market and improving economy. State tax revenue nationally climbed 6.7% in the fiscal year ended June 30, 2013, Moody’s Analytics says. (…)

Some states already have responded to rising tax collections by increasing spending on education and other programs, or cutting taxes. (…)

Economists warn the surge in tax revenue already is showing signs of slowing. Some of the strength has been fueled by people shifting income for tax purposes, making the gains more about timing than growth. New York, for example, forecasts income-tax receipts will grow 3% in the fiscal year starting this April after projecting a 6.5% rise in the current fiscal year. And rising collections spurred in part by profits from a record stock market leave some states such as New Jersey and California subject to sharp swings in revenue from income taxes. (…)

Can we now reasonably hope that state employment has bottomed out?

FRED Graph

 

FRED Graph

 

President to Hike Minimum Wage for Federal Contractors

President Barack Obama plans to act unilaterally to raise the minimum wage for employees of federal contractors, asserting his executive powers before the State of the Union address.

The executive order would raise the minimum wage for workers on new federal contracts to $10.10 an hour, according to a fact sheet from a White House official. It said Mr. Obama would announce the new policy in his speech Tuesday, which is scheduled to begin at 9 p.m. Eastern Time.

The current federal minimum wage is $7.25 per hour, and hasn’t been raised since July 2009. About 16,000 federal employees were paid at or below minimum wage in 2012, according to the Labor Department. The agency doesn’t specify how many employees were government contractors.

Mr. Obama’s executive policy change is the opening salvo in a broader, election-year push by Democrats to raise the federal minimum wage to $10.10 an hour for all eligible workers.

SENTIMENT WATCH

 

The “January indicator” says that if the stock market falls in January, it usually falls for the remainder of the year. So far, January has been a disaster for stocks. (…)

High five Wait, wait! Mike Lombardi, in the above post, reproduced in many other blogs today, writes that “it usually falls for the remainder of the year”. Ever thought what “usually” really means? Mark Hulbert shows you the stats since 1880:

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Voilà! Now you know that “usually” means anything above 50% of the time. Hulbert continues where Lombardi did not:

A follower of the January Indicator in 2009 and 2010 would have missed out on two years of double-digit gains if one were to have used the occasion of a “down” January to get out of the market.

Another example that it is usually best to check the facts out. Here “usually” means “generally”, at a minimum, “always” if you really care.

 

BANKING

 

Loan-Loss Reserves Shrink

At the end of September, about 6,500 U.S. banks had set aside loan-loss reserves of just 1.83% of their roughly $7.80 trillion in loans, according to data provider SNL Financial.

That cushion has been shrinking since 2010, and banks are on pace to have ended 2013 with reserves amounting to about 1.66% of total loans, based on fourth-quarter reports from eight of the country’s largest banks provided to The Wall Street Journal by SNL.

That would be the lowest proportion of such reserves since 1.74% in mid-2008, a few months before the collapse of Lehman Brothers.

By contrast, reserves hit a near-term peak of 3.24% at the end of 2010 as banks grappled with troubled loans in the aftermath of the Great Recession.

Total bank loans outstanding, however, still are below prerecession levels of $7.91 trillion at the end of 2007. (…)

U.S. Banks Prune Branches

Bank branch closures in the U.S. last year hit the highest level on record so far, a sign that sweeping technological advances in mobile and electronic banking are paying off for lenders but leaving some customers behind.

U.S. banks cut a net 1,487 branch locations last year, according to SNL Financial, the most since the research firm began collecting the data in 2002.

Branch numbers have been on a steady decline since 2009 and reached a total of 96,339 at the middle of last year, the lowest since 2006, according to data from the Federal Deposit Insurance Corp.

 
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NEW$ & VIEW$ (24 JANUARY 2014)

No Recession In Sight:Conference Board Leading Economic Index Edged Up in December

The index rose to 0.1 percent to 99.4 percent from the previous month’s 99.3 (2004 = 100). This month’s gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.

Click to View

Chicago Fed: Economic Growth Moderated in December

Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.

The index’s three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions.

Click to View

HOUSING WATCH

Existing Home Sales Approach a New Normal

Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million.

But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data.

A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist.

CalculatedRisk adds:

The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).

 

Pointing up All-cash sales jump as “normal” buyers go on strike. RealtyTrac reports:

All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012.

States where all-cash sales accounted for more than 50 percent of all residential sales in December included Florida (62.5 percent), Wisconsin (59.8 percent), Alabama (55.7 percent), South Carolina (51.3 percent), and Georgia (51.3 percent).

Institutional investor purchases (comprised of entities that purchased at least 10 properties in a year) accounted for 7.9 percent of all U.S. residential sales in December, up from 7.2 percent the previous month and up from 7.8 percent in December 2012.

Metro areas with the highest percentages of institutional investor purchases in December included Jacksonville, Fla., (38.7 percent), Knoxville, Tenn., (31.9 percent), Atlanta (25.2 percent), Cape Coral-Fort Myers, Fla. (24.9 percent), Cincinnati (19.3 percent), and Las Vegas (18.2 percent).

For all of 2013, institutional investor purchases accounted for 7.3 percent of all U.S. residential property purchases, up from 5.8 percent in 2012 and 5.1 percent in 2011.

 

Not a sign of a healthy market, is it? Meanwhile,

Framing Lumber Prices: Moving on Up

 

 

The faith may well be strong, the means are simply not there:image image

Also: Gundlach Counting Rotting Homes Makes Subprime Bear

 

GE’s Rice Sees Global Growth

General Electric vice chairman John G. Rice said that the global economy “was getting better, not worse,” and that beneath lower growth expectations for emerging markets “there was tremendous underlying demand for infrastructure.”

Investors Flee Developing Countries

Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. (…)

Countries with similar current-account deficits considered especially fragile by investors include Brazil, South Africa, India and Indonesia. But the emerging-markets tumult hasn’t hit the “contagion” stage of across-the-board, fear-driven selling of all emerging economies. Indonesia’s rupiah and India’s rupee, for example, advanced against the dollar Thursday, benefiting from those countries’ efforts to adjust their policies to support their currencies.

And this little nugget:

Art Cashin, who runs UBS’s operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. “China Beige Book has a sentence that translates into English as ‘credit transmission is broken,’ ” he wrote. “That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns.” (WSJ)

BOE’s Carney Suggests Falling Unemployment Doesn’t Mean Rates Will Rise Bank of England Gov. Carney said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

imageBoE signals scrapping of forward guidance Carney flags dropping of 7% jobless threshold

(…) Mr Carney made it clear in the interview that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance. Then, he said, the concern was that the UK economy was stagnating and might contract again: now the concern is that rapid growth might need action by the BoE to make it more sustainable. (…)

Punch If this is not clear guidance, what is? FYI, here’s the situation in the U.S.:

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Google chief warns of IT threat
Range of jobs in danger of being wiped out, says Schmidt

 

(…) Mr Schmidt’s comments follow warnings from some economists that the spread of information technology is starting to have a deeper impact than previous periods of technological change and may have a permanent impact on employment levels.

Google itself, which has 46,000 employees, has placed big bets on automation over some existing forms of human labour, with a series of acquisitions of robot start-ups late last year. Its high-profile work on driverless cars has also led to a race in the automobile industry to create vehicles that can operate without humans, adding to concerns that some classes of manual labour once thought to be beyond the reach of machines might eventually be automated.

Recent advances in artificial intelligence and mobile communications have also fuelled fears that whole classes of clerical and research jobs may also be replaced by machines. While such upheaval has been made up for in the past by new types of work created by advancing technology, some economists have warned that the current pace of change is too fast for employment levels to adapt. (…)

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” he said. The auto industry was an example of robots being able to produce higher quality products, he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . . [but] the problem is that the middle class jobs are being replaced by service jobs,” the Google chairman said. (…)

Shale Boom Forces Pemex’s Hand

For decades, Mexico’s state oil company, Petróleos Mexicanos, had the best customer an oil company could want: the U.S. But now the U.S. energy boom is curtailing the country’s demand for imported oil, and Pemex is being forced to look farther afield.

For the first time, the company is negotiating to sell its extra-light Olmeca crude oil in Europe, according to Pemex officials. The first shipment will go out in the second half of February to the Cressier refinery in Switzerland, the company said.

The change is one of many in the North American energy landscape affecting Pemex, which also faces competition in exploration and production as Mexico prepares to allow foreign oil companies back into the country for the first time in 75 years. (…)

 
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NEW$ & VIEW$ (17 JANUARY 2014)

Philly Fed Stronger Than Expected

Following on the heels of yesterday’s stronger than expected Empire Manufacturing report, today’s release of the Philly Fed Manufacturing report for January also came in stronger than expected.  While economists were looking for the headline index to come in at a level of 8.7, the actual reading was slightly higher at 9.4, which was three 3 points higher than the reading for December.

As shown, the majority (5) of components increased this month, while just three declined.  The biggest increases this month came from Number of Employees and Unfilled Orders.  The fact that Number of Employees increased seems to provide more evidence that last Friday’s employment report was an outlier.  On the downside, the biggest declines were seen in Inventories, Average Workweek, and New Orders.  Believe it or not , the 35.6 decline in the Inventories index was the largest month to month drop in the history of the survey (since 1980).  While that drop is large for one month, it takes that index back to levels seen as recently as April.

Homebuilder Sentiment Slips

Homebuilder sentiment for the month of January slipped from a revised reading of 57 down to 56 (expectations were for 58).  While sentiment slipped, it is important to note that any reading above 50 indicates optimism among homebuilders.

The table to the right breaks out this month’s report by components and region.  As shown, Present Sales, Future Sales, and Traffic all declined this month, with the biggest drop coming in traffic.  (…)

The chart below shows the historical levels of the NAHB Sentiment survey going back to 1985 with recessions highlighted in gray.  The current level of 56 is down slightly from the post-recession high of 58 reached in August.  While the index has seen a remarkable improvement since the lows from the recession, optimism still has some work to do on the upside before getting back to the highs from the prior expansion.

INFLATION WATCH

So while everybody is talking deflation risk:

  • Core CPI rose at a 1.8% annualized rate in Nov-Dec. and is up 1.7% YoY.
  • Same with the Cleveland Fed’s 16% trimmed-mean Consumer Price Index .
  • The median CPI has accelerated from +0.1% MoM in October to +0.2% in November and to +0.3% in December. The median CPI is up 2.1% YoY in December, unchanged for 6 months.

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The WSJ recently polled economists on a number of items. The tilt towards faster growth is clear:image

Even more interesting is that the WSJ did not bother to enquire about inflation and interest rates. Bernanke really did a fine job!

Shopping Spree Ends in Retail Stocks

A disappointing holiday shopping season has investors dialing back expectations for retail stocks after last year’s big runup in the sector.

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Stores Confront New World With Less Foot Traffic

A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.

(…) Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.

Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows. (…)

On Wednesday, J.C. Penney said it planned to close 33 underperforming stores and trim 2,000 positions to focus on locations that generate the strongest profits.

Such closings could accelerate: Leases for big retailers typically last between 10 and 25 years, meaning many were negotiated before e-commerce really took off.

Only 44 million square feet of retail space opened in the 54 largest U.S. markets last year, down 87% from 325 million in 2006, according to CoStar Group, Inc., a real-estate research firm. (…)

NMHC Survey: Apartment Market Conditions Softer in Q4 (CalculatedRisk)

Apartment market conditions weakened a bit in January compared with three months earlier. The market tightness (41), sales volume (41) and debt financing (42) indexes were all a little below the breakeven level of 50, although the equity financing index rebounded to 50. (…)

Although markets are a little looser than in October, this is largely seasonal; overall markets remain fairly tight.

“New supply is finally starting to arrive at levels that will more closely match overall demand. In a few markets, we are seeing completions a little higher than absorptions, but this is likely to be short term in nature. Fundamentally, demand for apartment homes should be strong for the rest of the decade (and beyond) – provided only that the economy remains on track.”

CORPORATE DELEVERAGING

From SocGen via ZeroHedge:

US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers.

Don’t forget that corporate cash is heavily concentrated in just a few companies.

SHELL WOES

 

Shell Warns On Profit

The company said profit would be significantly weaker partly because of higher exploration costs. The warning is rare for an oil major, and marks an inauspicious start to energy earnings reports.

The oil major said it expects to post fourth-quarter earnings of $2.2 billion on a current-cost-of-supplies basis—a figure that factors out the impact of inventories, making it equivalent to the net profit reported by U.S. oil companies—down from $7.3 billion a year earlier. Full-year earnings on a CCS basis are expected to be about $16.8 billion, down from $27.2 billion last year.

Shell blames refining woes for warning Oil group issues first profits warning in 10 years

And the wrap up:

Shell warns of ‘significant’ profit miss

Royal Dutch Shell issued a “significant” profit warning on Friday, detailing across-the-board problems and the extent of the challenges facing the oil major’s new boss Ben van Beurden, who took over two weeks ago.

Now you know! Winking smile

 
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NEW$ & VIEW$ (15 JANUARY 2014)

Consumers Spent Solidly in December

Just kidding This is the WSJ’s headline today. Below is the reality:

U.S. Retail Sales Post Moderate Year-End Increase

Retail spending increased 0.2% (4.1% y/y) during December after a 0.4% November gain, revised down from 0.7%. For all of last year retail sales increased 4.3%, the weakest increase of the economic recovery.

A 1.8% reduction (+5.9% y/y) in sales of motor vehicles & parts held back the increase in overall December sales. Nonauto retail sales rose 0.7% (3.7% y/y) after a 0.1% November uptick. Nonauto sales rose 3.4% during all of 2013, also the weakest gain of the recovery.

Higher sales of food & beverages led last month’s sales with a 2.0% gain (4.2% y/y) following two months of slippage. Clothing & accessory sales increased 1.8% (5.2% y/y) after a 0.5% November dip and gasoline service station sales rose 1.6% (0.6% y/y), after two months of decline. Sales of nonstore retailers showed continued strength with a 1.4% jump (9.9% y/y) following a 1.6% November gain. Furniture store sales dropped 0.4% (+4.5% y/y) after a 0.2% decline and building materials & garden equipment store sales slipped 0.4% (+2.1% y/y), down for the third month in the last five.

Not easy to get a clear measure of retail sales given the calendar quirks and bad weather. It is best to look at average sales growth for November and December.

  • Total retail sales: +0.3% (Nov.-Dec. avg) vs +0.5% in October.
  • Autos and Parts:  +0.1% vs +1.0%.
  • Non Autos ex Gas and Building Supplies: +0.5% vs +0.6%

Surprised smile Total sales for the October through December 2013 period were up 1.0% YoY.

Note that these figures are subject to big revisions. November’s surprising 0.7% original gain was revised down to 0.4%.

Pointing up U.S. Business Inventories Increase Slows

Total business inventories increased 0.4% in November (4.0% y/y), the slowest increase in three months. This inventory rise accompanied a 0.8% jump (4.0% y/y) in business sales after October’s 0.5% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

Pointing up In the retail sector, inventories advanced 0.8% (7.3% y/y) in November, including a 1.3% jump (13.7% y/y) in motor vehicles. Inventories excluding autos rose 0.6% (4.4% y/y).

Sad smile Taking the 3 months to November, retail inventories rose 2.9% sequentially while sales advanced only 0.7%. Ex-Autos: +1.3% vs +0.5%.

As I have been warning, there is clearly an inventory problem entering Q114. If you don’t believe me, read this:

Auto AutoNation CEO Calls U.S. Vehicle Inventories Too High

AutoNation Chief Executive Mike Jackson says new-car supplies in the U.S. are rising rapidly, putting pressure on auto companies as they try to avoid a profit-sapping price war.

(…) U.S. dealers have about $100 billion worth of unsold cars and trucks sitting on their lots, Mr. Jackson said. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run-up to the financial crisis and the auto-sales collapse of 2008-2009, Mr. Jackson said. Auto makers book revenue when a car is shipped, not when it is sold at the dealership.

At the end of 2013, auto dealers had 3.45 million cars and trucks in stock, enough to last 63 days at the current selling rate, according to research firm Autodata Corp. A 60-day supply of cars is typically considered as healthy by the industry.

High five But Mr. Jackson said the inventory levels are much higher than that—closer to 90 to 120 days of supply—if cars sold to fleets are excluded from the selling rate. (…)

AutoNation’s Mr. Jackson said discounts are starting to rise across the industry already, even if they aren’t as obvious to consumers.

Among them are “stair-step programs” where car companies give money directly to dealers in exchange for hitting monthly sales targets.

“What worries me is if the industry was as disciplined as it says it is we would have stopped before 3.5 million” vehicles at dealerships, Mr. Jackson said. He sees about a 50-50 chance the industry will resort to an all-out discount war.

“What I’m saying is you’re on the edge of a slippery slope and even sliding down it a bit,” he said. “It’s a risk.”

Auto Makers Dare to Boost Output

A string of new factories in the region will start cranking out a million or more cars over the next several years.

A large increase in production capacity poses a serious risk for auto makers. They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%. (…)

Some auto makers are already concerned about overcapacity.

“The last thing we need is to get bricks-and-mortar capacity increased,” Sergio Marchionne, chief executive of Chrysler Group LLC and Fiat SpA, said this week. Building new plants isn’t the only trend to watch, he added, because increasing the use of automated production lines can boost output at existing factories. (…)

Magna warns 2014 sales likely below analysts’ estimates

Canadian auto-parts giant Magna International Inc. is forecasting 2014 sales that are below analysts’ estimates.

Aurora, Ont.-based Magna said on Wednesday in its financial outlook that it anticipates total sales of between $33.8-billion (U.S.) and $35.5-billion in 2014, lower than the consensus analysts’ estimate of $35.8-billion.

Jobs Deal Collapses in Senate

(…) After more than a week of talks, lawmakers failed to reach agreement to revive benefits for the roughly 1.4 million people who have lost aid since last month. Senate Democrats rejected the latest proposal from a group of eight Republicans, while GOP lawmakers dismissed an overture from Senate Majority Leader Harry Reid (D., Nev.) to allow votes on a handful of Republican amendments.

The law that expired in December dates from the financial crisis and provided federal aid to supplement the 26 weeks of unemployment benefits provided by most states, giving up to 47 weeks of additional payments. The latest proposals from both Democrats and Republicans would scale that back to a maximum of 31 weeks. (…)

Several lawmakers said they hope to continue negotiations, but the Senate isn’t expected to return to the issue until late January after next week’s congressional recess. The Senate is shifting its focus on Wednesday to consider the short-term stopgap spending bill to prevent a partial government shutdown and the $1.012 trillion bill to fund the federal government through Sept. 30, the end of the current fiscal year. (…)

HOUSING WATCH

From Raymond James:

  • California’s November existing single-family home sales fell 3.4%, on a seasonally-adjusted basis relative to October as rising home prices and higher mortgage rates reduced affordability. Closed sales stood at the lowest level since July 2010, falling to an annual run rate of 387,520 units (down 12.0% y/y). We note on a sequential basis, sales fell for the fourth consecutive month in November and have now declined on a year-over-year basis in ten of the last eleven months. California’s non-seasonally-adjusted pending home sales index (PHSI) fell 9.4% y/y (versus -10.4% y/y in October), and declined 13.6% m/m as Golden State buyers’ sensitivity to interest rate swings becomes increasingly apparent.
  • Florida existing home sales fell 1.2% y/y in November, the first negative y/y comp since March 2012 and down from a +6.5% y/y comp in October. Sequentially, sales decreased 11.3% from October, fueled by the combined increase in prices and mortgage rates outpacing household income growth. According to November data from RealtyTrac, 62.7% of Florida homes sold were all-cash transactions, the highest level of any state and well ahead of the next closest state (Georgia, 51.3%).

German GDP Disappoints

German economic growth failed to gain momentum in the fourth quarter of 2013, but economists predict stronger growth this year

Germany’s gross domestic product expanded 0.4% in 2013, following growth of 0.7% in 2012, the Federal Statistics Office said on Wednesday. The economy grew 0.5% when taking account of the number of working days each year.

Based on the full-year figures, GDP increased around 0.25% in the three months through December—about the same rate as the third quarter—according to the statistics office, which is due to publish fourth-quarter national accounts in mid-February.

Productivity crisis haunts global economy
Report shows most countries failed to improve overall efficiency

A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades.

In a sign that innovation might be stalling in the face of weak demand, the Conference Board, a think-tank, said a “dramatic” result of the 2013 figures was a decline in the world’s ability to turn labour and capital resources into goods and services.

Productivity growth is the most important ingredient for raising prosperity in rich and poor countries alike. If overall productivity growth disappears in the years ahead, it will dash hopes that rich countries can improve their population’s living standards and that emerging economies can catch up with the advanced world.

The Conference Board said: “This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation.”

The failure of overall efficiency – known to economists as total factor productivity – to grow in 2013 results from slower economic growth in emerging economies alongside continued rapid increases in capital used and labour inputs. Labour productivity growth also slowed for the third consecutive year.

The decline in total factor productivity continues a trend of recent years in which the remarkable rise in the efficiency of emerging markets has slowed and in advanced economies it has declined. (…)

The Conference Board’s annual analysis of productivity uses the latest data to estimate economic growth in all countries, the increase in hours worked and the deployment of additional capital to estimate the efficiency of individual economies.

Globally, it found that labour productivity growth declined from 1.8 per cent in 2012 to 1.7 per cent in 2013, having been as high as 3.9 per cent in 2010. Total factor productivity dipped 0.1 per cent.

For the US it found that productivity gains of the early years of the crisis continued to be elusive in 2013, with labour productivity growth stable at 0.9 per cent in 2013.

The US trends were, however, better than those in Europe, which has seen extremely weak productivity growth alongside relatively muted unemployment in most large economies with the exception of Spain, where joblessness soared. Labour productivity grew 0.4 per cent in 2013, having fallen 0.1 per cent in 2012.

Mr van Ark said Europe’s problem in achieving more efficiency from its labour force stemmed from structural rigidities.(…)

Emerging economies saw rates of growth of productivity fall from extraordinarily rapid rates, even though the rate of growth at 3.3 per cent was still much higher than in advanced economies.

For China, the Conference Board said that, while “the statistical information for the latest years is sketchy, the indications are that sustained investment growth in China has not been accompanied by the efficiency gains (measured by total factor productivity growth) similar to those of the previous decade”. (…)

World Bank warns of emerging market risk
Capital flows could fall 80% if central banks move too abruptly

An abrupt unwinding of central bank support for advanced world economies could cause capital flows to emerging markets to contract by as much as 80 per cent, inflicting significant economic damage and throwing some countries into crises, the World Bank has warned.

Capital flows into emerging markets are influenced more by global than domestic forces, leaving them vulnerable to disorderly changes in policy by the US Federal Reserve, concludes a study by World Bank economists.

SENTIMENT WATCH

 

The Year-Two Curse

In a world full of January barometers, Super Bowl indicators and sell-in-May-and-go mantras, Jeffrey Kleintop, chief market strategist at LPL Financial, thinks he’s found an indicator that actually works: the “year-two curse.”

“Year two” refers to the second year of a presidential cycle, which is what we’re in right now. Per the chart below, courtesy of LPL, the middle of the year tends to be fairly volatile for investors.

“The start of the second quarter to the end of the third quarter of year two has consistently marked the biggest peak-to-trough decline of any year of the four-year presidential term,” Mr. Kleintop wrote in a note to clients.Since 1960, nine of the 13 presidential terms have suffered from the dreaded curse, as the S&P 500 fell in the second and third quarters of those years, he says. (…)

Still, Mr. Kleintop maintains a relatively bullish stance about the rest of the year. “We may again see some seasonal weakness, but there is no need to fear the curse,” he says. “In fact, the curse may be a blessing for some, allowing those who have been awaiting a long-overdue pullback a chance to buy. It is important to keep in mind that history shows that, on average, year two posts a solid gain for stocks, and the year-two curse is reversed by the end of the year.”

 
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NEW$ & VIEW$ (7 JANUARY 2014)

Weaker Than Expected ISM Services

Monday’s ISM Services report for December came in weaker than expected.  While economists were expecting the headline reading to come in at a level of 54.5, the actual reading was a bit weaker at 53.0.  Taking both the ISM Manufacturing and Non Manufacturing reports and accounting for their size in the overall economy, the combined reading for December fell to 53.5.

Sad smile Slumping new orders and backlog! First contraction in new orders since July 2009.

U.S. Rents Rise as Market Tightens

Nationwide, landlords raised rents by an average of 0.8% to $1,083 a month in the quarter, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. While that is below the previous quarter’s 1% increase, it is above the 0.6% gain seen in 2012′s final quarter. Rents climbed 3.2% for all of 2013.

The vacancy rate, meantime, fell to 4.1% in the fourth quarter from 4.6% in the year-earlier quarter, remaining well below the 8% peak at the end of 2009. (…)

Nearly 42,000 units were completed in the fourth quarter, the most since the fourth quarter of 2003, and about 127,000 for all of 2013, according to Reis. (…)

In 2014, completions should total more than 160,000 apartments, roughly one-third more than the long-term historical average, according to Reis. That could cause the national vacancy rate to rise slightly for the first time since 2009.

CoStar Group, another real-estate research firm, predicts new-apartment supply will peak this year at 220,000, but an additional 350,000 units will hit the nation’s 54 largest markets in 2015 and 2016 combined. (…)

Euro-Zone Inflation Rate Slips

The European Union’s statistics agency Tuesday said a preliminary reading showed consumer prices in the 17 countries that then shared the euro rose by just 0.8% over the 12 months to December, a decline in the annual rate of inflation from 0.9% in November.

After stripping out prices for food and energy, which tend to be more volatile, prices rose by just 0.7% in the 12 months to December—the lowest rate of “core” inflation since records began in January 2001. That suggests that weak domestic demand is becoming an increasingly significant source of disinflationary pressure, adding to the impact from falling world energy prices and the end of a period of administered price rises as governments sought to repair their finances by increasing revenue from sales taxes and charging more for services such as health care. (…)

Separate figures from Eurostat suggested consumer prices are unlikely to rise sharply in coming months. The agency said the price of goods leaving factory gates in November fell for the second straight month, although by just 0.1%.

Slump in Trading Threatens Profit Engine

The trading boom that helped reshape global investment banks over the past decade is sputtering, raising fears that one of Wall Street’s biggest profit engines is in peril.

(…) Executives have warned that lackluster markets could lead to year-over-year declines in fixed-income, commodities and currency trading revenue when banks begin reporting fourth-quarter results next week. That would mark the fourth consecutive drop and the 11th in the past 16 quarters.

Few corners of banks’ trading operations have escaped the slump. A 10-year commodities rally has fizzled, while foreign-exchange trading volume has fallen sharply from its 2008 peak. Since the financial crisis, investors have eschewed exotic fixed-income securities in favor of low-risk government bonds, which are less profitable for banks, and overall trading volumes have dipped.

A rash of new regulations, meanwhile, have prompted Wall Street firms to exit from once-lucrative businesses such as energy trading and storing and transporting physical commodities.

The slump has gone on so long that some observers are beginning to question whether it is part of an ordinary down cycle or a more permanent shift. (…)

FRENCH PMIS DISAPPOINT ONCE MORE

The French Manufacturing PMI fell for the third consecutive month in December to 47.0. It has been stuck below the neutral 50 level for almost two years. On this measure, the French manufacturing sector is the weakest in the Eurozone by some margin. Even the Greek manufacturing PMI improved slightly last month, from 49.2 to 49.6. Official surveys of the French economy paint a somewhat brighter picture. According to a survey by the French statistical agency, Insee, business manager’s perceptions of the overall business climate improved by 2 points to 100 in December, in line with the historic average.

France continues to suffer from declining competitiveness, both in absolute terms and relative to its Eurozone competitors. According to IMF estimates of the real effective exchange rate, the competitiveness of the French manufacturing sector has deteriorated by 12% against Germany since the debt crisis hit in 2010. Over the same period, it has fallen much further against those countries that have experienced deflation. For example, French competitiveness has declined by 28% against Ireland, and by 23% against Greece. Our central view is that France will continue to disappoint through 2014, with growth around zero – the Consensus is looking for something closer to 1%. Risks to our central view are to the downside.

COTW_0106

GOOD READ

Great dollar rally of 2014 as Fukuyama’s History returns in tooth and claw China and Japan are on a quasi-war footing, one misjudgement away from a chain of events that would shatter all economic assumptions (By Ambrose Evans-Pritchard  Tks Fred!)

We enter the year of the all-conquering US dollar. As the global security system unravels – with echoes of 1914 – the premium on the world’s safe-haven currency must rise.

The effect is doubly powerful since the US economy is simultaneously coming back to life. America has shaken off the most drastic fiscal tightening since the Korean War, thanks to quantitative easing. Growth is near “escape velocity” – at least for now – at a time when half of Europe is still trapped in semi-slump and China is trying to cool the world’s most dangerous credit boom.

As the Fed turns off the spigot of dollar liquidity, it will starve the world’s dysfunctional economy of $1 trillion a year of stimulus. This will occur through the quantity of money effect, hitting in a series of hammer blows, regardless of whether interest rates remain at zero. The Fed denies that this is “tightening”, and I have an ocean-front property to sell you in Sichuan.

It is hard to imagine a strategic and economic setting more conducive to a blistering dollar rally, a process that will pick up speed as yields on 10-year US Treasuries break through 3pc. (…)

In case you had forgotten, China has imposed an Air Defence Indentification Zone (ADIC) covering the Japanese-controlled Senkaku islands. The purpose of this escalation in the East China Sea is to test US willingness to back its military alliance with Japan, just as Kaiser Wilhelm provoked seemingly petty disputes with France to test Britain’s response before the First World War.

The ploy has been successful. The US has wobbled, wisely or not depending on your point of view. While American airlines comply, Japanese airlines fly through defiantly under orders from Japan’s leader Shinzo Abe. Mr Abe has upped the ante by visiting Tokyo’s Yasukuni Shrine – the burial place of war-time leader Tojo – in a gesture aimed at Beijing.

Asia’s two great powers are on a quasi-war footing already, one misjudgement away from a chain of events that would shatter all economic assumptions. It would leave America facing an invidious choice: either back Japan, or stand aloof and let the security structure of East Asia disintegrate. (…)

The US is stepping back from the Middle East, leaving the region to be engulfed by a Sunni-Shia conflict that resembles Europe’s Thirty Years War, when Lutherans and Catholics battled for supremacy. Sunni allies are being dropped, Shia Iran courted. Even Turkey risks succumbing, replicating Syria’s sectarian fault lines. (…)

In Europe, the EU Project has by now lost so much caste that Ukraine’s leaders dare to tear up an association accord, opting instead for a quick $15bn from Vladimir Putin’s Russia. (…)

So with that caveat let me try to make sense of global economic forces. Bearish as usual, I doubt that we are safely out of the woods, let alone on the start of a fresh boom. How can it be if the global savings rate is still rising, expected to hit a fresh record of 25.5pc this year? There is still a chronic lack of consumption.

As the Fed tightens under a hawkish Janet Yellen, a big chunk of the $4 trillion of foreign capital that has flowed into emerging markets since 2009 will come out again. It is fickle money, late to the party. (…)

Euroland will be hit on two fronts by Fed action. Bond yields will ratchet up, shackled to US Treasuries. Emerging market woes will ricochet into the eurozone. The benefits of US recovery will not leak out as generously as in past cycles. Dario Perkins from Lombard Street Research says the US is now more competitive than at any time since the Second World War. America is poised to meet its own consumption, its industries rebounding on cheap energy. Europe will have to generate its own stimulus this time. Don’t laugh. (…)

Credit to firms is still contracting at a rate of 3.7pc, or 5.2pc in Italy, 5.9pc in Portugal and 13.5pc in Spain. This is not deleveraging. The effects have been displaced onto public debt, made worse by near deflation across the South.

Italy’s debt has risen from 119pc to 133pc of GDP in three years despite a primary surplus, near the danger line for a country with no sovereign currency. For all the talk of reform – Orwellian EMU-speak for austerity – Italy is digging itself deeper into one hole even as it claws itself out of another, its industries relentlessly hollowed out. Much the same goes for Portugal and, increasingly, France. (…)

There is just enough growth on offer this year – the ECB says 1pc – to sustain the illusion of recovery. Those in control think they have licked the crisis, citing Club Med current account surpluses. Victims know this feat is mostly the result of crushing internal demand. They know too that job wastage is eroding skills (hysteresis) and blighting their future. Yet they dare not draw their swords.

It will take politics – not markets – to break this bad equilibrium, the moment when democracies cease to tolerate youth unemployment of 58pc in Greece, 57.4pc in Spain, 41.2pc in Italy and 36.5pc in Portugal.

Unemployment in the eurozone (yellow), US (red) and Japan (light blue)

The European elections in May will be an inflexion point. A eurosceptic landslide by Marine Le Pen’s Front National, Holland’s Freedom Party, Italy’s Cinque Stelle and Britain’s UKIP, among others, will puncture the sense of historic inevitability that drives the EU Project. (…)

Over all else hangs the fate of China. The sino-bubble is galactic. Credit has grown from $9 trillion to $24 trillion since late 2008, as if adding the US and Japanese banking systems combined. The pace of loan growth – 100pc of GDP over five years – is unprecedented in any major economy, eclipsing the great boom-bust dramas of the past century.

The central bank is struggling to deflate this gently, with two spasms of credit stress in the past six months. I doubt it will prove any more adept than the Bank of Japan in 1990, or the Fed in 1928, and again in 2007. This will be a bumpy descent.

China may try to cushion any hard-landing by driving down the yuan. The more that Mr Abe forces down the Japenese yen, the more likely that China will counter with its own devaluation to protect the margins of it manufacturing industry. We may be on the brink of another East Asian currency war, a replay of 1998 but this time on a much bigger scale and with China playing a full part.

If so, this will transmit an a further deflationary shock through the global system, catching the West sleeping with its defences against deflation already run down. The US may be strong enough to cope. For Europe it would be fatal. The denominator effect would push Club Med into a debt compound spiral. Let us give it a 30pc probability. Happy new year.

 
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NEW$ & VIEW$ (20 DECEMBER 2013)

The Fed is actively engaged in a communication blitz to convince investors that tapering is no big deal.

Fed’s Mortgage Role Expands The central bank’s asset purchases are a bigger share of the market as it begins to taper its bond-buying program.

(…) Because bond production has tumbled, the Fed’s share of total mortgage-bond purchases has risen significantly over the past three months.

The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year, according to data from J.P. Morgan Chase & Co. The Fed’s large role in the mortgage market means that even as it reduces its bond purchases, the market could enjoy considerable support from the central bank in the near term.

Well, we’ll see how things go as the elephant in the room is trying to back up through the front door.

Mortgage rates stood at 4.6% last week for the average 30-year, fixed-rate mortgage, according to the Mortgage Bankers Association. Rates had been as low as 3.6% in May.

The yield on the 10-year Treasury note, a key driver of trading in mortgage markets, hit a three-month high Thursday at 2.923%. (…)

The Fed’s plan to purchase at least $35 billion in mortgage securities in January compares with market-wide net mortgage-bond issuance of about $18 billion a month in recent months, said Mr. Jozoff. (…)

Despite taking initial steps to reduce its asset purchases, the Fed “will be still expanding our holdings of longer-term securities at a rapid pace,” said Federal Reserve Chairman Ben Bernanke at a news conference on Wednesday. “We’re not doing less,” Mr. Bernanke said. “I would dispute the idea that we’re not providing a lot of accommodation to the economy.” (…)

Mortgage applications fell to a 13-year low last week, a sign that mortgage volumes could remain low for now. (…)

Even Markit plays the Fed’s tune: Fed tapers as outlook improves, removing one more global economic uncertainty

Something that many overlooked – especially back in May, when talk of taper first appeared – is that the taper is not a tightening policy. It is merely a reduction in the pace at which the central bank is pumping money in to the financial markets. That total, which has been growing at $85bn every month since the Fed embarked on its third wave of Quantitative easing 15 months ago, will instead grow by $75bn per month from January onwards.

Ask any junky what happens during tapering (see Withdrawal Syndrom)

Remember, we are all parts of this huge experiment.

By the way:

 

  • U.S. Existing Home Sales Down 4.3% Sales of previously owned homes slipped to the lowest level in nearly a year in November, signaling that higher mortgage rates are making buyers wary.

Existing-home sales decreased 4.3% from the prior month to a seasonally adjusted annual rate of 4.9 million, the National Association of Realtors said Thursday. Home sales fell by 1.2% from a year earlier, the first time in 29 months the year-over-year figure declined. (Chart from ZeroHedge)

  • From National Bank Financial:

The US housing market is facing some headwinds as evidenced by existing home sales which, in November, fell to the lowest since late 2012. The slump shouldn’t be entirely surprising considering the decline in
mortgage loans, the latter on pace to contract in Q4 at the fastest pace since 2011. Rising long rates partly explain why mortgage loans are drying up, but bad credit among one important segment of the population can also be having a detrimental effect.

Indeed the youth seem to be finding it difficult to qualify for loans
due to the lack of job opportunities but also due to bad credit. Note the disproportionate increase in student loan delinquencies in recent years.

And as today’s Hot Charts show, that may explain why the homeownership rate among the youth has dropped in recent years at a faster pace than that of any other age segment. So, barring new government measures to help address student debt and delinquencies, it may take longer for the housing market to fully recover from the crash that triggered the Great Recession. That’s one of the reasons why we expect home price inflation in 2014 to moderate somewhat from this year’s hot pace.

image

Currently, the U.S. economy is forming just over 400,000 new households per year as of the third quarter of 2013, significantly below the long-term average of just under 1.2 million. Given current population growth, America should be forming roughly 1 million new households each year.

However, the latest recession was so severe that it continues to suppress household formation. One piece of evidence: A growing percentage of young adults aged 18-34 are living with their parents. (…) We believe the “American Dream” of home ownership is intact and note the recent uptick in the home ownership rate as evidence of pent-up demand and an improving outlook for household formation given rising wealth and stronger job creation.

Kiesel just forgot to mention that rising wealth may not be reaching the 18-34 cohort just yet, while rising mortgage rates and restrictive credit scores are.

Philly Fed Weaker Than Expected

Just one day after the Fed announced a $10 billion taper to its monthly asset purchase program, the economic data has not been very good.  Of the five economic indicators released on Thursday, four came in weaker than expected.  One of those indicators was the Philly Fed report.  While economists were expecting the headline reading to come in at a level of 10, the actual reading was 7.0, which represented a slight increase from November’s reading of 6.5.

As shown, four of the nine components declined this month, led lower by Delivery Time and Prices Paid. The decline in Prices Paid should be a good sign for the Fed as it implies that inflation pressures remain contained.  On the upside, we saw the greatest improvement in Average Workweek and Shipments.  All in all, this morning’s report was pretty much neutral, but with a string of weaker than expected economic data just one day after the ‘taper’ was announced, one wonders if anyone at the Fed is beginning to have second thoughts.

High five Slight oversight by Bespoke: New Orders remain strong.

Jobless Claims Highest Since March

Jobless claims came in significantly higher than expected for the second straight week today (379K vs. 334K).  This week’s reading exceeded the spike we saw during the government shutdown and was the highest reading since March.  While the BLS blamed normal seasonal volatility, if the seasonality was so ‘normal’ why was it unexpected?  While last week’s rise was written off as a one off, two weeks is a little more notable.

After the increases of the last two weeks, the four-week moving average rose to 343.5K.  If the elevated levels of the last two weeks continue, it will start showing up more in this figure and that would be troubling especially given the Fed’s timing of the taper yesterday.

Conference Board Leading Economic Index: Fifth Month of Growth
 

The Conference Board LEI for the U.S. increased for the fifth consecutive month in November. Positive contributions from the yield spread, initial claims for unemployment insurance (inverted), and ISM® new orders more than offset negative contributions from consumer expectations for business conditions and building permits. In the six-month period ending November 2013, the leading economic index increased 3.1 percent (about a 6.4 percent annual rate), faster than the growth of 2.0 percent (about a 4.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Click to View
 

No recession in sight. Thumbs up

China cash injection fails to calm lenders
Stocks slide as money market rates stay dangerously high

An emergency cash injection by the Chinese central bank failed to calm the country’s lenders as money market rates climbed to dangerously high levels.

Analysts cited a variety of technical factors for the tightness in the Chinese financial system, but the sudden run-up in rates was an uncomfortable echo of a cash crunch that rattled global markets earlier this year.

Concerns focused on the rates at which Chinese banks lend to each other. The seven-day bond repurchase rate, a key gauge of short-term liquidity, was emblematic of their reluctance to part with cash. It averaged 7.6 per cent in morning trading on Friday, its highest since the crunch that hit China in late June. That was up 100 basis points from Thursday and far above the 4.3 per cent level at which it traded just a week ago.

The sharp increase occurred despite the central bank’s highly unusual decision to conduct a “short-term liquidity operation” on Thursday, providing a shot of credit to lenders struggling for cash. In a clear sign of its concern at the stress in financial markets, the People’s Bank of China used its account on Weibo, China’s version of Twitter, to announce the SLO. According to the central bank’s own rules, it is only supposed to confirm SLOs one month after completing them.

The China Business News, a state-owned financial newspaper, reported that the short-term injection was worth Rmb200bn ($33bn), a large amount. But traders blamed the central bank for letting market conditions deteriorate to the point of needing an emergency injection in the first place. The PBoC steadfastly refused to add liquidity to the market in recent weeks despite the banking system’s regular year-end scramble for cash.

Pointing up Lu Ting, an economist with Bank of America Merrill Lynch, said China’s financial system was entering a new era and policy makers were struggling to adapt. “The PBoC is faced with some serious challenges . . . and is confused,” he said. “The PBoC finds it much more likely than before to make [operational] mistakes.”

Mr Lu said he was confident that China would avoid a full-fledged repeat of June’s cash crunch because the central bank did not want to see an over-tightening of monetary conditions. Rather, he and other analysts said the PBoC appeared to have misjudged the flow of funds in the economy. (…)

 
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NEW$ & VIEW$ (19 DECEMBER 2013)

Fed Slows Bond Buying 

Ben Bernanke gave the U.S. economy a nod of approval just a month before he leaves the Federal Reserve, moving the central bank to begin winding down a bond-buying program meant to boost growth with the recovery on firmer footing.

“Today’s policy actions reflect the [Fed's] assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal,” Mr. Bernanke said.

After months of wringing their hands about the implications of less Fed stimulus, investors resoundingly approved of the latest action to begin paring the $85 billion-a-month program. They were cheered in part because the move came with new Fed assurances that short-term interest rates would stay low long after the bond-buying program ends. (…)

The Fed, which launched the latest round of bond buying in September 2012 in a bid to fire up the tepid recovery, will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. That will include $35 billion monthly of mortgage securities and $40 billion of Treasurys, $5 billion less of each. It will look to cut the monthly amount of its purchases in $10 billion increments at subsequent meetings, Mr. Bernanke said.

Although the Fed expects to keep reducing the program “in measured steps” next year, the timing and the course isn’t preset. “Continued progress [in the economy] is by no means certain,” Mr. Bernanke said. “The steps that we take will be data-dependent.”

If the Fed proceeds at the pace he set out, it would complete the bond-buying program toward the end of 2014 with holdings of nearly $4.5 trillion in bonds, loans and other assets, nearly six times as large as the Fed’s total holdings when the financial crisis started in 2008. (…)

The Fed has said it wouldn’t raise short-term rates, which are now near zero, until the jobless rate gets to 6.5% or lower. (…)

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials who participated in the policy meeting said they expected their benchmark short-term rate to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016. (…)

But What About Inflation

Barry Eichengreen Taper in a teapot (The writer is professor of economics and political science at the University of California, Berkeley)

(…) But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this month’s $10bn reduction is the first in a series of successive monthly steps in the same direction, it will take many months before the change has discernible impact on the Fed’s financial statement.

Wall Street may have had some trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the markets into a tizzy. But given a night’s sleep, stock traders should be able to recognise the Fed’s announcement for the non-event that it is. (…)

The value of this week’s FOMC decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates would have said, it has at least done no harm.

The Fed’s Shifting Unemployment Guideposts

Dec. 12, 2012. In an effort to bolster confidence, the Fed pledged to keep its interest-rate target low “at least as long as the unemployment rate remains above 6.5%” and inflation remained under control.

June 19, 2013. In a press conference, Fed Chairman Ben Bernanke qualified the 6.5% target, calling it a “threshold, not a trigger,” at which point the Fed would begin to “look at whether an increase in rates is appropriate.” But then the chairman offered a new guidepost, this one for the central bank’s bond-buying program. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%,” Mr. Bernanke said. (Unemployment reached that point last month.)

Sep. 18, 2013. A surprise decline in the unemployment rate despite relatively weak economic growth forced Mr. Bernanke to back away from the new 7% target at his very next press conference. “The unemployment rate is not necessarily a great measure, in all circumstances, of the state of the labor market overall,” Mr. Bernanke said, noting the recent decline was primarily the result of people leaving the workforce, not finding jobs. “There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.”

Dec. 18, 2013. As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely. “It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” the Fed said in its statement following its latest meeting. In his press conference, Mr. Bernanke said the Fed will be looking at other gauges of labor-market health. “So I expect there will be some time past the 6.5% level before all of the other variables we’ll be looking at will line up in a way that will” give the central bank the confidence to raise rates.

Firm, but flexible…

But with the Fed projecting that the output gap will narrow, inflation will edge up, and unemployment will fall in the years ahead, even these more liberal Taylor rules suggest the Fed should be ratcheting up rates faster than it says it will. Indeed, Fed officials’ median projection is for the target rate to have risen to just 1.75% by the end of 2016; typical Taylor rules would prescribe over 3%. (WSJ)

For the record, here are the FOMC projections and how they have “evolved” since June 2013, courtesy of CalculatedRisk:

  • On the projections, GDP was mostly unrevised, the unemployment rate was revised down slightly, and inflation was revised down.

imageProjections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

  • The unemployment rate was at 7.0% in November.

imageProjections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

  • The FOMC believes inflation will stay significantly below target.

image

  • Here is core inflation:

image

Nerd smile  The only “significant changes since June are in the unemployment rate projections. Everything else is somewhat weaker. So much for an “economy that is continuing to make progress”.

Fingers crossed  WARNING: Another Soft Patch Ahead? (Ed Yardeni)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

I have been warning about this possible inventory cycle. See Ford’s warning below.

U.S. Home Building Hits Highest Level in Nearly 6 Years

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the highest level in nearly six years, in the latest sign of renewed momentum in the sector’s recovery.

U.S. housing starts rose 22.7% from October to a seasonally adjusted annual rate of 1,091,000 in November, the Commerce Department said Wednesday. That was higher than the 952,000 forecast by economists and brought the average pace of starts for the past three months to 951,000.

Details of the report showed broad strength for housing. Starts for single-family homes, a bigger and more stable segment of the market, also rose to their highest level in nearly six years.

November building permits, an indicator of future construction, fell slightly to the still-elevated level of 1,007,000. Permits had jumped 6.7% in October.

The report showed home building returning to the brisk pace seen early this year, before the sector’s recovery took a hit from rising interest rates. Builders broke ground on an average 869,000 homes between June and August.

 

 

Mobile homes are also moving:

 

RV Sales Rebound as U.S. Economy Improves

(…) More Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. The total for all new units sold this year is projected to rise about 11 percent from last year to 316,300, Walworth said. Meanwhile, 2014 looks like “another good year,” as sales could top 335,000, the most in six years. (…)

More than four years since the 18-month recession ended in June 2009, sales of these units — with an entry-level price of about $80,000 — are up more than 30 percent from last year, he said, citing data from the Recreation Vehicle Industry Association, a trade group. Meanwhile, towable units — retailing for as little as $4,000 — have risen 8.5 percent. (…)

It’s useful for investors to monitor this industry because it’s proven to be “fantastic as a leading indicator of overall economic trends,” said Kathryn Thompson, a founder and analyst at Thompson Research Group in Nashville, Tennessee. Sales began to drop as interest rates climbed into 2006; the yield on 10-year Treasuries reached 5.24 percent in June of that year. By December, “the consumer was completely falling apart in the RV industry.”

That slump came one year before the U.S. entered the worst recession in more than 70 years. Now traffic at dealerships nationwide probably will be even better in 2014, Thompson said, adding that “very strong” sales have helped drive towable units near the pre-recession peak. (…)

EARNINGS WATCH

 

FedEx Bolsters Full-Year Forecast

FedEx Corp. said a shorter holiday shipping season stunted growth in its ground division, but the package-delivery company bolstered its full-year guidance and said it expects an improved financial performance next quarter.

Profit rose 14% to $500 million for the company’s fiscal second quarter ended Nov. 30, up from $438 million in the same period a year earlier. Per-share profit totalled $1.57 for the most recent quarter, less than the $1.64 that analysts surveyed by Thomson Reuters had expected.

Cyber Monday, one of the year’s busiest online-shopping days, fell on Dec. 2 this holiday season instead of in November, damping expected growth and keeping ground-business profits from reaching as high as analysts had predicted, FedEx said. The company added that its results were affected by costs associated with the expansion of its ground network. (…)

It seems that just about everybody was surprised that Cyber Monday occurred Dec. 2nd this year…But no worry, buybacks will save the year.

FedEx, based in Memphis, Tenn., indicated that it is poised for strong growth in the current quarter. Chief Executive Frederick W. Smith said FedEx’s 22 million shipments on Dec. 16 marked its third-straight record Monday this month.

The company increased its outlook for full-year earnings-per-share growth to a range of 8% to 14% above last year’s adjusted results, up from 7% to 13% previously, in part because of the effects from its share-buyback program announced in October.

Auto  Ford Warns on Earnings Growth

Ford Motor Co. warned on Wednesday its 2014 profits won’t match this year’s results because of higher costs and a currency devaluation. And it said it likely won’t meet operating profit projections of between 8% and 9% of sales by 2015 or 2016. That goal is “at risk” because of the recession in Europe and weaker results in South America. (…)

In the U.S., it blamed competition from Japanese rivals for a decision earlier this month to temporarily idle U.S. factories that build the midsize Fusion and the compact Focus to reduce inventories. The shutdowns came less than four months after Ford expanded Fusion output, citing a shortage of the cars. It also was hurt by warranty costs for Escape engine repairs. (…)

Sounds more like poor production planning leading to excess inventory, just as the Japs are benefitting from their weak Yen. What about GM and Chrysler?

GM executives also say ambitious new product programs will be vital to sustaining profitability in the next few years. “You’ve got to protect your product and you got to protect your cash flow and you have got to invest in the future,” GM CEO Akerson said earlier this week. “That may mean short-term disruptions in other priorities.”

Hmmm…”You’ve got to protect…” Sounds like a warning to me.

(…) However, the recent decline in the value of the Japanese yen against the dollar gives Toyota, Honda and Nissan more latitude to cut prices. All three have aggressive holiday promotions, a sign they want to regain market share lost after the 2011 tsunami and a period of yen strength. (…)

Which leads to

Surprised smile McDonald’s Japan slashes profit forecast by nearly 60%
Battered yen raises costs for the Japanese affiliate of the US fast-food giant

(…) It’s now forecasting net profit of Y5bn, down from Y11.7bn, according to a statement to the Tokyo Stock Exchange. Analysts had been looking for Y9.5bn in profit, according a Bloomberg poll.

The profit warning follows a Nov 7 earnings report that revealed net income had dropped 36 per cent from a year earlier in the third quarter.

Even after the Nov. 7 release, estimates remained 60% too high! Sleepy smile

McDonald’s Corp, which owns 50 per cent of the Japanese fast-food chain, doesn’t break out Japan in its earnings results but calls it is one of six “major markets” alongside the UK, France, China, Australia and the US, which together accounted for 70 per cent of revenues last fiscal year.

Jabil Circuit Warns, Stock Sinks

Shares of Apple Inc. AAPL -0.76% supplier Jabil Circuit Inc. JBL -20.54% fell more than 20% Wednesday after the components maker said an unanticipated drop in demand from a big customer would hurt revenue and profit in the current quarter.

Jabil’s warning raised concerns about sales of Apple’s iPhone 5C, a less-expensive model that Apple released in September. Apple is Jabil’s biggest customer, accounting for 19% of its revenue in the fiscal year ended Aug. 31. Analysts said Jabil produces the plastic cases for the iPhone 5C and the metal exteriors for the iPhone 5S.

THE AMERICAN ENERGY REVOLUTION (Cnt’d)

Cheap Natural Gas Could Put More Money in Americans’ Pockets

A surge in natural-gas production has driven prices down 50% in the last eight years, a stunning development that is reducing Americans’ energy costs, according to a study by the Boston Consulting Group. By 2020, these savings from low-cost energy could amount to nearly 10% of the average U.S. household’s spending after taxes and paying for necessities, or about $1,200 a year, the report said.

Economists say lower natural-gas prices will help U.S. businesses reduce costs, but there’s an important impact on consumers, too: The average U.S. household devoted about 20% of its total spending last year to energy, both directly (things like electricity and heating) and indirectly (higher costs for goods and services), BCG says. If Americans save more on energy and see lower prices when they buy goods, they might ramp up discretionary spending and propel the sluggish recovery. (…)

Consumer spending, which accounts for roughly two-thirds of the nation’s economic activity, has been resilient this year despite higher taxes and stagnant wages. One possible explanation is lower energy costs. Indeed, BCG says the average American household is already saving more than $700 a year. On Tuesday, the Labor Department said energy prices fell in November, helping muffle overall inflation. Prices at the gasoline pump have also fallen on average from nearly $3.70 in mid-July to below $3.25 as of Monday, according to the Energy Information Administration. (…)

 
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NEW$ & VIEW$ (12 DECEMBER 2013)

Budget Deal Picks Up Steam House Republican leaders threw their weight behind a two-year budget deal, planning to bring it to a vote Thursday as opposition in both parties failed to gain enough traction to threaten passage.

HOUSING WATCH

Homebuilders continue to digest Toll Brothers’ (TOL -1.8%) “leveling in demand”comments from yesterday’s earnings results – in the 19 weeks since August 1, business has been flat vs. last year, and in the first 5 weeks of FQ1 (beginning Nov. 1) business has also been flat from 2012 (though Hurricane Sandy makes a tricky comparison). (SA)

Pointing up Storm cloud  Container Exports at Lowest Point in Four Years; Imports Slow Against Growing Inventories

The month of November saw U.S. ocean container exports hit their lowest point since January 2010, when our Index begins. The November export index registered .934, compared to our baseline of 1.0 in January 2010. This is only the second time that the export index has fallen below 1.0. Imports were stronger than in two of the previous three years, but dropped 6.1 percent from October to November, a period where we have typically seen increases.

image

Interestingly, volumes declined almost across the board for the 25 destination countries included in the export index. Matching our data, many of the nation’s ports are reporting drops in the number of
containers handled. Production of automotive and related products
slowed in November because of falling domestic and foreign demand, which in turn reduced shipments of parts and finished goods.

Container imports fell for the third month in a row, dropping 6.1 percent in November. What amounted to a peak season “bump” in July and August has given way to a steady decline in imports since. This is not unusual for November, and is by far not the worst November showing
since 2010. Retail and wholesale inventories have reached levels above
their pre‐recession highs without the spending activity to support the
growth.

image

Hmmm…

Euro-Zone Industrial Output Falls

The European Union’s statistics agency said industrial production was 1.1% lower than in September, the second straight month of decline and the sharpest drop since September 2012. The decline was spread across most of the currency area, with only Italy and Estonia recording increases in output.

Surprised smile  The decline in output came as a surprise, with 24 economists surveyed by The Wall Street Journal last week having estimated that output rose by 0.2% during the month. It raises the possibility that the euro zone’s return to growth may come to a halt in the final quarter of this year, having already weakened in the third quarter. (…)

The decline in industrial output was led by the energy sector, which recorded a 4% drop in production during October. That wasn’t a great surprise, given that temperatures across Europe were higher than usual during that month. However, output of capital goods fell by 1.3%, while output of consumer durables fell by 2.4% and of non-durables by 0.9%.

That suggests the drop in production was a response to weak demand from businesses and consumers. Figures released last week showed retail sales in the euro zone fell in October, while a November survey of consumers recorded the first decline in confidence this year.

Stock Surge Fuels Pensions

A roaring stock market and rising interest rates are fueling the strongest recovery in the $2.4 trillion U.S. corporate-pension sector in more than a quarter-century.

Investments in the average company’s pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate by J.P. Morgan Chase & Co. A separate analysis by Milliman Inc., which provides actuarial products and services, puts the figure above 94%, while pension specialist Mercer says the figure was 91% at the end of October. Funding levels are up from 77% at the end of last year, according to J.P. Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on bonds continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates on corporate bonds, which are used to value future retirement obligations. (…)

Pension-funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year.  (…)

About 25% of corporate pensions now are overfunded, or have more investments than future obligations, J.P. Morgan estimates. (…)

SENTIMENT WATCH

Gift with a bow Waiting for That Santa Claus Rally

Say what you will about the stock market’s recent skid, investors have a very favorable tailwind at their backs heading into the final few weeks of the year.

(…) For now, the selloff isn’t causing much concern among market watchers. “This is more of a lack of buyers than any type of real panic,” Mark Newton, chief technical analyst at Greywolf Execution Partners, wrote to clients Wednesday afternoon.

Looking beyond the day-to-day gyrations, here are five trends, courtesy of WSJ Markets Data Group, that point to the December effect on stocks and the rally reaccelerating by the end of the year:

December Is the Best Month for Stocks: The Dow has risen in December 72% of the time throughout its history. It averages a 1.4% monthly gain, the best increase of all 12 months.

Don’t Fret About the Early December Weakness: The bulk of the December rally typically occurs in the final 10 trading days of a year, a trend that bodes well considering the Dow is down 1.5% this month. Historically the Dow is flat, on average, in the first two weeks of December. It then averages a 1.5% gain in the final 10 trading days of the month.

Yearly Highs Happen Most Often in December: There have been 36 times the Dow has hit its high of the year in December, more than twice the amount of the next highest month — January – which has had 16 highs in a given year.

Last-Day-of-the-Year Effect: The Dow has ended at a high on the final trading day of the year 11 times throughout its history. Ten of those 11 instances were record closes, with the most recent occurrence coming in 2003.

Santa Claus Is Good for Stocks: The Dow has risen in the five days before Christmas 65% of the time, including 10 of the past 12 years, averaging a 0.5% gain. The last five days of the year are typically even better for stocks: The Dow has risen 79% throughout this timeframe, averaging a 1.2% gain.

High five  World’s biggest investor BlackRock says US rally nearing exhaustion BlackRock has advised clients to be ready to pull out of global stock markets at any sign of serious trouble

(…) The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.

BlackRock, which manages funds worth $4.1 trillion, said the global system is still in the doldrums and far from achieving sustainable recovery. “The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody’s currency can fall at once,” it said.

The report said Wall Street is not in a bubble yet but BlackRock’s risk indicator – measuring “enterprise value” against earnings, adjusted for volatility – is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis,” it said. (…)

 

 

BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

“The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicentre of funding risk in 2014 due to big refinancings,” it said. BlackRock said the eurozone is “stuck in a monetary corset”, failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens. (…)

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013.

BlackRock said the profit share of GDP has soared to a modern-era high of 12pc of GDP, while the workers’ share has collapsed from 66pc to 57pc in one decade. “This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins.

Emerging markets are no longer accumulating foreign reserves at the same torrid pace. The annual growth rate of reserves has dropped to 7pc from 40pc five years ago, which implies far less money flooding into global bond markets. “This is bad news for struggling advanced economies and financial markets addicted to monetary stimulus,” it said.

There is a 25pc chance that the world navigates these reefs and achieves a “growth break-out”. Even if that happens it will not help stocks, and will be “bad for bonds”. The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles. What is good for investors is corrosive for societies, hardly tenable equilibrium.

 
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