NEW$ & VIEW$ (16 DECEMBER 2013)

U.S. Producer Prices Fall 0.1%

The producer-price index, which measures what firms pay for everything from lumber to light trucks, fell 0.1% from October, the Labor Department said Friday. That marked the third straight monthly decline, owing largely to a fall in gasoline costs from the summer. Excluding food and energy, “core” prices rose 0.1% in November after climbing 0.2% in October.

Compared with a year earlier, overall prices were up 0.7% in November, more than double the pace of the prior two months. Core prices climbed 1.3% in November from a year earlier after rising 1.4% year-over-year in October.

Half of U.S. Lives in Household Getting Benefits  The share of Americans living with someone receiving government benefits continued to rise well into the economic recovery, reflecting a weak labor market that pushed more families onto food stamps, Medicaid or other programs.

Nearly half of the U.S., or 49.2% of the population, live in a household that received government benefits in the fourth quarter of 2011, up from 45.3% three years earlier, the Census Bureau said.

Government benefits as defined by Census include Medicaid, Medicare, Social Security, food stamps, unemployment insurance, disability pay, workers’ compensation and other programs.

Part of the increase comes from an aging population, with the 16.4% of the population living in a household where someone gets Social Security and 15.1% where someone receives Medicare. That was up from 15.3% and 14%, respectively, at the end of 2008.

But the biggest increases were in benefits aimed at helping the poor. The program experiencing the sharpest rise in participation was food stamps, officially known as the Supplemental Nutrition Assistance Program. About 16% of people lived in a household where someone was receiving SNAP benefits, up from just 11.4% at the end of 2008.

Participation in Medicaid, the government health-insurance program for the poor and disabled, also climbed. At the end of 2011, 26.9% of the population was living in a household where at least one member was receiving Medicaid benefits, up from 23.7% three years earlier.

(…) unemployment compensation is one of the smaller pieces of the safety net. The Census report showed 1.7% of people lived in households where someone was collecting unemployment compensation in the final quarter of 2011 up a bit from 1.4% in 2008.

Canadian Housing: The Bubble Debate

It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view: Canada Housing Bubble

  • Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.
  • Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.
  • Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.
  • High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.
  • Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.

The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.


This Thomson Reuters chart has been around a lot lately, generally on its own, being apparently self-explicit.


The chart deserves some explanations, however:

  • The reason the ratio is so high currently is not really because many more companies have decreased guidance but rather because very few have raised it.

Over the past four quarters (Q412 – Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up only 3% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 54% compared to the one-year average. (Factset)

  • The chart uses Thomson Reuters data which seems to be the most negative among aggregators. Factset data show a negative/positive ratio of 7.8x. The ratio has deteriorated from 7.4x the previous week, however, as 5 more companies have issued negative guidance against zero positive.

(…) a record-high 94 companies in the S&P 500 index already have done so for the current quarter. Conversely, a record-low 12 have said they would do better. That ratio of 7.83 negative-to-positive warnings dwarfs any quarter going back to 2006, when FactSet began tracking such data.

  • So far 120 companies have issued outlooks. In a typical quarter, between 130 and 150 S&P 500 companies issue guidance.
  • In small and mid-cap stocks, the trend appears much less gloomy. Thomson Reuters data for S&P 400 companies shows 2.2 negative outlooks for every one positive forecast, while data for S&P 600 companies shows a similar ratio.

The bulk of negative preannouncements is in IT and Consumer Discretionary sectors which have also recorded the largest increase in negative preannouncements in recent weeks.image

In spite of the above, earnings estimates are not cut. Q4 estimates (as per S&P) are now $28.41 ($28.45 last week) while 2014 estimates have been shaved $0.13 to $122.42, up 13.8% YoY. Actually, 2014 estimates have increased 0.4% since September 30.


This is December over the past ten years (Ryan Detrick, Senior Technical Strategist, Shaeffer’s Investment Research)

Is Santa Coming This Year?

Wait, wait!

Bespoke Investment suggests the market is oversold:

(…) Below is a one-year trading range chart of the S&P 500.  The blue shading represents between one standard deviation above and below its 50-day moving average (white line).  The red zone is between one and two standard deviations above the 50-day, and moves into or above this area are considered overbought.  As shown, after trading in overbought territory since October, the S&P has finally pulled back into its “normal” trading range this week.  Technicians will be looking for the 50-day to act as support in the near term if the index trades down to it.  A break below means we’ll potentially see a close in oversold territory for the first time since June.  

While the S&P 500 is just above its 50-day in terms of price, its 10-day advance/decline line is indeed oversold.  The 10-day A/D line measures the average number of daily advancers minus decliners in the index over the last 10 trading days.  This provides a good reading on short-term breadth levels.  The oversold reading in place right now means the last ten days have not been kind to market bulls.  Over the last year, however, moves into the green zone have been good buying opportunities.

Gift with a bow  And here’s your Christmas present:

The Santa Claus Rally Season Is About To Begin (

I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.)

Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)

Here’s a look at the Dow’s average performance in December and January (December 21st is based at 100):

You should note how small the vertical axis is. Ultimately, we’re not talking about a very large move.

May I remind you that you can get all the dope on monthly stock returns in the “MARKET SMARTS” section of my sidebar. Here are the two charts that matter:

This is the simplified chart from RBC Capital Markets


Here is Doug Short’s:


Buy The “December Triple Witching” Dip (BofAML via ZeroHedge),

This Friday is December Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options). Consistently the week of December Triple Witching is one strongest of the year for the S&P500. In the 31 years since the creation of equity index futures, the S&P500 has risen 74% of the time during this week. More recently, it has risen in ten of the past 12 years. With equity volatility fast approaching a buy signal, the conditions are growing ripe for an end to the month long range trade and resumption of the larger bull trend (we target 1840/1850 into year-end).


General Electric to raise dividend 16%  Largest increase by US manufacturing group since 2010

Hunger Grows for U.S. Corporate Bonds

Investors are buying new U.S. corporate bonds at a record pace, and demanding the smallest interest-rate premium to comparable government bonds since 2007.

imageDemand has also put sales of new junk-rated corporate bonds in the U.S. on pace to surpass last year’s record. Sales of investment-grade bonds in the U.S. this year are already at the highest ever, according to data provider Dealogic. (…)

The narrowest reading for investment-grade corporate-bond spreads in recent years came in 2005, when the gap hit 0.75 percentage point. (…)

According to Moody’s Investors Service, the default rate for below-investment-grade companies in the U.S. was 2.4% in November, down from 3.1% a year earlier. (…)


U.S. Rate Rise Sends High-Dividend Stocks Lower

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6 percentage points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88 percent from 1.67 percent. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.


An Upbeat View of 2014 Wall Street strategists expect stocks to rise 10%, boosted by a stronger economy and fatter corporate profits. Bullish on tech, industrials.

THE 10 STRATEGISTS Barron’s consulted about the outlook for 2014 have year-end targets for the S&P of 1900 to 2100, well above Friday’s close of 1775.32; their mean prediction is 1977.

(…) the strategists expect earnings growth to do the heavy lifting, with S&P profits climbing 9%, compared with subpar gains of 5% in the past few years.

Specifically, the strategists eye S&P profits of $118, up from this year’s estimated $108 to $109. Industry analysts typically have higher forecasts; their 2014 consensus is $122, according to Yardeni Research.

The consensus view is that yields on 10-year Treasury bonds will climb to 3.4% next year from a current 2.8%. Our panel’s predictions on year-end yields for the 10-year bond range widely, from 2.9% to 3.75%.

(…) corporations are sitting on $1 trillion of cash, and there is pent-up demand for investment around the world. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase, notes that U.S. gross fixed investment has fallen to 13% of GDP, on par with Greece and well below the 16% to 21% range that obtained from 1950 to 2007. Just getting back to the midpoint of that range would require additional spending of $600 billion, he observes. (…)

The calendar, too, is a help. Addition will come from subtraction as the U.S. begins to lap some of the government’s automatic spending cuts tied to the sequestration that began last spring, and the expiration of the Obama administration’s 2% payroll-tax cut early this year. The government cost the economy perhaps 1.5 percentage points of GDP growth in 2013, but “government drag will be a lot less in 2014,” predicts Auth.

Both people and companies will start to spend more in 2014, he adds.

How to be right, whatever happens;

Time to Brace for a 20% Correction Ned Davis Research expects a 2014 buying opportunity. How to play the decline-and-recovery scenario.

Davis: Right now, about 78% of industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish. However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] — a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was about 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.

We also looked at midterm-election years — the second year of a presidential term, like the one coming up in 2014 — going back to 1934, and the average decline in those years was 21%. But after the low was hit in those years, the market, on average, gained 60% over two years. So, a correction should be followed by a great buying opportunity. (…)

Hedge Funds Underperform The S&P For The 5th Year In A Row

The $2.5 trillion hedge-fund industry is headed for its worst annual performance relative to U.S. stocks since at least 2005. As Bloomberg Brief reports, the funds returned 7.1% in 2013 through November; that’s 22 percentage points less than the 29.1% return of the S&P 500, with reinvested dividends, as markets rallied to records. Hedge funds are underperforming the benchmark U.S. index for the fifth year in a row as the Fed’s inexorable liquidity pushes equity markets higher (and the only way to outperform is throw every risk model out the window). Hedge funds (in aggregate) have underperformed the S&P 500 by 97 percentage points since the end of 2008.

Light bulb  Hence the new marketing stance:

“We are seeing a shift in how investors view hedge funds,” said Amy Bensted, head of hedge funds at Preqin. “Pre-2008, investors thought of them – and hedge funds marketed themselves – as a source of additional returns.

“Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years.” (FT)

Winking smile  NEXT JOB FOR BERNANKE  China’s Smog Forces Pilots to Train for Blind Landings


NEW$ & VIEW$ (11 NOVEMBER 2013)



Jobs Strength Puts Fed on Hot Seat

The U.S. job market showed surprising resilience in October, rekindling debate about whether the economy is strong enough for the Federal Reserve to rein in its signature easy-money program.

The Labor Department reported that U.S. employers added 204,000 jobs last month, defying expectations for weaker hiring amid the shutdown and a debt-ceiling fight that knocked down consumer and business confidence.

Among the most encouraging revelations in the jobs report were upward revisions to government estimates of job growth in August and September, before the government shutdown, easing worries about a renewed slowdown in the labor market.

The 204,000 jump in nonfarm payrolls came on top of upward revisions of 60,000 for the two previous months.

With the revisions, the trend in job creation looks notably better than it did just a few weeks ago. The latest report showed that payroll employment grew by an average of just less than 202,000 jobs per month in the past three months. The previous jobs report, released Oct. 22, showed job growth had averaged 143,000 per month over the prior three-month period.

See the impact before and after the revisions. The “summer lull” was shallower and employment growth could be turning up:

image  image


The latest figures included a number of statistical quirks that will likely lead Fed officials to be even more cautious than usual about inferring too much from a single month’s jobs report. For example, the timing of the delayed monthly hiring survey might have skewed the data.

And these peculiar stats:

Retail boom coming to a store near you?

Pointing up CalculatedRisk writes that according to the BLS, retailers hired seasonal workers in October at the highest level since 1999. This may have to do with these announcements posted here on Oct. 1st.:

Amazon to Hire 70,000 Workers For Holiday Selling Season

Amazon plans to hire 70,000 seasonal workers for its U.S. warehouse network this year, a 40% increase that points to the company’s upbeat expectations about the holiday selling season. (…)

Wal-Mart, for instance, said this week it will add about 55,000 seasonal workers this year and Kohl’s Corp. is targeting 50,000. Target Corp.’s estimated 70,000 in seasonal hires is 20% lower than last year, the company said, reflecting the desire by employees to log more hours at work.

Punch But, out there, in Real-Land, this is what’s happening:

Personal spending, a broad measure of consumer outlays on items from refrigerators to health care, rose 0.2% in September from a month earlier, the Commerce Department said Friday. While that was in line with economists’ forecast of a 0.2% increase and matched the average rise over the July-through-September period, it is still a tepid reading when taken in broader context.

This is in nominal dollars. In real terms, growth is +0.1% for the month and +0.3% over 3 months. While the rolling 3-month real expenditures are still showing 1.8% YoY growth, the annualized growth rate over the last 3 and 6 months has been a tepid 1.2%.


Here’s the trend in PDI and “department store type merchandise” sales. Hard to see any reason for retailers’ enthusiasm.image

Confused smile More quirks:

The weirdness was in the household survey, which showed a 735,000 plunge in employment, mainly 507,000 workers who were kept home by the federal government’s partial shutdown. But private employment was down 9,000, while the Bureau of Labor Statistics counted a massive exodus of 720,000 folks from the workforce.

Accordingly, the six-month average through October now comes to an increase of 174,000, basically the same as the six-month average through September of 173,000.

From the GDP report:

Consumer spending rose at an annualised rate of just 1.5%, down from 1.8% in the second quarter and 2.3% in the first three months of the year. The increase was the smallest for just over three years and considerably
below the 3.6% average seen in the 15 years prior to the financial crisis.




In a nutshell, the BLS reports a surge in jobs thanks largely to accelerating retail employment that is not supported by actual trends in consumer expenditures nor by their ability to spend.

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

October Housing Traffic Weakest In Two Years On “Broad-Based” Housing Market Slowdown

In case the world needed any additional proof that the latest housing bubble (not our words, Fitch’s) was on its last legs, it came earlier today from Credit Suisse’ Dan Oppenheim who in his monthly survey of real estate agents observed that October was “another weak month” for traffic, with “pricing power fading as sluggish demand persists.” (…)

Oppenheim notes that the “weakness was again broad-based, and particularly acute in Seattle, Orlando, Baltimore and Sacramento…. Our buyer traffic index fell to 28 in October from 36 in September, indicating weaker levels below agents’ expectations (any reading below 50). This is the lowest level since September 2011.”

Other notable findings:

  • The Price appreciation is continuing to moderate: while many markets saw home prices rising if at a far slower pace, 7 of the 40 markets saw sequential declines (vs. no markets seeing declines in each of the past 8 months). Agents also noted increased use of incentives. Tight inventory levels remain supportive, but are being outweighed by lower demand.
  • Longer time needed to sell: it took longer to sell a home in October as our time to sell index dropped to 42 from 57 (below a neutral 50). This is  typically a negative indicator for near-term home price trends.


U.S. Stocks Rise as Jobs Data Offset Fed Stimulus Concern

U.S. stocks rose, pushing the Dow Jones Industrial Average to a record close, as a better-than-forecast jobs report added to signs growth is strong enough for the economy to withstand a stimulus reduction.

Nerd smile  Ray Dalio warns, echoing one of my points in Blind Thrust:

Ray Dalio’s Bridgewater On The Fed’s Dilemma: “We’re Worried That There’s No Gas Left In The QE Tank”

(…) As shown in the charts below, the marginal effects of wealth increases on economic activity have been declining significantly. The Fed’s dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing. If it were targeting asset prices, it would tighten monetary policy to curtail the emerging bubble, whereas if it were targeting economic conditions, it would have a slight easing bias. In other words, 1) the Fed is faced with a difficult choice, and 2) it is losing its effectiveness.

We expect this limit to worsen. As the Fed pushes asset prices higher and prospective asset returns lower, and cash yields can’t decline, the spread between the prospective returns of risky assets and those of safe assets (i.e. risk premia) will shrink at the same time as the riskiness of risky assets will not decline, changing the reward-to-risk ratio in a way that will make it more difficult to push asset prices higher and create a wealth effect.

Said differently, at higher prices and lower expected returns the compensation for taking risk will be too small to get investors to bid prices up and drive prospective returns down further. If that were to happen, it would become difficult for the Fed to produce much more of a wealth effect. If that were the case at the same time as the trickling down of the wealth effect to spending continues to diminish, which seems likely, the Fed’s power to affect the economy would be greatly reduced. (…)

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed.  So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation.  So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won’t matter that much.  What will matter much more is the efficacy of Fed stimulation going forward. 

In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.


S&P Cuts France’s Credit Rating

The firm cut France’s rating by one notch to double-A, sharply criticizing the president’s strategy for repairing the economy.

“We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects,” S&P said. “Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.”

S&P’s is the third downgrade of France by a major ratings firm since Mr. Hollande was elected. (…)

The political situation leaves the government with little room to raise taxes, S&P said. On the spending side, the agency said the government’s current steps and future plans to cut spending will have only a modest impact, leaving the country with limited levers to reduce its deficit.

Smile with tongue out  French Credit Swaps Fall as Investors Shun Debt Downgrade

The cost of insuring against a French default fell to the lowest in more than three years, as investors ignored a sovereign-credit rating downgrade by Standard & Poor’s.

Credit-default swaps on France fell for a sixth day, declining 1 basis point to about 51 basis points at 1:45 p.m. That would be the lowest closing price since April 20, 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012 when France lost its top rating at S&P.

“You need to ignore the S&P downgrade of France,” saidHarvinder Sian, fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It is behind the market.”

Surprise Jump in China Exports

Exports rebounded sharply in October from a September slump as demand improved in the U.S. and Europe, a potentially positive sign for the global economic outlook.

Exports in October were up 5.6% from a year earlier, after registering a 0.3% fall in September. The median forecast of economists surveyed by The Wall Street Journal was for an expansion of just 1.5%.

The news from China follows reports of a strong October performance from South Korea’s exports, up 7.3% from a year earlier, and suggests the recovery in the U.S. and elsewhere, though slow, is feeding through into increased demand for Asia’s export machine.

Shipments from China to the European Union were up 12.7% from a year earlier, while those to the U.S. were up 8.1%. But exports to Japan lagged behind, against a background of continued political tensions and a weakening of the Japanese yen.

China’s good export performance is even more striking given that last year’s figures were widely thought to have been overreported, so that growth looks weaker by comparison. Excluding that effect, real export growth could be as high as 7.6%, Mr. Kuijs estimated.

Imports to China also showed strength in October, up 7.6% from a year earlier, accelerating a bit from September’s 7.4% pace.

Surprised smile  China Auto Sales Climb at Fastest Pace in Nine Months

Wholesale deliveries of cars, multipurpose and sport utility vehicles rose 24 percent to 1.61 million units in October, according to the state-backed China Association of Automobile Manufacturers today. That compares with the median estimate of 1.5 million units by three analysts surveyed by Bloomberg News. (…)

Total sales of vehicles, including buses and trucks, rose 20 percent to 1.93 million units last month, the association said. In the first 10 months of the year, 17.8 million vehicles were delivered, with 14.5 million being automobiles.

Commercial vehicles sales increased 7.4 percent in the first 10 months of the year to 3.36 million units.

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

The consumer price index rose to 3.2% on a year-on-year basis in October, up from 3.1% in September. The rise was largely due to mounting food prices, which climbed 6.5%, and rising rents, according to government data released on Saturday. But it was still well within the government’s ceiling of 3.5% for the year.

Producer prices were down 1.5% year on year after moderating to a fall of 1.3% in September. This was the 20th month in a row of falling factory prices.

On a month-on-month basis, prices were even less of a concern, gaining only 0.1%.

CPI/non-food rose 1.6% YoY (same as September and vs. 1.7% a year ago), and was +0.3% MoM (+0.4% in September). Last 2 months annualized: +4.3%.

Data also showed China’s factory output rose 10.3% YoY in October. Fixed-asset investment, a key driver of economic growth, climbed 20.1% in the first 10 months. Real estate investment growth rose 19.2%, while property sales rose 32.3%.

Power production rode 8.4% YoY in October, compared to 8.2% in September and 6.4% a year earlier.

Retail sales were up 13.3%. Nominal retail sales growth has been stable at about 13% YoY for the past five months.


Central Banks Renew Reflation Push as Prices Weaken

A day after the European Central Bank unexpectedly halved its benchmark interest rate to a record-low 0.25 percent and Peru cut its main rate for the first time in four years, the Czech central bank yesterday intervened in currency markets. The Reserve Bank of Australiayesterday left open the chance of cheaper borrowing costs by forecasting below-trend economic growth. (…)

Other central banks also held their fire this week. The Bank of England on Nov. 7 kept its benchmark at 0.5 percent and its bond purchase program at 375 billion pounds ($600 billion).

Malaysia held its main rate at 3 percent for a 15th straight meeting to support economic growth, rather than take on inflation that reached a 20-month high in September.


The Economist agrees (tks Jean):

The perils of falling inflation In both America and Europe central bankers should be pushing prices upwards

(…) The most obvious danger of too-low inflation is the risk of slipping into outright deflation, when prices persistently fall. As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. There is a real danger that this may happen in southern Europe. Greece’s consumer prices are now falling, as are Spain’s if you exclude the effect of one-off tax increases. (…)

Race to Bottom Resumes as Central Bankers Ease Anew

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

Canada’s housing market teeters precariously
Analysts warn nation is on verge of ‘prolonged correction’

(…) Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce. (…)

Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says. (…)


From various aggregators:

  • Bloomberg:

Among 449 S&P 500 companies that have announced results during the earnings season, 75 percent beat analysts’ estimates for profits, data compiled by Bloomberg show. Growth in fourth-quarter earnings will accelerate to 6.2 percent from 4.7 percent in the previous three months, analysts’ projections show.

  • Thomson Reuters:
  • Third quarter earnings are expected to grow 5.5% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.2%.
  • Of the 447 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.
  • 53% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.
  • For Q4 2013, there have been 78 negative EPS preannouncements issued by S&P 500 corporations compared to 8 positive EPS preannouncements. By dividing 78 by 8, one arrives at an N/P ratio of 9.8 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.
  • Zacks:

Total earnings for the 440  S&P 500 companies that have reported results already, as of Thursday morning November 7th, are up +4.6% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 51.4% beating revenue expectations with a median surprise of +0.1%.

The charts below show how the results from these 440 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates, which looked materially weaker in the earlier phase of the Q3 reporting cycle, have improved.

The earnings beat ratio looks more normal now than was the case earlier in this reporting cycle. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.

The composite earnings growth rate for Q3, combining the results from the 440 that have come out with the 60 still to come, currently remains at +4.6% on +2.9% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.

We may not have had much growth in recent quarters, but the expectation is for material growth acceleration in Q4 and beyond. The chart below shows total earnings growth on a trailing 4-quarter basis. The +3.1% growth rate in the chart means that total earnings in the four quarters through 2013 2Q were up by that much from the four quarters through 2012 2Q. As you can see, the expectation is for strong uptrend in the growth momentum from Q4 onwards.

Guidance has been overwhelmingly negative over the last few quarters and is not much different in Q3 either, a few notable exceptions aside.

Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.



Stocks Regain Broad Appeal

Mom-and-pop investors are returning to stocks, but their renewed optimism is considered by many professionals to be a warning sign, thanks to a long history of Main Street arriving late to market rallies.

(…) “Frankly, from 2009 until recently, I wanted to stay very conservative,” said Chris Rouk, a technology sales manager in Irvine, Calif. Now, he said, “I want to get more aggressive.” (…)

More investors are saying they are bullish about the stock market, according to the latest poll from the American Association of Individual Investors, which found that 45% of individuals are bullish on stocks, above the long-term average of 39%. Last month, the same survey said the number of investors who said they were bearish on stocks fell to the lowest level since the first week of 2012. (…)

Flurry of Stock, Bond Issuance Is a Danger Sign for Markets

Just as financial markets were recovering from the Washington turmoil, a new danger signal has started blinking, in the form of a flood of stock and bond issues.

So far this year, U.S. companies have put out $51 billion in first-time stock issues, known as initial public offerings or IPOs, based on data from Dealogic. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped.

Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.

It isn’t just stock. U.S. corporate-bond issues have exceeded $911 billion, also the most in Dealogic’s database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever. (…)

Small stocks with weak finances are outperforming bigger, safer stocks. And the risky payment-in-kind bond, which can pay interest in new bonds rather than money, is popular again. (…)


NEW$ & VIEW$ (17 SEPTEMBER 2013)

Still travelling. Pardon the interruptions.

Industrial production rebounds in August, led by manufacturing

In August, the US industrial sector showed its largest monthly production gain since February, with output rising 0.4% during the month, according to the Federal Reserve. The increase is a big relief after production was unchanged in July, which had marked a
disappointingly weak start to the third quarter.


The data on goods production were even more encouraging – a 0.7% gain during August more than reversed a 0.4% drop in July. The turnaround was largely due to the autos sector, which reported a surge
in production after a slump one month previously. However, broad-based gains were seen in almost all the major manufacturing sectors, with the exceptions of chemicals and basic metals.

The less-volatile quarterly growth rate picked up to 0.3% in the three
months to August compared with a 0.1% drop in manufacturing output in the three months to June.

The Fed also published data on capacity utilisation, which showed capacity running 2.4% below its long run average. Such excess capacity is good news for inflation, as it means the industrial sector has room to
grow before demand exceeds supply, which often leads to the build-up of inflationary pressures.

(…) However, when viewed alongside last week’s disappointing retail sales data, it is likely that the pace of economic growth will have slowed compared to the 2.5% annualised pace seen in the second quarter.

US retail sales growth disappoints in August, but unlikely to deter Fed tapering

Retail sales rose 0.2% in August against expectations of a 0.4% rise. Core sales (excluding autos, building materials and gasoline), also rose 0.2%, lower than expectations of a 0.3% rise and down from 0.5% in July.
With the latest rise building on a 0.4% increase in July, it looks like retail sales will help drive economic growth again in the third quarter, though it seems unlikely that the contribution will be as large as the 0.9% rise in
sales had in the second quarter.



Haver Analytics adds:

There were also sizable gains in August at furniture stores, up 0.9% (+4.9% y/y), electronics & appliance stores, up 0.8% (+3.1% y/y) and miscellaneous stores, up 1.0% (+4.2% y/y). So several durable goods sectors had firm performances in the latest period. At the same time, building materials, supplies and hardware sales retreated 0.9% (+7.6% y/y) following their 1.8% surge in July.

Markit continues:

The message from the various official data that are available is therefore that the economy continued to grow in the third quarter, but that growth is likely to have slipped from the 2.5% annualized pace seen in the second quarter.

Although weaker than expected, the retail data are unlikely to stop the Fed starting to withdraw its stimulus at next week’s FOMC meeting. However, the Fed is most likely to make only a small but symbolic reduction to the stimulus programme, perhaps reducing the asset purchases by $5bn per month, due to the fragility of the upturn. Importantly, any tapering is likely to be accompanied by a statement of reassurance that any further tightening of policy will be carefully considered to ensure it does not set back the recovery.

Ghost  BloombergBriefs: The Economy’s Sub-Two Percent Tipping Point

There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months. Real GDP growth was an annual 1.6 percent in the second quarter. It was last at 2 percent in the fourth quarter 2012, down from 3.1 percent in the third. In addition, real disposable personal incomes (0.8 percent), and real consumer spending (1.7 percent) flash warning signs. With GDP,
they possess exceptional recession-predicting abilities.

The reason is simple: like riding a bike, if you don’t pedal, you tip over.

(…)Another rarely-cited statistic with excellent predictive qualities is the pace of real final sales of domestic product, which measures the level of goods produced in the economy that are actually sold rather than placed in inventory. The current 12-month pace is 1.6 percent. Alternatively,
some economists look to the level of final sales to domestic purchases,
which represents GDP less net exports and inventories.


These two indicators are often seen by Wall Street economists as preferred measures since they pertain to domestic demand, not what is produced or stockpiled. The year-on-year change in real final sales to domestic purchases is 1.5 percent.

(…) The more meaningful household-sensitive component — revolving
credit — contracted by an annualized 2.6 percent in July following a 5.2 percent decline in the previous month. During the last 12 months, revolving credit advanced 0.8 percent — essentially the same pace
it has held since early 2012. (…)

Retail sales at general merchandise stores — the second largest category of retail sales behind motor vehicles and parts — fell 0.2 percent month-on-month in August and 0.3 percent from August 2012. These are all signs of a consumer led slowdown.

ShopperTrak Forecasts a Weak Holiday

ShopperTrak, which measures store traffic in 60,000 locations world-wide and crunches other data to come up with its forecast, expects retail sales in November and December to rise by 2.4% from a year earlier, less than the 3% increase in 2012 and below the gains of around 4% in 2011 and 2010.

Early forecasts are often well off the mark, and ShopperTrak’s forecasts have tended to undershoot actual Commerce Department data. But ShopperTrak’s projection echoes weak back-to-school results from some retailers and a tepid showing for retail sales last month. Consumers remain cautious despite improvements in hiring and the housing market. (…)

ShopperTrak predicted a 2.5% increase in retail sales in 2012, while the actual increase was 3%, based on sales of general merchandise, apparel and accessories, furniture and other categories as measured by the Commerce Department. In 2011 the prediction was for a 3% increase, while the actual rise came in at 4%.

Producer Prices Rise 0.3%

But core prices, which exclude volatile energy and food components, were flat, marking the first time since October that category failed to rise.

Compared with a year ago, overall prices were up 1.4%, the smallest year-over-year increase since April. Core prices were up 1.1% from a year ago.

Eurozone employment downturn eases sharply in second quarter

Employment in the eurozone continued to fall in the second quarter, but the rate of decline eased markedly, adding to hopes that the region is on a recovery path.

Employment in the eurozone fell 0.1% in the second quarter, according to Eurostat, taking the total down to 145 million, its lowest since the final quarter of 2005. Employment has fallen continually over the past two years as the region moved back into recession in 2011. However, the rate at which employment is falling has eased significantly. The 0.1% drop in the second quarter compares with a 0.4% fall in the first quarter and a 0.3% decline in the final three months of last year. That equates to 33,000 jobs being lost per month in the second quarter compared to more than 200,000 in the first quarter.


PMI survey data also suggest that the rate of job losses has eased further in the third quarter so far: an average composite employment index reading of 48.5 compares with an average of 47.3 in the second quarter.

Looking at the four largest economies, employment edged up by 0.1% in Germany in the three months to June, but was flat in France. Spain and Italy both saw the rate of decline ease to -0.5% and -0.3% respectively, down from -1.0% and -1.2% in the first quarter. Elsewhere, the Netherlands saw the rate of decline pick up to -0.4%, but employment rose in Ireland (+0.5%), Austria (+0.2%), Portugal (+0.8%) and
even Greece (+0.1%).

The recent cut in employment took place despite GDP rising 0.3% over the same period. However, comparing employment changes with GDP highlights how, since the financial crisis, jobs have been cut at a significantly faster rate than the pre-crisis relationship between GDP and employment would suggest, pointing to a steep improvement in labour productivity over this period.


Auto  Lightning  Europe August Car Sales Drop as Demand Lowest on Record

Registrations dropped 4.9 percent to 686,957 vehicles from 722,458 cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Eight-month sales declined 5.2 percent to 8.14 million autos.

The European car market rose 4.9 percent in July to 1.02 million vehicles. The gain was the second this year, following a 1.7 percent increase in April that marked the first growth in European car sales in 19 months. The trade group releases July and August sales figures simultaneously each September.

Registrations in the past two months were affected by differences in the number of business days versus 2012, with one more in July and one less in August, the ACEA said today.  (…)

Four of Europe’s five biggest automotive markets shrank last month. Deliveries in top-ranked Germany dropped 5.5 percent to 214,044 vehicles. That compared with a 2.1 percent increase in July. The U.K. market, the region’s second biggest, expanded 11 percent to 65,937 cars in August. (…)

Record Saudi oil output fills supply gap Saudi pumps out more crude than at any time since the 1970s

(…) The trigger for the jump in Gulf production has been huge disruption to supplies from Libya, where striking workers and militias have reduced exports from about 1m b/d to merely a trickle. Saudi Arabia has responded by pushing output to 10.2m barrels a day in August, according to the International Energy Agency, the most in IEA records. The country is now reaping more than $1bn a day in export revenues.

The UAE and Kuwait have also both set records for output this summer, at about 2.8 mb/d. In August the three large Gulf producers met 17.1 per cent of global demand. In thirty years of IEA data, their share has not topped 18 per cent. (…)

The IEA estimates that even when producing at current levels, Saudi Arabia still has more than 2mb/d of spare production capacity. Ali-al Naimi, the kingdom’s oil minister, emphasised again last week Riyadh’s willingness to meet any demand.

But that appears to have required a subtle shift in policy. Saudi Arabia has been slowly bringing online its giant offshore Manifa oilfield, which should eventually be able to produce 900,000 b/d.

Riyadh had originally planned to send Manifa output to a domestic refinery, while throttling back production at some of its other fields in order to prolong their lives. That would have made less oil available to the global market. But the IEA thinks that has not happened. (…)

By factoring in Manifa output, the IEA has raised its estimate of Saudi output capacity by more than 500,000 b/d this year, to 12.5 mb/d. That provides some buffer to the market, and means the IEA is hopeful that the current tightness in the oil market will ease over the next few months, as refineries are shut for maintenance.

Within the Gulf, though, Saudi Arabia’s ability to bring on new production at will appears to be an exception. The UAE has pushed back its target for increasing production capacity to 3.5m b/d to 2020, from 2017. Kuwait is still targeting 4m b/d by 2020, but is struggling to overcome rapid decline rates from its existing fields.

Both countries are currently pumping near their maximum capacity, according to the IEA. Qatar, meanwhile, has seen output fall slightly in recent years. (…0

Mexico to speed up infrastructure spending
President’s pledge is an attempt to revive sluggish economic growth

Mexican president Enrique Peña Nieto, under fire over tax proposals that herald pain for the middle class, has promised to accelerate spending of 27bn pesos ($2bn) on infrastructure, kick-starting access to credits and boosting the housing industry.

The move is an attempt to revive sluggish economic growth before the end of the year, and reveals the government’s concern with the economy’s sudden deflation. It grew just 1.5 per cent in the first half after shrinking 0.7 per cent in the second quarter, and official estimates of modest 1.8 per cent growth this year are looking optimistic at best.

 Canadian Home Sales Jump

Existing home sales across Canada rose 2.8% in August from July—and surged by 11.1% from a year ago—as real-estate activity ramped back up in most major cities, the country’s real-estate trade group said Monday.


Canada Household Debt Hits Record High

Canadian household debt hit a record high in the second quarter as consumers continued to take out mortgages. Net worth, meanwhile, rose 3%.

Canadian household debt, deemed by policymakers as the biggest domestic risk facing the Canadian economy, rose to a record high in the second quarter of 2013 as consumers continued to take out mortgages, albeit at slower pace compared to the same year-ago period, Statistics Canada said Friday.

The data agency said the ratio of household credit-market debt to disposable income hit 163.37% in the April-to-June period, up from the 162.10% level recorded in the first quarter.

According to the figures, Canadians borrowed 25.9 billion Canadian dollars ($25.1 billion) from financial institutions in the three-month period, with mortgages accounting for nearly 70% of that total. However, the amount of mortgages issued to Canadians in the second quarter totaled C$18.24 billion, down from C$21.85 billion a year earlier.

Credit-market debt — which includes mortgages, lines of credit and other loans — totaled roughly C$1.72 trillion at the end of June, for a quarter-over-quarter increase of 1.6%.

Meanwhile, Canadian net worth rose 3.1% in quarter to C$7.31 trillion, or C$207,300 on a per-capita basis.

Sweden’s economy shrinks in Q2
Transport sector helps industrial output grow in Hungary

Final figures for April to June showed that the economy shrank 0.2 per cent quarter on quarter . It was still 0.1 per cent bigger than it was in the second quarter of 2012. Gross fixed capital formation fell 3 per cent year on year, exports fell 2.3 per cent and imports dropped 1.1 per cent. However, household consumption did increase 1.9 per cent and government consumption rose 2 per cent.

Hungary: Industrial output increased 2.5 per cent year on year in July, aided by a strong performance in the transport sector, which increased 12.9 per cent. A 4.9 per cent increase in food production also helped, though the electronics sector struggled. New orders were up 5.9 per cent year on year, after two months of contractions and total orders surged 9.1 per cent.



ISM Services Index Hits Highest Level Since 2005!

Combining today’s reading in the ISM Services with the ISM Manufacturing report earlier this month and weighting each indicator according to its weight in the overall economy, the overall reading of the ISM Manufacturing and ISM Services index came in at a level of 58.3.  This was tied for the highest reading in this indicator since November 2005.

(…) like the Manufacturing index, both Business Activity and New Orders were both above 60.  The last time both of these components were above 60 in each index was back in February 2011.

Surprised smile Here’s the important chart from BMO Capital:

If history were an infallible guide, we would be calling for 4% GDP growth in Q3. It isn’t, so we’re sticking with an estimate of half this rate (2.0%) based on a few soggy indicators. That said, for the first time this year, we now see some upside risk to our growth profile. It’s a start.


 August Retail Sales Shy of Hopes

Same-store sales—for the few companies that still report monthly results—came in slightly below expectations, which had been lowered in recent weeks thanks to a number of downbeat forecasts. (…)

Mall traffic remains weak, promotional activity is still high, and apparel retailers in particular are facing difficult comparisons following last year’s strong back-to-school season.

And given that a retailer’s performance during the back-to-school season is typically an indicator of holiday performance, this year’s sluggish August raises concerns about apparel retailers’ prospects for November and December.

The nine retailers tracked by Thomson Reuters reported 2.9% growth in August same-store sales. This compares with analysts’ expectations for 3.2% growth and with 6.5% growth a year earlier.

Many retailers, including the major department stores, have stopped reporting monthly results over the past year, making it more difficult to gauge the performance of the entire industry. (…)

But we have the weekly chain store sales from ICSC:


U.S. Freight Volumes Increase in August

Shipments rose 1.7 percent from July, supporting the prediction that 2013 will have a peak holiday shipping season, even if it is little more than a bump in volume. Railroad traffic was very strong in August, with carload traffic up 6 percent and intermodal shipments up 6.5 percent. The American Trucking Association’s truck tonnage index fell in July, however the not seasonally adjusted index actually rose 3 percent (latest figures available). August shipments were still lower than in the same month in 2011 and 2012, but the gap has narrowed. On a cumulative basis the number of shipments has risen 5.1 percent since the beginning of the year.


Emerging market output edges higher in August

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, recovered from July‟s post-crisis low in August, but signalled only a marginal rise in output across global emerging markets. The EMI rose from 49.5 to 50.7, the third-lowest figure in over four years. That said, it was the first rise in the
headline figure since March.

Manufacturing output was flat in August, as a fractional rise in China was weighed down by declines in other Asian economies and Brazil. Growth of services activity remained weak.

imageOf the four largest emerging economies, China and Russia posted mild increases in output following declines in July. Brazil registered a further marginal drop in activity, while India posted the steepest rate of
decline since March 2009.

Growth of new business resumed following July‟s contraction. The rate of expansion was only marginal, however, with manufacturing new orders little-changed on the month.

Employment declined further in August. The manufacturing workforce shrank for the fourth month running, while service sector staffing declined for the first time in over four years, albeit marginally.




National Bank Financial has one of the best groups of economists on the sell side. Here’s another reason why:

The British magazine “The Economist” recently took another shot at the Canadian housing market. According to an article published for its August 31 issue “Canada’s house prices are bubbly whereas Japan’s are undeservedly flat”. This conclusion is based on a simple comparison of price-to-rent and price-to-income ratios.

In our view, a more thorough analysis of home prices sustainability must also take into account the level of mortgage rates as well as another crucial factor: demographics. As it turns out, Canada has one of the fastest population growth rates in the advanced economies for people
aged 20-44 – the cohort most likely to form households.

As today’s Hot Chart shows, the annual growth in Canada is currently running at 1.2% vs. a 0.3% decline for all advanced economies and a 1.2% drop in Japan.


ECB Raises GDP Forecast

The ECB slightly upgraded its economic forecast and now expects a contraction in gross domestic product this year of just 0.4%. It shaved 0.1 percentage point from next year’s estimate and now expects GDP growth of 1%.

ECB economists expect inflation to average 1.3% next year, well below the bank’s 2% target, suggesting higher prices aren’t an impediment to additional economic stimulus.

German Exports Unexpectedly Dropped in July

Exports, adjusted for working days and seasonal changes, fell 1.1 percent from June, when they gained 0.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.7 percent, according to the median forecast of 13 estimates in a Bloomberg News survey. Imports rose 0.5 percent.

Spain industrial output falls for 23rd month in July

Calendar-adjusted output fell 1.4 percent year-on-year in July, data from the National Statistics Institute showed on Friday after a drop of 2.2 percent in June, which was revised down from a preliminary reading for a 1.9 percent contraction.

Japan Government Upgrades Economic Assessment  After 14 long months of “worsening” and “standstills”, Japan’s government finally upgraded its overall economic view on Friday.

Japan’s Cabinet Office deemed July’s coincident composite index—consisting of 11 key economic indicators including industrial output and retail sales—to be “showing improvement” after it rose 0.9 points on month to 106.4, the highest since April 2012. The government defines improvement as being when the index shows “a high likelihood of an economic expansion.” (…)

The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage, owing to hikes in semiconductor parts production.

According to a Cabinet Office official, even sectors that negatively impacted the coincident index—lagging retails sales—had more to do with bad weather, fewer calendar holidays and earlier-than-usual summer sales schedules rather than consumer mindset. Sales of luxury items such as expensive watches continued to perform well, the official said.

Reuters’s AlphaNow blog remains cautious: JAPAN AT RISK OF A 1997 RE-RUN?

(…) However, a closer look at the details unveils pockets of weakness in terms of the underlying trends—not only are deflationary pressures still brewing, but real wage growth turned negative in the twelve-months to July. This backdrop renders the upcoming decision—expected after the release of the Tankan survey in early October—on the introduction of a VAT increase in April even more contentious. In turn, the looming risk is that we witness a repeat of the mistake made by the Hashimoto administration in 1997. In our view, it is only following concrete signs of a pick-up in wage growth and private demand for credit that fiscal consolidation can be successfully enacted—something Mr Abe should not lose sight of.

Both headline and core—excluding fresh food—CPI measures posted an annual 0.7% increase in July, the highest in five years. However, after stripping out energy costs, CPI was a negative 0.1%. There are, of course, adverse consequences for real earnings, which fell 0.4% in the year to July. Were it not for a large increase in bonuses and overtime pay, the decline in real earnings would have been larger still. In conjunction with July’s declining real exports, these numbers suggest that not only has a weaker yen failed to contain—let alone reduce—Japan’s trade deficit, but it is also giving the economy the wrong kind of inflation. The balance Mr Abe has to strike, between pursuit of growth and fiscal discipline, is getting increasingly finer.

This situation is reminiscent of 1997, when the Hashimoto government proceeded with what proved to be premature fiscal consolidation. Back then, the decision to implement a combination of higher taxes and lower spending was predicated on the belief that the economy could ‘take it’, drawing confidence from a strong GDP report for the previous year. Ironically, we have a similar set of circumstances this time. (…)

Notwithstanding the fragile state of Japanese consumers’ purchasing power, it is predominantly government spending that is helping to sustain aggregate demand—Japan’s private sector is still saving at a rate equal to over 9% of GDP. Until there is clear evidence of growth in private demand for credit, which would act as an offset to fiscal consolidation, a tighter budget will more likely than not arrest Japan’s positive economic momentum.

Moreover, we are not at all convinced that the much-vaunted counterbalancing measures will stem the negative implications higher VAT has for domestic demand, at least in the short term. Any benefit from the introduction of corporate tax cuts and an accelerated depreciation scheme for business investment would be a long time coming, in contrast to the immediate impact of a tax on consumption. In addition, one lesson policymakers ought to have learned by now is that more QE is no direct substitute for fiscal retrenchment, particularly amid a balance sheet recession.

Mr Abe is between a rock and a hard place. Backing off on the VAT rise could be perceived as simply sending the wrong message to investors, both in terms of political credibility and commitment to fiscal discipline. But should a decision to proceed as planned backfire, this would constitute a heavy blow to Abenomics as a whole. A reversal of market sentiment on Japan could provide the catalyst for a broad selloff. The ‘honeymoon’ period for JGBs—which remain largely unaffected by Fed tapering talk—could be tested once again.

One policy option for the government might be to announce some additional targeted fiscal spending measures along with, and as an offset to, the tax increase. Mr Abe would do well to play it safe at this juncture—particularly as the sizes of Japan’s debt and deficit dwarfs those facing Mr Hashimoto in 1997.

Optimism grows for developed economies Government borrowing costs in the US and Europe surge

Treasury Yields Top 3%

Hours ahead of U.S. employment data that could seal the deal for the U.S. Federal Reserve to start pulling back on monetary stimulus this month, ten-year bond yields traded above 3% for the first time in over two years.

image(…) As Treasurys have tottered, yields on 10-year gilts have climbed to over two-year highs over 3%. The yield on the 10-year Bund has risen to 2.02%, the highest level since March 2012. The yield on 10-year Japanese government bonds climbed to a one-month-high Friday

An unwinding of monetary stimulus in the U.S. will also mean fewer dollars flowing into emerging markets. Jitters over Fed tapering have cast the market’s unfriendly gaze over countries with greater dependency on foreign money, such as Turkey and India. Bond markets from Brazil to South Africa have tumbled.


As the industry’s capital ratios have greatly improved from pre-crisis levels, we expect that eventually the industry’s “beta” will fall due to capital strength, a stronger regulatory framework, and enhanced transparency afforded by processes such as the CCAR. (RBC Capital)



In my Sept. 3 New$ & View$, I disagreed with John Mauldin on the long-term correlation between copper and equity prices:

Something inside me screeched when I read “Unless the long-term correlation has disappeared”. John is younger than me so his “long term” must differ. Here’s my “long term” which does not correlate copper with equity prices very well (sorry, I do not have John’s means to quickly combine both series on the same chart but the time frames are the same).

I may be short on means but not on friends. Terry Orstland (TSO Research) graciously sent me copper prices back to 1970. Here’s the chart combining both series:



Suzanne and I will be travelling in Europe for the next 3 weeks. Posting will continue as much as possible subject to our schedule. Switzerland, Germany, Holland, Belgium. Sounds like a beer tour! Mug


NEW$ & VIEW$ (18 MARCH 2013)

Cyprus. Spring peak? Earnings watch. U.S., EMU inflation. Strong U.S. IP. China housing strong, posing risk. Canada housing weak, posing risk. Currency wars. Japanese stocks valuation. Sentiment watch. Italian clowns. Financial clowns.

CYPRUS!!  Whatever It Takes?

Cyprus concerns spook markets
Plan to tax bank deposits to fund bailout fuels risk aversion

Europe botches another rescue

Just as the eurozone had begun to set the right course in its struggle with an ever-mutating debt crisis, it relapsed into its old vice. Faced with a drowning member state, instead of throwing Cyprus a lifebuoy, leaders put a millstone around its neck.

Appearances notwithstanding, the Cyprus deal does not “bail-in” creditors in an orderly resolution of bankrupt banks. Instead it imposes a tax on all depositors down to the smallest ones. (…)

Pointing up The biggest risk is political. The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.

Europe is risking a bank run

(…) With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe.

I am using the expressions “in all but name” and “effectively” because legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut. (…)

So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.

If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus. (…)

FT Alphaville has a good piece on this wealth tax (The stupid idea, and the system) in which he quotes Barclay’s:

Recent events have highlighted the increasing willingness of governments and regulators to impose losses on bondholders and depositors. (…)

In addition to highlighting the risk of eroding protection for European bank bondholders, we believe the action taken in Cyprus will reignite concerns about the stability of deposits in weaker banking systems, especially considering that deposit insurance is still provided locally. This flaw is to be addressed as part of the banking union but progress has been minimal.

Understand that Cyprus is (was) considered a tax heaven by Russians “nouveaux riches” who deposited enormous amounts into Cyprus tiny banks. They are learning that there is no free lunch, but small savers should not be impacted by this.


Equity markets hit a speed bump in the spring of each of the last 3 years. Not only were valuations getting pretty close to fair value on the Rule of 20 scale (19.2 in 04’10, 18.7 in 04’11 and 17.3 in 03’12, the latter admittedly more reasonable), but economic momentum stalled, leading to a soft patch and rising investor concerns, aggravated by political chaos in Europe and the U.S.

Concerns on the U.S. economy, the only “steady” engine at this time, center on consumers facing a significant fiscal drag and on the impact of the sequester. Looking for signs of weakening momentum, ISI weekly Company Surveys provided good early warnings in each of the last 3 years. So far, so good: the surveys diffusion index rose to a nine month high last week as retailers, auto dealers, truckers and credit card companies all had solid moves higher. The fact that the consumer side of the surveys has strengthened in the last 2 weeks is both surprising and reassuring.

Equity valuation worsened a little last week as U.S. inflation rose from 1.6% in January to 2.0% in February, a level that looks like a strong anchor for inflation (see below). As a result, the Rule of 20 reading is now 18.1 (16.1 trailing P/E + 2.) inflation), 10.4% below fair value while downside to the rising 200-day moving average (1415) is 9.2%. Hmmm…


So, the upside = technical downside. The economic momentum is positive (see below) but inflation ticked up a little. March CPI could benefit if gasoline prices decline some more. Earnings season resumes in 3 weeks but Fedex results and conf. call on Wednesday will be scrutinized for signs of impending weakness…or continued strength. American politics are nowhere near stable but having survived the fiscal drag and the sequester, so far at least, investors have become less apprehensive of the games played in DC. Same in Europe…


Overall, 83 companies have issued negative EPS guidance for Q1 2013, while 25 companies have issued positive EPS guidance. Thus, 77% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 61%. (Factset)


The most recent S&P data (March 14) shows Q1’13 estimates at $25.53, down 2.5% from Dec. 31, 2012 but essentially unchanged since mid-February ($25.57). Earnings would rise +5.3% Y/Y and reverse 2 quarters of Y/Y declines. Fingers crossed


Higher energy prices pushed the U.S. CPI up 0.7% in February, +2.0% Y/Y. All other ways used by the Cleveland Fed to monitor inflationary pressures rose 0.2% in February, very much in line with the trends of the last six months. Inflation seems stuck at the 2.0% level, although the Fed, perhaps seeking to cap expectations, still projects inflation to stay between 1.3% and 2.0% in 2013. The fact remains that monthly core CPI has gained 0.5% in the last two months, a 3.0% annualized rate.


Gasoline prices surged 9.1% M/M in February, accounting for nearly three-fourths of the gain. Overall energy prices climbed 5.4% after declining the previous three months.

The national average retail price of regular gas hit a four-month high of $3.78 a gallon toward the end of February, according to Energy Information Administration data, up almost 15% from the start of the year. Prices have since eased a little and were at $3.71 in the week ended Monday, the EIA said.




Crude-oil futures fell sharply in London trade Monday as the euro-zone bailout for Cyprus’ embattled financial sector sent shivers through the market and pushed the dollar higher.

At 1000 GMT, the front-month May Brent contract on London’s ICE futures exchange was down $1.23 at $108.58 a barrel.

The front-month April light, sweet crude contract on the New York Mercantile Exchange was trading 77 cents lower at $92.68 a barrel.

Pointing up  I sense that the time to begin to worry about inflation is about now. John Mauldin posted a piece from Dylan Grice explaining how central bankers’ printing presses eventually cause inflation.

Bernanke has monetized about a half of the federally guaranteed debt issued since 2009. The incoming Bank of England governor thinks the UK’s problem hasn’t been too much monetary experimentation but too little, and likes the idea of actively targeting nominal GDP. The PM in Tokyo thinks his country’s every ill is a lack of inflation, and his new guy at the Bank of Japan is revving up its printing presses to buy government bonds, corporate bonds and ETFs. China’s shadow banking credit bubble meanwhile continues to inflate…

U.S. PPI Led Higher By Energy Prices; Elsewhere Inflation is Moderate

The producer price index for finished goods gained 0.2% last month (1.8% y/y), the same as during January. The latest rise matched expectations.

Also, as expected, there was a 0.2% gain (1.7% y/y) in prices excluding food & energy during February. A 3.0% advance (1.1% y/y) in energy prices led the increase in wholesale prices last month. That rise was led by an 11.6% spurt (1.1% y/y) in home heating oil costs. Gasoline prices followed with a 9.3% increase (1.2% y/y). Offsetting these gains was a 0.5% drop (+2.6% y/y) in food prices. Fresh fruit prices were 3.0% lower (+4.1% y/y) while dairy prices fell 1.3% (+3.6% y/y). 

EMU Inflation Steadies

The accompanying chart shows the incredible impact of the ongoing austerity programs in Europe. In high-inflation Italy the inflation rate has plunged. In low-inflation Germany inflation rate has continued to work lower. The current EMU rate of inflation is below 2%, the long-run policy objective of the European central bank.

If we look at the statistical standard deviation of inflation among the first 12 members of the community, we find that we are back-tracking to the kind of intra-community inflation differences that were present in the early goings of the Monetary Union. In the early days of the Union the standard deviation of inflation across these members of the community started about 0.9% occasionally flaring up to 1.2 1.3% with an average of about 1.1%.

Currently the deviations are back up to about 1% and the trend is rising. (…) Some huge divergences have reemerged within the Community despite the fact that the chart above seems to show that, at least for those countries, inflation rates are moving in tandem.

Open-mouthed smile  U.S. Industrial Production Recovers With Across-the-Board Gains

Industrial production jumped 0.7% (2.5% y/y) during February following a 0.1% January uptick, earlier reported as a 0.1% dip. Firmer factory sector production led the increase with a 0.8% rebound (2.0% y/y) after a 0.4% January drop.

The increase in factory sector output was led by a 3.6% rise (9.3% y/y) in motor vehicle production. In the consumer products area, furniture & related product production surged another 1.7% (0.3% y/y) while apparel output rose 0.2% (-2.1% y/y). For business equipment, machinery output posted a strong 1.7% gain (1.7% y/y) while electrical equipment production improved by 1.2% (2.9% y/y).

Pointing up  The capacity utilization rate recovered to 79.6% in February. In the factory sector, the rate increased to 78.3%, its highest level since December 2007.



Markit looks at the rolling three month data:

The February upturn takes industrial production 1.5% higher in the three months to February compared with the prior three months, while manufacturing output is up some 2.3% in the same period – the strongest rate of expansion since March of last year.

These data therefore point to a strengthening rate of growth of the industrial sector in the first quarter compared to the end of last year. Industrial production rose just 0.7% in the fourth quarter, while
manufacturing output was up 0.8%.

Sun  And, considering the consumer sector, rightly concludes that

The upturn in manufacturing so far this year has coincided with better-than-expected non-farm payroll and retail sales data, suggesting that the US economy is faring well in the face of weak global economic growth, an increase in payroll tax and uncertainty caused by looming fiscal headwinds.

China Housing Prices Rise

Average new home prices in China rose sharply in February from a month earlier, a development that could give Beijing added reason to clamp down on the fast-heating property market.

(…) Prices of newly built homes in 66 of 70 large and medium-size cities rose in February from January, data released Monday by the National Bureau of Statistics showed. In January, prices rose in 53 cities.

Based on The Wall Street Journal’s calculations, prices in the surveyed cities rose 1.01% on average in February from January, compared with a 0.54% increase in January. (…)

Data provided show housing prices in the surveyed cities rose 1.75% on average in February from a year earlier, accelerating from the 0.63% increase in January from a year earlier, the first increase of its kind since February last year. In terms of floor space, housing sales jumped 55.2% in the January-February period from a year earlier.

Chinese Stocks Enter Correction as JPMorgan Cuts to Underweight  China’s stocks fell, dragging the Hang Seng China Enterprises Index down 12 percent from this year’s high, as slowing growth and faster inflation spurred JPMorgan Chase & Co. to downgrade the nation’s shares.


Slip in Home Sales Clouds Canada Forecast

(…) Now, Canada’s economic outlook is cloudier. Gross domestic product grew a paltry, annualized 0.6% in the fourth quarter, following a 0.7% gain in the prior three months. That was the weakest set of consecutive quarters since the recession. The economy grew just 1.8% last year, and many expect the government to soon trim its forecast of 2% growth for 2013.

Those numbers aren’t likely to get a lift this time around from the housing market. Existing home sales across Canada fell 2.1% in February from January—and dropped a sharp 15.8% from a year ago. Real-estate activity slowed in most major cities, and prices fell by the widest margin since July, the country’s real-estate trade group said Friday.

Nearly 80% of local markets across Canada posted year-to-year sales declines, the Canada Real Estate Association said. The average, non seasonally adjusted home price in Canada fell 1% year-to-year, CREA said, to 368,895 Canadian dollars ($361,697). (…)

Meanwhile, Canadian household debt reached another record high in the fourth quarter of 2012, according to the country’s statistics agency, although the pace of growth slowed sharply. (…)  The ratio of household debt to personal disposable income edged up to 164.97%, up slightly from 164.7% in the third quarter, Statistics Canada said Friday. That is the highest reading since the agency began compiling the data in 1990. (…)

Ghost  RBC Capital Markets summarizes Canada’s housing market:

Valuation metrics such as the price-to- rent and price-to-household income ratio suggest that homes are more than 60% overvalued nation-wide. And, despite historically low interest rates, affordability measures such as the RBC Housing Affordability Index, which measures home ownership costs as a percentage of household income, remain stubbornly high. In markets such as Vancouver and Toronto, ownership costs as a percentage of income are running at close to 90% and 60%, respectively, which seems unsustainable.


Flaherty to cut spending in response to weak growth forecast

Meanwhile, in the U.S.:

2013 Economic Report of the President (456 pages)


Currency Intervention Has Big Trade Impact  Is the world facing currency worries or an all-out war?

(…) But a new paper by former senior U.S. Federal Reserve economist Joseph Gagnon says currency intervention — when a government forcibly lowers the value of their exchange rate — has an impact on other economies several times larger than originally thought. The findings back arguments by some economists and lawmakers that not enough is being done to stop currency manipulation.

Mr. Gagnon says that the $1 trillion a year spent on currency intervention by countries such as China, Switzerland and South Korea will continue to fuel trade tensions without stronger action. (…)

Mr. Gagnon’s paper argues that for every dollar a country spends to lower the value of a its currency, it boosts the trade balance by between 60 cents to a dollar. For a country such as China, that impact is three to five times bigger than the IMF calculated in its last exchange rate assessment released last year.

(…) Mr. Gagnon says the study has the potential to put pressure on the IMF and the Group of 20 largest economies to act more urgently to stop exchange rate interventions.(…)

Clock  EUROPE: Shortermism Is Back

Monti’s analysis guides EU debate  Economic reform taking too long to work, says prime minister

(…) the summit’s communiqué seemed to hint at a change in thinking. The conclusions, backed by all 27 leaders including Ms Merkel, endorsed “short-term targeted measures to boost growth and support job creation” and the need to “balance productive public investment needs with fiscal discipline”. Just kidding

At a post-summit press conference, José Manuel Barroso, the European Commission president who has long been one of the most ardent advocates of fiscal consolidation, appeared almost Keynesian.

“We should have short-term measures addressing some of the most pressing social needs and indeed addressing some of possibilities to have, let’s call them, ‘quick wins’ in terms of growth,” Mr Barroso said. (…)

Mr Monti might have succeeded in shifting leaders’ thinking of what was happening politically and economically in the eurozone. But the divisions over how to respond appear little changed from the day he took office a year and a half ago.

S&P warns of socially explosive situation in euro zone

Standard and Poor’s sees a high risk that Spain, Italy, Portugal and France will not be able to carry through necessary reforms as the unemployed become less willing to put up with austerity, S&P’s Germany head Torsten Hinrichs told a newspaper.


Abenomics has become a buzzword and Japanese stocks have done well lately. This chart from CLSA (thanks Gary) puts Japanese equity valuation in perspective.



Note: you may also want to read Grant Williams’ pretty negative analysis on Japan (‘It’s Just Bluefish’) before you commit all your savings.

The election of Shinzo Abe in December of 2012 has brought Kyle’s premise closer to realization but still hasn’t been enough to scare people out of the water, as they willfully ignore the mathematical implications of a PM promising to generate 2% inflation in a country that has the largest debt relative to GDP anywhere on earth but can, for now at least, borrow money at levels that will most definitely NOT be available to them should they succeed in their aims.



  • Snap! There Goes Dow’s Streak 

    The Dow industrials’ winning streak ended at 10 sessions, its best run since 1996, after a disappointing reading on consumer confidence sent stocks lower.

Stocks declined just as another major benchmark, the Standard & Poor’s 500-stock index, was about to join the Dow in record territory. (…)

“The market is taking a breather,” said Patrick Kaser, a portfolio manager with Brandywine Global Investment Management, which oversees $42 billion. “This is pretty minor, to be down less than half a percent. I think it’s encouraging.” (…)

Pointing up  Although the day’s move was modest, investor interest was high. Total trading was the year’s highest, with overall volume of New York Stock Exchange stocks exceeding 4.9 billion shares. Nasdaq trading also was the highest of 2013. (…)

As they question whether indexes have more gains in them, investors will be influenced by the fact that stocks have defied skeptics since before the election last year. Repeatedly, experts warned they had come too far, too fast, and repeatedly stocks broke higher.

Other signs of frothy sentiment also have been bubbling up, notably a jump in bullishness among investment advisory services polled by Investors Intelligence. Bulls increased sharply to 50.0% last week from 44.2%, while outright bears fell to 18.8% from 21.1%, their largest weekly drop in 10 months. Advisors looking for a correction also dwindled to 31.2% from 34.7%. Moreover, the spread between bulls and bears surged to 31.2% from 23.1% in just a week and put it in “the dangerous territory around 30%,” Investors Intelligence commented. A wide spread a year ago preceded a market retreat, the service noted. (…)

And for Dow Theorists, Kass pointed to the advance in the Dow Transportation Average, which is looking rather extended. The transports were 19% above their 200-day moving average Thursday, implying that the average was well ahead of itself, which has tended to portend a pullback to its trend. The last time this happened was in early May 2010, after which the market fell 18% over the next two months. In January 2010, the transports jumped 19% above their moving average; this was followed by a 12% dip over the next month. And in May 2006, they got 21% above their moving average, after which came an 11% dip over the next two months.

(…) As a matter of fact, the fever of despair is slowly dissipating. Editorials are more positive and blogs are less preoccupied. Media is realizing that dynamism abounds, that many firms are doing well and that life is not centered around politicians. Insightful investors are seeing the difference and, in turn, the stock market is quietly booming.

Italy Did Not Just Send in The Clowns Why The Political Stalemate Is a Warning to Democracies Everywhere

(…) One reading of this extraordinary outcome is that it was a protest against the painful spending cuts, tax increases, and economic reforms that Monti’s government implemented as a precondition (albeit an unstated one) for European Central Bank support. The fact that, together, Grillo, who promised a referendum on the euro, and Berlusconi, who took a euroskeptic stance throughout 2012, won more than half of the votes was described by the economist Joseph Stiglitz as “a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.”

But the Italian election is telling us much more than that. In fact, Grillo’s party, founded only in 2009, focused less on euroskepticism than on a blanket rejection of the established Italian political elite and its way of doing politics. Rejecting traditional campaign techniques in favor of social media, the party pushed its agenda of, first, ending the generous state subsidies and salaries paid to Italy’s political parties and elected politicians and, second, replacing them with a vaguely conceived Internet-based representation system. The Grillo phenomenon is a challenge not only to austerity politics, but to the traditional party system itself. The economic crisis gave Grillo a favorable wind, but his offensive against Italy’s corrupt and self-serving politicians was brewing even before the downturn began.

It would be unwise to dismiss the election results as yet another Italian anomaly. All across Europe, membership of political parties is at its lowest level since the World War II. Voters are also less loyal than ever to traditional parties — they are more likely to switch votes to a rival party or an entirely new one. Only days after Grillo’s triumph, the UK Independence Party, which campaigns for British withdrawal from the EU, came to within 2,000 votes of winning a by-election held to replace a disgraced Liberal Democrat MP, pushing the ruling Conservatives into third place. And the success of the Pirate Party in Sweden, the anti-Islam party led by Geert Wilders in the Netherlands, and more established populist parties such as the French Front National, confirm that Italy is far from being an outlier.

The economic crisis in Europe is threatening the very survival of the mainstream political parties. European citizens have been showing signs of frustration and dissatisfaction with their elected politicians for years. Even before the crisis, voters had tired of choosing between broadly similar political parties whose policy options are constrained by European laws or the pressures of globalization. Faced with the worst economic crisis since the Great Depression, this frustration is boiling over into resentment and rejection. And the imposition of draconian measures by supranational institutions only makes things worse.

All that has created a crisis of legitimacy for Europe’s ailing political parties. If the established political class can be blown out of the water in Italy, politicians Europe-wide must be wondering how safe they are from a similar fate. Political parties not only need to address the economic crisis, they also need to reconnect with voters and revitalize their central role in democratic politics. If they do not, what happened in Italy may soon repeat.

Angry smile  SAC in record $614m insider settlements
Agreements over trading in Wyeth, Elan and Dell shares

(…) A person close to SAC said the fund had chosen settlement over two to three years of civil litigation that would follow the trial of Mr Martoma, threatening prolonged uncertainty for investors and staff of the hedge fund. (…)

Ed Butowsky, of Chapwood Investments, said he retained full confidence in SAC and Mr Cohen to manage money for him and his clients following the settlement: “Its like saying you would drop Michael Jordan from your team because of a technical foul”.

A technical foul!!!!!!!

SAC said in a statement: “We are happy to put the Elan and Dell matters with the SEC behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

Yeah, sure!

Remember Martha?

According to U.S. Securities and Exchange Commission (SEC), Stewart avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart’s broker at Merrill Lynch. The day following her sale, the stock value fell 16%.

In the months that followed, Stewart drew heavy media scrutiny, including a Newsweek cover headlined “Martha’s Mess”.

After a highly publicized five-week jury trial that was the most closely watched of a wave of corporate fraud trials, Stewart was found guilty in March 2004 of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators, and was sentenced in July 2004 to serve a five-month term in a federal correctional facility and a two-year period of supervised release (to include five months of electronic monitoring).

Bacanovic and Waksal were also convicted of federal charges and sentenced to prison terms. Stewart also paid a fine of $30,000.

In August 2006, the SEC announced that it had agreed to settle the related civil case against Stewart. Under the settlement, Stewart agreed to disgorge $58,062 (including interest from the losses she avoided), as well as a civil penalty of three times the loss avoided, or $137,019. She also agreed to a five-year ban from serving as a director, CEO, CFO, or any other officer role responsible for preparing, auditing, or disclosing financial results of any public company.


NEW$ & VIEW$ (17 DECEMBER 2012)


A fresh proposal from House Speaker John Boehner to raise tax rates on millionaires marked a breakthrough in stalled budget negotiations with President Barack Obama, suggesting a potential framework for avoiding year-end spending cuts and tax increases known as the fiscal cliff.

The proposal, which the speaker offered privately to Mr. Obama Friday, calls for raising $1 trillion in tax revenues over 10 years, up from the $800 billion Mr. Boehner previously proposed, and cutting about $1 trillion from spending.

The Boehner proposal would extend all current tax rates, while raising rates only for income above $1 million, which would rise to 39.6% from 35%. Previewing an argument likely to be used in selling the idea to conservatives, GOP officials argued Sunday that Mr. Boehner’s proposal would not call for Republicans to vote for a tax increase: The plan will simply allow rates to rise, as scheduled, for income over $1 million.

While the White House objected to major parts of the proposal, senior Democrats described it as a tipping point that moves talks away from deadlock. (…)

Mr. Boehner’s proposal calls for a two-stage process, providing for enactment of a small-scale deficit-reduction plan by year’s end, coupled with a second phase next year, in which lawmakers would embark on a revamp of the tax code and entitlement programs, using a final agreement as a guide.

Mr. Boehner offered to include an increase in the U.S. borrowing limit as part of the deal—enough to avoid another fight over the issue for perhaps a year if it is matched by comparable spending cuts. (…)

Centrists who are seeking a big deficit-reduction deal, however, saw promise in Mr. Boehner’s willingness to take a politically risky move toward compromise. (…)

Smart move from Boehner.

The Washington Post adds:

Senior White House officials remained in contact with Boehner’s staff throughout the weekend in a sign that serious negotiations had finally begun after weeks of stalemate and partisan posturing.

Fingers crossed  No grand bargain now but an agreement on a two-step program seems possible.

Smile  Consumer Prices Fell in November

U.S. consumer prices dropped 0.3% in November as the cost of gasoline declined.

Gasoline prices dropped 7.4% in November, the largest decrease in nearly four years. Retail fuel prices have fallen in eight of the past nine weeks, according to a different government measure. Overall energy costs fell 4.1% in November.

(…) core consumer prices rose 0.1% last month. That number reflects higher prices for shelter, transportation services and medical care. Food costs rose 0.2%, the sixth consecutive monthly increase.

Year over year, consumer prices were up 1.8% and core prices were 1.9% higher.

This is good news from the Rule of 20 point of view. Inflation dropping from +2.2% to +1.8% means fair P/E rises from 17.8 to 18.2, more than offsetting the 0.5% decline in trailing earnings after Q3. If only politicians could do something smart…



Buy high, sell low charts from RBC Capital. Institutional investors, as a group, are no smarter than individual investors.


Deflation is not a big threat at this time:

Median CPI remains above 2.0%

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.



Open-mouthed smile  U.S. Retail Sales Restrained By Lower Gas Prices

Total retail sales recovered 0.3% last month following an unrevised 0.3% October decline. Retail sales were unchanged excluding autos, as expected, for the second consecutive month. The mix of sales, however, was more encouraging than these top-line numbers suggest.

Consumers spent less on gasoline last month as prices fell. A 4.0% drop (+0.8% y/y) in gas purchases accompanied a 2.5% decline in seasonally adjusted prices, as calculated by Haver. Also adding to volatility was a 1.4% recovery (5.4% y/y) in motor vehicle sales. Excluding gasoline and autos, retail sales rose a notable 0.7% (3.3% y/y) and more than recovered their 0.2% October falloff.

Also adding to volatility was a 1.6% rise (5.4% y/y) in sales of building materials. A good indication of consumers’ underlying ability to spend on discretionary items are sales without these volatile components. Excluding autos, gas and building materials, retail sales rose a respectable 0.5%. However, the 2.9% y/y increase was lower than the peak y/y gain of 7.1%, ending October of last year.



Looking at the last 3 months, total retail sales are +1.2% or +4.9% annualized. Non-Auto less Gasoline sales are +1.4% or +5.7% annualized. The U.S. consumer is not retrenching just yet. That is in spite of slow income growth:

The recent 3.2% yearly increase by employment income limits the upside for retail sales growth. After slowing from the 6.4% of 1991-2000’s recovery to the 4.5% of 2002-2007’s recovery, employment income’s average annual increase subsequently slowed to the 3.4% of the current upturn. (Moody’s)





Thinking smile  But, for how long? Americans may be willing to spend but can they? (Chart from Gary Shilling).


U.S. Industrial Output Recovers After Sandy, But The Trend Weakens

The rebound in industrial sector output from Hurricane Sandy totaled 1.1% (2.5% y/y) last month following a deepened 0.7% October decline, last month reported as -0.4%. The Fed indicated that virtually all of last month’s increase in output was due to the passage of the storm. A weakening trend is indicated by the 1.2% y/y increase in factory sector output which was down from the 4.3% rise during all of last year as well as versus 5.7% in 2010.

In the manufacturing sector, a 0.9% increase (1.2% y/y) in output just made up for October’s 1.0% drop. The pattern is the same for the 1.3% m/m gains in consumer goods and business equipment output, although the latter’s 7.5% y/y rise easily outpaced the 1.2% y/y increase for consumer goods.

The capacity utilization rate rose to 78.4% and recovered its October fall. In the factory sector, the rate also rose to 76.6% and made up for the October decline to 75.9%.



Markit’s December flash PMI offers strong hopes that the manufacturing sector is re-accelerating:



U.S. Business Inventories Continue To Accumulate

Business inventories rose a slower 0.4% (5.7% y/y) during October following a 0.6% September rise. Factory inventories ticked up just 0.1% (3.1% y/y). The slower 0.6% gain in merchant wholesalers inventories reflected a 3.1% decline (+2.4% y/y) in petroleum inventories with lower crude oil prices. Elsewhere, wholesale inventories increased a firm 0.8% (6.8% y/y) during October. Inventories at the retail level gained a firmer 0.6% (8.2% y/y). That was led by a 0.9% jump in autos (21.2% y/y) after a 0.9% September increase. Nonauto retail inventories gained 0.4% (3.2% y/y) reflecting strength in building materials (4.0% y/y) and clothing stores (3.8% y/y).

Business sales fell 0.4% (+3.1% y/y) after a 1.2% September jump. Wholesale sales dropped 1.2% (+2.3% y/y) with the decline in petroleum prices. Even without oil, however, wholesale  sales fell 0.3% (+1.6% y/y).

large image 




Auto  The U.S. auto sector, particularly GM, seems to be caught with excess inventory even with reasonably strong sales recently. Imports from Canada are already weakening which is not positive for Canada’s GDP as this chart from RBC Capital shows:image

In effect, Canada is also at the edge of the U.S. fiscal cliff!

Sun  Global outlook brightens as flash PMIs rise in the US, China & Eurozone

The strongest gain was seen in the United States, where’s Markit’s flash PMI hit an eight-month high in December. The survey had correctly signalled the downturn in official data, which showed a contraction of manufacturing output in October, and therefore bodes well for a rapid return to growth. The December PMI was broadly consistent with US manufacturing output growing at a 4% annualised rate.

The US PMI came on the heels of Markit’s PMI for China, produced for HSBC, which hit a 14-month peak in December. The PMI has now risen for four successive months in China, rising above the no change level of 50 in the final two months of 2012, providing strong evidence to suggest that industrial production growth will have continued to revive after the annual growth rate picked up to 9.6% in October.

Even the Markit Eurozone Manufacturing PMI improved in December, rising to its highest since March. However, although well up on the three-year low seen in July, the rise in the Eurozone PMI was only very marginal, and the index remains firmly in contraction territory, contrasting with the expansions seen in the US and China. The PMI data therefore add to worries that the Eurozone recession deepened in the fourth quarter after GDP data showed a surprisingly mild 0.1% contraction in the third quarter. But, the rise in the PMI nevertheless suggests that the picture is beginning to brighten for even the hard pressed Eurozone as we move in 2013.

 image image

I agree with Markit’s view on the U.S. and China, but not on the Eurozone where the picture will only begin to brighten when new orders turn positive. The Euro has not depreciated sufficiently to offset the very slow progress to date on the lack of competitiveness of the Euroblock.


Right on cue, Eurostat released October’s trade data this morning: exports fell 1.4% M/M after dropping 1.3% in September. Imports rose 0.6% in October but they had declined 3.6% in the previous 2 months.

Coincidentally, Eurostat also released Hourly Labor Costs: they are up 2.0% Y/Y in Q3, up from +1.9% in Q2 and +1.6% in Q1.

Just kidding  In case you think that the Eurocrisis has ended:

Lightning  Spanish House Prices Quicken Decline

imageIn an indication that the market isn’t yet bottoming out, Spanish housing prices are now falling at the fastest pace on record, after double-digit falls over the past year. House prices fell on average by 15.2% in the third quarter from the year-earlier period, compared with the 14.4% decline in the second quarter, the country’s statistics agency, INE, said Friday.

Unlike other markets faced with a housing slump, like the U.S. and Ireland, house prices in Spain fell at a slower pace in the first few years after the 2008 property bust. The pickup in the rate of decline comes after Spain’s government urged the banks to unload foreclosed properties more quickly.

More pain in Spain (chart below from Gary Shilling):


More from Gary Shilling, this time on Canada:





Looks like an accident waiting to happen. As I said earlier, Canada is right at the edge of the U.S. fiscal cliff.

Green with envy  Portugal Moves to Cut Corporate Tax

(…) The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said.

The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview.

That would be the lowest in the European Union along with Cyprus and Bulgaria, which have blanket 10% corporate tax rates, according to consultancy firm KPMG. The average corporate tax in the EU is above 22%. (…)

Mr. Santos Pereira, who was an economics professor at Simon Fraser University in Vancouver, Canada, before taking over the Portuguese ministry, said Portugal’s economic revamping will pay off.

Changes to make the labor law more flexible and companies easier to be set up, fiscal incentives to new investment and the use of EU funds to train the Portuguese to work in export-led industries will provide sustainable economic growth, he said.

“Fifteen years ago, Germany was the sick man of Europe, and it regained its competitiveness by reforming its laws and legislation and by investing quite a lot of resources in technical training. Their model in terms of industries, exports and technical training is the model we are getting back to in Portugal,” Mr. Santos Pereira said.

Let’s see how the EU reacts to that…

Abe Sets Economic Agenda in Japan

To revive the sickly economy, incoming Japanese Prime Minister Shinzo Abe vowed a hefty spending package and increased pressure on the central bank to pull the country out of recession and deflation

Singapore Home Sales Fall

Singapore’s clampdown on home loans is showing some signs of success, as sales of new private homes fell to their lowest level so far this year in November.

Sales of new private residential units fell to 1,087 units in November, down 44% from October, according to data from the Urban Redevelopment Authority. October’s tally was 26% lower than the previous month’s.

The Energy game Changer

US sees $90bn boost from shale gas boom  Europe fears widening divide amid America’s industrial renaissance

Manufacturers have announced more than $90bn worth of investments in the US to take advantage of its cheap natural gas, according to new calculations, underlining how the shale revolution appears to be driving the country’s industrial renaissance.

Petrochemicals, fuel, fertiliser and steel companies are among those that have committed to or are considering multibillion dollar investments based on their ability to source cheap energy and feedstocks. (…)

Industry executives say low-cost feedstocks and energy are already having an effect on the US economy.

Pointing up  Since the start of 2010, industrial production is up 12 per cent in the US, while it has fallen 2 per cent in China, 3 per cent in Britain, and 6 per cent in Japan.

Germany’s production has risen 11 per cent over the same period, but German industrial companies including Bayer and BASF have been warning that they expect to lose competitiveness against US rivals over the coming decade because their energy costs are rising.

For more on that see Facts & Trends: The U.S. Energy Game Changer.


NEW$ & VIEW$ (16 OCTOBER 2012)

Smile  Consumers Step Up Spending

Retail and restaurant sales rose a seasonally adjusted 1.1% in September from August, and the Commerce Department boosted its estimate for sales over the summer. Sales have now climbed for three consecutive months after flagging during the spring. (…)

The three-month average rose 1% in September, the second consecutive monthly increase. Over the past year, the three-month average is up 4.8% compared with 5.4% for the unaveraged data.

Markit gives more details:

imageCore sales, which exclude building materials, motor vehicle & parts & gasoline, rose 0.9%.

Over the third quarter as a whole, retail sales are up 1.4%. That compares with a decline of 0.3% in the second quarter and highlights the positive contribution consumer spending is likely to make to economic
growth in the third quarter.


Pointing up  The Apple Effect (Bespoke Investment)



No big deal though. I calculate that “core” retail sales (ex-food, cars and gas) were up 1.0% MoM in September. Taking out Electronic Stores, the gain is 0.85%, still quite good.

Weekly chain store sales were flat last week and are not showing much strength during this important shopping season. The 4-wk moving average is up 2.7% YoY.



Total CPI + 0.6% in September, +2.0% YoY, up from 1.7% in August and 1.4% in July. Core CPI rose 0.1% as for the previous 2 months. It is up 2.0% YoY


Total CPI rose 2.6% in September 2012, unchanged compared with August. Monthly inflation was 0.7% in September. Core inflation was up 0.8% MoM as clothing costs jumped 14%! Core CPI was up 0.2% in August, up from 1.9% in August.

U.K. Inflation Cools to 2.2%, Least in Almost Three Years


The October Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline for a third consecutive month. The general business conditions index increased four points but remained negative at -6.2.

imageThe new orders index rose five points to -9.0, while the shipments index fell nine points to -6.4, its first negative reading in more than a year.

imageEmployment conditions weakened, with the index for number of employees declining five points to -1.1 and the average workweek index falling three points to -4.3.


Spain Considers EU Credit Line

Spain is considering a request for a line of credit from the EU’s new bailout mechanism, giving the first details of the country’s plans for seeking help to avoid its debt problems spinning out of control.

(…) To qualify for ECB support, a government would first have to apply for one of two kinds of help from the new European Stability Mechanism, which will have an eventual lending capacity of €500 billion ($643 billion).

Under one option, the ESM would become that government’s sole lender, buying up all its debt—as the European Union and other international lenders did when they bailed out Greece, Portugal and Ireland. Spain, the official said, would prefer a second option available under the new bailout arrangements: It would apply for a credit line, a request that the ESM make money available only if needed.

(…) The official said that once Spain made a bailout requests, those costs would drop and Spain wouldn’t need a disbursement of ESM credit.

“One could say it’s a virtual credit line,” the official said.

By opening a credit line and qualifying for the ECB’s bond-buying program, he said, Spain would gain enough of a financial backstop to significantly lower its borrowing costs to manageable levels. The day following a Spanish bailout request, the official predicted, interest rate on 10-year notes of Spanish government debt could fall by 1.5 percentage points while the Spanish stock market could surge 15%. (…)

Smile  Euro-Zone Exports Surge  Exports of goods from the 17 countries that share the euro rose sharply in August.

For weaker economies in the euro zone that are seeing subdued domestic demand as a result of austerity programs, there were also encouraging signs in the trade figures for August. Exports from Portugal rose by 14.5%, while exports from Ireland, Spain and Italy were up 7.6%, 5.4% and 3.3%, respectively. Greece was the main exception, as exports rose by just 0.9%.




GOOD READ: Euroland’s debt strategy is an economic and moral disgrace

Drastic fiscal tightening in a string of interlinked countries does two to three times more damage than assumed, especially if there is no offsetting monetary stimulus.

Pushed beyond the therapeutic dose, it is self-defeating. At a certain point it becomes pain for pain’s sake. (…)

The authorities have repeated the blunders of the Great Depression, but with fewer excuses. (…)

One might expect a flicker of recognition from Germany’s Wolfgang Schauble that something must change. But no, with half Europe sliding into a second and more menacing leg of depression, and with unemployment already at 25.1pc in Greece and Spain, and 15.9pc in Portugal, he refuses to brook deviation.

“Increasing public debt doesn’t create growth, it destroys growth,” he snapped back. There is “no alternative” to debt reduction. Always the same pedantry. (…)

Pointing up  In Reversal, Cash Leaks Out of China

A Journal analysis of Chinese economic data suggests that capital is pouring out of the country—about $225 billion in the 12 months through September, equivalent to about 3% of China’s economic output.

imageWealthy Chinese citizens are buying beachfront condos in Cyprus, paying big U.S. tuition bills for their children and stocking up on luxury goods in Singapore, frequently moving cash secretly through a flourishing network of money-transfer agents. Chinese companies, for their part, are making big-ticket foreign acquisitions, buying up natural resources and letting foreign profits accumulate overseas. (…)

Chinese individuals aren’t allowed to move more than $50,000 per year out of the country. Chinese companies can exchange yuan for foreign currencies only for approved business purposes, such as paying for imports or approved foreign investments.

In reality, the closed system has become more porous and the rules are routinely ignored. “The wealthy in China have always had an open capital account,” says Eswar Prasad, a Cornell University economist and former International Monetary Fund official. (…)

The outflow helps explain why China’s banks have been slow to increase lending this year. Accelerated outflows might force China’s central bank to push the yuan to appreciate more strongly against foreign currencies, to encourage Chinese investors to keep their money in the country. (…)

Big cracks in the “system”. A remarkable piece from the WSJ. Worth reading in its entirety.

Money  LVMH Revenue Growth Slows

Revenue growth slowed for the second consecutive quarter at French holding company LVMH Moët Hennessy Louis Vuitton which is a barometer in the luxury-goods industry.

LVMH—whose design and lifestyle brands include Louis Vuitton accessories, Veuve Clicquot champagne and the Céline fashion label—said third-quarter sales increased 6% from the year-earlier period, stripping out acquisitions and exchange-rate fluctuations. That marked a slowdown from the 10% and 14% growth rates posted in the second and first quarters, respectively.

Surprised smile  Canada Household Debt Hits Record

Canadian household debt hit another record high in the second quarter as demand for loans grew, and past data covering debt were revised sharply higher.

Statistics Canada, the country’s data agency, said the ratio of household credit-market debt to disposable income hit 163.4% in the April-to-June period, an increase from the upwardly revised 161.8% recorded in the first quarter. The original first-quarter figure was 152%. The ratio for 2011 was also raised, to 161.7% from 150.6%.

While the upward revisions were technical in nature—reflecting changes in the agency’s methodology—their size caught many economists by surprise. The risks posed to the Canadian economy by overindebted consumers are now “elevated, absolutely,” said Glen Hodgson, chief economist at the Conference Board of Canada, a nonpartisan think tank in Ottawa. “The reality hasn’t changed, but we are having a better look at what the reality is, and it’s not pretty.” (…)

Paul Ferley, economist at Royal Bank of Canada, said the newly revised debt levels are close to the peak witnessed in the U.S. at the height of the subprime mortgage crisis. The U.S. debt-to-income ratio is now in the 140% range after Americans deleveraged after the recession. But the comparison isn’t perfect, Mr. Ferley and other economists said, because Canada and the U.S. deploy different methodologies in tracking the data. (Chart below from BMO Capital).


Home Loans May Get Shield

Federal regulators are considering giving mortgage lenders protection from certain lawsuits, a move designed to encourage lending to well-qualified borrowers.

(…) Small and midsize lenders have been the most vocal in calling for such a “safe harbor,” contending that their biggest competitors (…) can more easily absorb the risk of lawsuits.

“A safe harbor creates more certainty and competition in the mortgage market, which benefits consumers,” a spokeswoman for Regions Financial Corp. said Monday. (…)

Lawsuits aren’t the only worry for mortgage lenders. Banks have also kept underwriting standards tight in recent years due to uncertainty about whether they’ll be forced to buy back loans made in the housing boom.

The regulation doesn’t address this issue.(…)


NEW$ & VIEW$ (15 OCTOBER 2012)


Warnings on fourth quarter add to U.S. earnings worries

Outlooks for the fourth quarter – just two weeks old – are so far decidedly more negative than positive. Thomson Reuters data shows 11 negative outlooks so far from Standard & Poor’s 500 companies and no positive outlooks.

Third-quarter guidance, meanwhile, at the comparable period showed 6 negative outlooks and no positive. (…)

U.S. companies so far are having a tougher time beating analyst expectations in the third quarter, with 59 percent of companies exceeding forecasts, below the 62 percent long-term average, based on Thomson Reuters data. (…)

Revenue trends have also been weak: Just 50 percent of companies that have reported have beaten estimates on revenue, compared with the 62 percent average, he said.

Warnings continue to come in for third-quarter reports, helping to drag down earnings estimates for the period. Several of those warnings have come from Kohl’s (KSS.N) and other retailers, which do not report results until early November. (…)

Europe was cited more than any other reason for negative forecasts from S&P 500 companies for the third quarter, a Thomson Reuters survey showed, but China is a growing concern.

  Factset adds:

The 32 companies that have reported to date have surpassed estimates by just 3.0%. Over the last four quarters on average, actual earnings have surpassed estimates by 4.7%.

If the final surprise factor is 3.0%, it would be the lowest final surprise factor since Q4 2008. However, even if the remaining companies were to only beat estimates by 3.0%, the final earnings growth rate for the quarter would still finish in the positive, at 0.15%.

Banks stocks were hit hard late last week after WFC and JPM reported. Yet, banks were supposed to be among the stronger gainers in Q3…


J.P. Morgan, Wells Fargo: Housing Is on Mend  J.P. Morgan Chase and Wells Fargo both reported solid gains in profit and pointed to a recovery in the housing market. Low interest rates, however, continue to pose problems.

“The housing market has turned the corner,” J.P. Morgan Chase & Co. Chief Executive James Dimon said Friday. Wells Fargo & Co. Chief Financial Officer Tim Sloan was just as definitive: “We do believe that we’ve seen a turn,” he said.

At the same time, the headwinds that have kept a lid on the U.S. recovery and weighed on bank stocks were plainly in evidence. Profit margins are being crimped by the same low interest rates that spurred the mortgage-refinancing wave, and investors continue to scrutinize the companies’ operating costs and legal expenses. Bank stocks tumbled on a relatively flat day in the broader stock market. (…)

Surprised smile  J.P. Morgan and Wells Fargo emerged as the two of the sturdiest U.S. banks in the aftermath of the 2008 crisis and together are now responsible for more than 44% of all mortgage volume, according to Inside Mortgage Finance. (…)

Pointing up J.P. Morgan Chase said 75% of third-quarter mortgage volume came from refinancings; Wells Fargo said 72% of its applications during the quarter were for refinancings.

Margin squeeze:

[image]J.P. Morgan’s net interest margin—measuring what it makes on its loans—dropped to 2.43% from 2.66% a year earlier. Wells Fargo’s net interest margin slid to 3.66% from 3.84% a year ago.(…)

With deposit rates already near zero, banks have limited room to further lower their cost of funding. Wells said that its average deposit cost in the third quarter was just 0.18 percentage point, down only marginally from 0.19 percentage point the prior quarter.

Meanwhile, each quarter banks see higher-yielding loans and securities mature, only to replace them with ones that yield significantly less. That contributed to a 0.25 percentage point fall in the margin at Wells to 3.66%. J.P. Morgan’s margin fell 0.04 percentage point to 2.43%. (…)

“We have to be very careful at this point in time not to just go out there and stretch for yield and take on a lot of interest-rate risk,” Mr. Stumpf said on Friday’s call.

Buyers Are Back After Foreclosure

Millions of families lost their homes to foreclosure after the housing crash hit six years ago. Now, some of those families are back in the housing market. Call them the “boomerang” buyers.

(…) Using the three-year benchmark it takes to get an FHA-guaranteed loan, in this year’s second quarter there were 729,000 households that were foreclosed upon during the bust that are now eligible to apply for an FHA mortgage, up from 285,000 in the second quarter of 2011, according to an analysis of foreclosure data by Moody’s Analytics. The company projects that number will grow to 1.5 million by the first quarter of 2014. (…)

Until recently, many of the people who had lost their home to foreclosure or short sale have rented homes, leaving many economists and industry watchers to wonder if the nation would become more of a renter society. In the second quarter, the national home-ownership rate came in at 65.5%, down from 65.9% a year earlier and 69.2% in the second quarter of 2004. Each percentage-point decline represents about one million households.

But as rental rates continue rising—they climbed 0.8% in the third quarter to a national average of $1,090 per month, according to Reis Inc. homeownership is increasingly becoming cheaper than renting. (…)

A housing boom will lift the US economy

Roger Altman, former US deputy Treasury secretary from 1993-94, writes in the FT that the housing market

(…) will be powerful enough, together with rising oil and gas production and other factors, to lift the entire US economy. Indeed, the resultant US economic growth rate may be higher than the Federal Reserve’s long-term forecast of 2-2.5 per cent.

This surge will be driven by a combination of improving house prices, a lower inventory of homes for sale, rising rates of household formation and population growth, and improving access to mortgage credit. Together, they should push residential investment, which includes both new construction and remodellings, to annual growth of 15-20 per cent during the next five years. This alone may contribute 1-2 percentage points to annual growth in gross domestic product and up to 4m jobs over that period.

(…) housing demand is going to be strong, driven by demographics. The International Monetary Fund forecasts that the US population will increase by 15m during the 2012-17 period, more than the increase of the past five years. The two groups of the population that are growing fastest are the over-55s and the so-called echo boomers, the grandchildren of the baby-boom generation. The first group has the highest rate of home ownership. The second has been renting disproportionately, and is primed to start buying. JPMorgan estimates that 6m new units of housing are needed by 2017 just to serve the bigger population.

Then there is the coming recovery in household formation. According to JPMorgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years. (…)

In Canada, mirror image: Why TD thinks Canada is ‘overbuilt’

(…) The latest numbers from Canada Mortgage and Housing Corp., released this week, showed housing starts in September dipping to an annual pace of about 220,000, which TD economist Francis Fong notes tops the average of about 209,000 over the past decade. (…)

image“The current pace of construction is also well north of the average rate of household formation in Canada. According to the 2011 census, only 177,000 new households were created each year since 2006. This would imply that, over time, we have been building more than the demographic need requires.” (…)

The bottom line for Mr. Fong is that the bank believes there’s a “moderate   level of overbuilding” in some cities that will lead to a “gradual price correction” over the course of the next several years as the rate of construction eases.

Also: Canadian housing market peers over the edge


Charting the future of crude oil

image(…) The most dramatic change to the global oil map is the boom in the United States, with the “light, tight oil” that is now being produced in North Dakota’s Bakken field and Texas’ Permian and Eagle Ford plays. The IEA forecasts that the U.S. will increase its production by 3.3 million barrels per day over the next five years to 11.4 million barrels, a level that exceeds the current output of Saudi Arabia.

And it expects Canada’s oil production to grow by 1.1 million barrels a day, primarily from the oil sands. Domestic oil production was about 3 million barrels a day last year. (…)

Some have written about this “potential” game changer in the past year. Doubters claim that optimistic projections take little account from declining production at many mature fields and the apparent high decline rates in shale wells. Political and environmental issues also add to the uncertainties.

Nonetheless, the fact is that U.S. production is growing fast and faster than previously forecast. image

The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results – given the fact that most shale/tight oil resources in the world are still unknown and untapped. What’s more, the application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world’s oil production. (L. Maugeri, Harvard Kennedy School)

I will be shortly posting on that very important trend.

Devil  Iran’s Secret Plan to Contaminate the Strait of Hormuz

Iran could be planning to create a vast oil spill in the Strait of Hormuz, according to a top secret report obtained by Western intelligence officials.

The goal of the plan seems to be that of contaminating the strait so as to temporarily close the important shipping route for international oil tankers, thereby “punishing” the Arab countries that are hostile to Iran and forcing the West to join Iran in a large-scale cleanup operation — one that might require the temporary suspension of sanctions against Tehran.


Wholesale Prices Rise

The producer price index increased a seasonally adjusted 1.1% in September from a month earlier, the Labor Department said Friday. The gain was largely due to energy prices that jumped 4.7% during the month, following a 6.4% rise in August. (…) So-called core prices, which strip out volatile energy and food components, were unchanged from August.

A 1.1% monthly increase in wholesale prices can be rapidly dismissed as inconsequential if it appears to come from rising energy prices. But when it follows a 1.7% jump which itself came after 0.2% and 0.3% gains the two months previous, one should begin to pay attention.

During the first 5 months of 2012, the PPI declined 0.8% or 2.4% annualized. Over the next four months through September, the U.S. PPI rose 3.3%. That’s a 10.2% annualized rate. The core PPI rose 0.9% during the last 4 months or 2.7% annualized, the same annualized rate as for the whole of 2012 so far. Such high inflation is happening while the U.S. economy is barely growing…


Finance Chiefs at Odds

A weekend gathering of the world’s top finance officials deepened—rather than eased—conflicts among some of the largest economies, raising fresh doubts about boosting the flagging recovery.

At the annual meetings here of the International Monetary Fund and World Bank, European officials bickered about the damage caused by austerity; this week they head into a major euro-zone summit with no clear rescue plan for Greece. A territorial row between China and Japan, the world’s second- and third-largest economies, bled into the conference with no sign of resolution, highlighting a new risk to growth. And many top finance officials pointed fingers at the U.S. for casting a new cloud over global markets by failing to make progress on the budget mess in the world’s largest economy. (…)

Some officials at the Tokyo meetings acknowledged that a new round of fear in financial markets could help force action in areas such as the euro zone. “Markets are doing their job,” said IMF chief economist Olivier Blanchard. “They scare policy makers into doing the right things…I’m relatively optimistic that we’ll get there. How we get there, whether it’s completely smooth or not, we’ll have to see.”



China’s Trade Surplus Widens

China’s trade surplus widened in September as exports rose on improved overseas demand and imports recovered slightly, but analysts warned the healthier trade picture may not hold up over the coming months.

(…) Exports were at a record monthly level of $186.4 billion in September, rising a solid 9.9% from a year ago, data from the General Administration of Customs showed Saturday. This was much higher than the 2.7% rise in August (…). Imports were up 2.4%, compared with a 2.6% fall in August (…).

Exports to the U.S. have held up fairly well this year, showing a 9.6% year-on-year gain in the January-September period. But exports to the EU have struggled, falling 5.6% over the same period (…).

Exports climbed to a record last month, with sales to the U.S. increasing at the fastest pace in three months. Shipments to Japan rose for the first time since June and those to Southeast Asian nations jumped 25.5 percent. The gains helped counter a 10.7 percent drop in exports to the European Union.

High five  Before getting too excited on China:

  • Beware of Chinese data.
  • Chinese exporters fear grim outlook
  • On the ground in China the situation looks grimmer than the data reflects. Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

  • Alarm bells jingle over Xmas exports

The traditional export powerhouses in eastern China say many European companies are not buying Christmas products, and those that do put in an order are buying less, or asking for much lower prices – sometimes even lower than the production cost.

  •   ISI’s weekly China Sales Survey broke below 40 and is not far from the 2009 low of 36.1.


  • The generally more reliable electricity stats continue to show weakness:

Statistics from the National Energy Administration showed that in the first eight months, China’s total electricity consumption grew 5.1 percent year-on-year to 3.28 trillion kWh, further easing from the 5.4-percent growth seen in the first seven months.

  • World economies remain weak:

Just 10 of the 30 countries covered by manufacturing PMIs saw an improvement in business conditions in September, and in three of those 10 the increase was only marginal. The remaining seven which saw growth were either north American or non-Asian emerging markets, with a notable exception of India. The bottom of the PMI league table was again dominated by Eurozone and Asia-Pacific countries. (Markit)




image                (Chart from Schwab Market Perspective: Teetering on the edge?)


China’s central bank governor, Zhou Xiaochuan, cast doubts about any fresh monetary stimulus Sunday by saying in a central-bank publication that global policy makers should be vigilantly focused on fending off inflationary risks. (WSJ)

China Inflation Eases

The consumer price index rose 1.9% in September from the same month a year earlier, slower than a 2.0% on-year gain in August, data from the National Bureau of Statistics showed Monday. In sequential terms, the CPI increased 0.3% in September from August, when it rose 0.6% from July.


Food prices, which account for nearly one-third of the weighting in the calculation of China’s CPI, rose 2.5% YoY last month. This was down from the 3.4% YoY increase in August.

(…) the producer price index fell 3.6% in September from the same month a year earlier, after a 3.5% on-year decline in August. The PPI declined 0.1% in September from August, when it fell 0.5% from July.

India’s Inflation Accelerates to 10-Month High

The wholesale-price index rose 7.81 percent from a year earlier, after climbing 7.55 percent in August, the Commerce Ministry said in a statement in New Delhi today.

Fuel prices advanced 11.9 percent in September from a year earlier, today’s report showed. Non-food manufactured goods prices, a measure of core inflation, rose 5.57 percent compared with 5.58 percent in August, calculations by Bloomberg showed.

Auto  Volvo Halts Production at Sweden Plant

Volvo Car Corp. Monday said it would halt production for a week from Oct. 29 at its plant in Torslanda, Sweden, in the latest response to shrinking demand from an auto maker.

“The recession in Europe is deepening and that impacts customers’ willingness to buy new cars,” said Volvo spokesman Per-Ake Froberg. “Therefore we have to continue to adjust production.” (…)

Volvo last month said it would decelerate production at Torslanda, citing the weakness in China. Since Oct. 1, the plant has made 50 cars an hour, having previously produced 57 an hour. The temporary shutdown at the end of this month will further reduce Volvo’s production by about 3,000 cars, representing 0.7% of its total sales in 2011.

The company has also reduced production at its plant in Ghent, Belgium, where it made most of its 449,000 cars last year, and Mr. Froberg said further reductions there are possible.

Tata Motors Global Sales Fall

Tata Motors Ltd. Monday said its global vehicle sales for September fell 4% from a year earlier to 103,656 units, hit by lower volume in the passenger-car segment.

India’s biggest auto maker by sales said its U.K.-based luxury-car unit, Jaguar Land Rover PLC, sold 4% fewer vehicles at 26,461 units. Total passenger-car sales dropped 11% to 48,895 vehicles.

Poland pledges to boost spending  Prime minister warns of difficult year ahead

Poland will fight the economic slowdown by boosting investment spending, Donald Tusk, the Polish premier, promised in a speech to parliament on Friday, breaking with the government’s traditional emphasis on fiscal consolidation.

Money, politics and fear: What the BAE-EADS fiasco says about Europe

(…) Blame the political agenda in Paris, Berlin and London. The rights and independence of the executives and the shareholders were quickly buried under an avalanche of fears that the head office would be in the wrong country; there would be too much state control, or too little; jobs would disappear in one country and pop up in another; and industrial decision-making left entirely in the hands of management and owners risked damaging national agendas and the preservation of national corporate champions.

And so on. The whole affair descended into what’s-in-it-for-me political bedlam.

Now you know why it’s taking so long to fix the euro crisis. (…)


My friend Hubert Marleau at Palos Management Inc. explains why dividend paying stocks keep outperforming.

(…) What is going on? Three Institutional reports may have the answer. These are Black Rock, Columbia Management and Eagle Asset Management.

Firstly, they argue that the demographic shifts to a new generation of retirees are not fully understood by the population at large. A world retirement boom is underway; the number of people aged 60 and older will triple to 2 billion in 2050 from 780 million in 2009. Eighty million Americans will reach retirement age in the next 20 years.

Secondly, quality driven companies that offer both dividends and growth are the few securities that can fill the bill. The dividend payout ratio of the S&P 500 is about 28%. This is far away from the normal range of 40 to 60 percent. Moreover, corporate cash levels are high making it possible for cash flow driven companies to pay more dividends. For example, S&P 500 index companies’ cash as a percentage of market value is very near the historical record level of 13%.

Thirdly, institutional investors have more clout than retail ones and a growing number of them are pushing for favorable dividend actions from companies that can afford to do so.

Goat Schumer to Tax Reform: Drop Dead

A Senate Democratic leader lays down a partisan 2013 marker.

Mr. Schumer says the only way to reform is to broaden the tax base and raise tax rates.