NEW$ & VIEW$ (4 OCTOBER 2012)


Worldwide PMI surveys showed some signs of picking up in September, though remains far weaker than seen earlier in the year. The JPMorgan Global PMI, produced by Markit from national PMI surveys, rose from 50.9 in August to 52.5, but suggests that the global economy is expanding at a mere 1.5-2.0% annual pace.

Growth of global services hit a six-month high, though the improvement was largely driven by a jump in the volatile ISM non-manufacturing index for the US.


High five  Jump in New Orders in Service Sector Overstated

That was a big surprise in yesterday’s Non-Manufacturing ISM.

(…) The new orders subindex climbed to 57.7 last month, compared to 53.7 in August. Reading above 50 indicate expansion. A closer look reveals the increase was actually driven mainly by an exceedingly high percentage of respondents — 65% — who said new orders were flat, combined with a much lower number — 11% — who said orders fell.

Only 24% said September orders were higher, better than 22% in August, but notably below the 28.6% average in 2012′s first eight months.

At 65%, the percentage who reported flat orders was up from 60% in August and 55% in July, and also the highest percentage in monthly data going back to July 1997.

Fingers crossed  Wealth Effect: David Rosenberg did the math:

the correlation between wealth and spending is only 52% since 1952. The correlation between spending and after-tax personal incomes is more like 75%.

Smile  Hey! Here’s a wealth effect:

Oil Tumbles 4.1% on China Fears

(…) Light, sweet crude for November delivery settled $3.75 lower at $88.14 a barrel on the New York Mercantile Exchange, a two-month low. Europe’s benchmark Brent crude fell $3.40, or 3%, to $108.17 a barrel. (…)

Wednesday’s drop came as weekly data from the U.S. Department of Energy showed that domestic oil production rose to 6.52 million barrels a day, the highest level since December 1996, and 12.4% higher than the output last year. U.S. gasoline demand fell 3.6% from last year to a 10-year low for this time of year. (…)


Not quite yet in California:

California Gas Stations Begin to Shut on Record-High Spot Prices

Gasoline station owners in the Los Angeles area including Costco Wholesale Corp. are beginning to shut pumps because of supply shortages that have driven wholesale fuel prices to record highs. (…)

Spot, or wholesale, gasoline in Los Angeles has surged 70 cents this week to a premium of $1.15 a gallon versus gasoline futures traded on the New York Mercantile Exchange, data compiled by Bloomberg show. That’s the highest level for the fuel since at least November 2007, when Bloomberg began publishing prices there. On an outright basis, the fuel jumped to $3.9495 a gallon.

Gasoline at the pump cost $4.232 a gallon in California on Oct. 2, according to, 45 cents more than the national average of $3.782. In Los Angeles the price was $4.259. Gasoline futures for the front month on the Nymex sank to the lowest level in 10 weeks yesterday, settling at $2.7995 a gallon, down from $3.342 on Sept. 28. Retail price movements tend to lag behind those of futures. (…)

Clock  Van der Valk called the price surge a “a short-term problem.” Wholesale costs should start falling as Exxon’s refinery returns to normal operations and other plants finish maintenance. (…)

Sad smile  Un-wealth effect:

World Food Prices Jump to Six-Month High as Dairy Costs Rise

(…) An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.

Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. (…)

The FAO dairy-price index jumped 6.9 percent to 187.7 points from 175.6 in August, the biggest advance since April 2010, the data showed. The index for meat prices rose 2.1 percent to 175, climbing for a second month.

The world cereal-price index rose to 262.6 points from 259.9 points the previous month to reach the highest level since April last year. The index for grain prices in July surged 17 percent, the biggest jump since February 2008. (…)

Thumbs up Thumbs down Wealth effect?

(FT): Romney dominates presidential debate
Republican challenger reignites campaign

(Bloomberg): Romney Puts Race Against Obama Back on Track in Debate

(Business Insider) Mitt Romney Absolutely Destroyed Obama In Last Night’s Presidential Debate

ISI: Romney Gets a Win.

Storm cloud  Retail Hiring Weakens in September, Raising Concerns About Holiday Season  Retail hiring activity continued to weaken in September, reflecting broader labor-market troubles, in what could be a worrisome development for the upcoming holiday season.

(…) retail-level hiring declined in September to a seasonally adjusted 31,776 new hires, the fourth-straight monthly decline. (…)

Smile  U.S. Vehicle Sales Reach Recovery High

Unit sales of light motor vehicles during September gained another 3.0% m/m (13.9% y/y) to 14.96M (SAAR) according to the Autodata Corporation. The gain raised sales to their highest since March 2008.

Auto sales increased 4.2% m/m (24.1% y/y) to 7.69M. Domestic car sales nudged up 0.2% to 5.32M (27.1% y/y) while imports jumped 14.3% (17.7% y/y) to 2.37M. Light truck sales rose 1.8% (4.7% y/y) to 7.27M. Domestic light truck purchases gained just 0.2% (7.0% y/y) to 6.30M but sales of imported light trucks recovered 13.4% (-7.8% y/y) to 0.97M.

Disappointed smile  QE3 headwinds:

The Mortgage Bankers Association index of total mortgage applications gained 16.6% last week (38.8% y/y) led by a 19.6% spurt (46.5% y/y) in applications to refinance an existing loan. Home purchase applications gained a lesser 3.9% last week (10.8% y/y). Applications for fixed interest rate loans have risen 42.5% y/y as lower mortgage rates are locked in. Conversely, adjustable rate loan applications have fallen 14.4% y/y. (Haver Analytics)

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Devil  Old Mortgages Slow New Bank Lending

A battle over who gets stuck with tens of billions worth of bad housing loans made during the boom years explains why many Americans still can’t get a mortgage as interest rates hit a new low.

The average rate on a 30-year fixed-rate mortgage hit 3.53% last week, the Mortgage Bankers Association said Wednesday. It was the lowest rate since at least the 1950s. But thousands of would-be homeowners are being locked out of the market because lenders, facing a hard-line stance from Fannie Mae and Freddie Mac, have grown wary of making new loans.

The two mortgage giants have been forcing banks to take back an increasing number of loans that the banks made during the boom years and sold to Fannie and Freddie. To protect themselves from such demands in the future, banks are ratcheting up credit and documentation standards for new mortgages. (…)

Buying back defective mortgages “is part of the business if we make a legitimate mistake,” says Bill Cosgrove, chief executive of Union National Mortgage Co., a Strongsville, Ohio-based lender.

But bankers believe Fannie and Freddie are going too far. (…)

There is near-universal acknowledgment that mortgages were much too easy to get during the past decade. But Mr. Cosgrove said standards are now more conservative than at any time since he started working as an underwriter in 1986.


On the other hand:

U.S. Consumer Credit Delinquencies Near 6-Year Low

(…) Delinquencies across eight loan categories fell a total of 11 basis points to 2.24 percent of all accounts in the second quarter, the best showing since the fourth quarter of 2006, when the rate was 2.23 percent. The rate has now been below the 15- year average of 2.40 percent for two consecutive quarters, the ABA said in its Consumer Credit Delinquency Bulletin. (…)

Delinquencies on bank card debt fell from 3.08 percent of all accounts in the first quarter to an 11-year low of 2.93 percent, and well below the 15-year average of 3.91 percent. (…)

The broad decline masked a rise in delinquencies in some categories, including home equity loans and lines of credit, and direct auto loans. Home equity loan delinquencies rose 9 basis points to 4.09 percent over the first quarter, while those for lines of credit spiked 13 basis points to 1.91 percent, and direct auto loans climbed 6 basis points to 2.34 percent. (…)

Freezing  Small Businesses Fear the Fiscal Cliff

A survey of 833 business owners released Wednesday found that 47% of small-business owners and chief executives said they don’t expect the country will avoid the tax increases and deep spending cuts that are set to take effect at year-end unless Congress and President Barack Obama agree on a new deficit-reduction plan.

In comparison, 38% of respondents said they thought lawmakers would be able to reach an agreement. Another 14% weren’t sure.

Same news, different spins:

Sad smile  Shopping Center Demand Slows as Consumer Spending Stalls  Demand for space in U.S. shopping centers slowed in the third quarter as economic growth was reduced by stalled consumer spending, Reis Inc. said today.

(…) Occupancies at neighborhood and community shopping centers rose by a net 1.46 million square feet (135,000 square meters), the smallest quarterly increase in a year, according to the New York-based real estate research firm. The gain in so-called net absorptions compared with an increase of 2.18 million square feet in the previous three months, and was the smallest since 840,000 square feet were added in the third quarter of 2011. (…)

Smile  Malls See Fewer Vacancies

(…) [image]Malls in the top 77 U.S. markets posted an average vacancy rate of 8.7% in the quarter, down from 8.9% in the second quarter, according to new data from real-estate research company Reis Inc. The latest figure is a notable step down from the recent high of 9.4% set in last year’s third quarter.

Mall rents, meanwhile, continued their slow rise, climbing 0.3% in the third quarter from the previous quarter to an average of $39.24 a square foot per year, according to Reis. The increase marked the fifth consecutive quarterly increase for malls, a group that includes large, enclosed shopping centers typically anchored by department stores.

Retail strip centers, which are smaller than malls and feature several stores facing a common parking lot, typically with a grocery store as an anchor, didn’t fare quite as well. Their vacancy averaged 10.8% in the third quarter, unchanged from the previous one, Reis said. That rate is only slightly less than the recent high of 11% in last year’s fourth quarter as well as the 32-year high of 11.1% in 1990.

Rents at retail strips increased by 0.1% to $16.57 per square foot per year, marking the third consecutive quarter of razor-thin increases in that sector. (…)


The Toronto Real Estate Board released their September sales tally yesterday, and added more to the pile of evidence that Canada’s housing market has begun a slow melt since mortgage rules were tightened in early July (or is it an accelerated melt?—the market was already moderating on its own accord beforehand). Sales fell a hefty 20.8% y/y in September, though TREB noted that there were two fewer business days than in the same month last year, and sales on a per-day basis were down a more modest 12.5%—still, the direction is clear.

Condos underperformed, with sales down 27% y/y, but detached singles were not far behind at – 19% y/y. Interestingly, average prices were still up a solid 8.6% y/y, to above the $500,000 mark. But, with new listings up 4% y/y against a backdrop of falling sales, and with plenty of potential resale condo supply coming over the next year, Toronto is quickly heading for buyers’ market. (BMO Capital with chart below)



Clock  ECB Holds Interest Rates as Spain Keeps Draghi Waiting  The European Central Bank kept interest rates on hold today as President Mario Draghi waits for Spain to decide if it needs his help.

Meanwhile, in the real world:

Eurozone retail sales

imageRetail sales rose 0.1% across the Eurozone in August, led by a 0.3% increase in Germany, according to official Eurostat data. A 0.2% decline in July was also revised to show a 0.1% gain. Eurozone retail sales have now risen for four successive months. The retail PMI, however, indicates that retailers saw the worst quarter for two-and-half years in the third quarter, as sales fell again in September. (Markit)

What Markit is not saying is that sales volume was down 0.2% between February and June and has risen only 0.1% per month since. Excluding food and fuel, sales volume is down 0.3% in the June-August period. Remember these data are subject to revisions. Can we really believe that Spain sales volume jumped 2.1% in August? Only if we believe that Portugal’s rose 2.8%.

Austerity anyone?


Lightning  Portugal to Raise Income Taxes

Portugal announced new austerity measures to help narrow its budget gap, raising income taxes after a popular uproar prompted the government to back away from an earlier proposal to reconfigure payroll taxes. (…)

Finance Minister Vítor Gaspar said Wednesday all earners will pay an extraordinary additional tax of about 4% on their annual income next year. The government will also reduce the number of tax brackets to five from eight, effectively raising average tax rates, and increase taxes on luxury goods and cigarettes by an unspecified amount. (…)

He said the tax measures, combined with a new “solidarity tax” of 2.5% of income on top earners, will raise an estimated €2 billion ($2.58 billion) in additional revenue. He reiterated that public workers will also forego one paycheck, and that there will be new taxes on financial transactions. Mr. Gaspar also repeated the government’s projection that the Portuguese economy will contract 3% this year and 1% in 2013. (…) Charts below from Moody’s

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Pan Pacific to Offer 15% Cut in Copper Premium for China  Pan Pacific Copper Co., Japan’s largest producer, offered a 15 percent cut in next year’s premium for refined metal supplied to clients in China and Taiwan, said two executives with knowledge of the pricing.

(…) Pan Pacific’s offers for 2013 came before Codelco, the world’s largest copper producer, sets its annual sales premiums for buyers in Europe, South Korea and China. Premiums of copper cathode sales decline when the market sees more supply. The premium includes shipping and insurance costs. (…)

Property market peak season see weak sales  Real estate developers are lowering their expectations for ‘Golden September and Silver October’ as fewer homebuyers turn out.

September and October are as important to China’s property developers as Christmas is for retailers in the West. Potential homebuyers are more likely to buy during these months, commonly known in China as “Golden September and Silver October”. (…)

GOOD READ: A new power: China’s young flex their muscles

(…) From 2015, when the working-age population will start to shrink, the demographic dividend China has enjoyed for so long will crank into rapid reverse.

This is all happening much quicker than in other countries that trod a similar development path. Yolanda Fernandez Lommen, in a 2010 ADB working paper, calculates that China started ageing when its real per capita income was $4,000. That compares with $14,900 in Japan and $16,200 in South Korea.

At factory-floor level, that means the balance has been tilted in favour of labour at a much earlier stage of development. Jobs are easier to come by and workers far less beholden to their employers. (…)

Today’s workers are less willing to tolerate long hours of drudgery. Dissatisfaction is compounded by a growing awareness of the lifestyle richer Chinese are leading. True, factory wages are now rising by as much as 20 per cent a year. But for an increasing number of workers, that does not compensate for the feeling that they are being exploited in dead-end jobs.

There is another, more subtle, demographic influence at work. The one-child policy, introduced in 1979, explains China’s sudden ageing. It also explains a shortage of women. (…)

In factories, one result is a gradual increase in male workers, less easily corralled than the predominantly female workforce that used to line factory floors. Alexandra Harney, author of The China Price, has been visiting Chinese factories for a decade. A few years ago she began to notice she was interviewing more and more men. Recently, a young woman told her: “Our generation doesn’t work in factories.”

In a fascinating Bloomberg column, Ms Harney writes that Chinese factories do a terrible job of training their workers or offering them a credible career path. Instead, they want what she calls “just-in-time workers”, who can be hired and fired to fit the demands of each new order cycle. “The question for me,” she says, referring to the need for more manufacturing value-added, “is how China moves up the ladder.”

That’s a huge question for China. It’s not such a small one for factory owners either. Foxconn founder Terry Gou has already announced plans to install 1m robots in his factories in three years. Foxconn is also diversifying, investing in plants in Brazil, Mexico and eastern Europe. Indonesia has been trying to woo Mr Gou to set up a plant there. Installing robots and moving to other countries is one response to Chinese demographics. Far harder will be to figure out how to design factories where workers can build more sophisticated products and a career at the same time.

Australian Retail Sales Rose Less Than Forecast in August

Sales climbed 0.2 percent to A$21.5 billion ($22 billion) from a month earlier, when they fell 0.8 percent, the Bureau of Statistics said in Sydney today.


S&P 500 Earnings Likely To Post First Drop In 3 Years (IBD)

(…) Analysts are setting a lower bar. They see total S&P 500 revenue coming in flat. Earnings should decline 2.3% — the first drop since Q3 2009, when the nation crawled out of the last recession. (…)

Pointing up  Already 22 firms in the S&P 500 have posted, with 55% beating views. Last quarter, 67% topped higher, though still modest views. The long-term average for beating forecasts is 63%.

And there have been 4.3 negative pre-announcements for each firm guiding higher. The average is 2.4 negative to positive. (…)

For the record, the Q3 2012 EPS estimate ($25.01) is 4.5% below the estimate ($26.20) at the start of the quarter (June 30). In terms of revenues, the estimated growth rate stands at 0.0%, down from an estimate of 1.9% at the start of the quarter.

Factset notes:

It is interesting to note that while the EPS estimate for the index for Q3 2012 declined 4.5% during the quarter, the price of the index actually increased 6.2% (to 1447.15 from 1362.16) during this same time.

While it is not unusual to see EPS estimate revisions for a quarter and the price of the market move in opposite directions (it has happened in 20 of the past 40 quarters), it is unusual to see this magnitude of change in both the EPS estimate revisions and price. In the 20 quarters in which the estimate revisions and the price moved in opposite directions, there were just six quarters in which both moved in opposite directions by 3% or more.

In fact, three of these six quarters have occurred in the past year. In Q4 2011, the EPS estimate dropped 6.6% while the price of the index rose 11.2%. In Q1 2012, the EPS estimate fell 3.0% while the price of the index jumped 12.0%.

Grim Outlook Hits H-P  H-P warned profit and revenue will decline in the coming year before CEO Meg Whitman’s turnaround effort gains traction. The bleak forecast sent the tech giant’s shares sharply lower.

(…) The strategy for years helped H-P prosper. But Ms. Whitman’s said in an interview that the growth through acquisition came with unacknowledged costs.

She said H-P for years didn’t invest enough in research and development, and failed to develop internal software systems that could provide her and other executives with necessary intelligence about how the business is performing. (…)  Confused smile

Punch  Always be wary of fast growers through acquisitions.

Google warns of more cuts at Motorola, third-quarter cuts to cost $340 million

The Internet search giant said in August that it would cut 20 percent of the workforce at Motorola Mobility, which it bought for $12.5 billion last year, as it moves to make more smartphones and fewer simple mobiles.