NEW$ & VIEW$ (1 NOVEMBER 2013)

Europe Sparks Growth Fears Euro Zone Faces Threat of Too Little Inflation

The latest numbers signal that dangerously low inflation—which Japan struggled with for two decades and the U.S. central bank has labored in recent years to avoid—is at Europe’s front door. (…)

Super-low inflation will persist in Europe, economists warn. Euro-zone unemployment in September matched a record-high 12.2%, which could exert downward pressure on wages and spending. Commercial banks are cutting credit to euro-area businesses, especially in the weaker southern rim. (…)

Deflation is less of a risk in the more prosperous north. Inflation is 1.3% in Germany and close to 2% in Austria and the Netherlands. (…)

In emerging markets the rate is closer to 5% to 6%. It is 2.7% in the U.K., whose central bank—like the Fed—bought large amounts of government bonds to keep borrowing costs low. (…)


Euro Down as ECB Cut Eyed

The euro continued to weaken amid growing expectations that low inflation will push the European Central Bank to cut interest rates, possibly as early as next week.

The single currency dropped 1.1% against the dollar Thursday after data showed that inflation in the euro zone fell to a near four-year low in October. Early Friday, the euro dropped further, fetching $1.3532 from $1.3582 late Thursday in New York.

China Home Prices Jump by Most This Year as Demand Defies Curbs

The average price surged 10.7 percent last month from a year earlier to 10,685 yuan ($1,753) per square meter (10.76 square feet), SouFun Holdings Ltd. (SFUN), the nation’s biggest real estate website owner, said in a statement after a survey of 100 cities. Prices rose 1.24 percent from September, the 17th consecutive month of increases. (…)

Last month’s month-on-month increase widened from September’s 1.07 percent, though the number of cities with gains exceeding 1 percent dropped by five to 29, SouFun said. Housing sales in the first nine months surged 34.5 percent to 4.54 trillion yuan from a year earlier, according to government data released Oct. 18.


Over 75% in the earnings season:

Zacks Research:

(…) when all is said done about the Q3 earnings season, we will have a new quarterly record for total earnings and the quarter’s earnings growth rate will likely be the best thus far this year.

Total earnings for the 355  S&P 500 companies that have reported results already, as of Thursday morning October 31st, are up +4.5% from the same period last year, with 67.3% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 49% beating revenue expectations with a median surprise of +0.1%.

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 355 that have come out with the 145 still to come, currently remains at +4.2% on +2.4% higher revenues. It is perhaps reasonable to expect that the final Q3 earnings growth tally will likely be not much different from the +3.4% achieved in Q2.

We may not have had much growth in recent quarters, but the expectation is for strong growth resumption in Q4 and beyond. Estimates for Q4 have started coming down, with the current +8.4% growth pace down from last week’s +9.1%. But as the chart below shows, consensus estimates for Q4 and beyond represent a material acceleration in earnings growth.

Guidance has been overwhelmingly negative over the last few quarters and is not much different thus far 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.


Thus far, the third-quarter operating profits and sales of S&P 500 companies have topped expectations. As of September 2013, the consensus expected year-over-year increases of 2.3% and 2.8% for Q3-2013’s S&P 500 operating profits with and excluding the index’s financial company members, respectively. As of October 30, these forecasts had been raised to 4.3% and 3.7%.

Nevertheless, the consensus has pared its projections for each subsequent quarter through the second quarter of 2014. For example, the consensus pared its estimate of Q4-2013’s yearly growth by the operating income of the S&P 500’s nonfinancial companies from September’s 8.3% to a recent 5.9%.


David Einhorn’s latest letter to investors warns:

The game of Earnings Expectation Conflation continues. It’s a bit like limbo – with a twist. Though the bar gets lowered every round, the goal is to make it over the bar, rather than go under it.

Here’s what the current round looks like: At the end of June, third quarter S&P 500 index earnings were expected to grow 6.5%. In July, as actual earnings started to come in and companies lowballed the next quarter’s guidance, index earnings expectations were likewise adjusted lower.

As more companies reported “beat and lower” earnings, market expectations continued to fall to the point where third quarter index earnings growth is now expected to be half of what was forecast in June. Of course, when earnings are announced in October and they “beat” the guidance set in July, everyone will celebrate with cake and ice cream. (Never mind that the earnings are actually in line with the original June predictions, or that they’ve lowballed guidance for next quarter – if anyone noticed that, they wouldn’t be able to move to the next round by lowering the December bar, which is currently set at 13% growth.) As the S&P 500 index has  advanced this year mostly through multiple expansion, the index is no longer cheap, particularly considering that we are now almost half a decade into an economic expansion and earnings growth is unexciting.

Pointing up There is evidence of much more (and increasingly creative) speculative behavior. Some companies have convinced the market to embrace earnings reports that ignore what they must pay employees to show up to work every day, provided the employees accept equity rather than cash. We don’t understand how some investors view this as economically different from the company selling shares into the market and using the proceeds to pay workers.

Then there’s the sizable group of companies (including a number of recent IPOs) that are apparently not subject to conventional valuation methods. Many have no profits and no real plan to make future profits. The market doesn’t seem to mind – in fact, it is hard to fall short of such modest expectations and the prices of these stocks have performed particularly well of late.

Finally, there are the market participants whose investment process appears to be “bet on whatever has made money most recently.” They’ve noticed that stocks with large short-interest ratios have materially outperformed over the last year and they continue to invest accordingly. When “high short interest” becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can’t help but feel a sense of déjà vu. We never expected to find ourselves in an environment like this again, given the savings that were lost when the internet bubble popped.


NEW$ & VIEW$ (22 OCTOBER 2013)


Sales rose 1.4% last week. The 4-week moving average declined for the 10th consecutive week however and is +1.6% YoY. Last year, sales remained weak until early December and recovered somewhat during the final 3 weeks, possibly due to a sharp decline in gas prices. Will we witness the same this year?




Demand is flat while U.S. supply is rising (chart from Doug Short):



U.S. Existing Home Sales and Prices Move Lower

Sales of existing homes declined 1.9% (+10.7% y/y) last month to 5.290 million (AR). The drop followed no-change during August revised from a 1.7% rise, according to the National Association of Realtors. Consensus expectations had been for 5.30 million sales. Sales of existing single-family homes alone fell 1.5% to 4.680 million (+10.9% y/y).

The median price of an existing home fell to $199,200. The decline was the third straight down month and left prices at the lowest level since April. The peak was $230,300 in July 2006.

Sales performance was mixed during September. The greatest m/m decline occurred in the Midwest with a 5.3% shortfall (+12.6% y/y). Next was the Northeast which posted a 2.8% sales drop (+15.0% y/y. In the South, sales fell 1.4% m/m (+9.9% y/y) but sales in the West improved 1.6% (7.8% y/y).

The supply of homes on the market was roughly unchanged at 5.0 months of sales, down from a high of 11.9 months in July of 2010. The actual number of homes on the market increased 1.8% y/y last month. That started to reverse a 21.1% decline during all of last year and a 23.2% drop in 2011.

Listed inventory, now up YoY (+1.8%), typically declines a little in September. Listings are creeping up.


Sales of homes priced above $500,000 (10% of the market) jumped 37.2% YoY, while sales of homes under $250,000 (60% of the market) are up only 6.3% YoY. First-time buyers (normally 40-45%) accounted for 28% of September sales, down from 32%
last year. More examples of the two-speed economy: that of the top 1% is in high gear while the remaining 99% are in neutral at best.

CalculatedRisk notes:

The NAR reported total sales were up 10.7% from September 2012, but conventional sales are probably up close to 25% from September 2012, and distressed sales down.  The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 14 percent of September sales, up from 12 percent in August, which was the lowest share since monthly tracking began in October 2008; they were 24 percent in September 2012.

Although this survey isn’t perfect, if total sales were up 10.7% from September 2012, and distressed sales declined to 14% of total sales (14% of 5.29 million) from 24% (24% of 4.78 million in September 2012), this suggests conventional sales were up sharply year-over-year – a good sign.

China Housing Prices Rise Faster

(…) Prices were up from a year earlier for the ninth consecutive month, data released Tuesday by the National Bureau of Statistics showed, with the pace accelerating for the eighth consecutive month. As in August, prices were up in 69 of the 70 cities in September, despite nearly four years of controls on the property market. Month-on-month price increases moderated slightly. In August, prices were up from a month earlier in 66 cities. (…)

The average increase from a year earlier accelerated to 8.19%, from 7.48% in August and 6.70% in July, calculations by The Wall Street Journal showed. The average rise from a month earlier in September was 0.67%, moderating from 0.79% in August. (…)

In particular, there have been steady increases in home prices in tier-one cities—Beijing, Shanghai, Shenzhen and Guangzhou—which offer the best jobs and schools and so attract home buyers from the rest of the country. And the pace of increase accelerated in all four cities last month: Average home prices in Beijing were up 16% from a year earlier, beating August’s 14.9%. In Guangzhou, the pace increased to 20% from 18.8%; in Shanghai, to 17% from 15.4%; and in Shenzhen, to 19.7% from 18.1%. (…)

Soaring London House Prices Fuel Concerns

Home sellers in London raised their asking prices by 10% during early October, adding to concerns that the U.K. capital may be on the verge of a fresh property bubble.

The average asking price for a London home advertised via online real estate agency Rightmove’s website surged by £50,484 ($81,617) to a record-high £544,232 in October. By contrast, house prices rose between 1% and 4% in most of England and Wales, falling in two regions.

Asia’s housing bubbles put UK in shade

(…) Property prices in Hong Kong rose by 19.1 per cent year-on-year in Q2, and those in Taiwan swelled by 15.4 per cent, according to Knight Frank’s global pricing index. House prices in Shanghai and Beijing look pretty heady, too, growing at 14.8 per cent. Look at a longer time frame and there is evidence of a boom:

Source: Capital Economics

The fast pace of price rises, in comparison to incomes, indicates that Hong Kong and Taiwan are going through a bubble, according to Capital Economics. The Chinese story is more complicated (more of this later).

Hong Kong’s house prices have more than doubled in under five years. (…) Gareth Leather of Capital Economics thinks prices are over-valued by at least 40 per cent, and even bigger falls are possible. House prices in Taiwan’s capital, Taipei, are over-valued to a similar degree. But there need not be a crash like the US 2007 housing bust. Leather writes:

Housing construction in Hong Kong and Taiwan accounts for a relatively small share of GDP compared to the US on the eve of the global financial crisis. Meanwhile, banks in Hong Kong and Taiwan have required much bigger down-payments […] If property prices fall sharply, the damage to local banks should be limited.

In China’s larger Tier I cities, house prices are high: the move from countryside to city means housing demand outstrips supply. But the reverse is true elsewhere: in over 200 small cities – which make up more than half of total property sales – there is a downward pressure on pricing. This explains why China’s average house prices rose about 5 per cent year-on-year in Q2:

Source: GK Dragonomics

Supply now exceeds demand in a number of small Chinese cities. Easy money and government subsidies after 2009 pushed up the supply of housing in small prefectural-level cities. But the demand has not kept up, as rural dwellers often cannot afford to move, according to Rosealea Yao of GK Dragonomics. “We are more worried more about falling prices in small cities than high prices in big cities,” she writes. (…)

Bundesbank warns of property bubble Report fuels concern on impact of loose ECB monetary policy

The Bundesbank has warned that apartment prices in Germany’s biggest cities could be overvalued by as much as 20 per cent, stepping up its concern about a real estate boom in the powerhouse of the European economy.

The warning will feed into German concern that the European Central Bank’s monetary policy is far too loose for the country. The bank’s main refinancing rate is 0.5 per cent, a record low.

It also adds to signs that international investors are fuelling rising property prices around the world. The trend reflects the lack of opportunities investors regard as a safe haven and low returns for traditional asset classes such as bonds and stocks.

Rapid price rises have particularly affected the seven largest cities in Germany, the central bank said on Monday, although the value of houses had risen at a more moderate pace. Flats in Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Düsseldorf had, on average, seen prices rise more than 25 per cent since 2010.

“After the real estate bubbles in the US and several European house markets burst, the German property market, which had been quiet for many years, became more attractive to international investors,” the Bundesbank said in its monthly report for October. (…)

Asian cities such as Hong Kong and Singapore have imposed new taxes on foreign buyers in an attempt to limit the effect on their housing markets. Prices of the most expensive homes are now above their pre-crash highs in Hong Kong, according to data from estate agent Knight Frank. (…)

The property market trend is unusual in Germany, a nation of home renters with historically slumbering property markets, and is in sharp contrast to the rest of the eurozone, where house prices are near seven-year lows following property slumps in Spain, Ireland and the Netherlands. (…)

“In the short term, the [upward] price pressure will not ease,” the Bundesbank said. But it was “not very likely that the price structure on real estate markets currently represents a serious macroeconomic risk. The observed price movements are an expression of delayed increases in supply.”

However, “the empirical evidence shows there is no substantial overvaluation of the German residential property market as a whole”, the central bank said. (…)


Eni chief warns on impact of shale gas
Energy intensive industries drawn to US from Europe over prices

Paolo Scaroni, chief executive of the Italian oil and gas group, warned that European economies face a long-term structural challenge of competing with industrial operators in the US, which now enjoy far cheaper gas and electricity prices than those prevailing across the EU.

“Why would anyone invest in anything energy intensive [in Europe] rather than go to Texas, where the cost of electricity is half and gas a third, on top of all the other favourable factors,” he said on Monday. “We have seen clients moving investment from Europe to the US.”

Speaking at the Financial Times Global Shale Energy Summit, Mr Scaroni said the start-up of exports of liquefied shale gas from the US to European markets, combined with other global supplies coming on stream, could see European gas prices moderating from a predicted $10-$11 per million British Thermal Unit (mBTU) to $8 in the coming years.

However, he said the differential would still leave Europe disadvantaged. “Is $8 per unit enough to compete with the US? I think that it isn’t enough.” (…)


NEW$ & VIEW$ (19 AUGUST 2013)


We now have Q2 reports from 446 of the S&P 500 companies. Based on S&P data, the beat rate slipped again to 65.2% while the miss rate rose to 27.3%. Interestingly and worryingly, only 3 sectors had a higher beat rate than the average: Health Care (76.9%), Financials (70.4%) and IT (71.9%). The other 7 sectors had a beat rate of 59.7%, down from 62.3% in Q1 and an average of 61.7% in the 3 previous quarters.

Factset notes that 92 companies have preannounced Q3, 81.5% negative. That compares with 94 preannouncements at the same time after Q1 with 79.8% negative and 95 preannouncements after Q4’12 with 75.8% negative. Of the 92 recent preannouncements, 49 were in the 3 sectors with the highest beat rates in Q2 and 40 (81.6%) were negative.

Q2’13 earnings are now estimated at $26.38, up 3.7% YoY. Trailing 12-month operating earnings would thus reach $99.30, up 1.0% from their level after Q1 and barely exceeding the last 18 months tight range of $97.40-$98.69.

Q3 estimates are $27.14, up 13% YoY while Q4 is seen jumping a whopping 26% YoY. Analysts are not meaningfully reducing their second half forecasts even though revenues are up a slow 3.4% YoY and trailing 4-quarter margins have plateaued during the last 12 months. They are obviously counting (hoping?) on a recovery from the weak Q3 and Q4’12 margins but even a return to 2011 margins would not boost earnings anywhere near their forecasts unless revenues really take off. I calculate that assuming quarterly margins return to their 2012 peak levels on a 5% increase in revenues, operating profits would rise 12% in Q3 and 13.5% in Q4. These apparently optimum conditions would take full year EPS to $105.30, nearly 3% lower than current expectations of $108.41.

Adding to the risk, it should be noted that only Financials recorded a meaningful increase in margins in Q2 (14.8% vs 12.4% last year). Ex-Financials, S&P calculates that earnings grew only 1.1% as margins declined from 9.2% last year to 8.9%. Trailing 4Q margins ex-Financials have been in a downtrend since Q3’11, dropping steadily from 9% to 8.6% during this 2-year period.


And here’s something that won’t help:

Productivity Growth Comes To A Halt

Cape crusader
Ratio is too negative, says Jeremy Siegel

Jeremy Siegel adds his support to my views on the Shiller P/E and profit margins in today’s FT:

(…) I believe the Cape ratio’s overly pessimistic predictions are based on biased earnings data. Changes in the accounting standards in the 1990s forced companies to charge large write-offs when assets they hold fall in price, but when assets rise in price they do not boost earnings unless the asset is sold. This change in earnings patterns is evident when comparing the cyclical behaviour of Standard and Poor’s earnings series with the after-tax profit series published in the National Income and Product Accounts (NIPA). (…)

Downward biased S&P earnings send average 10-year earnings down and bias the Cape ratio upward. In fact, when NIPA profits are substituted for S&P reported earnings in the Cape model, the current market shows no overvaluation.

On the above, Prof. Siegel omits another important flaw of the current CAPE reading: most of the companies that recorded humongous losses in 2008-09 are no longer in the index. As I wrote in The Shiller P/E: Alas, A Useless Friend:

This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

On profit margins:

A second argument used by bears is that the profit margins (the ratio of earnings to sales) of US companies are at unsustainably high levels and are likely to fall. Indeed, in 2012 profit margins of S&P 500 companies (based on operating income) reached 8.9 per cent, well above the long-term average of 7.2 per cent.

But David Bianco, chief equity strategist at Deutsche Bank, has shown that most of the margin expansion over the past 15 years has come from two factors: the increased proportion of foreign profits, which have higher margins because of lower corporate tax rates; and the increased weight of the technology sector in the S&P 500 index, a sector that usually carries the highest profit margins.

Higher profit margins also result from stronger balance sheets. The Federal Reserve reports that since 1996, the ratio of corporate liquid assets to short-term liabilities has nearly doubled, and the proportion of credit market debt that is long term has increased to almost 80 per cent from about 50 per cent. This means many companies have locked in the recent record low interest rates and will be much less sensitive to any future increase in rates, keeping margins high. (…)

Economists Trim 2013 GDP Growth Forecasts

The third-quarter survey of 41 forecasters done by the Federal Reserve Bank of Philadelphia shows the consensus view on gross domestic product expects growth of 1.5% for all of this year, down significantly from 2.0% expected when the survey was last done in May.

Part of the downward revision reflects the refiguring of historical GDP reported last month by the Commerce Department. But the economists in the Philadelphia Fed survey also expect the second half of 2013 will be less robust than they expected three months ago. The median forecast thinks real GDP will grow 2.2% this quarter and 2.3% in the fourth quarter, down from 2.3% and 2.7%, respectively.

For 2014, forecasters expect real GDP to grow 2.6%, down from 2.8% projected in May.

Asia Faces Higher Borrowing Costs

Low rates have been a significant motor of Asia’s developing economies. Now, rising U.S. rates are making it harder for Asian issuers to raise funds cheaply.


Debt loads in emerging Asia—measured as total public and private borrowing as a percentage of gross domestic product—rose to 155% in mid-2012 from 133% in 2008, according to McKinsey Global Institute, a unit of consulting firm McKinsey & Co.

Thai Economy Slows Sharply

Thailand’s economy entered a technical recession in the three months through June as China’s slowing growth and weak demand in the U.S. continued to weigh on exports, adding to signs of woes across Asia.

Thai gross domestic product, the broadest measure of economic activity, contracted 0.3% on a seasonally adjusted basis from the first quarter. GDP was 1.7% lower in the first three months of 2013 compared with the previous period.

The planning agency downgraded its full-year growth forecast to between 3.8% and 4.3% from a previous range of 4.2% t0 5.2%.

Thai exports fell 1.4% on quarter, driven lower by weak overseas sales to China, Thailand’s largest market, as well as the U.S. and Europe. Private consumption was 1.9% lower on quarter as the government phased out a tax-rebate program. The nation’s current account swung from a $1.3 billion surplus in the first quarter to a $5.1 billion deficit in the second quarter as exports slumped.

India fails to prevent fresh falls for the rupee

Currency hits new record low despite government measures


India and Indonesia appeared trapped in a race to the bottom on Monday, as both the rupee and the rupiah fell sharply against the US dollar, prompting a sell-off in equities.

The Indian rupee continued its relentless decline, hitting the latest in a series of all-time lows against the US dollar and dashing hopes the government had succeeded in calming the country’s unsettled financial markets. (…)

Like India, Indonesia relies on foreign capital to fund its deficits. But global investors have been pulling back from emerging markets since May, amid expectations the US could soon start reversing its ultra-loose monetary policy. (…)

The fresh currency falls also increased pressure on the debt markets. Yields on India’s 10-year debt spiked above 9 per cent for the first time since late 2011, while Jakarta’s cost of borrowing jumped 18 basis points to the highest level since March 2011. (…)

From FT Alphaville:

That’s the Jakarta Composite down more than 5.5 per cent at pixel time on Monday, anyway.

U.S. Manufacturers Regain Footing

After a decade of losing ground to China and other export powerhouses, U.S. manufacturers are finally showing signs of regaining their competitive edge.

(…) In a report for release Tuesday, BCG says rising exports and “reshoring” of production to the U.S. from China “could create 2.5 million to five million American factory and service jobs associated with increased manufacturing” by 2020. That, BCG says, could reduce the unemployment rate, currently 7.4%, by as much as two to three percentage points.

The overall U.S. trade deficit, meanwhile, narrowed recently, as new shale-drilling technologies have sharply boosted domestic energy production.

At present, about 12 million Americans are directly employed by manufacturers, down from nearly 17 million two decades ago. (…)

The U.S. accounted for 11% of global exports of manufactured goods in 2011, down from 19% in 2000, Mr. Preeg said. During the same period, China’s share rocketed to nearly 21% from 7%, and the European Union slipped to 20% from 22%.

China’s performance has cooled recently. U.S. exports of manufacturing goods to China surged 19% to $19.9 billion in the second quarter, Mr. Preeg said, but that is about one-fifth of China’s manufacturing exports to the U.S. (…)

Meanwhile, China no longer relies heavily on labor-cost advantages to get a leg up on other countries. As wages rise, China has shifted to more exports of higher-tech items, including telecommunications equipment, computers and scientific instruments, Mr. Preeg said. Only about 15% of China’s manufacturing exports are in labor-intensive industries, such as textiles or shoes, he said.

Value of US fuel exports soars
Petroleum and coal top growth rankings at $110.2bn

(…) According to Census bureau export data reviewed by the FT, the value of petroleum and coal exports more than doubled from $51.5bn in the year to June 2010 to $110.2bn in the year to June 2013. This placed it at the top of the rankings of export growth.

Oil and gas exports were second, with a 68.3 per cent increase over the same period but based on smaller nominal values. Primary metals and livestock exports have also experienced strong export growth under Mr Obama, well above the average 32.7 per cent for all commodities. (…)

China’s House Prices Spark Concern

[image](…) Prices rose an average 6.7% year-over-year in July, up from 6.1% in June, calculations by The Wall Street Journal based on official data released Sunday showed. On a month-to-month basis, the increase in prices moderated slightly. (…)

New home prices in major cities like Beijing, Shanghai and Guangzhou showed the largest gains in July. Export hub Guangzhou in China’s southeast recorded the largest year-over-year gain among the 70 cities tracked—a 17.2% increase. On a sequential basis, the increase in prices moderated—up 0.68% month-to-month in July, down from 0.78% in June, calculations showed.

Pointing up  China’s Xi Embraces Mao as He Tightens Grip


(…) It isn’t just Mr. Xi’s rhetoric that has taken on a Maoist tinge in recent months. He has borrowed from Mao’s tactical playbook, launching a “rectification” campaign to purify the Communist Party, while tightening limits on discussion of ideas such as democracy, rule of law and enforcement of the constitution.

Mr. Xi’s apparent lurch to the left comes as Chinese authorities prepare for the coming trial of Bo Xilai, the former party rising star who led a Maoist revival movement until his dramatic downfall last year. Two of Mr. Bo’s lawyers said they expected the trial where he faces corruption charges to take place next week. Before he was detained, Mr. Bo rejected allegations of corruption.

The Chinese president’s Maoist leanings have dismayed many advocates of political reform, who hoped that Mr. Bo’s downfall signaled a repudiation of his autocratic leadership style and might lead to a strengthening of the rule of law and other limits on party power.

But Mr. Xi’s recent record has delighted and emboldened many former Bo supporters who advocate stronger, centralized leadership as the solution to the country’s problems. (…)

Mr. Xi’s use of Maoist imagery, rhetoric and strategy sets him apart from his two predecessors—who both emphasized collective leadership—and suggests to many party insiders that he won’t pursue meaningful political reform during the 10 years he is expected to stay in power. (…)

The new Chinese leadership has also ordered officials to combat the spread of “seven serious problems” including universal values, press freedom, civil society and judicial independence.

At the same time, state media have published a series of attacks on civil society and “constitutionalism”—the idea that the party’s power be limited by China’s existing constitution. (…)

Mr. Xi’s attitude toward political reform is a critical issue in China today because the country may be entering a prolonged period of slower economic growth and mounting public discontent over environmental problems, patchy public services and widespread corruption. (…)

On the political front, however, Mr. Xi has shown no sign of considering even limited liberalization, party insiders say. “Xi is really starting to show his true colors,” said one childhood friend who recalls Mr. Xi spending hours reading books on Marxist and Maoist theory as a teenager. “I think this is just the beginning.” (…)

Yet rather than losing faith in one-party rule, both Mr. Xi and Mr. Bo had worked harder than many contemporaries to prove their allegiance to Mao as young men, and had been left with a heightened sense of how to get ahead in Chinese politics.

“Their thinking is quite similar: They have the same Maoist education, the same red family background, and the same experiences growing up,” said Zhang Lifan, a historian whose father was a senior official. “When they face a problem, they revert quickly to Maoist thinking.” (…)

Ninja  Russia Moves to Restrict Imports if Ukraine Signs EU Deal

Russia is moving to clamp down on imports from Ukraine if its ex-Soviet neighbor signs a landmark free-trade and political-association deal with the European Union, a senior adviser to President Vladimir Putin said.

The comments Sunday by Sergei Glazyev, a senior economic advisor to Mr. Putin, signal a more forceful approach by the Kremlin to the potential deal, which could anchor Ukraine, for centuries ruled from Moscow, more firmly in the West. Moscow is urging Ukraine, a Texas-sized country sandwiched between Russia and the EU, to join a rival trade bloc that it is forming with other former Soviet republics.

Russia last week began tougher checks at the border that Ukrainian exporters said stalled shipments and caused serious financial losses.

Mr. Glazyev said Sunday that those checks were “preventative measures” in preparation for changes in customs procedures if Ukraine signs the EU pact. (…)

A post on Swedish Foreign Minister Carl Bildt’s Twitter blog Thursday said it would be “very serious” if Russia was starting a “silent trade war against Ukraine to block its relations with the EU.”


U.S. Stocks Beat BRICs by Most Ever on Emerging Flight

Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low. (…)

The last time U.S. shares traded at such a premium and volatility versus emerging-markets was similar to now, was in June 2004, when the Fed started to raise interest rates from a 45-year low of 1 percent. Emerging markets rallied 29 percentage points more than the S&P 500 in the next 12 months, according to Bloomberg data. (…)


NEW$ & VIEW$ (18 JULY 2013)


A while back, the Fed decided it needed to improve its communications with investors, add clarity to its guidance. Something all media should aim at. Alas, the world is getting more complex and humans remain humans. Bernanke’s message now is that the Fed might do this or that depending if this or that does this or that, adding that other factors might eventually come into play, in which case the Fed might decide to do this or that.

Of course, other Fed officials will add their own views in order to clarify guidance. Then, the media and the talking heads will analyse and decipher everything and add their own interpretation. Then we will know what’s going to happen.

Fed Chairman Ben Bernanke played down the unemployment rate’s weight in the central bank’s calculation of when to start raising short-term borrowing costs.

Since last December, the Fed has been saying short-term interest rates—now near zero—won’t go up at least until the jobless rate drops below 6.5%, and as long as inflation stays near 2%.

But Mr. Bernanke suggested the Fed might keep rates near zero long after the jobless rate, which was 7.6% in June, falls below that 6.5% threshold. It is a point he has made before, but he placed new emphasis on it in the first of two days of congressional testimony about the economy and monetary policy—possibly his last appearances before Congress since his term as chairman ends in January.

If very low inflation accompanies a drop in unemployment, Mr. Bernanke said, the Fed might feel less urgency about pulling back on cheap credit.

Moreover, the jobless rate may continue to fall partly because people are leaving the labor force, which means they are no longer looking for work and aren’t counted as unemployed. In this case, Mr. Bernanke said, the Fed might disregard a falling jobless rate as a misleading indicator of the economy’s vigor and keep rates low even after the rate falls below 6.5%. (…)

“Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” he said. (…)

“Risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect,” he said. Moreover, “with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”

While economists were expecting claims to fall to 345K, the actual level fell from 358K down to 334K.  That decline of 24K was the largest weekly decline since April 5th.  It is important to remember, though, that just as last week’s poor report may have been skewed by the July 4th holiday, this week’s report may also have a little noise in the numbers.

In a world where bad news is good, the last thing stocks needed to put a dent in the latest spin that the September taper may be moved to December, was an improvement in claims – which is what they got moments ago when the DOL reported a big claims drop from a downward revised 358K (so it does happen) to only 334K, beating consensus of a 345K print.

So Taper back on right? Not so fast. The pre-spun narrative is that July data is very “liquid” with car makers and factories either laying off (or not) workers more (or less) compared to historical seasonal patters. Indeed, the unadjusted claims number rose from 383K to 409K signifying that the only improvement was in the eye of the X-12-ARIMA seasonal adjustment bemodeler.

And furthering the No-Taper cause were continuing claims which soared to 3.114 million, up 91K from the prior week, the largest 1 week jump since November, and up from the 2.953 million two weeks ago: the biggest 2 week jump since February 2009. Judging by the stock market reaction, where futures have jumped on the news, the GETCO algos have shifted back into good news is good news mode. For confirmation, we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs.

Housing starts declined 9.9% in June from a month earlier to a seasonally adjusted annual rate of 836,000 units, the Commerce Department said Wednesday. Building permits, a key measure of future construction activity, fell by 7.5%. The readings were much worse than expected, with most economists forecasting modest gains in both categories.

But the decline in housing starts was primarily driven by a 26% drop in multifamily housing, a category that has traditionally been volatile and has lately shown signs of overbuilding. Starts for single-family homes, which account for the largest share of activity, fell by 0.8%. Single-family permits rose 0.1%.

“Solid”! What do you call solid if singles starts don’t rise in prime building season? Single-Family starts have been rolling over since February, actually showing zero momentum since September 2012.


Not that permits are not rising, though.


Must be the weather. Or “a bit of a pause” as one economist explains (!):

“The modest increase in single-family permits is indicative of steady demand trends on the ground, though the relative weakness in starts over the past several months gives us a bit of pause,” economists at Credit Suisse said in a note to clients. Just kidding

Thanks for that. Much clearer now!

Here’s the FT headline, somewhat less cheerleading than the above WSJ’s headline:

US housebuilding falls to 10-month low
Sharp slowdown in apartment building on rates caution
  • The weaker-than-expected housing activity could weigh even further on second-quarter growth estimates, which have already dropped below 1%.
  • The interest rate on a 30-year, fixed-rate mortgage has risen to about 4.5%, nearly a percentage point higher than the level in May.
  • The Mortgage Bankers Association on Wednesday said mortgage-loan applications were down 2.6% from last week while refinancing fell 4% to the lowest level since July 2011. (Chart from Haver Analytics)

For more good reads on communications:


China June Home Prices Rise as Big Cities Post Record Gains

Prices climbed in 69 of the 70 cities the government tracked last month from a year earlier, the National Bureau of Statistics said in a statement today, matching the data in May.

Existing home prices rose 14 percent in Beijing last month from a year earlier and increased 10 percent in Shanghai and Guangzhou, according to the data.

The value of home sales rose 24 percent in June from May, the biggest monthly gain this year, the statistics bureau reported this week.

Private data also showed rising housing values. Home prices jumped 7.4 percent from a year earlier last month, the biggest gain since an eight-month series of declines ended in December, according to SouFun Holdings Ltd., the nation’s biggest real estate website owner.

The Chinese Premier’s 2 Favorite Economic Indicators Look Super Depressing
china economic indicators


The #1 Thing Worrying Hedge Fund Managers Right Now

BofA Merrill Lynch just released the results of its July Fund Manager Survey, which polls 238 fundies around the world responsible for a combined $643 billion in assets under management on various topics.

“China is the biggest area of concern for investors,” says BAML Chief Investment Strategist Michael Hartnett. “[The] number of investors expecting stronger China growth collapsed to a net -65%, a massive reversal from 67% in December 2012.”

All it takes is two quarters of slowing economic growth, and sentiment among fund managers toward China is now at the lowest level since January 2009, during the height of the global financial crisis.

China growth expectations

BofA Merrill Lynch Global Investment Research

Meanwhile, fears of a hard landing for the Chinese economy now far and away eclipse anything else as the largest perceived outlier risk to investor portfolios among managers.

The percentage of survey respondents that view China as the biggest tail risk nearly doubled just from June to July.

“Investors continue to view a China hard landing and commodity collapse (56%) as the biggest tail risk,” says Hartnett. “In fact, they view [emerging markets] as the greatest potential threat to Financial Market Stability.”

BAML fund manager survey tail risks

BofA Merrill Lynch Global Investment Research

The fallout (Chart from Northern Trust)



Where to now, sir? (Chart from ISI)


Honda Builds ‘World’s Fastest Lawn Mower’

Honda U.K. has come up with a lean, mean mowing machine that it claims can reach 130 miles per hour, or 209 kilometers per hour, a top speed that could make it the world’s fastest lawn mower.

Built with its British Touring Car Championship partner Team Dynamics, the machine—appropriately dubbed the “Mean Mower”—can go from 0 to 60 mph in about four seconds while roaring at 130 decibels, a level that calls for protective gear to avoid permanent hearing loss.

There is no indication as of now as to whether the machine will be commercially produced.

FYI, Honda released a YouTube video on Wednesday showing that its new toy does just that. Hilarious!


NEW$ & VIEW$ (15 JULY 2013)


Market watchers have marvelled at the relative ease by which the U.S. economy has been absorbing the negative impact of the Sequester so far this year. Perhaps the big test is still to come. According to the latest budget data, the federal government achieved a surplus for the second time in three months. As today’s Hot Chart shows, the balance shows an excess of $100 billion over that period – the biggest since 2007.

The big difference between the April and June surpluses, however, is how they were achieved. In June, it was all about a reduction in spending outlays. As shown, net government outlays fell precipitously to their lowest level since 2003 in June. In fact, the 49% drop between May and June was the biggest drop since at least 1954 for this time of the year. The Sequester is biting and the teeth marks will show on Q3 GDP. (NBF Financial)


ISI’s company surveys, and particularly their diffusion index, have turned down. “Slower results at homebuilders, auto dealers, and shopping guides were the primary reasons for the deceleration.”

Goods Disinflation Reappears, but Shouldn’t Worry Fed The latest readings on producer prices and import prices show disinflation has not disappeared when it comes to goods.

The core PPI, which excludes food and energy, rose 0.2%. Yearly core inflation at the factory gate has held at just 1.7% for the past four months, compared with 2.6% in June 2012.

Meanwhile, foreign-made goods are becoming cheaper. Import prices excluding oil fell 0.3% in June, the fourth consecutive decline. Nonoil import prices are down 1.0% compared to a year ago. In June 2012, those prices were rising at a 0.6% annual rate.

Pointing up  Glitches Pump Up Gasoline Futures

August reformulated gasoline blendstock, or RBOB, settled 9.61 cents, or 3.2%, higher at $3.1175 a gallon on the New York Mercantile Exchange, the highest settlement for the contract since March 18. Analysts say the rally likely portends higher prices at the pump in the coming weeks.

Despite the recent rally, the U.S. is brimming with spare gasoline, due largely to weak demand. U.S. gasoline inventories now stand at 221 million barrels, their highest level for this time of year since 2001, according to the Energy Information Administration. However, supplies have fallen in recent weeks, whittling down the sizeable surplus.

Already, pump prices have been rising. On Friday, they rose 3.2 cents a gallon to average $3.55 a gallon nationwide, according to auto club AAA. That’s the biggest one-day rise in five months and comes on the heels of this week’s steep rise in oil prices. Mr. Lipow on Friday estimated that pump prices could rise another 10 cents a gallon over the next seven to 10 days.

Well, according to, gas is now $3.62/g. The last time WTI was $105, gas prices nearly hit $4.00. In fact, crude is now 6% above its summer 2012 peak of $99 but gas prices are 5% lower.image

That’s because Brent remains below its year ago level. But for how long?



Control retail sales (sales excluding autos, gasoline and building material stores, i.e. the portion of retail sales that goes directly into GDP consumption calculations) cratered last year when gas prices spiked from $3.40 to $3.85.



Also consider these recent revisions, not incorporated in the above chart:

Nominal personal consumption expenditure increased by 0.3% m-o-m in May, in line with consensus expectations. In real terms, consumer spending inched up by a relatively healthy 0.2%. However, the 0.1% monthly rise published initially for April was revised to a 0.1% drop. And this came in addition to the sharp downward revision for Q1 that was published in late June as a part of the GDP report. (Pictet)



The end result is quite spectacular and shows that consumption growth is on a softer trend than previously thought. Growth in consumer spending in Q1 was revised from 3.4% to 2.6% earlier this week and, with yesterday’s data in hand, we can now calculate that it settled at a soft 1.4% annualised between Q1 and April- May, whereas before the more recent data were published, the pace of increase in consumption between Q1 and April had been measured at 2.3% annualised.

Hmmm…The revised consumption data are a better reflection of the tight financial conditions of the average American following the expiry of the payroll tax cuts.


Too bad my fishing season is over!

Embarrassed smile  Restaurants Shift to Part-Time

U.S. restaurants added jobs at a much higher pace in the spring, but many say they are replacing full-time jobs with part-time positions, concerned about the new health-care law.

Restaurants and bars have been adding an average of 50,000 jobs monthly since April—about double the rate from 2012. (…)  Overall, leisure-and-hospitality establishments hired more workers than any other industry in June, accounting for 75,000 of the 195,000 jobs added last month, according to the most recent Labor Department report (…).

Views differ on exactly what is driving the hospitality industry’s pickup. (…) But a number of restaurants and other low-wage employers say they are increasing their staffs by hiring more part-time workers to reduce reliance on full-timers before the health-care law takes effect. (…)

For the entire U.S. workforce, employers have added far more part-time employees in 2013—averaging 93,000 a month, seasonally adjusted—than full-time workers, which have averaged 22,000. Last year the reverse was true, with employers adding 31,000 part-time workers monthly, compared with 171,000 full-time ones.

The Affordable Care Act requires employers with 50 or more full-time equivalent workers to offer affordable insurance to employees working 30 or more hours a week or face fines. Some companies have said the requirement could increase their costs significantly, although others have played down the potential hit. (…)

The administration says the law ultimately will help businesses by allowing them to pool risk with other smaller businesses in order to get more competitive rates. (…)

Well, business owners are voting with there feet now, never mind the “ultimate help” from the ACA. The delay announced won’t change the trend. Companies only got a full year to learn to operate with more part-timers.

Banks Are Cautious Even as Profits Rise

J.P. Morgan and Wells Fargo, two of the nation’s largest banks reported better-than-expected profits, but warned that mortgage lending could drop if interest rates stay elevated.

[image]The results from J.P. Morgan Chase & Co. and Wells Fargo & Co. show how even the biggest banks are struggling to overcome lackluster loan demand, a sluggish U.S. economy and a slew of new regulations that are crimping profits.

[image]Both banks exceeded Wall Street estimates, largely because they are scaling back the amount of money they have set aside to cover future losses. Net interest income–the revenue generated from the bank’s loans and other assets, minus their costs–was down at both banks.

J.P. Morgan reported net income of $6.5 billion, or $1.60 a share, versus $4.96 billion, or $1.21 a share, a year earlier. Revenue on a managed basis, which excludes the impact of credit-card securitizations, jumped 13% to $26 billion, beating the estimates of analysts polled by Thomson Reuters.

Wells Fargo reported net income of $5.52 billion, compared with year-earlier income of $4.62 billion. Per-share earnings were 98 cents versus 82 cents a year earlier. Revenue was roughly flat at $21.38 billion. Analysts polled by Thomson Reuters expected per-share earnings of 93 cents on revenue of $21.22 billion. (…)

J.P. Morgan Chief Financial Officer Marianne Lake told analysts Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise, saying “the market could be reduced by an estimated 30% to 40%” during the second half of the year.

For the second quarter, J.P. Morgan’s mortgage income dipped 14% compared with the same quarter a year earlier.

Wells Fargo Chief Financial Officer Timothy Sloan also warned that refinancings of existing mortgages will decline. Mortgage banking income at the San Francisco lender decreased 3% from the year-ago period. Wells Fargo has a 22% share of U.S. mortgage originations, more than any other lender. (…)

Both banks highlighted several positive signals from consumers and businesses. Average loan balances in J.P. Morgan’s commercial banking unit were $131.6 billion, up 11% from a year earlier and up about 2% from the prior quarter, indicating companies are taking on more credit to fund inventory. Commercial banking recorded a profit of $621 million, down 8% from a year earlier but up 4% from the first quarter.

At Wells Fargo total loans were up 6% amid stronger demand for certain types of loans, specifically in auto loans and credit card growth. Auto-loan originations, for example, were up 9% from the year earlier period to $7.1 billion. Credit card balances were up 9% from the year earlier period. (…)

Change That J.P. Morgan, Wells Can Believe In

Quarterly results from the two big banks show a silver lining to the shift upward in interest rates.

(…) the move higher in rates should take some pressure off net-interest margins. J.P. Morgan said its margin declined to 2.2% from 2.37% the prior quarter, driven in part by higher cash balances. The bank expects the margin to be flat in the second half, though.

And higher rates should, eventually, benefit both the margin and net-interest income. At J.P. Morgan, the rise since May in the 10-year Treasury yield to levels above 2.5% should add about $700 million to net-interest income in 2014.

The benefit would be even greater if rates on shorter-dated instruments also were to rise. But even small gains help. J.P. Morgan has seen its core net-interest income, which came in at $9.5 billion in the second quarter, fall in five of the past six quarters.

The biggest potential benefit of rising rates, albeit one that may take time to materialize, is if they are accurately reflecting an improved economic outlook that translates into loan growth.

J.P. Morgan, Wells and other banks are well-positioned to take advantage of that, given continued increases in deposits. This, coupled with the continued reluctance of companies and consumers to borrow more, has led net loan-to-deposit ratios to keep falling. At J.P. Morgan, this was 59% in the second quarter, compared with 63% a year earlier; at Wells, the ratio fell to 77% from nearly 82%.

US banks: loan strangers
Without lending more, JPMorgan has increased deposits by about 10%

(…) While loan growth has been lacklustre at JPMorgan, it and its rival have increased deposits by about 10 per cent each during the past year. If the economy continues to strengthen and consumers gain confidence, demand for loans should improve, allowing these banks to deploy some of that cash at improving rates. Even if that remains some time off, there is hope that reserve releases can continue to boost the bottom line. The risk is that a jump in interest rates throws borrowers back into duress or squelches the housing market. But if rates rise gently with the economy, it could be a pretty good time to be a bank again.

Here’s the chart courtesy of ZeroHedge:



Chinese economy slows to 7.5% growth
Government at risk of missing target for 2013

(…) Virtually every dimension of the Chinese economy registered weaker performance in the second quarter. Industrial output edged down to 8.9 per cent growth year on year in June, from 9.3 per cent in May. Fixed-asset investment slowed to 20.1 per cent growth in year-to-date terms, from 20.6 per cent in May. Exports fell in June for the first time in more than a year. (…)

Quarter-on-quarter growth edged up from 1.6 per cent in the first three months of the year to 1.7 per cent in the second quarter. Retail sales staged a small rebound, climbing to 13.3 per cent growth year on year in June, from 12.8 per cent in May, though they remained well below last year’s pace for the first half as a whole.

A breakdown of the overall growth numbers also showed differing fortunes for different parts of the economy. The services sector expanded 8.3 per cent, while the industrial sector grew 7.6 per cent. (…)

China GDP(FT Data)

From the WSJ:

The deceleration is particularly hard on commodities producers—the biggest beneficiaries of China’s boom. A Standard & Poor’s study of more than 90 of China’s biggest companies found they will cut total capital expenditures this year for the first time in at least a decade. Investments in factories, assembly lines, smelters and telecommunications links tend to create big demand for raw materials that China imports.

China Is Slow and Unbalanced

The payoff for slower growth in China is meant to be a more balanced economy with consumption playing a greater role. So far, though, China’s economy is stuttering without much sign of the hoped for rebalancing.

(…) But the consumption picture is less rosy than June’s data suggest. For starters, the top-line retail sales figure was mostly boosted by higher prices, not more consumption. Moreover, retail-sales growth of 12.7% in the first half of 2013 is actually down from 15.2% growth for all of last year. The National Bureau of Statistics estimates that consumption accounted for 45.2% of GDP growth in the first half of 2013, compared with 51.8% in 2012. In other words, the economy’s not only slowing, it is also getting more off-kilter.

There are good reasons for this. In particular, household-income growth is slowing along with the broader economy. Urban disposable income in China rose 6.5% in the first half, down from 9.6% in 2012.

Beijing’s efforts to get China spending will take much more time. Public pensions and health-insurance benefits remain too low to persuade people to reduce rainy-day savings. The government has promised to increase returns on bank deposits and loosen restrictions on the capacity of migrant workers to access social welfare in cities, but so far, this is mostly policy hot air rather than concrete action.

Meanwhile, China has now recorded five straight quarters of growth below the 8% level the country’s previous leaders set as their unofficial minimum acceptable growth rate for the economy. So far, the new leadership is holding firm on its plan to let growth slow if it benefits the country in the long run. But the shift to a more consumption-led economy seems some way off.

China GDP components

(FT Data)

China Real-Estate Sector Posts Strong Growth

Total property investment in China in the first half of the year rose 20.3% compared with a year earlier to 3.68 trillion yuan ($599.3 billion), according to data released on Monday by the National Bureau of Statistics. That is marginally slower than the 20.6% growth in the first five months of the year.

The statistics bureau doesn’t give data for individual months. Confused smile

Residential and commercial property sales totaled 3.34 trillion yuan in the January-June period, up 43.2% over a year earlier. Sales totaled 2.59 trillion yuan in the five months ended May, up 52.8%.

Construction starts by area in the first half rose 3.8% from a year earlier to 959.01 million square meters. They were up 1% at 736.13 million square meters in the January-May period.

Chinese export downturn accelerates

Trade data provided further signs that China’s economic slowdown gathered pace in June. Official data confirmed signals from the PMI surveys that exports are falling, while a drop in imports also indicated that domestic demand is weakening.

Official trade data showed exports down 3.1% on a year ago in June. That compared with a 1.0% rise in May and was the worst reading since October 2009. The deterioration in the official data comes after Markit’s HSBC manufacturing PMI data showed exports to have fallen for a third successive month in June, dropping at the fastest rate since March 2009.

The trade data also showed imports down 0.7% on a year ago in June after a 0.3% decline in May. These were the first back-to-back declines since October 2009. Falling imports are an indication that demand
has weakened in the domestic economy of mainland China. This corresponds with PMI data which showed the domestic-oriented services economy going through a soft-patch, with new business growth more or less stalling, registering the weakest growth since the services PMI survey was started in late-2005.



Pointing up By the way, here’s the most reliable chart on China, courtesy of Pictet:

The Li Keqiang index, a proxy for GDP growth based on three components (railway freight, bank loans and electricity consumption) shows the Chinese economy is now running close to 6% growth compared to the official 7.5% GDP growth target for 2013.


On today’s Q2 GDP numbers, you may want to read FT Alphaville’s post on the “numbers” (Some observations and oddities in China’s Q2 GDP). I find this part most interesting:

(…) nominal GDP growth decelerated much more sharply from 9.6% in Q1 to 8%, as the deflator increased just 0.5% yoy (1.7% yoy in Q1). We find this deflator somewhat too low given the monthly inflation data published over the quarter. In comparison, Q4 2009 had much lower CPI, similar PPI, lower export price inflation and higher import price inflation, but yet the GDP deflator was significantly higher at 1.4% yoy.

Pictet not only has good charts, it also has good wisdom:

The Chinese equity market has corrected sharply down, and is now trading at 7.8 forward P/E which corresponds to 1.5 standard deviation below the longterm average. China is now one of the cheapest markets in Asia ex Japan. The worst of the impact on corporates in the form of increased financing costs in a context of slower growth is yet to come. In this context, we do not see any significant short term catalyst for the Chinese equity market, which remains unattractive.

The Chinese authorities will remain committed to preventing defaults in the financial sector and a risky sharp deleveraging in the corporate sector which means it is unlikely the government can boost the economy. China’s economy has become more vulnerable. The unremitting slowdown in growth reveals how China’s economic model has been running out of steam just when the proliferation of ‘shadow banking’ in the country is heightening the vulnerability of the financial system as a whole.

A positive outcome for the Chinese economy is that the government may stick to its “no stimulus” approach while adopting more prudent monetary policy which would allow for an orderly deleveraging. More importantly, it could also pave the way for the structural reforms China needs to transition towards an exports-driven economic model that is less reliant on investment and more sustainable.

The FT Lex column is also not short on wisdom:

Granted Chinese companies look cheap. Three of China’s big four banks, which make up over a sixth of the weight of the Hang Seng index by market capitalisation, trade below book value. Bank of China now trades at 0.7 times book. But like China’s GDP figures, book values could be revised down many times yet.

GOOD READ: Asia Is Reaching a Turning Point by Blackstone’s Byron Wein:

I spent almost two weeks in Asia in June and in some ways it was an eye-opener.  In past years there was a sense of optimism everywhere you went.  Now you get a feeling of uncertainty touched by apprehension. (…)

E-Zone IP Dips in May

Eurozone manufacturing production in May fell by 0.4% after rising by 1% in April. The output of consumer durables fell sharply, by 2.3%, posting a second drop in a row, a drop of 1.9%. Capital goods output fell by 1.5% in May. That reversed a stronger 2.5% increase in April. Nondurables output rose by 0.6%, rising for the second month in a row. Intermediate goods output accelerated its continuing modest advance rising by 0.4% in May.

Fingers crossed  Despite the setback in May manufacturing output is on an accelerating path. After falling 1.6% over 12 months it is expanding at a 2.6% annual rate over six months and at a 3.7% annual rate over three.

Sad smile  Business Confidence Declines in Survey

Businesses around the world became more gloomy about their prospects in June, an indication that they are unlikely to increase their investment spending and hiring.

Of 11,000 manufacturers and services providers in 17 countries surveyed between June 12 and 26, the proportion expecting an increase in activity over the coming 12 months exceeded the proportion expecting a decline by 30 percentage points—down from 39 percentage points in February, data-analysis firm Markit said. (…)

Markit said the decline in business confidence was most notable in the U.S. and China, with smaller declines recorded in the euro zone and Japan.

“The deterioration in business optimism in the U.S. suggests the pace of economic growth is slowing sharply compared to that seen earlier in the year and calls into question the ability of the economy to continue generating jobs at anything like the pace seen in recent months,” said Chris Williamson, chief economist at Markit. “Any thoughts of an imminent tapering of the Fed’s stimulus are looking premature on this basis.” (…)

Within the euro zone, Markit said there were signs of rising business optimism in some countries that have been at the forefront of the currency area’s fiscal and banking crises, notably Spain and Ireland. But it said confidence was low in Germany and France, the two largest national economies to use the euro.

Red heart  GOOD READ # 2: Actually, a MUST READ: Neils Jensen’ Much Ado about Nothing


Factset notes that:

Of the 30 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is equal to the average of 73% recorded over the past four years. However, only 47% of companies have reported sales above estimates. This percentage is well below the average of 58% recorded over the past four years. If 47% is the final percentage, it will mark the fourth time in the last five quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for the S&P 500 overall for Q2 2013 is 0.6% this week, slightly above last week’s growth rate of 0.5%. Upside earnings surprises reported by JPMorgan Chase (+11%) and Wells Fargo (+6%) more than offset small downward revisions to estimates for companies in the Energy sector during the week.

Be aware that 70 S&P 500 companies will report this week. Based on the JPM and WFC beats, the tone should be positive:

The Financials sector will be a focus sector for the market during the upcoming week because the sector has the most companies (22) scheduled to release earnings and because the sector is reporting the highest earnings growth of all ten sectors at 18.7%. The sector is reporting a year-over-year increase in earnings of $7.5 billion ($47.8 billion for Q2 2013 compared to $40.2 billion in Q2 2012) for the quarter.

Laughing out loud  INVESTING IS GETTING SIMPLER! (Click to enlarge). Via Greed & Fear (Tks Gary).



NEW$ & VIEW$ (2 JULY 2013)

U.S. Factories Buck Global Growth Slowdown

The Institute for Supply Management on Monday said its broad index, in which any reading above 50 indicates expansion, rose to 50.9 last month from 49 in May. The report showed growth in new orders, production and inventories. However, in a potentially troubling sign for Friday’s jobs report, the employment index contracted for the first time since September 2009.



The JPMorgan Global Manufacturing PMI, produced by Markit from its worldwide business surveys, was unchanged at 50.6 in June. At a level close to the nochange mark of 50, the index signalled a continuation of the near-stagnant trend recorded throughout the first half of the year.


While the near-stagnation is an improvement on the mild rate of decline seen throughout much of the second half of last year, the survey data indicate that the underlying trend in the global manufacturing economy remains well below the trend rate of approximately 5% per annum seen in the years leading up to the financial crisis, growing instead at an annual rate of just 1-2%.

imageHowever, the unchanged reading masks diverging manufacturing performances by country, with the top of the manufacturing PMI rankings dominated by developed countries.

The top of the table was in fact dominated by developed countries, with the UK followed closely by Japan, where the PMI came in at 52.3 and signalled the fastest rate of improvement since February 2011. Meanwhile, the Markit US PMI dipped to an eight month low, which was in turn linked to the steepest drop in export orders for four years. The US
nevertheless ranked third in the PMI rankings. Part of the global export weakness reflected theongoing recession in the eurozone. However,  although euro countries continued to dominate the lower end of the PMI rankings, the single-currency area’s manufacturing PMI rose to 48.8 in June, indicating that the region is contracting at the slowest rate for 16
months. Output and new orders more or less stabilised, following big improvements in the survey data for Spain, Italy and France in recent months, and offsetting a slight deterioration in the German survey numbers.

In Asia, the ongoing improvement in the Japanese PMI, linked to rising domestic and export orders, contrasted with the PMI for China hitting a nine-month low of 48.2.

The increased rate of decline in China came as the country’s manufacturers reported the steepest monthly fall in export orders for four years. China sank to third from the bottom of the PMI ranking table as a result. Taiwan’s manufacturing sector meanwhile contracted for a second successive month, the PMI at 49.5, while the PMI for South Korea also dipped below the 50-line for the first time in five months with a reading of 49.4. At 46.4, the PMI for Vietnam registered the steepest
downturn for almost a year, and at 51.0 the PMI indicated the weakest expansion for four months in Indonesia. Of all the countries surveyed in June, the scale of the downturn seen in Vietnam was only exceeded by that recorded in Greece.

In India, the PMI ticked higher to 50.3, but nevertheless indicated the second-weakest expansion for over four years as orders fell for the first time since March 2009.

Elsewhere, the PMI for Mexico fell to 51.3, its lowest since data collection began in early-2011, and Brazil’s PMI was unchanged on May’s seven-month low of 50.4, with weakness fuelled in both bases by increased
rates of decline of exports. Russia bucked the deteriorating trend seen in other emerging markets, with rising domestic orders helping push the PMI to a four-month high of 51.7.


(Business Insider)

Air freight market struggled to grow in May: IATA

The international air freight market grew by a mere 0.1 percent in May compared to April, and was up 0.8 percent from May 2012, as slowing business confidence and weaker Asian trade undermined cargo demand, the International Air Transport Association (IATA) said on Tuesday.

Construction Spending Hits 3½-Year High

Total U.S. construction spending rose by 0.5% in May from the prior month to a seasonally adjusted annual rate of $874.9 billion, the Commerce Department said Monday. That was the highest level since September 2009.

The rise was driven by residential construction, which rose 1.2% from a month earlier and 22.7% from a year ago. Private residential construction, which excludes public housing, rose to the highest level since October 2008.

Meantime, spending on construction of public buildings—including, state, local and federal government structures—rose 1.8% in May from April, but was down 4.7% from a year ago.

Household Incomes Languish

Four years into recovery, parts of the economy have strengthened but real median household income remains below prerecession levels. The Household Income Index came in at 92.2 in May, below the 97 of June 2009, when the recession ended. It is also lower than the 98.8 reading seen in December 2007, when the recession began. In May, real median annual household income was $51,500.

Clouds Over Canada Damp Loonie

The Canadian dollar, also known as the “loonie,” has dropped 5% against the U.S. dollar since mid-May amid a broad downdraft in currencies of big commodity-exporting countries. On Friday, it hit its lowest level since October 2011. (…)

The combination of lower global commodity prices and nervousness about housing has become a drag on growth, which the Bank of Canada forecasts will slow to 1.5% this year from 1.8% in 2012.





China Home Prices Jumped in May

Housing prices in China’s 70 major cities in May registered their highest annual growth rate in more than two years, at 5.3%, which could increase pressure on cities to enforce the government’s property-cooling measures.

Average prices of newly built homes in China’s 70 major cities rose 5.3% in May compared with a year earlier, up from a 4.3% rise in April, according to calculations by The Wall Street Journal based on National Bureau of Statistics data. That is the highest reading since March 2011, when prices rose 5.3% as well. On a month-to-month basis, the increase in prices was 0.9%, the same as in April.

Prices rose in 69 cities in May compared with a year earlier, up from 68 cities in April. But there has been a moderation on a month-to-month basis, with prices of new homes in 65 of 70 cities rising in May from the month before, down from 67 cities in April.



Inside China’s Bank-Rate Missteps

A rare peek into the actions of China’s leaders in a month when a Chinese cash crunch spooked global investors shows a leadership falling short in its struggle to redirect China’s economy.

The People’s Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth, according to an internal document reviewed by The Wall Street Journal.

But by failing to make that clear—at a time when worries about slowing Chinese demand had already scared away some foreign capital, and as signals from the U.S. Federal Reserve also were redirecting global cash flows—the Chinese central bank inadvertently contributed to a surge in global market anxiety.

(…) Chinese leaders are blaming market speculation and what the authorities view as overly aggressive media coverage for the problems. Some critics, however, say the fault lies partly with clumsy maneuvering by the central bank and the senior officials who oversee it, saying it exposed their inexperience in anticipating how markets—domestic and foreign—would interpret their actions. (…)

According to a previously undisclosed summary of a PBOC internal meeting on June 19, the central bank was especially concerned that in the first 10 days of June, Chinese banks increased lending by 1 trillion yuan ($163 billion)—an amount the central bank said “had never been seen in history.” About 70% of that amount consisted of short-term notes that mostly don’t show up on banks’ balance sheets—making it easier for the banks to get around regulatory lending restrictions-—rather than lending the money to promising companies or projects.

The PBOC interpreted banks’ actions to mean that “some banks thought the government would launch stimulus policies as the economy slows, and positioned themselves in advance,” according to the summary. (…)

Spanish unemployment falls for fourth month Temporary hiring stepped up for holiday season

The number of Spaniards claiming unemployment benefits fell by more than 127,000 last month, a record drop for the month of June, as hotels and other businesses exposed to the holiday season stepped up temporary hiring.

Spain’s labour ministry said the number of registered unemployed now stood at 4.76m, down 2.6 per cent from the previous month. It was the fourth consecutive month that saw a drop in registered unemployment.

High five  However, economists warned that the drop in registered unemployment was likely to be a fleeting phenomenon – and that there was no sign yet of a genuine turnround in the labour market. Their case was bolstered by news that the seasonally adjusted number of registered unemployed in June rose by 996 to 4.88m. The number of workers on permanent contracts also fell compared with both the previous year and the month before, another sign that Spain has yet to enter a new phase of lasting job growth. (…)

The discrepancy between the registered employment data published monthly by the labour ministry and the more closely watched survey released by the statistics office has long been a topic of controversy in Spain. Experts say the difference is largely the result of the fact that many unemployed have little incentive to register with employment offices, for example because they are too young to claim benefits.



France, Spain, Italy Drag on Car Market

Europe’s car market is struggling to get out of reverse gear with sharp declines in new-car registrations in France, Spain and Italy in June.

In France, registrations fell 11% in the first half of the year, putting the proxy for new-vehicle sales on course for their lowest level since 1997.

The overall French market for passenger cars fell 9% in June from a year before. Adjusted for an equivalent number of working days, the year-over-year decline in June would have been 4.4%.

In Spain, new-car registrations slid 4.9% in the first half.

Italy saw a drop similar to that of France, with registrations down 10% at 731,203 units between January and June.



Germans Let Cars Age as Consumers Halt Buying in Crisis

Cars on German roads are older than they’ve ever been as consumers balk at replacing aging models with new ones amid Europe’s sovereign-debt crisis.

Registrations of new models in the country slumped 4.7 percent in June, the fifth decline this year, leading to an 8.1 percent drop for the first half of 2013 to 1.5 million vehicles, according to data released today from Germany’s motor vehicle office, KBA.

The lack of buying meant cars are 8.7 years old on average, a new high and a full year older than the pre-crisis level in 2007, the VDA, Germany’s auto-industry association, said today.

Maruti Posts Decline in Sales

Maruti Suzuki, the India’s largest car maker by sales, posted its sixth straight drop in monthly sales in June, as rising fuel prices and high loan rates continued to weigh on purchasing decisions by customers.

Total sales at Maruti fell 13% in June to 84,455 vehicles from 96,597 a year earlier. Sales in the local market dropped 7.8% to 77,002 vehicles, while exports plunged 43% to 453 vehicles.

Maruti—the biggest overseas unit of Japan’s Suzuki Motor Corp.–is considered the benchmark of the vitality of India’s car market as the company sells small cars, which comprise about three fourth of overall car sales in Asia’s third-biggest economy.

Revitalized Car Industry Cranks Up U.S. Exports

The U.S. auto industry, in tatters just four years ago, is emerging as an export powerhouse, driven by favorable exchange rates and labor costs in a trend experts say could drive business for many years.

(…) More competitive labor costs and restructurings that closed unproductive factories have made American auto plants tougher competitors in the global market. Some are also looking at U.S. production as a way to serve booming emerging markets. (…)

U.S.-made cars are being shipped to China, the world’s largest auto market, Saudi Arabia, the second largest destination for U.S.-made cars behind Germany, and South Korea, which now has a free-trade agreement with the U.S. (…)

Labor agreements paved the way for the two auto makers to hire thousands of workers who earn $14 an hour, about half that of veteran workers. Ford, which restructured without government intervention, got much the same terms from the United Auto Workers union as its crosstown rivals.

The leaner U.S. industry also contrasts with Europe and Japan, which are struggling with too much capacity, rising labor costs and shrinking domestic demand.

The average cost of a U.S. auto worker’s pay and benefits was $38 an hour in 2011, compared with $60 in Germany and $37 in Japan, according to the Center for Automotive Research. That’s up only $3 an hour from 2007. In Germany, the per-hour compensation has jumped $14 in the same period; in Japan, it is up $12. These trends have encouraged German and Japanese auto makers to boost exports from their U.S. factories. (…)

Forces Converge in Emerging Markets

Countries from Turkey to Brazil to China are getting hit by a brutal combination of events, as economies slow, investors pull out cash and protesters take to the streets—all fresh reminders that these markets can be difficult places to try to make money.



NEW$ & VIEW$ (4 JUNE 2013)

Sad smile  Weak Signs for Output

U.S. factories in May posted their worst month since the end of the recession, as weakness overseas overwhelmed a still-shaky manufacturing recovery at home.

(…) The ISM report showed weakness across the board, with current production declining, employment remaining stagnant, and new orders falling—an especially worrisome sign because it provides little hope for improvement in the months ahead. Brad Holcomb, chairman of the ISM’s manufacturing-survey panel, flagged the decline in new orders as particularly troubling. “I don’t recall the last time” more industries saw declines in new orders than growth, he said.


“It’s not a glitch,” John Silvia, chief economist at Wells Fargo, said of Monday’s report. “It suggests that there is a more fundamental slowdown in the U.S. economy.”

Mr. Silvia estimates economic growth, as measured by gross domestic product, has slowed to 1.2% in the second quarter, from an already tepid 2.4% rate in the first three months of the year. (…)

Surprised smile  SURPRISE ISM

That report pushed the Citigroup U.S. Economic Surprise Index to its second-lowest reading since early February. The index — which measures the degree to which economists’ consensus estimates have been too optimistic or pessimistic about data releases – fell to negative-22.6. It has been in negative territory for all but two trading days since mid-April. (…)

It’s not just manufacturing data that have been weak. Jobless claims have risen in three of the past four weeks, economic growth during the first quarter was revised lower last week and inflation has slowed to a near standstill.

Auto  U.S. Car Sales Signal Plateau

Overall, consumers and businesses bought vehicles at an annualized rate of 15.3 million vehicles, according to researcher Autodata Corp., the fourth month this year that sales have exceeded a 15 million vehicle pace. However, May’s sales pace was only slightly above the average for the first five months of 2013.

In anticipation of another strong year, U.S. car makers are limiting their traditional summer shutdown to keep cranking out cars. Ford plans to increase its third quarter U.S. production by 10% from a year ago to 740,000 vehicles. (…)

Some auto makers are paying extra rebates to push dealers to increase sales, a practice known as stair-step incentives. For example, Chrysler dealers who met certain month-end sales goals were paid a rebate of $600 a vehicle, while Nissan dealers got up to $500 a vehicle for hitting its targets, according to dealers.

The payments can amount to anywhere from $50,000 for a small dealer to several hundred thousand dollars for larger dealership groups, dealers say. Chrysler and Nissan declined to comment on their programs.


Trend to watch:


Haver Analytics

Sad smile  U.S. Construction Spending Inches Higher


U.S. construction activity remains limited to private housing.




Haver Analytics

Green with envy  Government to Hold Back Growth for Years

Shifting government finances are likely to take an even bigger bite out of growth over the next few years than many now expect, economists at the San Francisco Fed warned Monday.

In a research note, Brian Lucking and Daniel Wilson write fiscal policy headwinds will subtract one percentage point from growth over the next three years beyond the normal fiscal drag that usually comes during times of recovery. If not for the current and likely future stance of fiscal policy, the economy would be growing at a faster rate, which would allow for more robust job growth and, presumably, a more normal stance of monetary policy for the Federal Reserve.

“Federal fiscal policy has been a modest headwind to economic growth so far during the recovery,” the economists wrote. But due to a more rapid than expected contraction in the budget deficits, due largely to rising tax revenue, “federal budget trends will weigh on growth much more severely over the next three years.” (…)

“While our estimates show that fiscal policy has held back the recovery slightly to date, the effect over the next three years looks much bigger,” they wrote. “The excess fiscal drag on the horizon comes almost entirely from rising taxes.”

Fingers crossed  CONSUMER HOPES

American consumers always seem to come to the rescue. Weekly chain store sales jumped 1.9% last week, offering hope for a decent summer for retailers. The 4-week m.a., although still in a downtrend,  is up 2.8%, its best showing since January.





Fingers crossed  Spanish Job Seekers Fall

[image]The number of registered job seekers in Spain fell in May by a record amount and for the second consecutive month, the latest sign that unemployment in the recession-hit economy may be close to peaking.

Spain’s labor ministry said Tuesday the number of people filing for jobless benefits fell 2% to 4.89 million in May from April, the lowest mark since December last year. The number of job seekers fell by 98,265, the largest drop in the month of May ever, the ministry said. The decline was almost double the average fall in May, traditionally a good month for employment because of strong hiring ahead of the summer holiday season.

Still, seasonally-adjusted claims, a gauge of underlying unemployment trends, were practically flat—a fall of just 265 from April—and overall jobless claims still rose 3.8% from May last year.

Spain’s Crisis Fades as Exports Transform Country

Spanish exports climbed to a record 223 billion euros ($291 billion) last year as a drought in orders at home pushed companies to upgrade products and go abroad. (…)

The European Commission forecast in May that exports will grow 4.1 percent this year, almost twice the European Union average rate. Exports of goods and services as a share of GDP, at 32 percent, was the highest last year since at least 2000, Eurostat figures show. Sales are rising at double-digit rates in fast-growing markets in Asia and Africa, according to Trade Ministry data. (…)

In the last two years, the number of companies that export has jumped by more than 10 percent each year, compared with an increase of 1.7 percent in 2010, data from government agency Icex show. (…)

Exports with high-technology content increased by 14 percent in 2011, after a 17 percent surge in 2010, according to the most recent data available, published by the statistics institute. (…)

U.K. Retail Sales Rose in May on Furniture Demand, BRC Says

Sales at stores open at least 12 months, measured by value, increased 1.8 percent from a year earlier, the London-based trade group and KPMG said in an e-mailed report today. Total sales rose 3.4 percent.

Canadians still piling on consumer debt – but at a slower pace

The good news is that – compared with the fourth quarter of last year – consumer debt in the first quarter fell 2 per cent to $26,935, the first quarterly decline since the third quarter of 2011 and the biggest one since TransUnion started tracking the variable in 2004.

Another encouraging sign is that the year-over-year increase of 3.48 per cent is lower than the increases of the previous two quarters: 5.87 per cent in the fourth quarter of 2012 and 4.60 per cent in the third quarter of last year.

Beijing Caps Home Prices to Control Demand (Pointing up This is a long BB article worth reading. Some excerpts:)

The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. (1918) and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker. (…)

New-home prices in Beijing rose by 3.1 percent in April from the previous month, the biggest gain among the nation’s four so-called first-tier cities, and climbed by the most after Guangzhou in May, according to SouFun Holdings Ltd. (SFUN) They rose in each of the first five months of this year. (…)

New-home price gains in April, the biggest since they reversed declines in November, came even after Beijing on April 8 raised the minimum down payment on second-home mortgages to a record 70 percent and banned single-person households from buying more than one residence, a response to former Premier Wen Jiabao’s urge to counter surging values. (…)

Japan Wages Gain in Boost for Abe’s Drive to Reflate Economy

Monthly wages including overtime and bonuses rose 0.3 percent from a year earlier to 273,427 yen ($2,746), the Labor Ministry said today in Tokyo. The index of regular earnings, excluding overtime and bonuses, for full-time employees rose to 100.9 in April, the highest since October 2008, according to today’s report.

Major Japanese companies may boost summer bonuses by 7.4 percent, the most since 1990, according to a survey published last week by Keidanren, the country’s biggest business lobby.

Sick smile  Japan’s Market Skid Has Bulls Reeling

[image]At a hedge-fund conference in Las Vegas last month, Michael Novogratz, a principal at New York’s Fortress Investment Group, called Japan “the most exciting place to invest in the world.”

The bet paid off big, at first: The benchmark Nikkei 225 index soared 83% over the seven months to late May. Foreigners fell in love again with a market they had long ago left for dead.

Then, the rally turned with a vengeance. The Nikkei sank 7.3% on Thursday, May 23. It fell 3.2% the next Monday, 5.2% the following Thursday and then 3.7% on Monday of this week. It has fallen 15% in just eight trading days. Mr. Novogratz didn’t return phone calls seeking to determine what he has done with his investments.

US funds left bruised by heavy bond losses
Sharp rise in global yields takes toll

US funds that invest in higher-rated bonds with average maturities of under 10 years lost an average 1.8 per cent in May, marking their worst performance since the depths of the financial crisis in October 2008, according to Lipper, a research group.

Such a broad decline has been rare for these funds. With more than $900bn in assets, these investment vehicles have attracted the lion’s share of inflows from savers in search of regular income and low risk since the crisis.

Ben Bernanke may have to refresh his notions of wealth effect!


NEW$ & VIEW$ (20 MAY 2013)


Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.

Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

Click to View
Click to View

Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

Click to View

Click to View

Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

  • Auto  Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, Sputteringaccording to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.

Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.

The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.

The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

  • Mexico’s First Quarter GDP Down, But Far From Out  Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

ChartMexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.

Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.

But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.

Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.

The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011. (…)

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.

However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting. Confused smile

Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.

At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)

This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.



Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile  (Looks like devaluation is more effective than austerity)




Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.

Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.

It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)


March 2013 CCRSI National Results Highlights

  • PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period. 
  • SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively. 
  • TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013.  Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010.  Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity. 
  • DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.



U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace
Obama approves wider LNG exports as door opens to Japan and EU